[Federal Register Volume 81, Number 84 (Monday, May 2, 2016)]
[Rules and Regulations]
[Pages 26316-26410]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-09707]
[[Page 26315]]
Vol. 81
Monday,
No. 84
May 2, 2016
Part II
Library of Congress
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Copyright Royalty Board
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37 CFR Part 380
Determination of Royalty Rates and Terms for Ephemeral Recording and
Webcasting Digital Performance of Sound Recordings (Web IV); Final Rule
Federal Register / Vol. 81, No. 84 / Monday, May 2, 2016 / Rules and
Regulations
[[Page 26316]]
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LIBRARY OF CONGRESS
Copyright Royalty Board
37 CFR Part 380
[Docket No. 14-CRB-0001-WR (2016-2020)]
Determination of Royalty Rates and Terms for Ephemeral Recording
and Webcasting Digital Performance of Sound Recordings (Web IV)
AGENCY: Copyright Royalty Board, Library of Congress.
ACTION: Final rule and order.
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SUMMARY: The Copyright Royalty Judges announce their determination of
rates and terms for two statutory licenses (permitting certain digital
performances of sound recordings and the making of ephemeral
recordings) for the period beginning January 1, 2016, and ending on
December 31, 2020.
DATES: Effective Date: This rule is effective on May 2, 2016.
Applicability dates: These rates and terms are applicable to the
period January 1, 2016, through December 31, 2020.
FOR FURTHER INFORMATION CONTACT: LaKeshia Keys, Program Specialist, at
202-707-7658 or [email protected].
SUPPLEMENTARY INFORMATION: The Copyright Royalty Judges (Judges) hereby
issue their written determination of royalty rates and terms to apply
from January 1, 2016, through December 31, 2020, to digital performance
of sound recordings over the Internet by nonexempt, noninteractive
transmission services and to the making of ephemeral recordings to
facilitate those performances.
The rate for commercial subscription services in 2016 is $0.0022
per performance. The rate for commercial nonsubscription services in
2016 is $0.0017 per performance. The rates for the period 2017 through
2020 for both subscription and nonsubscription services shall be
adjusted to reflect the increases or decreases, if any, in the general
price level, as measured by the Consumer Price Index applicable to that
rate year, as set forth in the regulations adopted by this
determination.
The rates for noncommercial webcasters are: $500 annually for each
station or channel for all webcast transmissions totaling not more than
159,140 Aggregate Tuning Hours (ATH) in a month, for each year in the
rate term. In addition, if, in any month, a noncommercial webcaster
makes total transmissions in excess of 159,140 ATH on any individual
channel or station, the noncommercial webcaster shall pay per-
performance royalty fees for the transmissions it makes on that channel
or station in excess of 159,140 ATH at the rate of $0.0017 per
performance. The rates for transmissions over 159,140 ATH per month for
the period 2017 through 2020 shall be adjusted to reflect the increases
or decreases, if any, in the general price level, as measured by the
Consumer Price Index applicable to that rate year, as set forth in the
regulations adopted by this determination.
The Judges also determine herein details relating to the rates for
each category of webcasting service, such as minimum fee and
administrative terms. The regulatory language codifying the rates and
terms of the Judges' determination \1\ are set out below this
Supplementary Information section.
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\1\ The Judges proposed to the parties a reorganization of the
regulations. Only one party's (Pandora's) proposed regulations
followed the proposed new format. The other parties submitted
proposed new subparts for each type of entity. One party
(SoundExchange) specifically opposed the reorganization. The Judges
find that reducing the amount of repetition in the regulations is
not prejudicial to SoundExchange, and in the interests of plain
language have used the new format.
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I. Background
A. Purpose of the Proceeding
The licenses at issue in the captioned proceeding, viz., licenses
for commercial and noncommercial noninteractive webcasting, are
compulsory. Title 17, United States Code (Copyright Act or Act),
establishes exclusive rights reserved to copyright owners, including
the right to ``perform the copyrighted work publicly by means of a
digital audio transmission.'' See 17 U.S.C. 106(6). The digital
performance right is limited, however, by Sec. 114 of the Act, which
grants a statutory license for nonexempt noninteractive Internet
transmissions of protected works. 17 U.S.C. 114(d). Eligible webcasters
are entitled to perform sound recordings without an individual license
from the copyright owner, provided they pay the statutory royalty rates
for the performance of the sound recordings and for the ephemeral copy
of the sound recording necessary to transmit it. 17 U.S.C. 114(f) and
112(e). Licensee webcasters pay the royalties to a Collective, which
distributes the funds to copyright owners. The statutory rates and
terms apply for a period of five years.
The Act requires that the Judges ``shall establish rates and terms
that most clearly represent the rates and terms that would have been
negotiated in the marketplace between a willing buyer and a willing
seller.'' 17 U.S.C. 114(f)(2)(B). The marketplace the Judges look to is
a hypothetical marketplace, free of the influence of compulsory,
statutory licenses. Web II, 72 FR 24084, 24087 (May 1, 2007). The
Judges ``shall base their decision on economic, competitive[,] and
programming information presented by the parties . . . .'' 17 U.S.C.
114(f)(2)(B) and 112(e)(4) (emphasis added). Within these categories,
the Judges' determination shall account for (1) whether the Internet
service substitutes for or promotes the copyright owner's other streams
of revenue from the sound recording, and (2) the relative roles and
contributions of the copyright owner and the service, including
creative, technological, and financial contributions, and risk
assumption. Id. The Judges may consider rates and terms of comparable
services and comparable circumstances under voluntary, negotiated
license agreements. Id. The rates and terms established by the Judges
``shall distinguish'' among the types of services and ``shall include''
a minimum fee for each type of service. Id. (emphasis added).
B. Procedural Posture
Following the timeline prescribed by the Act, the Judges published
notice of commencement of this proceeding in the Federal Register.\2\
79 FR 412 (Jan. 3, 2014). Twenty-nine parties in interest filed
petitions to participate in the proceeding.\3\ Ten of those petitioners
subsequently withdrew from the proceeding, the Judges rejected the
petitions of three petitioners because the
[[Page 26317]]
Judges determined they lacked the requisite substantial interest in the
proceeding, and the Judges dismissed the Petition to Participate of
another party due to a procedural default.\4\
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\2\ Contemporaneously, the Judges commenced a proceeding to
establish rates and terms for ephemeral recording and digital
performance of sound recordings by ``New Subscription Services''
(NSS). See 79 FR 410 (Jan. 3, 2014). The NSS at issue in that
companion proceeding were limited to NSS transmitting to residential
subscribers through a cable television provider. See 37 CFR
383.2(h). That proceeding was resolved by negotiated agreement and
the Judges published rates and terms for new subscription licensees
at 80 FR 36927 (Jun. 29, 2015). Settlement of the cable NSS did not
have any effect on the Internet subscription services at issue in
this proceeding.
\3\ The 29 parties that filed Petitions to Participate were:
8tracks, Inc.; AccuRadio, LLC; Amazon.com, Inc.; Apple Inc.; Beats
Music, LLC; Clear Channel (nka iHeartMedia, Inc.); CMN, Inc.;
College Broadcasters, Inc. (CBI); CustomChannels.net, LLC; Digital
Media Association (DiMA); Digitally Imported, Inc.; Educational
Media Foundation; Feed Media, Inc.; Geo Music Group; Harvard Radio
Broadcasting Inc. (WHRB); idobi Network; Intercollegiate
Broadcasting System, Inc. (IBS); Music Reports Inc.; National
Association of Broadcasters (NAB); National Music Publishers
Association (NMPA); National Public Radio (NPR); National Religious
Broadcasters Noncommercial Music License Committee (NRBNMLC);
Pandora Media Inc.; Rhapsody International, Inc.; Sirius XM Radio
Inc.; SomaFM.com LLC; SoundExchange, Inc. (SX or SoundExchange);
Spotify USA Inc.; and Triton Digital, Inc.
\4\ The ten parties that withdrew their Petitions to Participate
were: 8tracks, Inc.; Amazon.com, Inc.; CMN, Inc.;
CustomChannels.net, LLC; Digitally Imported, Inc.; Feed Media, Inc.;
idobi Network; Rhapsody International, Inc.; SomaFM.com LLC; and
Spotify USA Inc. The three parties whose Petitions to Participate
were dismissed for lacking a substantial interest in the proceeding
were: Music Reports Inc., NMPA, and Triton Digital. The Petition to
Participate of AccuRadio was dismissed by the Judges due to a
procedural default. Although they did not formally withdraw from the
proceeding, Apple, Beats, and DiMA did not file Written Direct
Statements and did not participate in the hearing. Educational Media
Foundation joined with NAB and appeared by and through NAB and its
counsel.
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1. Negotiated Settlements
a. Educational Webcasters
The Judges published notice of the CBI-SoundExchange settlement in
November 2014.\5\ The Judges received approximately 60 comments in
response to the Notice. The Judges considered the comments, some of
which supported and others of which opposed the proposed settlement,
and concluded that the CBI-SoundExchange agreement provides a
reasonable basis to adopt its proposed rates and terms. On September
28, 2015, the Judges published amended regulations substantially in
conformity with the proposal.\6\
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\5\ 79 FR 65609 (Nov. 5, 2014).
\6\ 80 FR 58201 (Sept. 28, 2015).
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b. Public Broadcasters
The NPR-CPB settlement with SoundExchange proposed creation of a
new Subpart D to part 380 of the Regulations entitled Certain
Transmissions by Public Broadcasting Entities. IBS was the only
commenting party. IBS made procedural and substantive objections to the
settlement. Notwithstanding, the Judges concluded that, as the proposed
settlement would bind only the ``Covered Entities,'' i.e., NPR,
American Public Media, Public Radio International, and Public Radio
Exchange, and up to 530 Originating Public Radio Stations as named by
CPB, adoption of the settlement would not preclude the Judges' separate
consideration of the concerns of IBS, which is not one of the ``Covered
Entities'' subject to the new Subpart D. On October 2, 2015, the Judges
published the settlement, substantially as proposed, as a final
regulation.\7\
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\7\ 80 FR 59588 (Oct. 2, 2015). In publishing both negotiated
settlements, the Judges postponed the designation of a Collective
until issuance of the current determination.
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2. The Current Proceeding To Adjudicate Rates and Terms
The Act provides that the Judges shall make their determinations
``on the basis of a written record, prior determinations and
interpretations of the Copyright Royalty Tribunal, Librarian of
Congress . . .'' and their own prior determinations to the extent those
determinations are ``not inconsistent with a decision of the Register
of Copyrights . . .'' 17 U.S.C. 803(a). Pursuant to 17 U.S.C. 803(b),
the Judges conduct a hearing to create that ``written record,'' in
order to issue their determination as required by 17 U.S.C. 801(b)(1)
and 803(1).
To that end, non-settling parties appeared before the Judges for a
determination hearing. At the hearing, SoundExchange, Inc.
(SoundExchange), a member organization comprised of copyright owners
and performing artists, and the designated Collective in this
proceeding, and Mr. George Johnson, dba GEO Music, represented the
interests of licensors. Seven licensees participated in the hearing.\8\
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\8\ Harvard Radio Broadcasting, Inc. (WHRB), Intercollegiate
Broadcasting System, Inc., iHeartMedia, Inc., National Association
of Broadcasters (also representing the interests of Educational
Media Foundation), National Religious Broadcasters Noncommercial
Music Licensing Committee, Pandora Media, Inc., and Sirius XM Radio,
Inc.
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The hearing commenced on April 27, 2015, and concluded on June 3,
2015. The parties submitted proposed findings and conclusions (and
responses thereto) in writing, prior to their closing arguments on July
21, 2015. During the hearing, the Judges heard oral testimony from 47
witnesses, some of them for both direct case and rebuttal testimony.
The witnesses included 16 qualified experts. The Judges admitted 660
exhibits into evidence, consisting of over 12,000 pages of documents,
and considered numerous illustrative and demonstrative materials that
focused on aspects of the admitted evidence and the permitted oral
testimony.
On December 16, 2015, the Judges issued their Determination of
Rates and Terms. Pursuant to 17 U.S.C. 803(c)(2) and 37 CFR part 353,
SoundExchange and George Johnson dba GEO Music Group (GEO) filed
motions for rehearing. The Judges sought responses to the issues raised
in the SoundExchange motion, but did not solicit written responses to
the GEO Music motion.\9\ NAB, Pandora, and iHeart filed written
arguments responsive to the SoundExchange motion. Having reviewed the
motions, written arguments, and responses, the Judges denied the
motions for rehearing. The Judges determined that neither of the
motions presented the exceptional case required for rehearing or
reconsideration. In other words, neither SoundExchange nor GEO
established that the Determination (1) is not supported by the
evidence, (2) is erroneous, (3) is contrary to legal requirements, or
(4) requires the introduction of new evidence.\10\ See 17 U.S.C.
803(c)(2)(A); 37 CFR 353.1 and 353.2. The motions did not meet the
required standards set by statute, by regulation, or by case law.
Nevertheless, as discussed in the order denying SoundExchange's motion
for rehearing, the Judges amended certain of the royalty terms
regulations to enhance clarity. The Judges incorporate the regulatory
clarifications, making this Determination final and subject to legal
review by the Register of Copyrights.
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\9\ Order Permitting Written Response(s) to SoundExchange Motion
for Rehearing (Revised) (Jan. 6, 2016).
\10\ Order Denying in Part SoundExchange's Motion for Rehearing
and Granting in Part Requested Revisions to Certain Regulatory
Provisions (Feb. 10, 2016) and Order Denying George Johnson's Motion
for Rehearing (Feb. 10, 2016).
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II. Context of the Current Proceeding
A. Prior Rate Determinations
Congress created the exclusive sound recordings digital performance
copyright in 1995. See Digital Performance Right in Sound Recordings
Act of 1995, Public Law No. 104-39, 109 Stat. 336 (Nov. 1, 1995). At
the same time, Congress limited that performance right by granting
noninteractive subscription services a statutory license to perform
sound recordings by digital audio transmission. In 1998, Congress
created the ephemeral recording license and further defined and limited
the statutory license for digital performance of sound recordings. See
Digital Millennium Copyright Act, Public Law 105-304, 112 Stat. 2860
(Oct. 28, 1998) (DMCA).
1. Web I
The Copyright Office commenced the first webcasting rate
determination in November 1998. The resulting rates, published in July
2002, covered a rate period from October 1998 through December
2002.\11\ Interested parties negotiated rates and terms for 2003-2004,
including for the first time radio broadcasters with Internet simulcast
[[Page 26318]]
service.\12\ The published webcasting rate determination confirmed that
the willing buyer/willing seller standard in the Act is the determining
standard. The Librarian of Congress (Librarian) determined that rate-
setters must consider the promotion/substitution and relative
contribution factors, although they must not consider those factors
determinative, nor are they to use those additional factors to adjust a
rate derived from the willing buyer/willing seller analysis. See 67 FR
45240, 45244 (July 8, 2002). This conclusion is part of the rate-
setting precedent that instructs the Judges in the current proceeding.
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\11\ See 67 FR 45240 (Jul. 8, 2002); see also 67 FR 78510
(allowing non-precedential, negotiated modification of 1998-2002
rates and terms for ``small webcasters'' under the Small Webcaster
Settlement Act of 2002).
\12\ See 68 FR 35008 (Jun. 11, 2003) (noncommercial webcasters'
rates, effective 1998-2004); 37 FR 5693 (Feb. 6, 2004) (subscription
and nonsubscription services' and simulcasters' rates, effective
2003-04, and new subscription services' rates, effective 1998-2004).
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2. Web II Determination and Appeals and Webcaster Settlement Acts
In November 2004, Congress passed the Copyright Royalty and
Distribution Reform Act of 2004 (Reform Act), which became effective in
May 2005. The Reform Act established the Copyright Royalty Judges as
the institutional successor to the arbitration panel program managed by
the Copyright Office. The new statute continued the extant 2004 rates
through 2005 to enable the newly created Copyright Royalty Judges
program to initiate rate proceedings. The new statute also expanded the
rate period to five years.\13\
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\13\ Public Law 108-419, 118 Stat. 2341. In 2004, the Copyright
Office initiated a proceeding to adjust rates and terms for the
Section 114 and 112 licenses for 2005-2006 under the CARP system.
Congress terminated this proceeding, however, and directed that the
rates and terms in effect on December 31, 2004, remain in effect at
least for 2005. See 70 FR 7970 n.2 (Feb. 16, 2005) and 70 FR 6736
(Feb. 8, 2005).
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The Judges published the determination from their first webcasting
rate proceeding, covering the period 2006 to 2010, on May 1, 2007 (Web
II).\14\ In Web II, the Judges differentiated the rate structure for
commercial and noncommercial webcasters. They set commercial
webcasters' rates using a per-performance structure and set
noncommercial webcasters' rates as a flat fee up to a certain usage
level, after which the commercial rates would apply. See 72 FR 24084,
24096, 24097-98. In accordance with the statute, the Judges established
a minimum fee of $500 for each channel or station in either category.
The Judges did not differentiate the minimum fee, as they based it upon
the cost to SoundExchange, the designated Collective, to administer the
license. For noncommercial webcasters, the minimum fee is the only
royalty fee due, unless the webcaster exceeds established usage limits.
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\14\ 72 FR 24084.
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Intercollegiate Broadcasting System, Inc. (IBS) appealed the amount
of the minimum fee as it applied to noncommercial webcasters. The U.S.
Court of Appeals for the D.C. Circuit remanded the issue for further
fact-finding.\15\ The Judges received further evidence and ruled on
remand to keep the minimum fee at $500 for all licensees. See 75 FR
56873, 56874 (Sept. 17, 2010). IBS again appealed to the D.C. Circuit,
challenging the application of the minimum fee to noncommercial
educational webcasters. The court stayed the second Web II appeal
pending its resolution of a constitutional question raised by IBS in
relation to the Judges' Web III determination. Ultimately, the court
again remanded Web II to the Judges.\16\ The Judges conducted a de novo
review of the record and published their determination on the second
remand in 2014. See 79 FR 64669 (Oct. 31, 2014). IBS moved to drop its
third appeal of Web II and the court dismissed it on September 11,
2015.\17\
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\15\ Intercollegiate Broad. Sys., Inc. v. Copyright Royalty
Board, 574 F.3d 748, 771 (D.C. Cir. 2009).
\16\ Intercollegiate Broadcasting Sys., Inc., v. Copyright
Royalty Board, No. 10-1314 (D.C. Cir. Sept. 30, 2013) (order
granting joint motion for vacatur and remand).
\17\ Intercollegiate Broad. Sys., Inc. v. Copyright Royalty
Board, No. 14-1262 (D.C. Cir. Sept. 11, 2015) (order granting joint
motion to dismiss appeal).
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After the Library published the Web II determination, Congress
passed the Webcaster Settlement Act of 2008 (2008 WSA) and the
Webcaster Settlement Act of 2009 (2009 WSA). These acts enabled
webcasters to renegotiate rates and terms for a portion of the Web II
rate period and set rates for the succeeding rate period (2011-2015).
Entities accounting for 95% of the webcasting royalties paid to
SoundExchange negotiated settlements under the 2008 WSA and the 2009
WSA.\18\
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\18\ 79 FR 23102 n.5 (Apr. 25, 2014).
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3. Web III Determination and Appeals
On January 5, 2009, the Judges commenced a proceeding to establish
rates and terms for webcasting for the period January 1, 2011, through
December 31, 2015 (Web III).\19\ Many interested webcasters had
recently reached agreements with SoundExchange pursuant to the WSAs and
did not participate in the Web III proceeding. Only three licensees did
participate: College Broadcasters, Inc. (CBI), Live365, Inc. (Live365),
and IBS.\20\
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\19\ 74 FR 318 (Jan. 5, 2009).
\20\ As part of the Web III determination, the Judges confirmed
their adoption of agreed rates and terms for commercial broadcasters
(simulcasters) proposed in a settlement agreement between
SoundExchange and the NAB. 76 FR at 13027.
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CBI's participation was limited to its defense of a proposed
settlement it negotiated with SoundExchange. Under the CBI/
SoundExchange agreement, the Judges were asked to adopt regulations
that established a subcategory of noncommercial webcasters, viz.,
noncommercial educational webcasters (NEWs). The Judges did so and
established the minimum fee for the educational category at the same
level as every other category of webcasting service, i.e., $500 per
year for each station or channel, applicable to the flat fee for usage.
See Digital Performance Right in Sound Recordings and Ephemeral
Recordings, 76 FR 13026 (March 9, 2011) (Web III). Recognizing the
operational constraints on educational webcasters, the Judges also
adopted less burdensome usage reporting standards for the category.
Educational webcasters not exceeding 159,140 Aggregate Tuning Hours
(ATH) of webcasting per month could opt for sample reporting in lieu of
census reporting of each sound recording performance. Educational
webcasters not exceeding 55,000 ATH could forego reporting usage at all
by paying a $100 proxy fee to defray the cost to SoundExchange of
developing proxy usage data.
For the commercial webcaster rates, SoundExchange and Live365 each
proposed a per-performance rate structure. Live365 attempted to reach a
per-performance rate by way of a revenue analysis, factoring in the
webcasting services' costs and a presumed 20% profit, and applying the
remainder of revenue to royalties. SoundExchange approached the
calculation by analyzing comparable market ``benchmark'' agreements,
with adjustments as necessary to account for differences in the
services. SoundExchange relied on interactive services rate agreements.
The Web III Judges rejected the Live365 attempt to base rates on a
service's ability to pay. Instead, the Judges derived the commercial
webcasting rate in Web III from a review of market benchmarks presented
by SoundExchange. SoundExchange provided only interactive services'
licenses as benchmarks. The Judges adjusted those benchmarks to account
for significant functional differences between interactive services and
[[Page 26319]]
noninteractive services subject to the statutory rates and terms.
IBS appealed the Web III determination.\21\ The D.C. Circuit agreed
with the IBS argument that the Librarian's appointment of the Judges
under the Reform Act violated the Appointments Clause of the
Constitution. The D.C. Circuit severed that portion of the Reform Act
that limited the Librarian's ability to remove Judges, remanding the
substantive merits of the determination for decision by a validly
appointed panel of Judges. The Librarian appointed the current Judges
and they issued a determination on remand in April 2014.\22\ In their
Web III Remand, the Judges relied upon the rates set forth in the WSA
agreements between SoundExchange and the NAB and between SoundExchange
and Sirius XM, and, to a lesser extent, SoundExchange's benchmark
analysis of various interactive agreements. Id.
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\21\ Intercollegiate Broad. Sys., Inc. v. Copyright Royalty Bd.,
684 F.3d 1332 (2012). SoundExchange and CBI intervened.
\22\ See Determination of Royalty Rates for Digital Performance
Right in Sound Recordings and Ephemeral Recordings, 79 FR 23102
(Apr. 25, 2014) (Web III Remand).
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IBS appealed the Judges' remand determination on May 2, 2014. The
D.C. Circuit affirmed the determination on August 11, 2015.\23\
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\23\ See Intercollegiate Broad. Sys., Inc. v. Copyright Royalty
Bd., Case No. 14-1098 (Aug. 11, 2015).
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B. Web IV
When the Judges commenced the present proceeding (Web IV) in
January 2014, they invited all potentially affected entities to
consider in the presentation of their respective cases: (1) The pros
and cons of revenue-based rates, (2) the existence or propriety of
price differentiation in a market in which the product (digital sound
recordings) can be reproduced at a near-zero marginal cost, and (3)
economic variations among buyers and sellers in the relevant market.
\24\ The parties addressed many of these issues in their filings
(including their rate proposals) and in testimony provided during the
proceeding.
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\24\ See 79 FR 412 (Jan. 3, 2014).
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III. Judges' Resolution of General Issues
A. Rate Differentiation
1. Majors vs. Indies
In the evidence presented during the hearing, the Services
established a potentially meaningful dichotomy between rates they pay
to Major Labels and those they pay to independent record companies
(Indies). Put simply, in the marketplace, Services have agreed to pay
higher royalty rates to Majors than to Indies.\25\
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\25\ This point is exemplified by the different effective rates
in the Pandora/Merlin Agreement and the iHeart/Warner Agreement,
discussed infra.
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The Act provides that the Judges must differentiate rates based
upon differences in the webcasting services, but is less clear on
whether the Judges may also establish differential rates based on
differences among copyright owners as revealed by the evidence. To gain
clarity on the latter issue, the Judges referred to the Register of
Copyrights the novel question whether the Copyright Act permits the
Judges to differentiate based on types of licensors. After careful
review, the Register concluded that the Judges' question ``d[id] not
meet the statutory criteria for referral,'' and declined to answer it.
Memorandum Opinion on Novel Question of Law at 7 (Nov. 24, 2015)
(Register's Opinion).
Citing the fact that no party in the proceeding had proposed a rate
structure that differentiated among licensors, the Register found that
``such a structure was not understood to be a subject of litigation.''
Id. at 8-9. Consequently, the Register found that the issue was not
``presented'' in the proceeding as required by the ``novel question''
provision in 17 U.S.C. 802(f)(1)(B). Id. at 7. The Register's Opinion
appears to be premised, in part, on an interpretation of the D.C.
Circuit's decisions in Settling Devotional Claimants v. Copyright
Royalty Bd., 797 F.3d 1106 (D.C. Cir. 2015), and Intercollegiate Broad.
Sys. v. Copyright Royalty Bd., 574 F.3d 748 (D.C. Cir. 2009). See
Register's Opinion at 9. The Register appears to interpret those cases
as barring the Judges from relying on theories ``first presented in the
Judges' determination and not advanced by any participant.'' Id.
Section 802(f)(1)(B) provides that the Register's timely decision
of a novel question is binding on the Judges. Because the Register has
declined to decide the question that the Judges referred to her in the
current proceeding, however, there is no decision that binds the Judges
on this issue. Moreover, to the extent that the Register's Opinion
rests on an interpretation of the D.C. Circuit's application of
traditional standards of administrative law to particular facts, that
interpretation does not constitute a resolution of a ``novel question
concerning an interpretation of . . . provisions of'' title 17 that
would bind the Judges.
Nevertheless, the Judges acknowledge that interpretation of the
evidence out of context and without adequate input of the parties would
be capricious. Moreover, reopening the proceeding at this juncture,
long after the closing of the record pursuant to 37 CFR 351.12, for
further evidence and argument on this issue would be improper. The
Judges, therefore, do not resolve the legal issue they referred to the
Register and do not set rates in this proceeding that distinguish among
classes of copyright owners.
2. Commercial Webcasters vs. Noncommercial Webcasters
In accordance with the statutory direction to ``distinguish among
the different types of eligible nonsubscription transmission
services,'' 17 U.S.C. 114(f)(2)(A), the Judges (and the Librarian of
Congress before them) have recognized noncommercial webcasters as a
separate rate category from commercial webcasters in prior
proceedings.\26\ The Judges deemed different (and lower) rates for
noncommercial webcasters to be appropriate because ``certain
`noncommercial' webcasters may constitute a distinct segment of the
noninteractive webcasting market that in a willing buyer/willing seller
hypothetical marketplace would produce different, lower rates than we
have determined . . . for Commercial Webcasters.'' Web II Original
Determination, 72 FR at 24097.
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\26\ See Determination of Reasonable Rates and Terms for the
Digital Performance of Sound Recordings and Ephemeral Recordings, 67
FR 45240, 45258-59 (July 8, 2002) (Web I); Digital Performance Right
in Sound Recordings and Ephemeral Recordings, 72 FR 24084, 24097
(May 1, 2007) (Web II Original Determination); Determination of
Royalty Rates for Digital Performance Right in Sound Recordings and
Ephemeral Recordings, 79 FR 23102, 23122 (April 25, 2014) (Web III
Remand).
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The record in the instant proceeding demonstrates some of the
reasons why, in a hypothetical marketplace, a noncommercial webcaster's
willingness to pay for sound recordings would be lower than a
commercial webcaster's willingness to pay. For example, a noncommercial
religious broadcaster that streams a simulcast of its broadcasts is
prohibited under FCC regulations from selling advertising.\27\ NRBNMLC
Ex. 7000 ] 18 (Emert WDT). Increased Internet performances are thus
unlikely to lead to increased revenue, even as
[[Page 26320]]
they result in an increased royalty burden. See 5/21/15 Tr. at 5270
(Henes).\28\
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\27\ The NRBNMLC also highlights a number of differences between
broadcasters and other ``pure play'' webcasters. See, e.g., NRBNMLC
PFF ] 33. No party has proposed noncommercial broadcasters as a rate
category separate from other noncommercial webcasters, and the
record does not provide the Judges a sufficient basis to establish
separate rates for those separate categories. Consequently, the
differences that the NRBNMLC highlights are irrelevant.
\28\ As discussed above, SoundExchange and two groups of
noncommercial webcasters--CBI and NPR/CPB--submitted settlement
agreements covering certain noncommercial webcasters that establish
separate, lower effective royalty rates for some noncommercial
webcasters. The Judges adopted these agreements. 80 FR 58201 (Sept.
28, 2015); 80 FR 59588 (Oct. 2, 2015). These agreements demonstrate
that willing sellers are prepared to accept royalty rates for at
least some noncommercial webcasters that are different and lower
than commercial webcasting rates.
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Indeed, the NRBNMLC and SoundExchange both proposed that the Judges
adopt a different rate structure for noncommercial webcasters than for
commercial webcasters, which suggests to the Judges that there is
continued support in the marketplace for a different rate structure for
commercial and noncommercial webcasters.
Therefore, for all of the foregoing reasons, and in accordance with
the Judges' reasoning from Web II and Web III, the Judges adopt a
separate rate structure for noncommercial webcasters than the one
applicable to commercial webcasters.
3. Simulcasters vs. Other Commercial Webcasters
The NAB participated in this proceeding on behalf of its member
terrestrial radio stations that simulcast over-the-air broadcasts on
the Internet. iHeartMedia (iHeart) also owns and operates terrestrial
broadcasting stations that simulcast, in whole or in large part, their
over-the-air programming. In this proceeding, the Judges focus solely
on the Internet transmissions of these broadcasters.
The NAB argues that simulcasting is different from other forms of
commercial webcasting. Given these purported differences, the NAB
advocates for a separate (lower) rate for simulcasters than for other
commercial webcasters. The NAB avers that simulcasting constitutes a
distinct submarket in which buyers and sellers would be willing to
agree to lower royalty rates than their counterparts in the commercial
webcasting market. See NAB Proposed Rates and Terms at 2 (definition of
eligible transmission) (Oct. 7, 2014). No other party's rate proposal
treats simulcasting differently from other commercial webcasting.
As the proponent of a rate structure that treats simulcasters as a
separate class of webcasters, the NAB bears the burden of demonstrating
not only that simulcasting differs from other forms of commercial
webcasting, but also that it differs in ways that would cause willing
buyers and willing sellers to agree to a lower royalty rate in the
hypothetical market. As discussed below, based on the record in the
current proceeding, the Judges do not believe that the NAB satisfied
that burden. Therefore, the Judges do not adopt a different rate
structure for simulcasters than that which applies to other commercial
webcasters.
a. History
No prior rate determination has treated simulcasters differently
from other webcasters. In Web I, the Librarian, at the recommendation
of the Register, rejected a CARP report that set a separate rate for
retransmission of radio broadcasts by a third-party distributor, and
adopted a single rate for commercial webcasters. 67 FR at 45252.\29\
---------------------------------------------------------------------------
\29\ The Librarian also rejected arguments that broadcasters who
stream their own radio broadcasts should be treated differently from
third parties who stream the same broadcasts. Id. at 45254.
---------------------------------------------------------------------------
In Web II, the Judges rejected broadcasters' arguments that rates
for simulcasting should be different from (and lower than) royalty
rates for other commercial webcasters.
The record before us fails to persuade us that these
simulcasters operate in a submarket separate from and noncompetitive
with other commercial webcasters. Indeed, there is substantial
evidence to the contrary in the record indicating that commercial
webcasters . . . and simulcasters . . . regard each other as
competitors in the marketplace.
Digital Performance Right in Sound Recordings and Ephemeral Recordings,
72 FR 24084, 24095 (May 1, 2007), aff'd in relevant part sub nom.
Intercollegiate Broad. Sys. v. Copyright Royalty Bd., 571 F.3d 69 (D.C.
Cir. 2009) (Web II).
The NAB reached a WSA settlement with SoundExchange prior to the
conclusion of Web III covering the remainder of the Web II rate period
and all of the Web III rate period.\30\ At the request of the NAB and
SoundExchange, the Judges adopted the settlement as statutory rates and
terms binding on all simulcasting broadcasters. See 75 FR 16377 (April
1, 2010). Consequently, simulcasters did not participate in the Web III
proceeding, in which the Judges determined rates for ``all other
commercial webcasters.'' Although the Judges did not determine separate
rates for simulcasters in Web III, because the Judges adopted the NAB
settlement, simulcasting broadcasters currently pay different rates
than webcasters that operate under the rates determined by the
Judges.\31\
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\30\ The NAB Settlement rates rose from $0.0017 per performance
in 2011 to $0.0025 in 2015. 37 CFR 380.12(a).
\31\ Under the NAB settlement, participating simulcasters
initially paid lower per-performance royalty rates than those set by
the Judges in Web III. In later years, however, the rates increased
to levels that exceed those set by the Judges in Web III. As a
consequence, simulcasters currently pay a higher royalty rate than
all other commercial webcasters. Since no party has asserted that
simulcasters should pay a higher rate than other commercial
webcasters, the Judges do not reach that issue at this time.
---------------------------------------------------------------------------
b. Comparable Agreements
In the current proceeding, the NAB presented no benchmarks in
support of its rate proposal, opting instead for an alternative
economic analysis.\32\ The NAB does not, therefore, direct the Judges
to any marketplace benchmarks to demonstrate different prevailing
royalty rates for simulcasters than for other webcasters.
---------------------------------------------------------------------------
\32\ See discussion infra, section IV.G.2.
---------------------------------------------------------------------------
The only agreements in the record that relate specifically to
simulcasting are the NAB WSA settlement agreement and the 27 direct
licenses between iHeartMedia and independent record labels (the iHeart/
Indie Agreements). The NAB settlement (which the NAB repudiates as a
benchmark) does not support the NAB proposal. The average of the
settlement rates over the Web III rate period is precisely the same as
the average of the rates that the Judges determined for all other
commercial webcasters in Web III.\33\ The 2015 rate of $0.0025 per
performance is five times the rate that the NAB proposes for the 2016-
2020 rate period ($0.0005).
---------------------------------------------------------------------------
\33\ In both cases the average per-performance royalty rate over
the 2011-2015 period is $0.00214.
---------------------------------------------------------------------------
The Judges cannot compare the iHeart/Indie rates directly to the
NAB settlement rate because they do not employ a per-performance
royalty rate. Instead those agreements set royalties at the record
company's pro-rata share of [REDACTED]% of [REDACTED]. See, e.g., Ex.
3351 at 7-8 (Clear Channel-RPM Entertainment License Agreement).
Without additional data (e.g., iHeart's net simulcasting revenues and
the number of simulcast performances of recorded music), the Judges are
unable to convert the [REDACTED] rate into a per-performance rate.
Moreover, there is insufficient evidence and economic analysis in the
record for the Judges to determine whether the headline rate for
simulcasting in the iHeart-Indie agreements fully accounts for the
economic value of the licenses to the parties.\34\ The Judges are
unable to
[[Page 26321]]
determine on this record whether or not the iHeart-Indie agreements
support the NAB proposal. Therefore, the Judges find that the iHeart-
Indie agreements do not provide adequate evidentiary support for the
NAB's proposed differential rate for simulcasters.
---------------------------------------------------------------------------
\34\ For example, the agreements include payments that are
characterized as royalties for performances of recorded music by
means of [REDACTED]. See, e.g., IHM Ex. 3351 at 7. Since U.S.
copyright law confers no exclusive right of public performance by
means of terrestrial radio transmissions for sound recording
copyright owners, the Judges would need further evidence to
determine whether, as an economic matter, these payments should be
treated, at least in part, as compensation for other uses (such as
[REDACTED]) covered by the agreements that do require a license
under copyright law.
---------------------------------------------------------------------------
c. NAB's Qualitative Arguments for a Separate Rate for Simulcasters
In lieu of quantitative benchmarks, the NAB offers several
qualitative arguments why willing buyers and sellers would agree to
lower simulcasting rates. Each argument proceeds from two basic
premises: (1) The programming content on a simulcast stream is the same
as programming content on terrestrial radio; and (2) terrestrial radio
is fundamentally different from music services.\35\
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\35\ See, e.g., NAB Ex. 4002 ]] 4, 11, 30-40 (Dimick WDT); NAB
Ex. 4009 ] 5 (Dimick WRT); 5/26/15 Tr. 5798-99 (Dimick); 5/20/15 Tr.
at 5076-78, 5104 (Newberry); NAB Ex. 4003 ]] 2, 13-26, 29 (Knight
WDT); NAB Ex. 4005 ] 14, 24-34 (Downs WDT); 5/21/15 Tr. at 5217-19
(Downs); NAB Ex. 4006 ]] 3, 9-19 (Koehn WDT).
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i. FCC License and Public Interest Requirement
Radio broadcasters, which are licensed and regulated by the Federal
Communications Commission (FCC), are legally required to act in the
public interest. See NAB Ex. 4001 ] 14 (Newberry WDT). By extension,
this requirement distinguishes simulcasters from other commercial
webcasters.
The NAB's witnesses testified persuasively that the public interest
requirement is a key consideration for radio broadcasters as they
conduct their business. See, e.g., 5/20/15 Tr. at 5075 (Newberry);
Dimick WDT ] 33. What is far less clear is the connection between this
requirement and the NAB's proposal that simulcasters should pay lower
royalty rates than other commercial webcasters. The NAB did not present
any persuasive evidence that the public interest requirement would in
any way affect the royalty rates that willing buyers and sellers would
agree to in the hypothetical market. To the extent the NAB's argument
is that, as a matter of public policy, radio broadcasters' public
interest requirement justifies lower royalty rates for simulcasting,
that argument is without any basis in Sec. 114.
ii. Local Focus and Community Involvement
NAB witnesses testified that radio broadcasters focus on their
local market both in their terrestrial broadcasts and in their
simulcast streams. They attribute this local focus to their legal
obligations under FCC regulations, 5/20/15 Tr. at 5075 (Newberry), to
the needs of their advertisers to reach customers proximate to their
places of business, id. at 5077-78, and to their desire to connect with
their listeners and, presumably, build listener loyalty. Id. One aspect
of that local focus is involvement in, and reporting of, activities in
the community. See, eg., Knight WDT ] 18; Dimick WDT ] 33. The Judges
find neither record evidence nor an articulated rationale to support a
lower royalty rate for simulcasters based on the purported local focus
of radio broadcasters. The Judges decline to infer such a rationale.
iii. On-Air Personalities and Other Non-Music Content
The NAB stresses the role of on-air personalities, news, weather,
and other non-music content in cultivating the loyalty of radio
listeners and distinguishing a radio station from its competitors. Once
again, the NAB ably demonstrated a distinction between simulcasting and
other webcasting, but failed to articulate why that distinction
supports differential royalty rates for simulcasters.
The NAB cites a survey conducted by Professor Dominique Hanssens
that concluded that 12.2% of the value that simulcast listeners derive
from listening to music-formatted stations is attributable to ``hosts,
DJs, and other on-air personalities.'' NAB Ex. 4012 ] 62, App. 8
(Hanssens WRT); NAB Ex. 4015 ] 67, Table 5 (Katz AWRT). The NAB
presents no evidence, however, that the on-air time consumed by on-air
personalities exceeds, on a percentage basis, the value that listeners
attribute to them. By including non-music content in their
transmissions, simulcasters reduce the number of performances of
recorded music, thus reducing their royalty obligation under a per-
performance rate structure. The NAB failed to present any evidence that
the value of non-music content is not fully accounted for in this
reduction of royalties.\36\ Absent such evidence, the Judges find that
the relative amount of non-music content transmitted by simulcasters
versus the amount transmitted by other commercial webcasters does not
support a reduced royalty rate for simulcasters.
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\36\ Were the Judges to adopt a percentage-of-revenue rate
structure, an appropriate adjustment would be necessary to reflect
the lower percentage of recorded music as compared with an Internet
music service. As the Judges do not adopt a percentage-of-revenue
rate structure in this proceeding, however, no adjustment is needed.
---------------------------------------------------------------------------
iv. Degree of Interactivity
The NAB argues that simulcasters should pay a lower royalty rate in
recognition of the fact that simulcast transmissions are the least
interactive form of webcasting. The NAB contends that three
SoundExchange fact witnesses--Dennis Kooker, Raymond Hair, and Aaron
Harrison--conceded as much in their testimony and pretrial depositions.
NAB PFF ]] 114-118.
(A) Kooker Testimony
Dennis Kooker, President, Global Digital Business at Sony Music
Entertainment, testified that
statutory licensees pay for their content at compulsory rates, and
as a consequence exert downward pressure on privately negotiated
rates. One of the original justifications for allowing statutory
services to pay these lower rates was that the offering under the
statutory license would provide a user experience similar to
terrestrial radio. Statutory services could offer channels of
particular musical genres, but the programming would be selected by
the service. If listeners wanted to select their programming, they
would have to pay for it through directly licensed services.
SX Ex. 12 at 15 (Kooker WDT). The NAB contends that ``Mr. Kooker
recognized a dichotomy between service-selected programming, which is
eligible for the lower statutory rate, and listener-selected
programming, which requires payment of a higher, directly licensed
rate.'' NAB PFF ] 115.
Even accepting Mr. Kooker's testimony at face value,\37\ it is not
a concession that simulcasters should be charged lower rates than other
webcasters. It is clear in context that the ``dichotomy'' that Mr.
Kooker identifies is that established in Sec. 114 between interactive
services, which are directly licensed, and noninteractive services,
which are subject to the statutory license that is the subject of this
proceeding.\38\ Mr. Kooker does not state that, among statutory
services, some should pay lower rates than others based on how
interactive they are. Mr. Kooker's testimony does not support a
conclusion that he believes simulcasters should pay lower rates than
other
[[Page 26322]]
webcasters, much less support the conclusion that willing sellers would
accept a lower rate in the hypothetical marketplace.
---------------------------------------------------------------------------
\37\ Mr. Kooker does not cite any evidence of legislative
history to support his conclusion that the similarity of
noninteractive webcasting to terrestrial radio was a
``justification'' for allowing statutory services to pay lower
rates. That statement is merely an expression of Mr. Kooker's lay
opinion.
\38\ Mr. Kooker then argues that that distinction is ``rapidly
disappearing'' in the marketplace. Kooker WDT at 15.
---------------------------------------------------------------------------
(B) Hair Testimony
In his hearing testimony, Raymond Hair, International President of
the American Federation of Musicians, confirmed that he had previously
expressed \39\ the opinion that services with greater ``functionality''
should pay higher rates than services with less functionality. 4/29/15
Tr. at 806 (Hair).\40\ Mr. Hair's opinion is not authoritative in this
context, however, because he represents neither the buyer nor the
seller in the hypothetical transaction that he describes.
---------------------------------------------------------------------------
\39\ The earlier statement was in comments Mr. Hair submitted on
behalf of the AFM to the Copyright Office in connection with a study
on music licensing issues. The comments are not a part of the record
of this proceeding.
\40\ Mr. Hair's view of what constitutes ``functionality'' is
not entirely clear, however, though it appears to include the
ability to ``hear what I want to hear and hear it when I want to
hear it.'' Id. at 809.
---------------------------------------------------------------------------
(C) Harrison Testimony
The strongest evidence the NAB offers on this point is Aaron
Harrison's testimony. Mr. Harrison, Senior Vice President, Business and
Legal Affairs of UMG Recordings, agreed with the statement ``the higher
the level of interactivity, the higher the rate'' because ``higher
levels of interactivity are more substitutional than less on-demand.''
4/30/15 Tr. at 1101 (Harrison). Mr. Harrison also agreed that
``simulcast is the least substitutional.'' Id.
As a record company executive, Mr. Harrison's testimony provides
some evidence that record companies would be willing to accept lower
royalties from services that are less interactive, because those
services are less likely to displace sales of sound recordings. The
probative value of his evidence in determining whether a differential
rate is justified for simulcasters is limited, however. First, Mr.
Harrison was responding to a question posed in the abstract, rather
than identifying specific transactions that he had witnessed or in
which he had participated. Second, Mr. Harrison stated that he was
aware of no empirical data on the subject, and was merely testifying as
to his ``perception from being in the industry.'' Id. at 1102. In sum,
testimony regarding the perceptions of an industry participant carries
considerably less weight than actual examples of marketplace behavior.
Nevertheless, Mr. Harrison's testimony carries some weight that
hypothetical sellers view the amount of interactivity that a service
offers as a relevant factor in assessing the royalty rate that a
service should be required to pay. As such, the Judges consider it
together with the other evidence relevant to the NAB's arguments.
Nevertheless, Mr. Harrison's testimony provides little support for
the NAB's assertion that simulcasters generally should be entitled to
pay lower royalty rates than other commercial webcasters. While the NAB
posits that simulcasting is less interactive than custom webcasting, it
has not established (or attempted to establish) that simulcasting as a
rule is materially less interactive than any other form of non-custom,
noninteractive webcasting, all of which would be subject to the general
commercial webcasting rates. The statutory license is available to
services that offer a continuum of features, including various levels
of interactivity, which are offered in a manner consistent with the
license. On the record before them, the Judges find little support for
attempting to parse the levels of interactivity that the various
statutory services offer to try to cobble together a customized rate
structure among categories of commercial webcasters based solely on
statutorily permissible levels of interactivity.
v. Promotional Effect
The record of this proceeding is replete with statements concerning
the promotional value of terrestrial radio play for introducing new
artists and new songs to the public and stimulating sales of sound
recordings. See, e.g., Knight WDT ]] 30-31; Dimick WDT ] 43; IHM Ex.
3226 ] 7 (Poleman WDT); 4/28/15 Tr. at 386-87, 461-62 (Kooker). There
appears to be consensus, or near-consensus, on this point.
The consensus breaks down, however, when it comes to the
promotional effect of webcasting, including simulcasting. The NAB
offers a somewhat tautological argument: Simulcasting is, by
definition, simultaneous retransmission of the content of a terrestrial
radio broadcast over the Internet; it is, therefore, the same as radio;
therefore, it must have the same promotional impact as terrestrial
radio. NAB PFF ]] 107-113; see NAB Ex. 4000 ] 83 (Katz WDT); Katz AWRT
] 98; see also iHeartMedia PFF ]] 123-124. SoundExchange disputes this
conclusion. See SoundExchange PFF ]] 897-938.
As SoundExchange points out, there are a number of differences
between terrestrial radio and simulcasting. For example, terrestrial
radio broadcasts are (as the NAB stresses) locally-focused; simulcasts,
by contrast, can be accessed throughout the country or even overseas.
See 5/14/15 Tr. at 3909-10 (Peterson); 5/29/15 Tr. at 6556 (Kooker);
Dimick WDT ] 12. The choices available to radio listeners are more
limited than those available to simulcast listeners. See 5/7/15 Tr. at
2522-23 (Wilcox); 5/29/15 Tr. at 6556 (Kooker). Through aggregation
sites, such as iHeartRadio and TuneIn, simulcasting offers listeners
greater functionality (e.g., the ability to search, pause, rewind and
record) than radio does. See 6/1/15 Tr. at 7075-77 (Burress); SX Ex. 27
at 5 (Kooker WRT); 5/26/15 Tr. at 5840-51 (Dimick).
These differences may affect listening habits in a way that
diminishes the promotional effect of simulcasting. This is supported by
uncontroverted evidence that radio advertisers are generally unwilling
to pay to promote their products and services on simulcast streams, see
Downs WDT ] 22; 5/21/15 Tr. at 5242-43 (Downs), and record companies do
not view simulcasting as having the same promotional impact as
terrestrial radio.\41\ See 6/1/15 Tr. at 7045, 7048, 7050 (Burress);
Ex. 3242 at 20, 33 (Walk Deposition at 75, 129). See also Blackburn WRT
] 42 (``neither interactive nor noninteractive services have a
statistically significant promotional impact on users' propensity to
purchase digital tracks'') (Ex. 24).
---------------------------------------------------------------------------
\41\ The NAB and iHeart repeatedly point to evidence that record
company promotional personnel thank music services for playing their
artists' music to support the conclusion that such ``spins'' are
promotional. See, e.g., Emert WDT ] 25; 5/13/15 Tr. at 3573
(Morris); 5/21/15 Tr. at 5165 (Poleman); Exs. 3241, 3569, 3570,
3576, 3575, 3576, 3643. The Judges do not find this argument
persuasive. It is at least equally plausible that record company
executives were merely displaying ``common courtesy.'' 6/1/15 Tr. at
7046-47 (Burress).
---------------------------------------------------------------------------
In short, there is no empirical evidence in the record that
simulcasting is promotional to the same degree as terrestrial radio,
and the narrative the NAB puts forward to support that proposition is
flawed at best. The Judges need not, however, decide that particular
question in order to determine whether simulcasters should receive a
discounted rate. Whether or not simulcasting is as promotional as
terrestrial radio simply is not the relevant question. The relevant
questions are (1) whether simulcasting is more promotional than other
forms of commercial webcasting and, if so, (2) whether such heightened
promotional impact justifies a discounted rate for simulcasters.
Assuming for the sake of argument that a promotional impact could
justify a discounted royalty rate for simulcasters, the NAB would be
[[Page 26323]]
required to demonstrate that such promotional effect is greater for
simulcasting than for other forms of commercial webcasting to an extent
that would justify a lower rate for simulcasters. The NAB has not done
so.
The licensee services introduced two studies in this proceeding to
demonstrate empirically that statutory webcasting is promotional.
Pandora presented a study by Dr. Stephen McBride that examined the
effect on sales of particular albums (in the case of new music) or
songs (in the case of catalog material) in particular geographic
regions if Pandora did not play that music in that region. See
generally McBride WDT (PAN Ex. 5020). iHeartMedia presented a study by
Dr. Todd Kendall that examined the relationship between music purchases
made on certain machines (PCs) and the amount of time that music was
streamed on those same machines. See generally Kendall WRT (IHM Ex.
3148).
Dr. McBride's study concluded that Pandora has a positive effect on
music sales. See McBride WDT ] 49. As it focused solely on the effect
that Pandora, a custom radio service, has on music sales, the McBride
study reveals nothing about the relative promotional value of
performances by simulcasters as compared with other commercial
webcasters.
Dr. Kendall's study compares the promotional effect of interactive
and noninteractive streaming services, finding that noninteractive
services have a greater promotional effect. See Kendall WRT ]] 25-29.
Again, however, this study fails to compare simulcasters with other
commercial webcasters. The noninteractive services that were included
in Dr. Kendall's study included both simulcast and non-simulcast
webcasters. See IHM Ex. 3151 (Exhibit A to Kendall WRT).
The Judges are well aware of SoundExchange's criticisms of these
two studies. However, for purposes of assessing the strength of the
NAB's argument for a separate rate for simulcasters, it suffices to
note that these studies do not even purport to answer the central
question whether simulcasting has a greater promotional effect than
other forms of commercial webcasting. In conclusion, the record does
not support a separate rate for simulcasters on the basis of any
purported promotional effect simulcasting may have.
vi. Additional Considerations Supporting the Same Rate for Simulcasters
and Other Commercial Webcasters
(A) Competition With Other Commercial Webcasters
Simulcasters and other commercial webcasters compete for listeners.
The record shows that Pandora, the largest commercial webcasting
service, regards iHeartRadio, one of the largest services that
aggregates simulcast streams (as well as providing a custom streaming
service), as a competitor, and vice versa. See, e.g., SX Ex. 269 at 18
(including iHeart among Pandora competitors); see generally Ex. 166
(including Pandora among iHeart competitors). Pandora broadly includes
other interactive and noninteractive streaming services, as well as
terrestrial radio, as its competitors. See Ex. 159 at 18-19. Internal
iHeartMedia emails demonstrate [REDACTED]. See, e.g., Exs. 373, 1028,
1189.The mutual competition between simulcasters and other commercial
webcasters is a strong indication that simulcasters and other
commercial webcasters operate in the same, not separate submarkets. See
Web II, 17 FR at 24095.
(B) Proposed Definitions of Simulcast
The NAB proposes to define ``broadcast retransmissions'' (the term
used to denote simulcasts in the Judges' regulations) as follows:
Broadcast Retransmissions means transmissions made by or on
behalf of a Broadcaster over the Internet, wireless data networks,
or other similar transmission facilities that are primarily
retransmissions of terrestrial over-the-air broadcast programming
transmitted by the Broadcaster through its AM or FM radio station,
including transmissions containing (1) substitute advertisements;
(2) other programming substituted for programming for which
requisite licenses or clearances to transmit over the Internet,
wireless data networks, or such other transmission facilities have
not been obtained, (3) substituted programming that does not contain
Performances licensed under 17 U.S.C. 112(e) and 114, and; (4)
occasional substitution of other programming that does not change
the character of the content of the transmission.
NAB Proposed Rates and Terms at 2.
iHeartMedia proposes to amend the current definition of ``broadcast
retransmission'' in 37 CFR 380.11 by adding:
[A] Broadcast Retransmission does not cease to be a Broadcast
Retransmission because the Broadcaster has replaced programming in
its retransmission of the radio broadcast, so long as a majority of
the programming in any given hour of the radio broadcast has not
been replaced.
iHeartMedia Proposed Rates and Terms at 3.
Both proposed definitions would permit the substitution of
substantial portions of the content of a broadcast before
retransmitting it over the Internet. [REDACTED], in fact, has already
developed and deployed [REDACTED] to accomplish this substitution more
easily. See 5/13/15 Tr. at 3662 (Littlejohn); see generally IHM Ex.
3210 (Littlejohn WDT). Even if the Judges were persuaded that simulcast
streams bear unique characteristics that distinguish them from other
webcast streams, the ability and demonstrated willingness of
broadcasters to alter those streams casts doubt on any proposal to
grant simulcasting lower rates than other commercial webcasters.
d. Conclusion Regarding Separate Rate for Simulcasters
Based on the record in the current proceeding, the Judges do not
find that a separate rate category for simulcasters is warranted. The
NAB's arguments in favor of a separate rate category for simulcasters
lack support in the record, or are otherwise unpersuasive. The bulk of
relevant evidence in the record persuades the Judges that simulcasters
and other commercial webcasters compete in the same submarket and
therefore should be subject to the same rate. Granting simulcasters
differential royalty treatment would distort competition in this
submarket, promoting one business model at the expense of others.
B. Greater-of Rate Structure
In their notice commencing this proceeding, the Judges inquired
about price differentiation in the market and the desirability of using
a percentage-of-revenue rate structure in lieu of, or in addition to,
the per-performance rate structure in use for the licenses at issue in
this proceeding. Perhaps in response to this solicitation of comment,
SoundExchange and Pandora each proposed different greater-of rate
structures employing a per-play rate and a percentage-of-revenue rate.
Nevertheless, all of the Services apart from Pandora oppose adoption of
this two-prong approach. As discussed below, after careful
consideration of all rate structure proposals presented in the
proceeding, the Judges find that a greater of rate structure is not
warranted in the current rate period.
1. SoundExchange's Support for a Greater-of Rate Structure
In support of its proposed greater-of rate structure, SoundExchange
makes the following arguments.
[[Page 26324]]
According to Dr. Daniel Rubinfeld and Dr. Thomas Lys (two
SoundExchange economic expert witness), willing buyers and willing
sellers have demonstrated a ``revealed preference'' for a greater-of
rate structure, as evidenced by the adoption of such rates in the
market.\42\ For example, many agreements that allow for more ``lean-
forward'' functionality contain a two-pronged per-play and revenue
percentage structure like the one SoundExchange proposes.\43\
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\42\ SX Ex. 17 ] 94 (Rubinfeld CWDT); SX Ex. 14 ]] 25-32 (Lys
WDT) (94% of 62 label-service pairings adopt a greater-of
structure). The majority (50% to 60%) of the purely interactive
agreements that contain a greater-of structure utilize the same two
prongs that SoundExchange proposes-a per-play rate and a percentage-
of-revenue rate. Rubinfeld CWDT ] 206; SX Ex. 63 (App. 1a).
\43\ See SX Ex. 2070 (the [REDACTED] Agreement Sec. 1(b), at1);
SX Ex. 2071 (the [REDACTED] Agreement Sec. 1(d), at 2; SX Ex. 33
(the [REDACTED] Agreement Sec. 3(b)(2), at 15-16); IHM Ex. 3343 at
9; IHM Ex. 3365 at 11; IHM Ex. 3356 at 9-10; Rubinfeld CWRT ] 87
([REDACTED]'s agreements with [REDACTED]); SX Ex. 80; ([REDACTED]
Agreement); SX Ex. 87 ([REDACTED] Agreement); SX Ex. 100 ([REDACTED]
Agreement); IHM Ex. 3476 ([REDACTED] Term Sheet); SX Ex. 100
([REDACTED] Agreement); SX Ex. 80 ([REDACTED] Agreement); PAN Ex.
5014 ([REDACTED] Agreement).
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A greater-of structure provides positive economic
efficiencies that benefit licensees as well as licensors. 5/5/15 Tr.
1756-58 (Rubinfeld).
In particular, the greater-of structure provides
reasonable compensation to the record companies because: (1) The per-
play prong provides a guaranteed revenue stream, especially against the
vicissitudes of consumer demand; and (2) the percentage-of-revenue
prong allows record companies to share in any substantial returns
generated by a Service. Rubinfeld CWDT ]] 96; 100.
The greater-of structure benefits the Services because the
presence of the percentage-of-revenue prong, on the upside, allows for
a lower per-play rate than would exist if a single-prong, per-play rate
were established, and a lower per-play rate would encourage entry into
the market by new services. Rubinfeld CWDT ] 95.
The greater-of structure would enable a beneficial form of
price discrimination. All else being equal, services facing relatively
low price elasticities (facing more inelastic demand) would be more
likely to charge higher prices, earn greater revenues and thus trigger
the percentage-of-revenue prong. Conversely, services facing relatively
high price elasticities (facing more elastic demand) would be more
likely to charge lower prices, generate lower revenues and therefore
pay royalties on the per-play basis. Rubinfeld CWDT ] 112.\44\
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\44\ SoundExchange proposed a ``55% of revenue'' rate as the
second prong of its proposed greater-of rate structure based on Dr.
Rubinfeld's survey of the revenue percentage shares contained in his
interactive benchmark agreements, which identified a range between
50% and 60% of the services' revenues, with the majority falling
between 55% and 60%. Rubinfeld CWDT ] 206; SX Ex. 63, App. 1a
(Rubinfeld CWDT App. 1a). The following noninteractive services and/
or nonsubscription services also have percentage-of-revenue prongs
that approximate the 55% rate SoundExchange has proposed:
[REDACTED]'s agreements with Universal, Warner, and Sony for
[REDACTED] Service, which purportedly does not have on-demand
functionality, has a greater-of structure with percentage-of-revenue
shares of between [REDACTED]%-[REDACTED]% paid by the labels.
[REDACTED]'s agreements with Universal, Sony, and Warner for
[REDACTED] streaming service, which allegedly does not have on-
demand functionality, has a greater-of structure with a pro-rata
share of [REDACTED]% of [REDACTED] premium net revenue.
[REDACTED]'s free radio service has a percentage-of-revenue
prong in its agreement with [REDACTED] for a pro-rata payment of
[REDACTED]% of revenue. See SX Ex. 80,
SNDEX_0024312_[REDACTED]_20130101 at SNDEX0024322 ([REDACTED]
Agreement). SoundExchange acknowledges that several other agreements
contain a percentage-of-revenue prong of 45%. More particularly, the
[REDACTED] agreements with [REDACTED] and [REDACTED] have a greater-
of compensation formula that includes a pro-rata [REDACTED]% share
of ad revenues for the [REDACTED] service. SX Ex. 2070 at section
1(b), p. 1 ([REDACTED] Agreement); SX Ex. 2071 at section 1(d), p. 2
([REDACTED] Agreement). Also, the [REDACTED] Agreement contains a
greater-of structure that includes a pro rata share of [REDACTED]%
of gross, non-simulcast webcasting revenues. SX Ex. 33 Sec.
3(b)(2), at 15-16.
---------------------------------------------------------------------------
2. The Services' Opposition to a Greater-of Rate Structure
The Services that oppose the greater-of structure in principle
argue \45\ that such a structure allocates all of the downside risk to
the Services alone, while allocating to the record companies a share of
potential upside benefits. See, e.g., Katz AWRT ] 140. Such
misallocation of risk and reward, according to the opposing Services,
not only unjustifiably allows the record companies to free-ride on a
service's economic success, but also ignores the services' downside
risk that they will fail to execute their respective business models
and go out of business. See, e.g., IHM Ex. 3216 ] 19-26 (Pakman WDT);
Katz AWRT ] 149.\46\
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\45\ The NAB, iHeart, and Sirius XM raise additional objections
to the use of a percentage-of-revenue prong as applied to
simulcasters. Because the Judges decline to adopt a separate rate
that applies only to simulcasters they need not address these
additional objections.
\46\ These Services assert that there is no economic
justification for ``rewarding'' record companies for ``incremental
value that is created by the webcaster above and beyond that created
directly by the music itself,'' an additional value that may arise
from lower price elasticities not attributable to the sound
recordings. See, e.g., Katz AWRT ] 148.
---------------------------------------------------------------------------
A further economic deficiency in this two-prong approach, according
to the opposing Services, is that it utilizes a percentage of revenue
rather than a percentage of profits. An investment that raises revenues
by less than the cost of the investment would reduce profits, yet,
under a percentage-of-revenue prong, royalty payments would rise. In
such a scenario, the ``upside'' from increases in revenues would not
necessarily translate into an increase in profits. See Katz AWRT ] 150.
According to the opposing Services, forty-two percent of the
Majors' contracts examined by Dr. Rubinfeld do not contain a per-play
prong, contradicting SoundExchange's claim that the market has
demonstrated a consistent ``revealed preference'' for a greater-of
approach. Katz AWRT ] 143. According to these Services, all but one of
the 62 ``label-service pairings'' identified by Dr. Lys related to
interactive services, thereby further contradicting SoundExchange's
claim of a revealed marketplace preference for a greater of rate
structure. 5/4/15 Tr. 1474-75 (Lys).
The opposing Services also note that the agreements entered into by
[REDACTED] and [REDACTED], relied upon by Dr. Rubinfeld, were
negotiated as parts of overall interactive agreements with their record
company counterparties, and the specific services within those
agreements upon which Dr. Rubinfeld relies have extra-statutory
interactive functionality. See NAB PFF ]] 510, 528-530, 515-518, 525-
527 (and citations to the record therein).\47\
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\47\ With particular regard to the [REDACTED] agreements, the
opposing Services also note that they were global deals (rather than
U.S.-only deals) and tied rates to the sale of [REDACTED], rendering
those agreements inapplicable as benchmarks. Katz AWRT ] 248.
---------------------------------------------------------------------------
The opposing Services point out that the parties to the other
agreements relied upon by Dr. Rubinfeld did not demonstrate an
expectation that the revenue prong of the greater-of formula would ever
be triggered (given the relative levels of the per-play and revenue
percentage prongs). See, e.g., PAN Ex. 5110 5/6/15 Tr. 6956-57
(Lexton). Rather, according to the opposing Services, the percentage-
of-revenue prongs were added by the record companies merely to create
favorable precedent for future proceedings. See generally Katz AWRT ]
193-196; PAN Ex. 5365 at 5-6 (Shapiro SWRT); 5/15/15 Tr. 4025
(Lichtman); 6/2/15 Tr. 7362-63 (Cutler). Consistent with this point,
the opposing Services note that:
There is no evidence that [REDACTED] has paid royalties
under
[[Page 26325]]
the percentage-of-revenue prongs of its agreements with [REDACTED] or
the Indies. See NAB PFF 603 (and record citations therein); and
[REDACTED] has not paid royalties under the percentage-of-
revenue prong of its agreement with [REDACTED]. 6/1/15 Tr. 6896-97
(Lexton).\48\
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\48\ Moreover, in this vein, the opposing Services point out
that [REDACTED] did not even estimate the potential value of the
percentage-of-revenue prong in its agreement with [REDACTED]. Id. at
6895.
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3. The Services' Opposition to the Percentage of Revenue That
SoundExchange Proposed
Even assuming that a percentage-of-revenue prong should be included
in a greater-of rate structure, the Services (including Pandora) oppose
the 55% percent figure SoundExchange proposed. Their opposition is
based on the following arguments:
First, as with his per-play proposal, Dr. Rubinfeld bases his
percentage-of-revenue analysis entirely on the unsupported and
economically improper assumption that, in a competitive market,
noninteractive services would pay the same percentage-of-revenue rates
as do interactive services.\49\
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\49\ Pandora's RPFF ] 226 (quoting Rubinfeld CWDT ] 169 (``I
have assumed that the ratio of the average retail subscription price
to the per-subscriber royalty paid by the licensee to the record
label is approximately the same in both interactive and
noninteractive markets.'')) (emphasis added). Pandora's RPFF ] 226
(quoting Rubinfeld CWDT ] 169 (``I have assumed that the ratio of
the average retail subscription price to the per-subscriber royalty
paid by the licensee to the record label is approximately the same
in both interactive and noninteractive markets.'')) (emphasis
added).
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Second, the Services assert that SoundExchange's reliance on
evidence that the Majors were able to extract similar supra-competitive
rates from a handful of services that are not fully on-demand fails to
support an importation of the 55% revenue rate into a fully and
effectively competitive noninteractive market. Pandora's RPFF ] 227
(responding to SX PFF ]] 425-430).
Third, the Services argue that Dr. Rubinfeld inexplicably ignored
an agreement between Slacker and Warner for Slacker's DMCA-compliant
noninteractive radio service that requires Slacker to pay the greater
of [REDACTED]% of revenue (or the stated per-play rates). The terms of
this agreement are in stark contrast to Slacker's agreement with Warner
for Slacker's on-demand service, under which Slacker pays the greater
of [REDACTED]% of revenue (or the stated per-play rates). PAN Ex. 5222
(Nov. 2013 agreement) at 16-17; see also 5/7/15 Tr. 2495:5-2498:8
(Wilcox). Similarly, the Services note that Dr. Rubinfeld ignored a
Slacker agreement with Universal, under which Slacker paid (until June
2014), the greater of [REDACTED]% of revenue (or the stated per-play
rates) for the on demand service, but only the greater of [REDACTED]%
of revenue (or the stated per-play rates) for Slacker's radio service.
PAN Ex. 5034 at 0022479-80; 4/30/15 Tr. 1133:6-1135:18 (Harrison).\50\
---------------------------------------------------------------------------
\50\ Additionally, the Services point out that beginning in June
2014, Slacker and [REDACTED] agreed to a reduction in the on-demand
percentage to [REDACTED]% in exchange for an increase in the basic
radio percentage to [REDACTED]%, but the radio service percentage-
prong royalty rate therefore was still significantly only 64% of the
rate for the on demand service. PAN Ex. 5035 at 116684-87; 4/30/15
Tr. 1137:19-1140:10 (A. Harrison).
---------------------------------------------------------------------------
The Services further note that the [REDACTED] revenue-sharing
provision relied on by SoundExchange is not for ``[REDACTED]'s free
radio service,'' but rather applies only to two premium subscription
services and specifically excludes [REDACTED]'s free offerings.\51\
Both subscription services offer on-demand functionality, among other
interactive features.52 53
---------------------------------------------------------------------------
\51\ See [REDACTED] Agreement, SNDEX_0024312_[REDACTED] 20130101
(SX Ex. 80) at 11 of 82 (revenue-share provisions); id. at 3 of 82
(defining ``Portable Service''); [REDACTED] Agreement,
SNDEX0023904_[REDACTED]_20100528 (SX. Ex. 80) at 15 of 155 (defining
``Tethered Service'' and ``Subscription Service'').
\52\ See [REDACTED] Agreement, SNDEX0023904_[REDACTED]_20100528
(SX. Ex. 80) at 15 of 155 (describing functionality of
``Subscription Service'').
\53\ Additionally, the Services aver that [REDACTED] service
relied on by SoundExchange is not DMCA compliant, and therefore is
not a noninteractive service, as SoundExchange claims. See IHM PFF
]] 352-355 (and citations to the record therein). Furthermore, the
[REDACTED]% of revenue share agreed to by [REDACTED] for the
[REDACTED] service is below SoundExchange's proposed interactive-
based 55% benchmark rate. According to the Services, the provisions
of the [REDACTED] agreements cited in this paragraph do not reflect
a comparable ``greater of compensation formula,'' as SoundExchange
claims, but rather reflect a formula whereby a per-play rate is
added to a different percent-of-revenue figure. See [REDACTED]
Agreement Sec. (1)(b), at 1-2 (SX Ex. 2070) (``[REDACTED]% of Net
Advertising Revenue Per Play''); [REDACTED] Agreement Sec. 1(d),
p.2 (SX Ex. 2071) (``[REDACTED]% of Net Advertising Revenues per
Play'').
---------------------------------------------------------------------------
Fourth, the Services point out that Dr. Rubinfeld ignored the
percent-of-revenue levels in the Pandora/Merlin Agreement and the 27
agreements between [REDACTED] and independent labels as they related to
custom (Pureplay) webcasting. Among those agreements, all but one
contained an alternative greater-of prong with a [REDACTED]% of revenue
rate, far less than Dr. Rubinfeld's proposed 55% rate. See, e.g., PAN
Ex. 5014; IHM Ex. 3343.\54\ This discussion is largely academic,
however, because, as discussed below, the Judges have determined not to
adopt a greater of rate structure and instead will continue the current
per-play structure for commercial webcasters.
---------------------------------------------------------------------------
\54\ Pandora notes one outlier, the agreement between [REDACTED]
and iHeartMedia, that contains a [REDACTED]% of revenue prong for
iHeartMedia's custom offering. The Services argue that this
[REDACTED]% rate should be given little weight, in that it ``was
only agreed to because it was almost certainly not going to become
binding during the term of the agreement.'' 6/2/15 Tr. 7362:21-
7363:5 (Cutler).
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4. The Judges Reject Adoption of a Greater-of Rate Structure
The Judges reject the proposals by SoundExchange and by Pandora
that the statutory rate should contain a greater-of structure. Rather,
the Judges find that the statutory rate should continue to be set on a
per-play basis for commercial webcasters. The Judges reach this
conclusion for several reasons, any one of which the Judges find to be
sufficient to reject the greater-of approach with a percentage-of-
revenue prong.
The Judges first note that none of the percentage-of-revenue prongs
in the greater-of agreements in the record has been triggered, which
may suggest that the parties to those agreements viewed the per-play
rate as the rate term that would most likely apply for the length of
the agreement. See, e.g., 6/2/15 Tr. 7362-63 (Cutler) (distinguishing
``hard'' negotiations over the iHeart/Warner per-play rate from the
percentage-of-revenue prong to which Warner ``agreed because we were
never really going to hit that feature anyway.'').
Additionally, the agreements, or portions of agreements, relied
upon by SoundExchange in support of a greater of rate structure, are
not contained within the benchmarks relied on by SoundExchange.
SoundExchange, through Dr. Rubinfeld, looked at agreements other than
his benchmark agreements to find rate structures with a percentage-of-
revenue prong. In other words, the agreements that SoundExchange
contends are most reflective of the marketplace value of the copyright
owners' rights under the statutory licenses do not contain a greater of
rate structure.
Further, for its part Pandora pointed to the 25% revenue rate from
the Pandora/Merlin Agreement to support a greater of rate structure.
Unlike the steered rate provision in the Pandora/Merlin Agreement,
however, the 25% of revenue prong was nothing other than a figurative
``cut and paste'' of the Pureplay percentage rate. As such, it reveals
nothing about whether the parties in the marketplace would agree to
include such a prong in an
[[Page 26326]]
agreement.\55\ Indeed, Dr. Shapiro proffered virtually no justification
for the inclusion of the percentage-of-revenue prong in Pandora's
proposal.
---------------------------------------------------------------------------
\55\ When Pandora and Merlin agreed to a lower per-play rate
through steering, they created a rate that was not the higher
Pureplay rate. By contrast, the 25% of revenue prong that they
incorporated into the agreement, which equaled the Pureplay rate,
reveals nothing about any specific negotiations between Pandora and
Merlin over that term. For example, if Pandora and Merlin had agreed
to a 20% or a 30% revenue prong, that fact would perhaps have been
informative of a marketplace term.
---------------------------------------------------------------------------
Relatedly, SoundExchange's rationale in support of a greater of
structure that record companies should share in the upside if the
Services monetize their models at a faster rate is wholly unconvincing.
Absent proof that the per-play prong had been set too low, there is no
justification for assuming that the record companies should share in
that monetization through a percentage-of-revenue prong in the rate
structure.\56\ Dr. Rubinfeld indicated that his ``ratio equivalency''
per-play methodology resulted in a per-play royalty payment that
approximated 55% of service revenue. Successful monetization by the
Services might drive the percent-of-revenue equivalence below 55%, but
there is no economic basis to support maintaining that level with a
separate percent-of-revenue prong.\57\
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\56\ A potential rationale for the percentage-of-revenue prong
is that it could offset a per-play rate that is ``too low.'' The
Judges have taken great care to discount any proposed rate that they
believe would be too low to compensate adequately the licensors for
the rights under the licenses. As discussed below, the per-play
rates that the Judges adopt for commercial webcasters are consistent
with rates negotiated in marketplace agreements.
\57\ This criticism would not apply to the subscription rates
for noninteractive services, based upon Dr. Rubinfeld's ``ratio
equivalency'' model. However, the other criticisms set forth in the
text are sufficient to reject the use of a greater-of rate structure
with a percentage-of-revenue prong even for the subscription rate.
---------------------------------------------------------------------------
Only SoundExchange and Pandora proposed a two-prong approach, and,
as discussed above, the Judges find their reasons in support of such a
structure unpersuasive. Moreover, other parties raised numerous, valid
objections to the use of a greater-of structure with a percent-of-
revenue prong. See, e.g., NAB Ex. 4011 (Weil WRT) (a percent-of-revenue
rate would create uncertainty and controversy regarding the definition
and allocation of revenue).
Finally, by maintaining the statutory rate as a per-play rate, the
Judges are acting in a manner consistent with prior decisions,
consistent with 17 U.S.C. 803(a)(1). Although new and persuasive
evidence could cause the Judges in future proceedings to consider a
greater-of rate structure and a percent-of-revenue rate, no such
evidence has been provided to the Judges in this proceeding.\58\
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\58\ Moreover, the Judges are concerned that, given the
limitations of the evidence in this proceeding regarding agreements
with greater of rate structures, any attempt to ``mix and match''
per-play rates with percentage-of-revenue rates could cause
licensors and licensees alike to experience undesirable and
potentially destabilizing swings in anticipated revenues and
payments over the length of the license. Continuation of the current
per-play rate structure helps to ameliorate this concern.
---------------------------------------------------------------------------
For these reasons, the Judges reject the two-pronged rate proposals
proposed by SoundExchange and Pandora, and shall continue the current
practice of setting the statutory webcasting rates on a per-play basis.
C. Promotion and Substitution
The Act provides, among other things, that the Judges base their
hypothetical marketplace rates on ``economic, competitive[,] and
programming information'' that the parties present, including promotion
and substitution as factors that would influence rates in the
marketplace. 17 U.S.C. 114(f)(2)(B).\59\
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\59\ In prior proceedings, the focus of the question of
substitution has been physical record sales. In the current market,
however, digital access through interactive services is a revenue
stream that might be affected by consumers choosing the statutory
noninteractive streaming services. To evaluate interactive licenses
as benchmarks for noninteractive services, therefore, the Judges
must look at how the latter might prove a substitute for the former.
---------------------------------------------------------------------------
As set forth in this determination, infra, the Judges have relied
upon certain marketplace agreements as benchmarks for the setting of
the statutory rates. In prior determinations, the Judges have concluded
that contracting parties, as rational economic actors, factor in the
promotion and substitution effects when negotiating direct
licenses.\60\ That is, parties negotiating direct licenses for the
performance of sound recordings on services will be cognizant of the
promotion and substitution effects, and those effects will influence
the rate at which they agree to a license. Witnesses on both sides in
this proceeding generally agree that promotion and substitution effects
are factored into negotiated agreements. See, e.g., Rubinfeld CWDT ]
31(d); Shapiro WDT at 39).\61\
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\60\ See Web III Remand, 79 FR 23102, 23119 n.50 (``The adoption
of an adjusted benchmark approach to determine the rates leads this
panel to agree with Web II and Web I that such statutory
considerations implicitly have been factored into the negotiated
prices utilized in the benchmark agreements. Web II, 72 FR at 24095;
Web I, 67 FR at 45244.'').
\61\ The more particular issue of whether noninteractive
services substitute for interactive services is part and parcel of
the issue of whether there has been important ``convergence''
between the two types of services, discussed at length in connection
with the evidence regarding segmentation of listeners based on their
willingness to pay.
---------------------------------------------------------------------------
The parties' mutual awareness reconfirms the Judges' earlier
conclusion that the promotion and substitution effects on royalty rates
are ``baked in'' to a negotiated license rate. To the extent the Judges
adopt a rate based on benchmark evidence, it is not necessary to make
additional adjustments to benchmarks to reflect the promotion and
substitution factors. The Judges hold in this determination, as they
have held consistently in the past, that the use of benchmarks ``bakes-
in'' the contracting parties' expectations regarding the promotional
and substitutional effects of the agreement. For the noninteractive
benchmarks upon which the Judges rely, this long-standing position to
deem substitution and promotion effects as incorporated into the
agreements appears to be fully applicable.
SoundExchange disagrees, however, and points, for example, to
testimony from Charlie Lexton of Merlin who stated that Merlin never
considered the promotional or substitutional effects when agreeing to
the terms of the Pandora/Merlin Agreement. 6/1/15 Tr. 6910 (Lexton).
The Judges find that such testimony is not credible and not sufficient
to support abandonment by the Judges of their long-standing treatment
of promotional and substitutional issues. Indeed, the fact that Merlin
arguably was so cavalier regarding the impact of the Pandora/Merlin
Agreement on the positive promotional effects or the negative
substitutional effects (to interactive streaming, download sales, and
other revenue channels) implies that Merlin either understood the net
value of these factors to be positive or, at worst, neutral.
Apparently, SoundExchange infers: ``This is not to say that [Merlin]
did not value those terms--of course it did, but there was no precise
calibration of the negotiated rate to Merlin's view of the promotional
and substitutional impact of the deal.'' SX PFF ] 1101. It strains
credulity to think that Merlin was oblivious to the potential
promotional and substitutional effects of the Pandora/Merlin Agreement,
yet proceeded with the deal on unaltered terms.
Additionally, the Judges reject the argument, advanced by
SoundExchange, that the Pandora/Merlin and iHeart/Warner Agreements are
too new and untested to support the longstanding understanding that
substitution and promotional effects are ``baked in'' to benchmark
agreements. An important aspect of the benchmarking approach is
[[Page 26327]]
that it credits sophisticated business entities that have carefully
negotiated their agreements with an understanding of market forces.
That is, there is a presumption that marketplace benchmarks demonstrate
how parties to the underlying agreements commit real funds and
resources, which serve as strong indicators of their understanding of
the market. If promotional or substitutional effects had separate
values that were not already reflected in those rate and play-quantity
terms, rational commercial entities would identify those promotional
and substitutional effects and account for them explicitly.
The ``baked-in'' aspect of promotional and substitutional effects
does not address the issue of whether there is a difference between the
promotional/substitutional effects of interactive services, on the one
hand, and noninteractive services, on the other. To the extent the
Judges rely on SoundExchange's interactive benchmark to set statutory
rates in the noninteractive market, the Judges must identify and
consider any difference in the promotional/substitutional effects
between these markets to determine whether to adjust the interactive
benchmark rate.
These potential promotional/substitutional effects hypothetically
could occur in two different ways. First, the availability of
noninteractive services could cause listeners to substitute
noninteractive listening at the expense of interactive services.
Second, noninteractive services could substitute for, or promote less,
the sale of sound recordings through downloads or otherwise. To address
these issues, the parties rely on expert witness testimony and on the
observational and anecdotal testimony of industry witnesses. The Judges
find the lay testimony to be unhelpful and essentially self-serving.
Rather, the Judges find this issue to be technical in nature, and
consider the expert testimony, discussed below, to be the type of
evidence that has the potential to identify whether such differences
exist. SoundExchange relied upon the survey work undertaken by Sarah
Butler, a Vice President at NERA Economic Consulting. The Services'
position was supported by the survey work of Larry Rosin, President of
Edison Research.
Ms. Butler, a survey expert, designed and constructed a consumer
survey to identify the types of music listening Pandora and iHeart
substituted for, in the opinion of listeners. SX Ex. 5 at 3. Ms. Butler
gathered information from on-line survey respondents on age, gender,
and familiarity with different types of music listening formats. She
then defined the relevant population as comprising those individuals
who reported themselves as currently using iHeart or Pandora. For
listeners who reported using both of these services, Ms. Butler
testified that she assigned them to either the iHeart or the Pandora
group. Id. ]] 30-31.
Survey respondents were asked two substantive questions relating to
each service. The first question asked:
Imagine you could no longer listen to music on iHeart [or Pandora].
Which of the following statements represents what you would be most
likely to do?
I would find a substitute for the music I listen to on iHeart
[or Pandora]
I would stop listening to music
Don't know/unsure
Id. ] 38.
The second question asked respondents who answered the first
question by stating they would find a substitute for the music they
listened to on either Pandora or iHeart:
Which of the following, if any, would be your most preferred
substitute for iHeart [Pandora]?
Id. ] 40. Respondents were given a list of alternatives. Id.
Ms. Butler's survey found that for Pandora users, 43.3% would
listen to one of the following services: Spotify (19.7%), iTunes Radio
(9.7%), Amazon and Rhapsody (about 4% each), Google Play and Slacker
(about 2% each), and Beats and Rdio (about 1% each). Id. ] 48, Figure
3. For iHeart users, Ms. Butler's survey showed that 30% would switch
to Pandora, and 23.1% would instead listen to another service,
including Spotify (10.7%), iTunes Radio (7.5%), or Amazon, Google Play,
Slacker, or Rhapsody (about 1% each). Id. ] 50, Figure 5.
According to SoundExchange, these results show that interactive
services are common, if not predominant, substitutes for noninteractive
services, and that listeners would turn to such interactive services in
a hypothetical world in which no statutory noninteractive services were
available. SX PFF ]] 1130-1131.
The Judges have evaluated Ms. Butler's survey and the criticisms by
the Services, and the Judges find that there are three significant
problems with Ms. Butler's survey that preclude its usefulness in
attempting to demonstrate that noninteractive statutory services
substitute for interactive services. Any one of these problems,
standing alone, is sufficient to preclude the Judges' reliance on Ms.
Butler's survey.
First, Ms. Butler's survey fails even to attempt to measure
listeners' willingness to pay (WTP) for different services. See 5/29/15
Tr. 6779, 6796-98 (Butler) (acknowledging that she did not measure
WTP--including whether WTP for any listener was greater than zero). Her
survey also did not test whether the responding listeners had any
knowledge of the prices of the potential substitute services she
provided to them when asking her second question. Given that the Judges
are attempting to set rates in this proceeding, a survey that asks
``listeners'' to rank substitute services without providing price
information fails to provide any meaningful information as to how those
``listeners'' will act as ``consumers'' of streaming services.
Second, Ms. Butler did not select her survey respondents in a
random manner, and therefore had no ability to calculate margins of
error or confidence intervals for her results. See 5/29/15 Tr. 6782
(Butler).
Third, Ms. Butler intentionally assigned virtually all respondents
who reported listening to both Pandora and iHeart to the iHeart group
only for further questioning. This caused her to omit about 40% of
actual Pandora users from her results as they related to such Pandora
users, including respondents who reported using Pandora daily. Id. at
6789, 6806-08.
Accordingly, the Judges cannot and do not rely on Ms. Butler's
survey results.
Mr. Rosin, on whose survey the Services rely, conducted his survey
in a manner consistent with the standards and code of ethics of the
American Association for Public Opinion Research, a major survey
research standards organization. PAN Ex 5021 at 5 n.2. (Rosin WRT).
Specifically, Mr. Rosin conducted a national telephone survey of
Americans 13 years of age and older. Respondents were selected
randomly, and 2,006 interviews were conducted via landlines and cell
phones. The margin of error for his results was +/-2%, with a
confidence interval of 95%. Rosin WRT at 5, 7.
The responses to Mr. Rosin's survey revealed, inter alia, that
only 1% to 1.6% of noninteractive users reported that
their listening was replacing listening on interactive services;
only 3.8% of survey respondents would subscribe to pay for
an interactive service;
only 2% of survey respondents were ``very likely'' to pay
the market monthly subscription rate of $9.99 for an interactive
service, and only 7% were ``somewhat likely'' to subscribe at this
price point--91% were ``not at all
[[Page 26328]]
likely'' or ``not very likely'' to subscribe at that price.
Rosin WRT at 9, 12.
Based upon these findings, Mr. Rosin concluded that:
1. Most consumers are unwilling to pay monthly subscription fees
for access to streaming services.
2. Noninteractive services like Pandora and iHeart are not close
substitutes for interactive on-demand services such as Spotify.
3. Only a small market exists for paid (subscription) services.
4. Listeners to Pandora would not otherwise be listening to
interactive services.
Rosin WRT at 4.
The Judges find Mr. Rosin's random survey to be generally credible,
and certainly more informative than the non-random survey work done by
Ms. Butler. Most importantly, Mr. Rosin treated ``listeners'' as
``consumers''--inquiring as to their WTP rather than their preferences
unconstrained by prices. SoundExchange argues that even this price-
point inquiry indicates that some listeners, at some lower price
points, might be somewhat likely to subscribe to an on-demand service.
See Rosin WRT at 10 (only 79% of respondents ``not at all likely'' or
``not very likely'' to spend $4.99 per month for a streaming
subscription, and that percentage drops to 69% if the price is lowered
to $2.99 per month). However, there is no dispute that subscribers
constitute a minority of overall streaming listeners (as noted infra in
the discussion of ``Convergence''), so it is not particularly revealing
that these levels of survey respondents would consider subscribing
instead to an on-demand interactive service at various lower price
points.\62\
---------------------------------------------------------------------------
\62\ Also, to the extent subscribership might increase if the
subscription price were lowered, then the commensurate royalty
derived by SoundExchange's interactive ``ratio equivalency''
benchmark analysis (discussed infra) would likewise be reduced.
Thus, these criticisms of Mr. Rosin's survey results undermine any
broad use of SoundExchange's own interactive benchmark.
---------------------------------------------------------------------------
The Judges reject the additional criticism by SoundExchange that
Mr. Rosin should not have presented specific price points to
respondents, but rather should have asked if they were willing to pay a
``small fee'' for interactive subscriptions. Such a vague phrase would
be less informative, and more subjective, than particular price points.
The Judges also reject the criticism that Mr. Rosin should not have
indicated that an alternative to noninteractive services was to listen
to ``free'' FM radio and that another alternative was to ``pay'' for a
subscription to an interactive service, because interactive services do
offer ``freemium'' subscriptions, which begin as free subscriptions
subject to a conversion option. The Judges find that Mr. Rosin's
language meaningfully reinforces the different pricing and pricing
strategies that exist in the market, because FM radio is free to the
listener and on-demand services are designed to obtain paying
subscribers, whether at the outset of the subscription period or by
using ad-supported services as a ``freemium'' tool to convert listeners
into subscribers. (Indeed, SoundExchange's economic expert, Dr.
Rubinfeld, testified that he did not even use interactive ad-supported
rates as a benchmark because they were designed as tools to convert
listeners into subscribers.)
The Judges take note of SoundExchange's criticism of Mr. Rosin's
decision not to rotate one of his multiple choice answers to the
question of what a listener would do if no free streaming services
existed. See Rosin WRT at App. B. The choice ``would you just listen to
less music'' was always asked last, whereas the other three choices
(listen to free FM radio, listen to your CDs and downloads or watch
music videos, YouTube, or Vevo) were rotated. SoundExchange notes the
presence of a potential ``recency effect'' if one choice is always
presented last, possibly inducing respondents to favor that choice. Mr.
Rosin acknowledged the general existence of such an effect, 5/14/15 Tr.
3755 (Rosin), but he indicated that ``pinning'' certain options in a
multiple choice question was necessary to enhance the respondents'
ability to comprehend the question. 5/14/15 Tr. 3743-44 (Rosin). The
Judges do not find that there was record evidence sufficient to find
that it was unreasonable for Mr. Rosin, in applying his expertise, to
weigh these technical survey issues and construct his choices in this
manner, nor do the Judges find that there was sufficient record
evidence to indicate that Mr. Rosin's fundamental conclusions would
have been materially different if he had rotated that final choice on
that single question.
Finally, the Judges do not agree with SoundExchange's criticism
that Mr. Rosin's survey is deficient because he failed to describe in
sufficient detail the features offered by a hypothetical on-demand
interactive subscription service in one of his questions.\63\ However,
in that question, he specifically mentioned Spotify, Rhapsody, and
Rdio, see Rosin WRT App. B at 9, and he identified additional features
of an on-demand service (Spotify) in a prior question. See id.,
Question 7E. There is not sufficient record evidence to suggest that
the structuring of these questions in this manner weakens the probative
value of Mr. Rosin's survey and conclusions.
---------------------------------------------------------------------------
\63\ Mr. Rosin described them in Question 9A as services that
allow listeners to stream music as they choose, for access but not
ownership.
---------------------------------------------------------------------------
Turning to the question of whether there is a difference between
the substitution or promotion effects of interactive versus
noninteractive services with regard to music sales, the parties
presented different empirical analyses.
iHeart relied upon the expert testimony of Dr. Todd Kendall, who
attempted to analyze the effect of listening to online streaming on
music purchases, by reviewing data from 10,000 personal computers over
a six month period. IHM Ex. 3148 ] 8 (Kendall WRT). Dr. Kendall used
three categories of monthly data for each sample computer: (1) The
amount of time spent listening to music; (2) the number of digital
music purchases made on Amazon and iTunes; and (3) the amount of time
spent visiting music sites, such as RollingStone.com. Id. ]] 10, 12;
see IHM Exs. 3151-3153.
He then compared the relative promotional effect of fourteen on-
demand services, including Spotify, with the relative promotional
effect of nine Internet radio services, including Pandora and iHeart.
Kendall WRT ]] 9, 15-17. Dr. Kendall found that a 10% increase in
listening to Internet radio was associated with a statistically
significant 0.070% increase in music purchasing. See id. ] 22; IHM Exs.
3154, 3156-3158. Based on this finding, Dr. Kendall opined that
noninteractive services are 15 times more promotional than interactive
services. Kendall WRT ] 5.
There are several important flaws in Dr. Kendall's work, however,
that render it insufficient for the Judges to conclude that Dr.
Rubinfeld's interactive benchmark should be reduced to reflect a
supposed lower promotional effect. Most importantly, Dr. Kendall's
conclusion is premised on his finding that on the computers he analyzed
individuals spent 18 times more time listening to interactive services
than to noninteractive services. 5/12/15 Tr. 3274 (Kendall). When
listeners spend more time on a service, that drives down the
calculation of the number of purchases per hour of listening, which is
the promotional effect being sought by the analysis.
SoundExchange demonstrated in its cross-examination of Dr. Kendall
that this extreme multiple resulted from the different methods of
recording listening
[[Page 26329]]
time for interactive and noninteractive services. More particularly,
Spotify, a leading interactive service, is more widely used on desktop
applications, and Pandora is more widely accessed through web browsers.
SX Ex. 1568; 5/12/15 Tr. 3305 (Kendall). Web site listening
measurements were cut off if the listener had not interacted with the
Pandora Web site. Kendall WRT ] 5 n.14. By contrast, listening
measurements based on the use of desktop applications simply measured
the time the application was open on a user's desktop, and otherwise
not in hibernation mode, screen saver mode, or some other similar mode.
Id. Further, the default setting for the Spotify application is for it
to launch when the computer is turned on--even if no one is listening.
5/12/15 Tr. 3306-07 (Kendall).
Simply put, these differences in measuring listening time alone
skew Dr. Kendall's analysis and results. Accordingly, the Judges cannot
conclude from his testimony and analysis that noninteractive services
are more promotional of music sales than interactive services.
With regard to the relative promotional or substitutional effects
of interactive versus noninteractive streaming services on music sales,
SoundExchange relies on the testimony of Dr. David Blackburn. Unlike
Dr. Kendall, he did not attempt to relate the amount of time spent
listening to these services to increases in purchasing music. Rather,
Dr. Blackburn attempted to determine whether there was any meaningful
promotional or substitution effect on music sales as between those who
use the two different types of services.
In this instance, the particulars of the study are less important
than the conclusion. Dr. Blackburn opined that, based on his analysis,
``neither interactive nor non-interactive services have a statistically
significant promotional impact on users' propensity to purchase digital
tracks.'' SX Ex. 24 ] 42 (Blackburn WRT). Because Dr. Blackburn is a
SoundExchange witness, and because the point of the present discussion
is to determine whether an interactive benchmark rate must be lowered
or raised to reflect such differences, his conclusion fails to support
any change in SoundExchange's interactive benchmark for promotional or
substitutional effects.
Finally, the Judges take note of Pandora's ``Music Sales
Experiments'' conducted by its Senior Scientist, Economics, Dr. Stephan
McBride. The purpose of that experiment was ``to test whether
performance of sound recordings on Pandora have a positive or negative
impact on sales of those sound recordings.'' PAN Ex. 5020 ] 23 (McBride
WDT). However, whether or not Pandora has a net promotional or
substitutional effect does not address the issue of whether that net
effect is different from the net promotional/substitutional effect of
interactive services.
Rather, when relying on benchmarks, the Judges deem the benchmark
agreements of rational actors to include an implicit understanding of
the promotional and substitutional effects of their transaction.
Therefore, Dr. McBride's conclusions, as well as Dr. Blackburn's
criticisms of those ``Music Sales Experiments,'' do not affect the
Judges' rate determination.
D. Impact of Parties' Financial Circumstances
The Services aver that the rates set in this proceeding must be
sufficiently low to permit their business models to be profitable. See,
e.g., NAB PFF ]] 119-149; IHM ]] 245-257 (and citations to the record
therein). Reciprocally, SoundExchange argues that the rates must be
sufficiently high to allow the record companies to cover their costs
and to obtain the necessary return on investment (ROI), plus a profit.
See, e.g., SX PFF ]] 165-208 (discussing costs and investments and
noting (] 165) that ``[t]he rates that record companies receive from
streaming services ha[ve] been--and over the next five years will
continue to be--critical to [the record companies'] ability to make
such recurring investments.''); 4/30/15 Tr. 972-73 (A. Harrison)
(``[T]he profit maximization goal is definitely . . . a top goal of the
company . . . and also provides the incentive to create music.'').
The Judges find that they do not need to relate the rates set in
this proceeding directly to the parties' proposed business models.
Rather, the Judges' adoption of the benchmark method of determining
rates obviates the need to: (1) Analyze whether the record companies'
costs require a particular rate to allow them to obtain an appropriate
ROI; and (2) protect particular noninteractive services whose business
models might require a low enough rate to sustain their survival and/or
growth. Benchmarks based on marketplace agreements, by their very
nature, reflect the parties' need for rates that allow them to project
a sufficient ROI and enable them to implement their respective business
models.
As with the promotional and substitutional impact of the rates, the
Judges conclude that the benchmarking process ``bakes-in''
(internalizes) these necessary elements, given the assumed rational,
maximizing nature of sophisticated business entities. Moreover, even if
the Judges were to attempt to ascertain whether a particular ROI could
be met by a given rate, or whether a particular business model could be
sustained, the present record would preclude such an analysis. The
Judges would require much more detailed financial and economic data
regarding the parties' costs and revenues before attempting to make
such determinations.
Further, as the Judges have previously held, the statute neither
requires nor permits the Judges to protect any given business model
proposed or adopted by a market participant. Web II, 72 FR at 24089.
The Judges further noted in the Web III Remand that any attempt by the
Judges to set rates with these ROI and business model issues in mind
would essentially convert this Sec. 114(f)(2)(B) proceeding into a
classic public utility style rate-of-return hearing. 79 FR at 23107.
None of the parties argues that the statutory standard permits such a
process, and neither the D.C. Circuit, nor the Judges (or any of their
predecessors) have so held.
E. The Effect of the Alleged ``Shadow'' of the Statutory Rate
The parties assert that the benchmarks that are adverse to their
positions are compromised by the fact that they were set in the
``shadow'' of the statutory rate. See, e.g., Rubinfeld CWDT ]] 80-85
(statutory rate as a shadow pushing rates down); Talley WRT at 46;
Shapiro WDT at 36 (statutory rate as a shadow pulling rates up); 5/15/
15 Tr. 3993-94 (Lichtman); Fischel (same). There are essentially two
types of statutory shadows noted by the parties.
The first purported shadow is cast by the existing statutory rate,
whether set in a CRB proceeding or through the parties' WSA
settlements. As an initial matter, the Judges find that any such
``shadows'' that could have been cast by existing statutory rates did
not meaningfully affect the effective steered rates in the Pandora/
Merlin Agreement or the IHeart/Warner Agreement. As discussed herein,
those rates are below the otherwise applicable statutory rates, and it
would be irrational for a licensor to accept a rate below the statutory
rate when it could have rejected the direct deal and enjoyed the higher
statutory rate. Also, the supposed shadow of the existing rate is less
relevant to the subscription-based benchmark proffered by
SoundExchange, because it is based on benchmarks that are at a further
[[Page 26330]]
remove from the statutory license. Rubinfeld CWDT ] 18.
Dr. Shapiro argues that the statutory shadow not only exceeds the
marketplace rate, but also acts like a ``focal point,'' or ``magnet,''
pulling a freely negotiated rate higher than it would be in the absence
of the statutory shadow. Shapiro WDT at 36-37. However, neither Dr.
Shapiro nor any other expert provides a sufficiently detailed
explanation as to how the statutory rate would pull up a below-statute
consensual rate that is otherwise mutually beneficial. Rather, the
experts who advance this variant of the shadow argument simply note the
existence of a ``focal point,'' ``magnet'' or ``anchor'' theory in the
economic literature and then posit that such an effect is present in
the noninteractive market--without making a sufficient connection
between theory and evidence. Indeed, Dr. Shapiro candidly acknowledged
that the focal point/magnet/anchor hypothesis is not an ``ironclad''
economic law. Id. at 37 n. 65. In sum, the Judges do not credit this
conjecture as sufficient to affect their determination of the rate in
this proceeding.
On behalf of SoundExchange, Dr. Talley asserts that the existing
statutory rate casts a shadow so dark as to obscure entirely evidence
of consensual transactions that would have been consummated in the
noninteractive space, but for the statutory rate. More particularly,
Dr. Talley notes that any pairing of willing licensors and licensees
(``dyads'' in Dr. Talley's parlance) in which the licensee's WTP was
greater than the statutory rate, and greater than or equal to a
licensor's ``willingness to accept'' (WTA) (also above the statutory
rate), would not consummate an agreement at a consensual rate, because
the buyer would always default to the lower statutory rate. SX Ex. 19
at 58 (Talley WRT) (Concluding ``in an economic environment most
relevant to this setting, a statutory licensing option can crowd out
negotiated transactions for relatively high-valuing buyer-seller dyads
while not affecting other, low-valuing dyads. . . . [T]his crowding out
phenomenon can generate downward statistical bias, leaving behind only
a subset of negotiated deals involving buyers and sellers whose
valuations . . . reflect[ ] prices which serve as poor benchmarks for
estimating the price [to which] willing buyers and sellers would
agree.) \64\
---------------------------------------------------------------------------
\64\ For example, assume the statutory rate was $0.0010. If a
licensor had a WTA of $0.0015 and a licensee had a WTP of $0.0020,
then in the absence of a statutory rate, these parties would strike
a deal between $0.0015 and $0.0020. However, with the statutory rate
at $0.0010, the licensee would not negotiate, but would default to
the lower statutory rate. Dr. Talley describes such a foreclosed
agreement as having been obscured by the shadow of the statutory
rate.
---------------------------------------------------------------------------
The Services counter that, although the logic of Dr. Talley's point
may be correct, Dr. Talley's analysis is purely theoretical and he did
not examine the evidence to determine whether his analysis was
supported by the facts. In particular, the Services criticize Dr.
Talley's ``shadow'' argument because he assumes that the ``missing
dyads'' would reflect a significantly different WTP and WTA than those
of the parties who entered into agreements (e.g., the Pandora/Merlin
dyad and the iHeart/Warner dyad). See, e.g., Pandora RPFF 96-103 (and
citations to the record therein). Dr. Talley counters, quite correctly,
that the very point of his analysis is that no negotiations or
agreements for above-statutory rates would exist because the parties
would not waste their time engaging in bargaining that was made moot by
the statutory rate. Id. at 6032-34.
Dr. Talley suggests though that Dr. Rubinfeld's interactive
benchmark may approximate the ``unseen'' noninteractive transactions
because it is affected less by the shadow of the statutory rate. Id. at
6036. However, that argument fails to note the fundamental distinction
in Dr. Rubinfeld's benchmark--that it pertains to an upstream market
for interactive licensees in which upstream demand is derived from
downstream consumers who have a positive WTP for streaming services.
The ``missing dyads,'' so to speak, would be those in the upstream
noninteractive market in which the ``missing'' agreements would reflect
only the downstream demand of listeners to free-to-the-listener ad-
supported platforms, not those dyads identified by Dr. Rubinfeld in the
subscription market.\65\
---------------------------------------------------------------------------
\65\ This important distinction between listeners based on their
differentiated WTP is discussed in greater detail infra in
connection with Dr. Rubinfeld's proposed benchmark.
---------------------------------------------------------------------------
Relatedly, the Services also criticize Dr. Talley's argument
because it fails to note the potential steering, ``competitive
dynamics'', or other interactions that would cause dyads to cluster
closely. 5/19/15 Tr. 4660-61 (Shapiro).
On balance, the Judges find Dr. Talley's criticism, albeit rational
and hypothetically correct, too untethered from the facts to be
predictive or useful in adjusting for the supposed shadow of the
existing statutory rate. The Services' criticisms are likewise
speculative, but that simply underscores the factual indeterminacy of
Dr. Talley's argument. Further, Dr. Talley's point appears to be a
back-door way to question both the applicability of the benchmarks in
the noninteractive market, as well as the benchmarking process itself.
However, the Judges have found that the Pandora/Merlin Agreement and
the iHeart/Warner Agreement to be sufficiently representative
benchmarks (and have found that Dr. Rubinfeld's benchmark analysis is
likewise representative) in particular segments of the statutory
market. This segmented analysis strengthens the representativeness of
the benchmarks and weakens the speculative argument that ``missing
dyads'' might tell a different story.
The second shadow identified by the parties is cast by the
statutory rate yet to be established in this proceeding. The record is
replete with evidence that the parties entered into various
transactions with the knowledge, if not the intent, that such
agreements could be used as evidentiary benchmarks in this proceeding.
See SX PFF ]] 567-570 (and citations to the record therein regarding
the Pandora/Merlin Agreement); IHM PFF ]] 359-362 (and citations to the
record therein regarding Apple's agreements with the Majors); NAB PFF
]] 456-458. Of course, a proposed benchmark is not disqualified because
a contracting party wanted it to be a benchmark. Such a desire would
apply to otherwise proper benchmarks as it would to dubious benchmarks.
The Judges analyze the proposed benchmarks based on the overall factual
merits attendant to their formation and applicability, not based upon
the parties' hopes or manipulations. If a benchmark is deficient in
some manner, the adversarial process of this proceeding allows the
parties to expose those deficiencies.
The Judges agree with a particular criticism made by iHeart of the
shadow argument asserted by SoundExchange: In the absence of the
statutory shadow, the antitrust policy toward the noninteractive
streaming market could well be different. Cf. 141 Cong. Rec. S. 11,962-
63 (daily ed. Aug. 8, 1995) (Letter from Assistant Attorney General
Andrew Fois to Hon. Patrick Leahy, July 21, 1995, noting that any
noncompetitive rates created by the existence of only a single
collective could be corrected by the ``rate panel.''). Although that
comment was made in connection with the potential anticompetitive
consequence of a single collective, it suggests to the Judges that the
so-called ``shadow'' of the statutory rate offsets any potential device
that
[[Page 26331]]
would cause rates to deviate from an ``effectively competitive''
level.\66\
---------------------------------------------------------------------------
\66\ The issue of ``effective competition'' is discussed at
length, infra.
---------------------------------------------------------------------------
Thus, to the extent the ``shadow of antitrust law'' has receded, it
was counterbalanced by the ``shadow of the statutory rate.''
Accordingly, the presence of the so-called statutory shadow appears to
reflect a trade-off and a second-best solution, rather than a
distortion of an effectively competitive marketplace.
Additionally, the Judges' consideration of the Pandora/Merlin
Agreement and the iHeart/Warner Agreement as appropriate benchmarks for
the ad-supported (free-to-the-listener) market obviates the supposed
``shadow'' problem. In both benchmarks, the rate is below the otherwise
applicable statutory rates. The statutory rates did not cast a shadow
that negatively affected the licensors in those agreements because (as
noted infra) they voluntarily agreed to rates below the applicable
statutory rates (in exchange for the steering of more plays), rather
than defaulting to the higher statutory rate.
Further, in the subscription market the Judges have adopted the
SoundExchange benchmark approach, which analogizes between the
interactive and noninteractive markets. As Dr. Rubinfeld testified, the
interactive contracts on which he relied for his subscription-based
benchmark ``minimize[] the effect of the statutory shadow'' because the
interactive services cannot default to the statutory rate. Rubinfeld
CWDT ] 18.
Finally, the Judges emphasize that they find the ``shadow''
criticism to be both nihilistic and self-contradictory. If the
``shadow'' infects all benchmarks so as to disqualify that method of
rate-setting, then the parties would need to adjust or abandon their
benchmarking strategies and develop new bases for analysis. That could
mean the wholesale abandonment of benchmarking, to be replaced by a
valuation approach yet to be applied and accepted in these
proceedings.\67\
---------------------------------------------------------------------------
\67\ As explained elsewhere in this determination, the Judges
have rejected the non-benchmarking approaches to rate setting
proposed by some parties in this proceeding. They were not rejected
because they were not benchmarks, but because each was unpersuasive
in its own right.
---------------------------------------------------------------------------
F. The Legal Issue of Whether Effective Competition Is a Required
Element of the Statutory Rate
The statutory language that includes the ``willing buyer/willing
seller language also commands that ``[i]n determining such rates . . .
the . . . Judges ``shall base their decision on economic, competitive
and programming information presented by the parties . . .'' 17 U.S.C.
114(f)(2)(B) (emphasis added). Accord, 17 U.S.C. 112(e)(4) (regarding
ephemeral licenses). Several previous decisions by the D.C. Circuit,
the Librarian, the Judges and the CARP (in Web I) have discussed the
concept of ``effective competition'' and its relationship to Sec.
114(f)(2)(B).
SoundExchange and the Services disagree as to whether Sec.
114(f)(2)(B) and prior decisions require the Judges to set a rate that
reflects an ``effectively competitive'' market populated by willing
buyers and willing sellers. SoundExchange argues that no authority
allows for such a requirement, while the Services assert that the
statute and prior decisions require the Judges to set rates that would
be established an ``effectively competitive'' market.\68\
---------------------------------------------------------------------------
\68\ As discussed in more detail in this determination,
SoundExchange asserts that its interactive benchmark need not be
reflective of an ``effectively competitive'' market because such a
requirement is not contained within section 114(f)(2)(B).
SoundExchange also argues that, assuming an ``effectively
competitive'' market standard is part of the statutory scheme, its
interactive benchmark is a product of effective competition. The
Services argue that their respective proposed benchmarks reflect
rates that have been set in an ``effectively competitive'' market,
unlike SoundExchange's proposed interactive benchmark that is the
product of a market lacking the necessary competitive features.
iHeart and Pandora each maintains that, even assuming that the
statute does not contain an ``effectively competitive'' market
standard, their respective benchmarks are nonetheless appropriate,
because they represent the rates to which willing sellers and
willing buyers would agree in the market, notwithstanding whether
those rates reflect ``effective competition.''
---------------------------------------------------------------------------
The Services construe Sec. 114(f)(2)(B) as explicitly requiring
the Judges to utilize competitive information introduced in evidence to
set a marketplace rate that reflects ``effective competition,'' and to
adjust an otherwise appropriate benchmark in order to reflect
``effective competition.'' In support of this position, the Services
make several principal arguments.
The Services assert that prior decisional law constitutes precedent
that requires the Judges to set rates that are ``effectively
competitive.'' They point to the most recent determination by the
Judges, the Web III Remand, in which the Judges approvingly cited and
relied upon the language in prior decisions by the Librarian in Web I
and the Judges in Web II regarding the need to set rates under Sec.
114(f)(2)(B) that reflect those that would be set in an ``effectively
competitive market.'' Web III Remand at 23114 n. 37. The NAB further
notes that in Web II, the Judges held that ``neither sellers nor buyers
can be said to be `willing' partners to an agreement if they are
coerced to agree to a price through the exercise of overwhelming market
power.'' Web II at 24091. Sirius XM emphasizes other particular
language from Web II, which states: ``An effectively competitive market
is one in which super-competitive prices or below-market prices cannot
be extracted by sellers or buyers . . . .'' 72 FR at 24091.
The NAB emphasizes that in the present proceeding the Judges must
follow these decisions because 17 U.S.C. 803(a)(1) expressly requires
the Judges to act in accordance with the Librarian of Congress's
interpretation. NAB PFFCL ] 689. The Services also rely on a decision
by the D.C. Circuit as persuasive, if not binding precedent, because it
states that Sec. 114(f)(2)(B) ``does not require that the market
assumed by the Judges achieve metaphysical perfection in
competitiveness.'' Intercollegiate Broad. Sys., Inc. v. Copyright
Royalty Board, 574 F.3d 748, 757 (D.C. Cir. 2009) (emphasis added).
Apparently, the Services construe the use of the adjective
``metaphysical'' to require, or at least suggest, that the rates
reflect some lesser yet nonetheless effective quantum of competition.
The Services further argue that the legislative history of Section
114 reflects a Congressional intention for rates to be set at a level
that avoids ``higher-than-competitive prices.'' See 141 Cong. Rec.
S11945-04, S11962 (1995). In similar fashion, according to the
Services, the legislative history makes it plain that the willing
buyer/willing seller standard in Sec. 114 was intended to direct the
CARP (now the Judges) ``to determine reasonable rates and terms.'').
H.R. Rep. No. 105-796 at 86 (Conf. Rep.); see H.R. Rep. No. 104-274 at
22 (1995) (legislative history of DPRSRA expressly provides ``[i]f
supracompetitive rates are attempted to be imposed on operators, the
copyright arbitration royalty panel can be called on to set an
acceptable rate.''). In this regard, the Services note that the
Department of Justice's objection to an earlier draft of the statute,
relating to whether the record companies could negotiate exclusively
through a common agent, was resolved because the ratemaking body (now
the Judges) could intercede and establish reasonable rates. 141 Cong.
Rec. S. 11,962-63 (daily ed. Aug. 8, 1995) (Letter from Assistant
Attorney General Andrew Fois to Hon. Patrick Leahy, July 21, 1995,
noting that any noncompetitive rates created by the existence of only a
single collective could be corrected by the ``rate panel.'').
The Services also note that, in comparable circumstances, courts
[[Page 26332]]
construe ``reasonable rates'' to be those ``rates that would be set in
a competitive market.'' ASCAP v. Showtime/The Movie Channel, Inc., 912
F.2d 563, 576 (2d Cir. 1990); see also NAB PFFCL ]] 706-709 (and cases
cited therein); In re Pandora Media, Inc., 6 F. Supp. 3d 317, 353-54
(S.D.N.Y. 2014), aff'd sub nom. Pandora Media, Inc. v. ASCAP, 785 F.3d
73 (2d Cir. 2015).
Finally, the NAB asserts that the statutory histories of the DPRA
and the DMCA reflect a Congressional intent to create a three-tier
performance right/rate structure, whereby: (1) Terrestrial radio
continues to enjoy free access to sound recordings; (2) interactive
services must pay market-negotiated royalties in order to play sound
recordings on demand; and (3) noninteractive services, falling between
these two extremes, cannot play sound recordings for free, shall not to
be subjected to the purely market rates paid by on-demand interactive
services and, instead, shall pay intermediate rates set by the Judges
(formerly the CARP arbitrators subject to Librarian review). See NAB ]]
678 et seq.; 682 et seq. (and authorities cited therein).
On the other hand, SoundExchange construes Sec. 114(f)(2)(B) as
precluding the Judges from adjusting an otherwise appropriate benchmark
in order to reflect ``effective competition.'' In support of this
position, SoundExchange makes several principal arguments.
First, SoundExchange emphasizes that the words ``effective
competition'' or the like are not included within the statute. Thus,
SoundExchange maintains that the plain language of the statute clearly
does not include such a standard. SX PCOL ] 21.
Second, SoundExchange relies upon a statement by the CARP in Web I
that ``the willing buyer/willing seller standard is the only standard
to be applied.'' In re Digital Performance Right in Sound Recordings
and Ephemeral Recordings, No. 2000-9 CARP DTRA 1&2 at 21 (Feb. 20,
2002), appv'd and modif'd by Librarian, 67 FR 45240 (July 8, 2002) (Web
I). SoundExchange construes this language as confirming the exclusion
of the ``effectively competitive'' condition from the ``willing buyer/
willing seller'' marketplace standard.
Third, SoundExchange argues that the ``willing buyer/willing
seller'' standard is essentially a restatement of the traditional
``fair market value'' test. See id. at 45244 (the Librarian's Web I
decision notes that the statutory standard requires rates that reflect
``strictly fair market value''). The Supreme Court has defined ``fair
market value'' as SoundExchange notes, as ``the price at which the
property would change hands between a willing buyer and a willing
seller, neither being under any compulsion to buy or sell and both
having reasonable knowledge of relevant facts.'' United States v.
Cartwright, 411 U.S. 546, 551 (1931).
Fourth, SoundExchange argues that statutory enactments of the fair
market value test and its willing buyer/willing seller component
constitute adoptions of a recognized common law definition of the test.
Therefore, the common law meaning should prevail because it is a
``settled principle of statutory construction that, absent contrary
indications, Congress intends to adopt a common law definition of
statutory terms. United States v. Shabani, 513 U.S. 10, 13 (1994); see
also United States v. Wells, 519 U.S. 482, 491 (1997) (same).
Fifth, SoundExchange points out that, when Congress intends a legal
standard to be based on ``effective competition,'' it makes the point
expressly and explicitly defines ``effective competition.'' Cf. 47
U.S.C. 543(1)(1) (defining ``effective competition'' in the Cable
Television Consumer Protection and Competition Act of 1992).
Sixth, SoundExchange characterizes the references to effective
competition in Intercollegiate Broad. Sys. and Web I as mere dicta that
may be ignored by the Judges.
Seventh, SoundExchange asserts that any attempt to apply an
``effective competition'' requirement would render the statutory test
indeterminate, unworkable, and vague. SoundExchange notes that the
Services' economic experts acknowledged the absence of a ``bright
line'' separating a market that is ``effectively competitive'' from one
that is not. Moreover, SoundExchange asserts that there is no evidence
or testimony setting forth what the level of rates would need to be in
SoundExchange's proffered interactive benchmark market, in order for it
to equate with ``effectively competitive'' rates.
Having considered the issue and the parties' positions, the Judges
conclude that they are required by law to set a rate that reflects a
market that is effectively competitive. The Judges reach this
conclusion through a consideration of the plain meaning of the statute,
the clear statutory purpose, applicable prior decisions, and the
relevant legislative history.
The Judges' starting point is the language of the statute itself.
The statute requires that the Judges ``shall base their decision on
[inter alia] competitive . . . information presented by the parties . .
. .'' 17 U.S.C. 114(f)(2)(B) (emphasis added); accord, 17 U.S.C.
112(e)(4) (identical language for the setting of rates for the
ephemeral license). The D.C. Circuit has expressly noted that, by this
specific language, ``Congress required the Judges to follow certain
statutory guidelines'' one of which is that ``the Judges must `base
[their] decision on . . . competitive . . . information presented by
the parties.' '' Intercollegiate Broad. Sys., Inc. v. Copyright Royalty
Board, 574 F.3d 748, 753 (D.C. Cir. 2009).
SoundExchange invites the Judges to ignore this statutory directive
and judicial command. The Judges cannot. The parties presented the
Judges with voluminous evidence and testimony comprising the required
``competitive information'' relating to Dr. Rubinfeld's proposed
interactive benchmark market, the Services' proposed noninteractive
benchmarks, the noninteractive market at issue in this proceeding, and
the alleged differences and similarities among them.\69\ The Judges are
commanded by the statutory language quoted above to ``base their
decision'' on precisely this sort of information, and, as
Intercollegiate Broadcast System makes plain, it would be legal error
for the Judges to ignore this statutory directive.
---------------------------------------------------------------------------
\69\ The ``competitive information'' provided by the parties was
extensive. SoundExchange and the Services provided factual and
expert testimony regarding: (1) The ``upstream'' market (in which
streaming services acquire licenses from the record companies); (2)
the ``downstream'' market (in which streaming services may (or may
not) compete with each other for listeners); (3) the horizontal
``upstream'' market (where the record companies compete (or fail to
compete) with each other; and (4) the interactions of these several
markets.
---------------------------------------------------------------------------
The Judges further conclude that, even if the directive that they
``shall'' consider competitive information could be construed as
ambiguous, their consideration of ``competitive information'' is
certainly a permissible, reasonable, and rational application of Sec.
114, for a number of reasons.
First, the D.C. Circuit, the Librarian, the Judges, and the CARP
have all acknowledged that the Judges can and should determine whether
the proffered rates reflect a sufficiently competitive market, i.e., an
``effectively competitive'' market. The Judges made this point clearly
in their decision in the Web III Remand, which included a summary of
the past decisional language regarding the Sec. 114 standard:
The D.C. Circuit has held that this statutory section does not
oblige the Judges to set rates by assuming a market that achieves
``metaphysical perfection and competitiveness.'' Intercollegiate
Broad. Sys., Inc. v. Copyright Royalty Board, 574 F.3d
[[Page 26333]]
748, 757 (D.C. Cir. 2009). Rather, as the Librarian of Congress held
in Web I, the ``willing seller/willing buyer'' standard calls for
rates that would have been set in a ``competitive marketplace.'' 67
FR at 45244-45 (emphasis added); see also Web II, 67 FR at 24091-93
(explaining that Web I required an ``effectively competitive
market'' rather than a ``perfectly competitive market.'' (emphasis
added)). Between the extremes of a market with ``metaphysically
perfect competition'' and a monopoly (or collusive oligopoly) market
devoid of competition there exists ``[in] the real world . . . a
mind-boggling array of different markets,'' Krugman & Wells, supra,
at 356, all of which possess varying characteristics of a
``competitive marketplace.''
Web III Remand, 79 FR at 23114 n. 37.
It is noteworthy that SoundExchange has not characterized the Web
III Remand decision as dicta. Thus, even if the prior language on which
the Web III Remand Judges had relied was dicta, there is no argument
that the holding in the Web III Remand was dicta. It is also noteworthy
that SoundExchange did not assert that the holding in Web II, that an
excess of market power can preclude a finding that a buyer or seller
was a ``willing'' participant, was dicta.\70\
---------------------------------------------------------------------------
\70\ Not only did SoundExchange fail to assert that the Web III
Remand decision regarding ``effective competition'' was dicta, that
decision could not possibly be construed as dicta. The distinction
between a holding and dictum has been thoroughly analyzed and
succinctly stated:
A holding consists of those propositions along the chosen
decisional path or paths of reasoning that (1) are actually decided,
(2) are based upon the facts of the case, and (3) lead to the
judgment. If not a holding, a proposition stated in a case counts as
dicta.
M. Abramowicz and M. Stearns, Defining Dicta, 57 Stan. L. Rev.
953, 961 (2005). Courts have long held that, in contrast with a
``holding,'' dicta as ``language unnecessary to a decision, ruling
on an issue not raised, or [an] opinion of a judge which does not
embody the resolution or determination of the court, . . . made
without argument or full consideration of the point.'' Lawson v.
U.S., 176 F.2d 49, 51 (D.C. Cir. 1949). As detailed in the text, a
consideration of the pertinent ruling in the Web III Remand and of
the ultimate decision in the Web III Remand itself, demonstrates
that the statements regarding the necessary competitive state of the
market were clearly holdings rather than dicta.
---------------------------------------------------------------------------
In Web III, a licensee, Live365, asked the Judges to reject certain
of SoundExchange's proposed benchmarks that were based on the Webcaster
Settlement Act (WSA) agreement between SoundExchange and the NAB, and
the WSA agreement between SoundExchange and Sirius XM. (The parties to
those agreements agreed to allow those WSA agreements to be introduced
as evidence in Web III.) Live365 argued ``the rates . . . reflect the
monopoly power of a single seller in those two contracts.'' 79 FR at
23113. The Judges rejected that argument and did so by taking a
``decisional path'' of reasoning based on: (1) A conclusion that an
effective level of competition was required for the Judges to adopt
those benchmarks; and (2) the facts of the case that demonstrated the
sufficiently competitive nature of those benchmarks.\71\ That legal
conclusion and that factual finding led the Judges to an application of
law to fact whereby they concluded that the proposed benchmarks were
reflective of an effectively competitive market and therefore satisfied
the Sec. 114(f)(2)(B) standard. Specifically, the Judges held in the
Web III Remand:
---------------------------------------------------------------------------
\71\ Both Sirius XM and the NAB assert in the present proceeding
that those two WSA settlement agreements were not reflective of
effective competition, based on evidence they have presented in this
proceeding but was not presented in Web III. That issue is addressed
infra, but, for present purposes, the pertinent point is that the
Judges found on the Web III record that these WSA settlement
agreements reflected an effectively competitive market.
An oligopolistic marketplace rate that did approximate the
monopoly rate could be inconsistent with the rate standard set forth
in 17 U.S.C. 114(f)(2)(B), as that standard has been set forth by
the D.C. Circuit and the Librarian of Congress. . . . [I]n this
proceeding the evidence demonstrates that sufficient competitive
factors exist to permit the [benchmarks] to serve as useful
benchmarks, and does not demonstrate that the rates in the
[benchmarks] approximated monopoly rates.
* * * * *
The parties presented no evidence from which the Judges could
conclude . . . that SoundExchange necessarily wielded a level of
pricing power sufficient to affect the use of the WSA Agreements as
benchmarks.
79 FR at 23114 (emphasis added). Thus, in the Web III Remand, the
Judges unequivocally applied the prior pronouncements of the D.C.
Circuit, the Librarian, and the Judges to render an unambiguous
holding: (1) Adopting a competitiveness standard; (2) applying the
facts to the competitiveness standard; and (3) using that application
of facts to law to reach their judgment. Alternately stated (and
applying the D.C. Circuit's Lawson definition of dicta quoted supra),
this decision regarding ``effective competition'' in the Web III Remand
was necessary to determine an issue raised in the proceeding (the
effectively competitive status of the WSA settlement agreements), after
argument and full consideration.
Moreover, even past dicta ``deserves serious consideration'' in
subsequent decisions when ``sufficiently persuasive.'' U.S. v. Libby,
475 F. Supp. 2d 73, 81 (D.D.C. 2007). Thus, ``persuasive dictum in an
important early case [can] establish[ ] [a] principle'' to be followed
by other courts. Committee of U.S. Citizens Living in Nicaragua v.
Reagan, 859 F.2d 929, 938-39 (D.C. Cir. 1988). Accordingly, although
SoundExchange assets that the statements relating to an effectively
competitive market in the D.C. Circuit's Intercollegiate Broadcast
System decision and the Librarian's Web I decision were dicta, the
Judges in Web II, the Web III Remand and the present proceeding were
all clearly able to convert such asserted dicta into binding holdings.
Thus, the Judges conclude that they are bound to follow the prior
directives that instruct them to make certain that the statutory rates
they set are those that would be set in a hypothetical ``effectively
competitive'' market. In light of this conclusion, based on the
foregoing reasons, the remainder of the arguments are insufficient to
alter the Judges' decision in this regard. However, in the interest of
completeness, the Judges address other arguments, including those
raised by the parties, that further support their conclusion.
The Judges agree that the legislative history supports the
conclusion that Sec. 114 directs the Judges to set rates that reflect
the workings of a hypothetical effectively competitive market. The
legislative history equates rates set under the willing buyer/willing
seller standard with ``reasonable rates.'' As the Services note, the
phrase ``reasonable rates'' has been construed by the rate court, in an
analogous context, as ``rates that would be set in a competitive
market.''
The Judges are informed by the analogous use of the willing buyer/
willing seller standard in eminent domain law. See, e.g., Kirby Forest
Ind., Inc. v. U.S., 467 U.S. 1, 10 (1984) (applying willing buyer/
willing seller test in eminent domain valuation dispute). In such
cases, the courts must consider whether to award a forced seller the
``holdout'' value of the seller's parcel, an additional value that
exists solely because the seller's property is a necessary complement
to the other properties that are needed by the governmental unit. As
discussed in detail infra, it is precisely this complementary oligopoly
value that the Judges are declining to include in the statutory rate
based upon their analyses of the parties' benchmarks proffered in this
proceeding. Cf. Thomas Miceli and C.F. Sirmans, The Holdout Problem,
Urban Sprawl and Eminent Domain, 16 J. Housing Econ. 309, 314 (2006)
(``complementarities among properties in the assembly case that are not
present in the individual transaction'' are the consequence of ``market
failure,'' economic ``rent seeking'' and generate
[[Page 26334]]
inefficient ``transaction costs'') (emphasis added).
The Judges are also persuaded that the structure of the Act with
regard to the sound recording performance right--as it relates to
terrestrial radio, noninteractive services, and interactive services--
confirms the necessity of adopting an ``effectively competitive''
standard in the rate-setting process. Copyright owners were provided a
limited performance right with regard to the use of their sound
recordings by noninteractive services--something less than the purely
private market-based rate for interactive use, but clearly more than
the ``zero rate'' required from terrestrial radio. The Judges conclude
that a rate that simply reflected or overemphasized either of the polar
extremes would be inconsistent with the three-tier structure of the
statute.\72\ As the Services note, if the Judges were simply to apply
the competitive dynamics of the interactive market, they would be
disregarding the particular statutory history that led to the three-
tier rate structure. See generally, William W. Fisher III, Promises to
Keep at 104-05 (2004) (different statutory treatment of terrestrial
radio, interactive services, and noninteractive services based upon
fundamental ability and limits regarding the performance, promotion of,
and substitution for sound recordings).
---------------------------------------------------------------------------
\72\ As discussed infra, the Judges also reject rates proposed
by several of the Services that attempt to use the ``zero rate''
paid by terrestrial radio as a guide in this proceeding. The
rejection of such proposals can be seen as a bookend to the Judges'
requirement that the statutory rate reflect effective competition,
rather than the complementary oligopoly power present in the
interactive market.
---------------------------------------------------------------------------
SoundExchange's arguments to the contrary are unavailing. First,
the fact that the statute requires the Judges to consider ``competitive
information'' adequately rebuts SoundExchange's contention that the
statutory language does not address the issue of competitiveness. That
provision, combined with the legislative history and the prior judicial
and administrative pronouncements make it clear that the statutory
language requires the Judges to establish rates that are effectively
competitive.
Second, the Judges do not find that the traditional fair market
value test permits the Judges to ignore the competitive status of the
hypothetical market in which the statutory rate is established. As
SoundExchange concedes in the very case law that it quotes, the common
law meaning of a phrase should only prevail when construing a statute
``absent contrary indications.'' Here, the requirement that the Judges
consider ``competitive information,'' the prior judicial and
administrative holdings and pronouncements, and the legislative history
all combine to clearly provide more than ``indications'' that the
Judges must set reasonable rates that reflect ``effective
competition.''
Third, the mere fact that, in another setting (regarding the cable
television industry) Congress chose to define ``effective competition''
hardly suggests that such an ``effective competition'' standard does
not exist in the present case. Indeed, the absence of a definition,
combined with the requirement that the Judges weigh ``competitive
information,'' is more consistent with the idea that Congress intended
to delegate discretion to the Judges to determine whether the rates
they set reflected an appropriate level of competitiveness.
Finally, the Judges reject SoundExchange's assertion that there is
no pre-existing ``bright line'' test sufficient to distinguish a rate
which is ``effectively competitive'' from one that is not. The very
essence of a competitive standard is that it suggests a continuum and
differences in degree rather than in kind. Once again, the statutory
charge that the Judges weigh ``competitive information'' indicates that
the Judges are empowered to make judgments and decide whether the rates
proposed adequately provide for an effective level of competition.
Moreover, in the present case, the Judges were presented with highly
specific facts regarding how to use the impact of steering on rate
setting in order to measure and account for the ``complementary
oligopoly'' power of the Majors that serves to prevent effective
competition.
IV. Commercial Webcasting Rates
A. Analyses and Findings
The rates proposed by the Services and SoundExchange are marked by
a wide disparity. Although it is unsurprising that adverse parties
would have strikingly different positions, what is surprising is that,
despite these differences, the parties' positions are supported to a
great extent (but not in all cases) by persuasive and logical economic
analyses. Initially, this created a conundrum for the Judges, because
none of these persuasive and logical economic analyses could easily be
rejected.
On closer inspection, however, what became clear to the Judges was
that the reason why many of these disparate economic analyses and
models could all appear to be correct was that they each reflected only
a portion of the marketplace. That is, to draw on a classic analogy,
the experts testified to different aspects of the market in much the
same manner as the several proverbial blind men \73\ who, after
touching but one part of an elephant, were asked to describe the
animal, and gave starkly different descriptions based upon whether they
had touched only the trunk, the torso or the tail. Perhaps an even more
apt analogy has been made with regard to the testimony of experts as
similar to the men in another fable:
---------------------------------------------------------------------------
\73\ The analogy is not meant to suggest that the testifying
experts were metaphorically blind. Indeed, they were all learned and
persuasive with regard to the aspects of the market upon which they
opined.
In a certain kingdom was a cave containing a treasure, guarded
by a beast of fierce repute. The king wished to know the nature of
the beast, and dispatched three of his subjects to invade the pitch
darkness of the cave and report. The first returned and declared
that he had felt the head of the beast, and it was toothed and maned
like a lion. The second reported that he had felt the sides of the
beast, and that it was winged and feathered like an eagle. The third
reported that the legs of the beast were long and hoofed like a
horse. A fearsome portrait of the beast was drawn up, and all were
thereafter afraid to approach the cave. Of course, in reality, the
cave contained a lion, an eagle, and a horse.
* * * * *
Another, less allegorical, way of saying this is that many of
the problems that the law has had in handling expertise in the
courtroom have sprung from a failure to examine the concept of
expertise in appropriate taxonomic detail.
Michael Risinger, Preliminary Thoughts on a Functional Taxonomy of
Expertise for the Post-Kumho World, 31 Seton Hall L. Rev. 508, 508-09
(2000).
This phenomenon among experts has particular applicability to
economists. As one prominent economist has recently written:
Rather than a single, specific model, economics encompasses a
collection of models . . . . The diversity of models in economics is
the necessary counterpart to the flexibility of the social world.
Different social settings require different models. Economists are
unlikely ever to uncover universal, general-purpose models. But . .
. economists have a tendency to misuse their models. They are prone
to mistake a model for the model, relevant and applicable under all
conditions. Economists must overcome this temptation.
Dani Rodrik, Economics Rules 5-6 (2015) (emphasis in original). Each
party and its experts nonetheless invite the Judges to rely on but a
single economic model--their model--as representative of the entire
noninteractive market. As this determination makes clear, the
[[Page 26335]]
Judges decline that invitation. Rather, the Judges have found that no
single economic model--no one mythic beast--reigns over the
noninteractive market writ large. Rather, the evidence and testimony
reveal a marketplace for sound recordings that is segmented, if not
fragmented. Indeed, the Judges note the economic dichotomies
demonstrated by the evidence:
Market Segmentation by WTP
Services that attract listeners who have no willingness to pay
(WTP) for access to a noninteractive service, and therefore who listen
mainly to ad-supported services, versus services that attract
relatively more listeners who have a WTP greater than zero, and
therefore can attract more subscription-based listeners.
Market Segmentation by On-Demand Functionality
Services that meet the statutory definition of an ``interactive
service'' and thus provide an on-demand function, i.e., that allow
listeners to select the sound recording they wish to hear whenever they
choose, versus noninteractive services, that--despite whatever other
functionality they may include--do not and cannot provide an on-demand
feature.
Market Segmentation by Major or Indie
The Majors, who have the ability to negotiate relatively higher
rates, versus the Indies, who have relatively less market power when
negotiating rates.
Complementary Oligopoly Power versus Oligopoly Market
Structure
``Complementary oligopoly'' power exercised by the Majors designed
to thwart price competition and thus inconsistent with an ``effectively
competitive market,'' versus the Majors' non-complementary
oligopolistic structure not proven to be the consequence of
anticompetitive acts or the cause of anticompetitive results.
Custom Pureplay Webcasting versus Simulcasting
Custom (Pureplay) noninteractive services that play only sound
recordings, versus simulcasters, who play principally (but not
exclusively) the sound recordings and other materials transmitted
simultaneously on a terrestrial broadcast.
The presence of such dichotomies is not particularly unusual. For
example, in Web II, the Judges noted that the marketplace consisted of
a variety of commercial actors, who had a heterogeneous mix of features
regarding costs, customers, business plans, and strategies. Such a
variety exists today, and has been amplified by technological changes
that have allowed for a greater diversity of music services. The
directive in Sec. 114, instructing the Judges to establish ``rates and
terms,'' that is, multiple rates and terms, anticipates the potential
for more than one set of rates and terms that would have been
negotiated in the marketplace between various willing buyers and
willing sellers. Because the marketplace as presented by the record in
this proceeding reveals important differences across these dichotomies,
the Judges, as required by Sec. 114, establish rates and terms in this
proceeding that reflect those marketplace realities.
B. SoundExchange's Rate Proposal
1. Introduction
SoundExchange proposes a single rate for all commercial webcasters
using a greater-of structure. All commercial webcasters would pay the
greater of 55% of revenue attributable to webcasting and the following
per-performance rate:
SoundExchange Proposed Per-Performance Rates
------------------------------------------------------------------------
Per-
Year performance
rate
------------------------------------------------------------------------
2016.................................................... $0.0025
2017.................................................... 0.0026
2018.................................................... 0.0027
2019.................................................... 0.0028
2020.................................................... 0.0029
------------------------------------------------------------------------
SoundExchange Rate Proposal at 2-3.
2. Dr. Rubinfeld's Proposed Interactive Streaming Services Benchmark
In support of its proposal, SoundExchange relies principally on an
analysis undertaken by one of its economic witnesses, Dr. Daniel
Rubinfeld, of rates set forth in direct licenses from record companies
to certain interactive streaming services.\74\
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\74\ An ``interactive service'' is defined as one that ``enables
a member of the public to receive transmission of a program
specially created for the recipient, or on request, a transmission
of a particular sound recording . . . which is selected by the
recipient.'' 17 U.S.C. 114(j)(7) (emphasis added). A service that
fails to meet the definition of an ``interactive service'' is, by
default, a noninteractive service that may be entitled to a
statutory license if it meets all other applicable criteria, see 17
U.S.C. 114(d)(2)(C), including adherence to the ``sound recording
performance complement'' as defined in 17 U.S.C. 114(j)(13).
---------------------------------------------------------------------------
a. Foundation for Rubinfeld's Proposed Per-Play Rates Benchmark
Dr. Rubinfeld derived SoundExchange's proposed per-play rates by
analyzing more than 80 agreements between interactive streaming
services and record companies. Dr. Rubinfeld identified 60 such
agreements that contained data on per-play royalty rates. 5/28/15 Tr.
6297 (Rubinfeld). From those 60 agreements, he selected 26 that
specified minimum per-play rates. Rubinfeld CWDT ] 205; SX Ex. 59
(Rubinfeld CWDT, Exhibit 16a) (listing 26 interactive streaming service
agreements).
According to Dr. Rubinfeld, interactive streaming service
benchmarks are more probative in this statutory rate proceeding than
they were in prior statutory rate proceedings due to: (1) A
``convergence'' in features that interactive and noninteractive
streaming services offer to the end-user (``downstream'') market; and
(2) greater head-to-head competition for listeners between interactive
and noninteractive streaming services. Rubinfeld CWDT ] 21.
i. Convergence of Features
SoundExchange avers that the listening choices (i.e.,
functionality) that interactive and noninteractive streaming services
offer their customers are becoming much more similar than they were in
previous years, i.e., they are converging. See, e.g., 5/6/15 Tr. 2013
(Rubinfeld) (``[C]onvergence [m]ean[s] that if I'm very active in
telling Pandora [a noninteractive service] what I like and don't like,
the nature of the station can evolve in ways that can become more
similar to what I might do on Spotify [an interactive service] if I
were curating my own station.'').
According to SoundExchange, the increasingly similar functionality
of interactive and noninteractive streaming services has ``blurred''
the previous distinctions between them. See, e.g., SX Ex. 3, ] 13
(Blackburn WDT); SX Ex. 32, ] 25 (Wilcox WRT). This purported blurring
has occurred, according to SoundExchange, because of technological
evolution, marketplace developments, and changes in consumer
preferences. See, e.g., Kooker WDT at 16; SX Ex. 21 ] 36 (Wheeler WDT).
SoundExchange asserts that, because of the market changes that it has
highlighted, interactive and noninteractive webcasters alike recognize
that any given music consumer ``is both a lean forward and a lean back
type of listener,'' whose particular preference ``depends very much on
the situation and the time of day'' and the ``mood that they're in.''
5/29/15 Tr. at 6570 (Kooker); Kooker
[[Page 26336]]
WRT.\75\ SoundExchange further notes that even Pandora has recognized
that for 75% of music consumers it is important that a music service
afford them both ``effortless listening'' and ``on demand music.'' SX
Ex. 269 at 17 (Pandora Board of Directors: Strategy Day document, Oct.
30, 2014).
---------------------------------------------------------------------------
\75\ ``Lean-forward'' and ``lean-back'' are not statutory
phrases that define types of services, and the record does not
reflect any precise meanings in the industry. Importantly, a ``lean-
forward service'' is not necessarily the same as an ``interactive
service,'' and a ``lean-back service'' is not necessarily the same
as a ``noninteractive service.'' Compare, e.g., 4/30/15 Tr. 1182-83
(A. Harrison) (``on-demand services have lean-back listening
options'' and ``statutory [noninteractive] services have lean-
forward capabilities.'') with 5/13/15 Tr. 3396-97 (Herring) (``lean-
back services are radio-like services, one where you hit play and
the service kind of chooses for you . . . [w]hereas . . . lean-
forward we consider on-demand services. So you go into the service
and you choose exactly what you want to listen to.'').
---------------------------------------------------------------------------
SoundExchange contends that to attract and retain listeners,
interactive streaming services have moved beyond merely playing, on
demand, the recordings selected by a listener, and have developed and
promoted curated playlists, radio components and other lean-back
methods of music delivery. Blackburn WDT ] 13; Wilcox WRT ] 25; Kooker
WRT at 14; 5/13/15 Tr. 3448-50 (Herring). To support this point,
SoundExchange introduced evidence and elicited testimony describing the
various custom radio features of several predominantly interactive
streaming services, e.g., Rdio; Rhapsody; Slacker; Beats; Amazon;
Google; and Apple. See SX PFF ] 266 (and record citations therein).
SoundExchange asserts that ``lean back'' features are a significant
part of the consumer listening experience on some of these services.
For example, SoundExchange points out that nearly [REDACTED]% of UMG's
plays on Slacker are such programmed streams, rather than the
traditional on-demand plays of an interactive service. SX Ex. 25 ] 11
(Harrison WRT). SoundExchange notes that on Spotify, approximately
[REDACTED]% of total listening to Sony's repertoire occurs through
playlists created by Spotify or other third parties (i.e., not the
listener). Kooker WRT ] 15.
SoundExchange further asserts that listener feature convergence is
occurring from the other direction as well, with statutory services
adding new ``lean-forward'' options. In May 2013, SoundExchange notes,
Pandora, a noninteractive streaming service, initiated its ``Pandora
Premieres'' feature, which ``allows for on-demand selection of certain
predetermined albums.'' Pan. Ex. 5002 ] 30 (Fleming-Wood WDT);
Rubinfeld CWDT ]] 53-54; 5/13/15 Tr. 3444 (Herring). Further,
SoundExchange notes that a Pandora listener can ``seed'' multiple
stations with various artists and sound recording tracks, and then
influence the types of recordings on each station by using Pandora's
``thumbs up/thumbs down'' button. PAN Ex. 5000 ]] 33-34 (Westergren
WDT); Fleming-Wood WDT ]] 8-9; Blackburn WDT ]] 9, 12-13; Rubinfeld
CWDT ] 53; Kooker WRT ]] 10-11. SoundExchange continues that Pandora
listeners can also skip songs, another form of customization. Rubinfeld
CWDT ] 53.
SoundExchange also points out that Sirius XM's noninteractive
steaming service (``My Sirius XM'') allows listeners to move
``sliders'' to change the type of music played. For example, a listener
can direct the service to play ``more acoustic'' or ``more electric''
within a particular genre. SX Ex. 232 at 15-21; 5/22/15 Tr. 5419-20
(Frear).
SoundExchange also notes that iHeart has developed a custom
streaming service that, according to SoundExchange, makes it ``very
likely'' that a listener who is seeking out a highly popular artist or
song will ``hear the exact song or songs he or she had in mind within
minutes of starting the station.'' Kooker WRT at 7.\76\
---------------------------------------------------------------------------
\76\ To demonstrate this point, SoundExchange introduced
evidence of several experiments that purported to show the high
frequency with which an iHeart station played the most popular songs
of a popular artist who was used to seed a custom station--in
contrast to the uncertain song rotation on terrestrial radio. Kooker
WRT at 7-8. In these experiments on iHeart's custom radio (i.e.,
non-simulcast), a seeded popular artist, Meghan Trainor, and her
current highest selling song, would play first 92% of the time. Ms.
Trainor's first or second current highest selling song would play
first 100% of the time. In 68% of the trials in the experiment, the
seeded station played three or more of Ms. Trainor's songs among the
first seven songs played. SX Ex. 27 at 7.
---------------------------------------------------------------------------
SoundExchange also notes that the statutory services are developing
new functionality that would allow even more listener control (while
still satisfying the DMCA requirements).\77\ These functions
purportedly would allow listeners to:
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\77\ None of the parties requested that the Judges interpret or
seek an interpretation from the Register on whether any one listener
feature or combination of features brought a particular
noninteractive service outside the scope of the statutory license.
---------------------------------------------------------------------------
Repeat songs, re-listen to songs they've ``thumbed up,''
skip additional tracks, and create playlists of ``thumbed up'' songs,
SX Ex. 1678 at 8;
ban from stations certain artists, live tracks,
instrumental recordings and tempos, SX Ex. 269 at 43; 5/13/15 Tr. 3498-
3503 (Herring); and
create stations that contain only those songs for which
the listener has indicated a preference. SX Ex. 213.
SoundExchange notes that a prime catalyst for increased convergence
between interactive and noninteractive streaming services is the trend
away from desktop listening toward mobile listening. For example,
SoundExchange points out that during the first quarter of 2015, 83% of
the hours streamed by Pandora listeners occurred through mobile
devices. 5/13/15 Tr. 3443 (Herring). SoundExchange asserts that the
leading edge of this competition to ``get into the car'' by both
noninteractive and interactive streaming services should hasten this
trend. 5/8/15 Tr. 2731-32 (Shapiro). Moreover, because on-demand song
selection is often incompatible with driving (absent hands-free voice
controls or self-driving cars), SoundExchange opines that interactive
streaming services have incentives to add ``lean-back'' functionality,
such as Spotify's ``Shuffle'' service, to their mobile services.
Blackburn WDT ] 39.
Based on the foregoing points, SoundExchange concludes that,
notwithstanding the requirements noninteractive streaming services must
meet to be eligible for the statutory license, statutory services are
increasingly offering enhanced functionality that ``come[ ] close to
replicating'' the on-demand listening experience of interactive
streaming services. Rubinfeld CWDT ]] 53-54; Blackburn WDT ] 9; Kooker
WDT at 16. As summarized by one record company witness, statutory
services now ``employ sophisticated algorithms, user-interface
controls, and other computer technology that allow users to communicate
their preferences to the service, and the service to customize and
curate programming tailored to the individual user.'' Kooker WDT at 16-
17.
SoundExchange concludes that ``[i]t is therefore no longer just
directly licensed interactive services that allow users to select their
programming. Users of statutory services can also lean forward and
influence what they hear.'' SX PFF ] 278 (emphases added).\78\
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\78\ The words ``select'' and ``influence'' as used by
SoundExchange and quoted in the accompanying text, supra, are
italicized to foreshadow the important distinction in meaning
between those words, as discussed infra, section IV.B.3.b. Suffice
it to note at present the different meanings of these two verbs:
``to select'' means ``to choose in preference to another or others;
pick out; to make a choice; pick,'' whereas ``to influence'' means
``to . . . affect; sway.'' See Dictionary.com.
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[[Page 26337]]
ii. Increased Competition for Listeners in the Downstream Market
79
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\79\ This proceeding involves two aspects of a vertical market:
(1) The ``upstream royalty market,'' in which record companies
charge streaming services for the right to access the record
companies' repertoires of sound recordings; and (2) the ``downstream
consumer market'' in which streaming services offer music to
listeners. Rubinfeld CWRT ] 132.
---------------------------------------------------------------------------
SoundExchange avers that interactive services and noninteractive
streaming services compete with each other for listeners. SX Ex. 269;
5/13/15 Tr. 3462 (Herring). SoundExchange contends that Pandora,
iHeart, and Sirius XM are all keenly aware of the developing
competition from interactive services. SoundExchange points to numerous
examples in the record of this purported competition for listeners
between interactive and noninteractive streaming services.
With regard to Pandora, SoundExchange cites the following evidence:
Pandora's own internal documents confirm that interactive
services ``compete head-to-head for listener hours with services that
operate under the statutory license,'' Kooker WDT at 16;
Pandora identifies Spotify as a ``competitor'' for the
``consumers [it is] trying to attract to use Pandora,'' SX Ex. 266 at
12; 5/13/15 Tr. 3483-84 (Herring);
Pandora identifies as ``competitor services'' Spotify's
Free Mobile App (described by Pandora as ``enabl[ing] [a] hybrid `lean-
in'/`lean-back' experience'') and Beats Music (a ``[p]ure on-demand
service with a novel personalization feature''), SX Ex. 266 at 15-21;
Pandora's ``Competitive Intelligence Report'' details the
product offerings of services like Beats, Google Play, Rdio, and
Spotify, SX Ex16 52; SX Ex. 2244;
In 2014, Pandora briefed its incoming CEO Brian McAndrews
on the ``[i]ncreased competition [that] exists from Apple, Google, and
[other interactive] streaming services like Spotify.'' SX Ex. 2367; 5/
27/15 Tr. 6163-65 (Fleming-Wood); and
Pandora identified Spotify, Rdio, Deezer, Rhapsody,
Slacker, Google, and Apple as ``competitors'' in Pandora's survey of
competitors' product strategies and business models in a ``Strategic
Planning Overview.'' SX Ex. 263 at 23.
Similarly, with regard to iHeart, SoundExchange notes the following
evidence of competition between interactive streaming services and
iHeart's custom noninteractive streaming service:
iHeart consistently identifies interactive services like
[REDACTED], [REDACTED], and [REDACTED] as competitors. SX Ex. 1262 at
4-11; SX Ex. 2157 at 5.
iHeart has monitored [REDACTED] on its ``competitor
tracker'' since [REDACTED] first launched [REDACTED]. SX Ex. 211 at 6.
iHeart has strategized as to how it could ``match or beat
[[[REDACTED]'s] experience,'' and listed ``major roadmap items to deal
with [REDACTED].'' Id. at 2.
Finally, SoundExchange notes that Sirius XM also internally
identifies interactive streaming services like [REDACTED], [REDACTED],
[REDACTED], [REDACTED], and [REDACTED] as ``competitors'' for listeners
of its noninteractive streaming service--My Sirius XM--and highlights
[REDACTED] as ``offer[ing] the strongest competition in terms of the
quality of customization.'' SX Ex.1759 at 15; 5/22/15 Tr. 5461-63
(Frear). Additionally, Sirius XM conducted a service-wide survey of
``competitive listening'' in which it sought input from listeners not
only on streaming services like [REDACTED], [REDACTED], [REDACTED], and
[REDACTED], but also on interactive streaming services like [REDACTED]
and [REDACTED]. SX Ex. 237 at 26.
Based on his proffered evidence of ``convergence'' and ``downstream
competition,'' Dr. Rubinfeld concluded that agreements between
interactive streaming services and record companies were an appropriate
foundation upon which to base a marketplace benchmark for determining
rates in this proceeding. 5/15/15 Tr. 1785 (Rubinfeld).
b. Comparability of Dr. Rubinfeld's Proffered Interactive Streaming
Services Benchmark to the Hypothetical Market
Dr. Rubinfeld asserts that his proposed interactive streaming
services benchmark satisfies the following four part-test that he
contends comprises the standard that the Judges applied in the Web III
Remand to determine the usefulness of a proffered benchmark:
Willing buyer and seller test: Dr. Rubinfeld contends that the
rates that the Judges are required to set must be those that would
have been negotiated in a hypothetical marketplace between a willing
buyer and a willing seller. Rubinfeld CWDT ] 122(a). Dr. Rubinfeld
opined that the interactive streaming services agreements upon which
he based his proffered benchmark are indicative of the results of
negotiations between willing buyers and willing sellers because they
were entered into voluntarily between parties who did not have the
option of electing the statutory license. Id. ] 158(a).
Same parties test: Dr. Rubinfeld contends that the buyers and
sellers in the hypothetical marketplace that the Judges are tasked
with replicating (i.e., statutory webcasting services and record
companies, respectively) are ``similar'' to the buyers and sellers
in his proffered benchmark. Id. ]] 122(b) and 158(b).
Absence of Statutory license test: Dr. Rubinfeld contends that
the hypothetical marketplace is one in which there is no statutory
license. Id. ] 122(c). He opines that, among the spectrum of
potential benchmarks that could have been offered, a benchmark based
upon interactive streaming services agreements is least likely to be
influenced by the statutory license because interactive services
cannot default to the statutory license and therefore, according to
Dr. Rubinfeld, his proffered benchmark is an appropriate replication
of a market without a statutory license. Id. ] 158(c).
Same rights test: Dr. Rubinfeld asserts that the products sold
in the hypothetical marketplace consist of a blanket license for the
record companies' complete repertoires of sound recordings, to be
used in compliance with the DMCA requirements. Id. ] 122(d). Unlike
the other three comparability tests discussed above, with regard to
the ``same rights test,'' Dr. Rubinfeld contends that certain
adjustments must be made to enhance the comparability of the
proffered benchmark to the hypothetical market. Dr. Rubinfeld
asserts that these adjustments are necessary because the agreements
upon which his proposed benchmark is based provide various
functionality that is not permitted by the statutory license (i.e.,
``on demand'' choice of songs; unlimited skips; and ``cached''
downloads). Id. ] 158(d).\80\
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\80\ Dr. Rubinfeld also noted that in the interactive streaming
services agreements that formed the basis of his proffered
benchmark, the licensed rights do not consist of a blanket license
for the record companies' complete repertoires of sound recordings.
Instead, artist/labels may limit (or exclude) the right to license
certain content from interactive streaming services. Id. Dr.
Rubinfeld did not offer any proposed adjustments to account for this
distinction.
Therefore, according to Dr. Rubinfeld, ``adjustments can and should
be made to account for these differences when applying the set of
interactive benchmarks.'' Id.\81\
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\81\ Dr. Rubinfeld made such adjustments, as discussed infra.
Understanding those adjustments in the proper context requires a
discussion of Dr. Rubinfeld's basic model, which follows.
---------------------------------------------------------------------------
c. Per-Play ``Ratio Equivalency'' in Noninteractive and Interactive
Markets
Dr. Rubinfeld ``assumed that the ratio of the average retail
subscription price to the per-subscriber royalty paid by the licensee
to the record label is approximately the same in both interactive and
noninteractive markets.'' Rubinfeld CWDT ] 169. This ``ratio
equivalency'' is best presented by the following equation:
[GRAPHIC] [TIFF OMITTED] TR02MY16.000
[[Page 26338]]
Where:
[A] = Avg. Retail Interactive Subscription Price
[B] = Interactive Subscriber Royalty Rate
[C] = Avg. Retail Noninteractive Subscription Price
[D] = Noninteractive Subscriber Royalty Rate
Dr. Rubinfeld testified that this ``ratio equivalency'' assumption is
not only important, but indeed is foundational to his entire analysis.
5/6/15 Tr. 2026 (Rubinfeld).\82\
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\82\ This ``ratio equivalency'' assumption in Dr. Rubinfeld's
model is essentially the same as the assumption made by Dr.
Pelcovits on behalf of SoundExchange in Web II and Web III. See
Rubinfeld CWDT ] 207 n.124 (acknowledging that he followed ``past
practices''); 5/6/1/155 Tr. 2026-27 (confirming that his reference
to ``past practices'' referred to Dr. Pelcovits's approach). Dr.
Rubinfeld indicates, however, that his application of the
interactive benchmark analysis does not suffer from the defects in
Dr. Pelcovits' application of that model in a prior proceeding. Id.
at 2027-28.
---------------------------------------------------------------------------
Dr. Rubinfeld calculated the interactive numerator and denominator
[A] and [B], and the noninteractive numerator [C], from available data
in the agreements he had analyzed. Dr. Rubinfeld did not have data to
calculate the noninteractive denominator [D]--i.e., the per-play
``Noninteractive Subscriber Royalty Rate.'' Therefore, Dr. Rubinfeld
attempted to estimate this number by: (1) Applying the above equation;
and (2) making what he describes as the necessary adjustments to the
rate he derives to account for differences between the interactive and
noninteractive markets and thus satisfy the ``same rights'' test.
More particularly, to determine his Interactive Numerator [A] (the
average monthly retail interactive subscription price), Dr. Rubinfeld
calculated ``the simple average of the [monthly] subscription prices
for the interactive services, which turned out to be in this case
$9.86.'' 5/5/15 Tr. 1797 (Rubinfeld).
To determine his Interactive Denominator [B] in his ratio (the
interactive subscriber royalty rate), Dr. Rubinfeld first identified
the average minimum per-play rate as defined in each of his selected
interactive agreements. Rubinfeld CWDT ] 205. Next, Dr. Rubinfeld
identified the various forms of non per-play consideration, if any, in
these agreements, which included non-recoupable cash payments and
advertising commitments with an explicit financial value. Rubinfeld
CWDT ] 218. To convert these lump-sum payments and values into per-play
values, Dr. Rubinfeld divided these payments by the number of actual
plays (as set forth in the applicable service's performance
statements). Id.\83\ He then added this derived per-play value to the
stated (i.e., headline) per-play rate. Dr. Rubinfeld then took an
average of these per-play rates, weighted by revenue, id. ] 203, to
determine the interactive subscriber royalty rate for his interactive
benchmark agreements.
---------------------------------------------------------------------------
\83\ If the agreements provided the record companies with rights
that were not quantifiable (e.g., data provision or equity stakes),
Dr. Rubinfeld did not account for the possible value of those rights
in his benchmark calculation. Id.
---------------------------------------------------------------------------
Having obtained values for [A] and [B], Dr. Rubinfeld was able to
calculate that the direct agreements with the interactive services
provided record companies with a minimum revenue share that generally
ranged between 50 percent and 60 percent of the services' revenues
(based on the record company's share of total streams), with the
majority falling between 55 percent and 60 percent. Rubinfeld CWDT ]
206 and, Appx. 1. Thus, given Dr. Rubinfeld's assumption that the
ratios should be equal in both markets, the per-play royalty rate for
noninteractive services [D] (i.e., the statutory rate) would also have
to provide record companies with the same minimum percentage of revenue
out of [C] (the average monthly retail noninteractive subscription
price).
However, Dr. Rubinfeld needed first to calculate [C] (the average
monthly retail noninteractive subscription price). Dr. Rubinfeld
calculated [C]--as he had calculated [A]--as a simple average of the
monthly subscription prices for the services he had identified as
``noninteractive.'' Because of varying rates within each service
(depending on whether the average is computed using monthly or yearly
fees), the average ranged between $4.84 and $5.25. 5/5/15 Tr. 1797
(Rubinfeld); Rubinfeld CWDT ] 207.
Having calculated values for [A], [B] and [C], Dr. Rubinfeld thus
could, and did, use the ratio of the interactive to noninteractive
subscription prices (the ratio of [A] to [C] \84\) to solve for [D]
(the statutory noninteractive per-play royalty rate). Dr. Rubinfeld
determined that the ratio of the two monthly subscription prices ranged
between 1.88 and 2.04.\85\ Dr. Rubinfeld applied what he considered to
be a reasonable and conservative figure within this range, 2.00, as a
discount factor to make his proffered downward ``interactivity
adjustment'' to the royalty rate for interactive services, which he
then applied to determine his proposed royalty rate for noninteractive
services.
---------------------------------------------------------------------------
\84\ As a basic mathematical point, if [A]/[B] = [C]/[D], then
[A]/[C] = [B]/[D]. Thus, assuming Dr. Rubinfeld's approach was
valid, he could mathematically determine [D] (the statutory
noninteractive rate) by applying the ratio of [A] to [C], since he
had calculated a value for [B] (the interactive royalty rate).
\85\ 9.86/4.84 = 2.04 (rounded). 9.86/5.25 = 1.88 (rounded).
---------------------------------------------------------------------------
i. SoundExchange's Alternative Calculation and Confirmation of Its
``Interactivity Adjustment''
Dr. Rubinfeld attempted to confirm the reasonableness of his 2.0
interactivity adjustment by considering a different method of
calculating the adjustment, undertaken by another SoundExchange expert
economic witness, Dr. Daniel McFadden. Rubinfeld CWDT ]] 171, 209. Dr.
McFadden conducted a ``conjoint survey'' \86\ to determine the value
that future consumers of digital streaming services place on various
features of those services. Dr. McFadden determined the value that
future consumers place on various features that are available on
streaming services, such as: (1) Limited or unlimited skips; (2)
offline listening; (3) on-demand (desktop and mobile); (4) addition of
mobile service; (5) playlists (from algorithms and ``tastemakers'');
(6) presence or absence of advertising; and (7) catalog size between
one million and twenty million. SX Ex. 15 ] 9 (McFadden WDT).
---------------------------------------------------------------------------
\86\ A conjoint survey creates a slate of alternative products
and asks the consumer to identify which product he or she most
prefers. The sets of products are designed to realistically mimic
the actual market process, in which a consumer is presented with and
chooses among various competing bundles of alternatives. By
presenting each consumer with several sets of choices, the
researcher can determine the relative importance and dollar value
that consumers place on each of the attributes. McFadden WDT ] 13.
---------------------------------------------------------------------------
Relying upon the entire sample of respondents to Dr. McFadden's
survey, Dr. Rubinfeld summed the average willingness to pay (WTP) \87\
values for various attributes for hypothetical interactive and
noninteractive services, in the following manner.
---------------------------------------------------------------------------
\87\ The word ``average'' is italicized in the text, supra, to
presage an important element of Dr. McFadden's results, one that he
identified and upon which one of the Services' economic experts, Dr.
Steven Peterson, elaborated the relationship between the average WTP
in Dr. McFadden's survey and the bimodal nature of Dr. McFadden's
WTP results. That issue is discussed further in this determination.
---------------------------------------------------------------------------
On the interactive side, Dr. Rubinfeld included the
following attributes: (1) Unlimited skips; (2) offline listening; (3)
on-demand availability (desktop and mobile); (4) mobile service; (5)
playlists (from algorithms and ``tastemakers''); (6) absence of
advertising; and (7) catalog size between one million and twenty
million).
[[Page 26339]]
On the noninteractive side, Dr. Rubinfeld included these
attributes but excluded the following features not offered by statutory
services: (1) Unlimited skips; (2) offline listening; and (3) on-demand
availability (desktop and mobile); and catalogs greater than ten
million (as arguably more reflective of noninteractive catalog sizes in
the market). Id.
Rubinfeld CWDT ] 209, SX Ex. 56 (Rubinfeld CWDT Ex. 14).
According to Dr. Rubinfeld, the survey results from Dr. McFadden's
conjoint survey indicated an interactivity ratio of 1.90, which Dr.
Rubinfeld noted was less than the 2.0 interactivity ratio calculated by
Dr. Rubinfeld through his own methodology, discussed supra. (Because
the interactivity ratio measures the relationship of interactive
subscription prices to noninteractive subscription prices, the lower
1.90 ratio would indicate that noninteractive subscription prices are
closer to interactive subscription prices, raising the benchmark
interactive royalty rate as compared to Dr. Rubinfeld's 2.0 ratio.)
Accordingly, Dr. Rubinfeld concluded that Dr. McFadden's alternative
method of calculating the value of interactivity confirmed that Dr.
Rubinfeld's own 2.0 interactivity adjustment was not only reasonable,
but conservative. Rubinfeld CWDT ] 210.
ii. Additional Adjustments Made by Dr. Rubinfeld
The other differences between the interactive market and the
noninteractive market that, according to Dr. Rubinfeld, required
further adjustment before he could determine a per-play royalty rate
based on his interactive benchmark analysis are described below.
(A) Adjustment for Royalty-Bearing Plays (Skips and Pre-1972
Recordings)
In his analysis, Dr. Rubinfeld accounted for the fact that, under
the statute, a ``skip,'' i.e., a song that that a listener skips after
several seconds, is considered a royalty-bearing play for a
noninteractive service. By contrast, interactive services, pursuant to
their direct license agreements with record companies, typically are
permitted to exclude from the royalty obligation at least some skips.
SX Ex.17 ] 212 (Rubinfeld CWDT). Offsetting to some extent this
downward adjustment, according to Dr. Rubinfeld, was his understanding
that statutory services (such as Pandora and Sirius XM) contend that
they are not required to pay royalties for pre-1972 sound recordings
under federal copyright law.\88\ Id. ] 213 (Rubinfeld CWDT). However,
Dr. Rubinfeld understood that directly-licensed interactive services,
such as those in his proffered benchmarks, are usually bound by
contract to pay royalties on pre-1972 sound recordings. Id.
---------------------------------------------------------------------------
\88\ The Copyright Act only covers sound recordings fixed after
February 15, 1972--the effective date of the Sound Recording
Amendment, Pub. L. 92-140, 85 Stat. 391 (1971). Protection, if any,
for sound recordings fixed prior to that date derives from state
law.
---------------------------------------------------------------------------
In order to make an ``apples-to-apples'' comparison, Dr. Rubinfeld
therefore corrected for these differences in royalty-bearing plays in
his interactive benchmark market and the statutory noninteractive
market. SX Ex. 29 ] 214 (Rubinfeld CWRT). Applying the foregoing
factors, Dr. Rubinfeld calculated that the ratio of (i) royalty-bearing
plays in his interactive benchmark market to (ii) royalty-bearing plays
in the statutory noninteractive market was 1.0:1.1. Accordingly, Dr.
Rubinfeld divided his per-play rate (as calculated in the prior steps,
supra) by a factor of 1.1.\89\
---------------------------------------------------------------------------
\89\ Dr. Rubinfeld calculated the 1.1 adjustment factor by: (i)
Estimating the number of royalty- bearing plays on a hypothetical
service that does not pay for skips, utilizing information about the
number of skips; the average skip length; song length; and ad
minutes per hour, and then dividing that number by (ii) the
estimated number of royalty-bearing plays as determined by analyzing
Pandora's SEC filings. Rubinfeld CWDT ] 216; SX Ex. 57 (Rubinfeld
CWDT Ex. 15a); SX Ex.58 (Rubinfeld CWDT Ex. 15b).
---------------------------------------------------------------------------
(B) Adjustment for Indies
Dr. Rubinfeld assumed that, on average, independent record
companies, commonly known as Indies, (i.e., those not owned by (or by a
division of) Universal, Sony or Warner) would likely negotiate less
beneficial arrangements with interactive services than would Majors.
Rubinfeld CWDT ]] 220, 223. Based on this assumption, he made a further
assumption that the difference in the consideration received by the
Majors and the Indies in the interactive market would be reflected
completely in the assumed fact that Indies ``would not receive any of
the non per-play financial or other unquantified consideration major
record companies receive . . . .'' Id. ] 223.\90\ Dr. Rubinfeld then
determined that the Indies accounted for an average of 24% of the
streams on interactive services, and he weighted his benchmark by
assuming that this 24% figure was also applicable to the noninteractive
market. Id. ] 225.\91\
---------------------------------------------------------------------------
\90\ Apparently, Dr. Rubinfeld did not separately examine the
Indies/Services agreements in his collected interactive agreements
to test his assumptions and apply the actual differences, if any,
between the headline rates and other compensation received by the
Indies, on the one hand, and by the Majors, on the other hand. See
Rubinfeld CWDT ] 223 (``I also assume that these independent record
companies receive the same per-play rates and proportionate revenue
shares as the majors.'') (emphasis added). Dr. Rubinfeld later
modified his direct testimony to note what he described as
confirmatory evidence--that in [REDACTED]'s [REDACTED] agreements
with the Majors and the Indies, ``the majors received [REDACTED] and
the indies did not.'' SX Ex. 128 ] 29 (Rubinfeld CWDT App. 2).
\91\ Dr. Rubinfeld noted that Nielsen Soundscan information he
possessed indicated that the independent record companies' 2013
market share was higher--it was approximately 35%--but he chose to
use the lower 24% interactive market figure. Rubinfeld CWDT ] 224
and n.131 (continuing to rely on the 24% figure for interactive
plays of Indie sound recordings and noting (but not linking,
logically or evidentially) the unsourced assertion that ``a
substantial portion of those sound recordings were distributed by
major labels.'').
---------------------------------------------------------------------------
After applying the foregoing steps and adjustments, Dr. Rubinfeld
calculated that, for the year 2014 (the year for which he had and
applied data), the per-play royalty rate for noninteractive services
implied by the interactive benchmark equaled $0.002376, or 0.2376
cents. SX Ex. 59 (Rubinfeld CWDT Ex. 16a).
(C) Adjustment for 2016-2020 Period
Finally, Dr. Rubinfeld determined that his proposed per-play rate
should increase by a linear $0.00008 for each year in the statutory
2016-2020 period. In support of these annual increases, Dr. Rubinfeld
relied upon: (1) The average $0.00008 annual increase in rates as set
in Web III; \92\ (2) his belief that there would be an ever-increasing
convergence in the retail prices of statutory and nonstatutory
services; (3) the presence of rate escalation provisions in the iHeart/
Warner Agreement and the Pandora/Merlin Agreement; and (4) the presence
of annual rate escalations in the Web III rates. Rubinfeld CWDT ]] 137-
141; PAN Ex. 5014 at 4, 5 (Pandora/Merlin Agreement). Thus, Dr.
Rubinfeld increased his 2014 interactive benchmark of $0.002376 by
$0.00008, for a 2015 benchmark of $0.002456. That 2015 figure was again
increased by $0.00008 to reflect a rate for 2016 of $0.002536 (rounded
by Dr. Rubinfeld to $0.0025).
---------------------------------------------------------------------------
\92\ See 37 CFR 380.3(a)(1) (setting forth Web III rates).
Although the average rate increased annually by $0.00008, the rate
remained constant for 2012 and 2013 (at $0.0021) and also remained
constant for 2014 and 2015 (at $0.0023). Thus, in 50% of the year-
over-year changes, the Judges declined to make any changes in the
Web III rates.
---------------------------------------------------------------------------
iii. The Interactive Rate Is an ``Effectively Competitive'' Benchmark
Rate
SoundExchange maintains that Dr. Rubinfeld's interactive benchmark
rate reflects effective competition because
[[Page 26340]]
downstream competition mitigates any arguable market power record
companies may have in the upstream licensing market. (However, it is
worthy of note that SoundExchange did not attempt to demonstrate that
the interactive market on which it relies for its benchmark is
effectively competitive, until its rebuttal case, after the Services
had made their direct arguments as to why the interactive market is not
effectively competitive.) In support of its argument, SoundExchange
relies on the testimony of another of its economic experts, Dr. Eric
Talley.
According to Dr. Talley, rates in the interactive market are
constrained by two factors. First, if there is an ``elastic downstream
demand curve'' for an input (such as a sound recording), upstream
prices for that input will be constrained. Second, if the ``expenditure
on that input versus other inputs''--``the cost intensity of that
particular input''--is proportionately significant compared to other
inputs in the downstream market, the constraint on pricing in the
upstream market will be more pronounced. 5/27/15 Tr. 6054-55
(Talley).\93\
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\93\ Dr. Talley's testimony describes factors pertinent to the
economic ``Hicks-Marshall'' principle, which provides that the
upstream demand for a factor of production (such as sound recording
licenses demanded by a webcaster) is ``derived'' in part from the
downstream demand for the finished product (such as a subscription
service that offers such sound recordings). Further, the elasticity
of demand downstream will be reflected in the upstream demand for
that factor of production.
---------------------------------------------------------------------------
According to Dr. Talley, both of these factors are present here.
First, high price elasticity exists downstream because of the threat
from piracy and because of competition from other outlets, such as
YouTube. Second, the variable costs associated with licenses are a very
significant element of the downstream sellers' expenses. Thus, these
elasticities would be passed upstream. Id. at 6054-58.
Dr. Talley then noted that his theoretical modeling demonstrated
that such downstream competitive forces ``will cause the WBWS price to
be tightly clustered, reducing variations due to differences in
bargaining power.'' SX Ex. 19 at 35, 44-45 (Talley WRT); see also SX
Ex. 29 ] 132 (Rubinfeld CWRT).
Sound Exchange notes that Dr. Talley's assertions regarding the
highly competitive state of the downstream market is essentially
undisputed and borne out by the evidence. See SX PFF ]] 449-458 (and
record citations therein). Moreover, SoundExchange notes that Drs.
Shapiro and Katz acknowledged that the presence of some ``free
alternatives'' in the downstream market have reduced interactive rates
in the upstream market. 5/20/15 Tr. 5049 (Shapiro); 5/11/15 Tr. 2973
(Katz).
SoundExchange also points to its negotiations with interactive
services as evidence that the upstream interactive market is
effectively competitive. Dr. Rubinfeld, described the negotiations as a
``real give and take,'' where the labels ``have in mind a particular
goal, but they have to give up something,'' which is ``consistent''
with the ``view that there's some bargaining power on the part of the
services.'' 5/5/15 Tr. 1863 (Rubinfeld). He further testified that the
possible bargaining range would at best only reveal ``something about
the other party's willingness to pay or willingness to sell.'' Id. at
1864-65. Dr. Rubinfeld and SoundExchange reached these conclusions
based on their consideration of the back and forth and ultimate
concessions record companies make in the final agreements reached (or
abandoned) with Apple, Google, Beats, Spotify and Amazon. See SX PFF ]
471-80 (and citations to the record therein).
d. Direct Licenses for Noninteractive Services Corroborate Dr.
Rubinfeld's Interactive Benchmark
SoundExchange offered analyses of direct licenses between record
companies and several noninteractive services to corroborate its
interactive benchmark analysis. These include two licenses from major
record companies to Apple, Inc. (Apple) for its iTunes Radio service,
and several licenses for what SoundExchange describes as noninteractive
offerings by services that also offer interactive streaming.
i. Apple Agreements
SoundExchange presented evidence of Apple's license agreements with
Warner and Sony, respectively, for Apple's iTunes Radio service. iTunes
Radio is a streaming service that offers users the opportunity to
listen to playlists selected by industry ``tastemakers,'' as well as
playlists that are generated by an algorithm based upon a song or
artist ``seeded'' by the listener (similar to Pandora's service). Dr.
Rubinfeld described the iTunes Radio service as ``DMCA compliant,''
although he acknowledged that the rights granted to Apple are ``not
identical to the statutory license.'' Rubinfeld CWRT, App. 2, ]] 1-
2.\94\ Dr. Rubinfeld concluded that the effective per-play royalty rate
under the Apple licenses with Warner and Sony range from $0.[REDACTED]
to $0.[REDACTED], the low end of which exceeds the highest rate
proposed by SoundExchange. Id. ]] 30, 42.
---------------------------------------------------------------------------
\94\ All testimony on the subject of iTunes Radio was taken
prior to the launch of Apple Music. Consequently, the discussion of
iTunes Radio in this determination does not reflect any changes
Apple may have made to the service as a result of that launch.
---------------------------------------------------------------------------
SoundExchange offered the Apple agreements as part of its rebuttal
of a number of the licensee services' criticisms of Dr. Rubinfeld's
interactive benchmark analysis. Dr. Rubinfeld contended that, because
the (noninteractive) Apple agreements were not susceptible to those
criticisms, those criticisms would be rebutted by evidence that the
royalty rates derived from the Apple agreements were roughly equivalent
to those derived from the interactive benchmark analysis. Id. ] 3.
Specifically, Dr. Rubinfeld argued that the following critiques
that the licensee services levied against his interactive benchmark
analysis would not apply to Apple's agreements with the majors for its
noninteractive service.
The majors' repertoires are ``must haves'' for interactive
services, enabling the majors to charge supracompetitive prices. Id. ]
4. The majors' repertoires are not ``must haves'' for a noninteractive
service, since a noninteractive service (and not its customers)
determines which songs will be played.
``[B]ecause noninteractive services purportedly have the
ability to steer listeners to sound recordings offered by independent
music labels and away from majors (or away from any particular major's
repertoire), record label catalogs are substitutes.'' Id. ] 5. iTunes
Radio would have the same ability to steer listeners as any other
noninteractive service. Id. ] 7.
``[B]ecause interactive services are primarily
subscription services, they have substantially higher ARPUs than
noninteractive services, which are primarily ad-supported,'' and would
therefore pay substantially higher royalties. Id. at 6. iTunes Radio,
by contrast, is a nonsubscription service that, like other
noninteractive services, is primarily ad-supported. Id. ] 7.
Dr. Rubinfeld also offered two additional reasons why the Judges
should consider the Apple agreements. First, he noted that Apple's
``unique position in the marketplace'' confers substantial bargaining
power in its negotiations with record companies, tending to negate any
argument based on a disparity of bargaining power between licensor and
licensee. Id. Second, Dr. Rubinfeld argued that the non-precedential
language in the agreements demonstrates that the parties did not expect
them to be used
[[Page 26341]]
in this proceeding.\95\ As a consequence, he suggested that the shadow
of the statutory license may not affect the Apple agreements as
strongly as other noninteractive benchmarks (e.g., the Pandora-Merlin
and iHeart-Warner agreements). Id. ] 8.
---------------------------------------------------------------------------
\95\ That proposition is questionable in light of other evidence
of what euphemistically could be called ``strategic behavior'' by
Apple and one of the major record companies. See IHM Ex. 3517
([REDACTED] email from [REDACTED] to [REDACTED]) (``[REDACTED].'')
(emphasis added).
---------------------------------------------------------------------------
ii. Other Noninteractive Agreements
SoundExchange also offered Dr. Rubinfeld's analysis of record
company licenses to Beats Music's ``The Sentence,'' Spotify's
``Shuffle'' service, Rhapsody's ``Unradio,'' and Nokia's ``MixRadio''
to corroborate its interactive benchmark analysis. SoundExchange
describes these services as noninteractive offerings, and concludes
that the effective per-play rates in the agreements exceed the per-play
rate derived from Dr. Rubinfeld's benchmark analysis of interactive
service agreements. See Rubinfeld CWRT ]] 179-201.
3. The Services' Opposition to the SoundExchange Rate Proposal and the
Judges' Determination on the Issues
a. Dr. Rubinfeld's Interactive Benchmark Must Be Adjusted To Reflect
Effective Competition
The Services' expert economic witnesses all agreed that
SoundExchange's proposed interactive benchmark would fail to establish
rates that are ``effectively competitive.'' See, e.g., Katz WDT ]] 5,
17, 18-34; Shapiro WDT at 3, 10-16; Fischel & Lichtman AWDT ] 10; 5/11/
15 Tr. 2799:9-16; 2800:3-18; 2801:9-17 (Katz); 5/8/15 Tr. 2604:10-22
(Shapiro); 5/15/15 Tr. 4094:7-19 (Lichtman); see also, e.g., Shapiro
WDT at10 n.11 (``My approach here is consistent with the one taken by
the Judges in the Web III Remand.''). More particularly, the Services'
economists equate the ``effectively competitive'' requirement as
essentially equivalent to the economic concept of ``workable
competition.'' In its essence, ``[a] workably competitive market is one
not subject to the exercise of significant market power.'' Shapiro WDT
at 10.\96\
---------------------------------------------------------------------------
\96\ See J. M. Clark, Toward a Concept of Workable Competition,
30 a.m. Econ. Rev. 241-56 (1940); Jesse Markham, An Alternative
Approach to the Concept of Workable Competition, 40 a.m. Econ. Rev.
349, 349 (1950) (treating ``effective competition'' and ``workable
competition'' as synonymous).
---------------------------------------------------------------------------
The NAB's economic expert, Dr. Katz, essentially analogizes the
D.C. Circuit's contrast between ``metaphysical'' and ``effective''
competition to the economists' contrast between ``perfect'' and
`workable'' competition:
The theoretical conditions of perfect competition often are not
satisfied in actual markets . . . . It is thus necessary to consider
markets that are competitive, but not perfectly so. Economists have
long examined this concept, beginning with Professor J.M. Clark, who
introduced the concept of ``workable'' competition. Economists also
refer to such markets as reasonably or effectively competitive.
Katz WDT ] 29 (emphasis in original).
Dr. Shapiro describes a ``workably'' or ``effectively'' competitive
market as follows:
The hallmark of a workably competitive market is regular,
significant competition among suppliers for the patronage of buyers.
. . . A market can be workably competitive even when the products or
services offered by different sellers are differentiated, so long as
no single supplier has significant unilateral market power. Indeed,
this is the norm for information products such as books, video
programming, or software applications. Workable competition does not
require marginal cost pricing or anything approaching the textbook
model of perfect competition. A market can also be workably
competitive even if it is quite concentrated, so long as the
suppliers compete regularly and energetically to win business from
each other. . . . In contrast, a market that is monopolized or
controlled by a cartel is not workably competitive. If such markets
were considered workably competitive, the concept of workable
competition would lose all meaning. Likewise, a moderately or highly
concentrated market in which the leading suppliers tacitly collude
is not workably competitive. For example, if the leading suppliers
have settled into some form of coordinated interaction, e.g., by
refraining from competing actively to poach each other's customers,
the market will fail to be workably competitive. More generally, if
the leading suppliers are colluding--either expressly or tacitly--
the market is not workably competitive.
Shapiro WDT at 10-11 (emphasis in original).
According to the Services' economists, the presence or absence of
``workable'' or ``effective'' competition in the present case must be
determined by recognizing that the noninteractive services are
``aggregators,'' that is, they aggregate sound recordings they have
licensed from record companies in the upstream market and then provide
access to such licensed sound recordings to listeners in the downstream
market. In such a market, ``workable competition'' is present,
according to the Services' economists, if ``aggregators can offer
attractive packages without the products of particular suppliers and to
the extent to which these aggregators can steer their customers toward
or away from particular suppliers.'' Shapiro WDT at 11. This ability to
steer toward or away from certain suppliers is an example of price
competition, according to Dr. Katz. See Katz WDT ] 32 (``[C]ompetition
arises only when buyers have the ability to substitute the offerings of
one seller for those of another. It is this possibility of substitution
that drives sellers to offer higher quality and lower prices in order
to attract buyers to themselves rather than their rivals. Conversely,
when buyers lack the ability to substitute among the offerings of
different sellers, there is no competition among sellers to attract
customers.'') (emphasis in original).
The Services assert that the interactive service agreements that
SoundExchange proffers as appropriate benchmarks are not the product of
such an ``effectively competitive'' market. In support of this
assertion, the Services advance several arguments.
First, the Services maintain that there is a fundamental difference
between interactive and noninteractive services that precludes the
former from serving as an ``effectively competitive'' benchmark for the
latter. That fundamental distinction arises, they aver, from the fact
that a sine qua non of on-demand services is that each downstream
listener chooses the artists, albums, and tracks to which he or she
listens, as well as the timing and frequency of each play. For this
reason, on-demand interactive services must always be in a position to
play any sound recording a listener might demand, and the on-demand
services therefore lack the ability to steer performances away from
higher-priced labels and toward lower-cost providers. See Shapiro WRT
at 23; see also Katz WDT ] 17 (describing buyer choice as the ``essence
of competition'' and opining that ``[t]he creation of a rate-
determination process and its willing-buyer/willing-seller standard can
best be reconciled with economic principles and common sense by
interpreting willing buyers as those who have meaningful choices among
competing sellers, rather than facing a single, all-or-nothing offer
from a monopolist.'').
Second, the Services note that a lack of effective competition in
the upstream interactive market is confirmed by the testimony of
numerous SoundExchange witnesses, who conceded that the licenses
between record labels and on-demand services are the product of a
market devoid of any price competition between record companies to
obtain additional plays on on-demand services. See 4/28/15 Tr. 415-16
(Kooker) (Sony has ``never cut [its] price responding to a competitor's
proposal or for more
[[Page 26342]]
plays.''); 4/30/15 Tr. 1097-99 (A. Harrison) (Universal has never
lowered a proposed rate as a consequence of finding out that another
Major was offering a lower rate, and, more broadly, Universal does not
take any actions to compete with Sony or Warner with respect to
services); 5/7/15 Tr. 2485-86 (Wilcox) (Warner has never offered a
lower rate to an interactive service for more plays).
Third, the Services' economists concluded that the reason for the
absence of price competition in the upstream interactive market is that
the repertoires of each Major are ``complements'' for each other. As
Dr. Shapiro opined:
In the parlance of economics, the ``must have'' suppliers are
complements, not substitutes, because buyers need each of them and
cannot substitute one for another. . . . This concept is well known
in economics. When two essential inputs must be used together, they
are often referred to as ``Cournot Complements.'' The evidence . . .
shows that the repertoires of the major record companies are Cournot
Complements for interactive services.
* * * * *
The evidence shows clearly that the major interactive services
``must have'' the music of each major record company to be
commercially viable. The repertoires of the major record companies
are not substitutes for each other in the eyes of either interactive
services or the record companies themselves. This means that there
is no true ``buyer choice'' in this market. Thus, the market for
licensing recorded music to interactive services is not workably
competitive. . . .
Shapiro WRT at 15.
Fourth, the Services note that SoundExchange's economic expert, Dr.
Rubinfeld, did not perform any separate analysis to determine whether
the proffered interactive benchmark reflected the dynamics of a
competitive market. Rather, he assumed, i.e., he took ``for granted,''
that his proffered interactive benchmark market was sufficiently
competitive. 5/5/15 Tr. 1922 (Rubinfeld).
Fifth, the Services rely upon numerous statements in several
documents from SoundExchange's own principal advocates in the present
case that had been submitted to the Federal Trade Commission (FTC) on
behalf of Universal seeking approval of Universal's then-proposed
merger with EMI--subsequently approved by the FTC and later
consummated.\97\ These documents, according to the Services, reveal
that Universal and its advocates asserted to the FTC that the proposed
merger would not lessen competition because the market for interactive
services was already not competitive. Specifically, the Services point
to statements to the FTC by or on behalf of Universal:
---------------------------------------------------------------------------
\97\ Professor Rubinfeld acted as economic advisor to UMG and
EMI in relation to that transaction, and Mr. Pomerantz,
SoundExchange's lead counsel in this proceeding, acted as UMG's
counsel. 5/5/15 Tr. 1942-43; 1950-51 (Rubinfeld); PAN Ex. 5345 at 1.
---------------------------------------------------------------------------
[REDACTED]
PAN Ex. 5349 at 1-2 (Universal).
[REDACTED]
PAN Ex. 5349 at 17 (Universal).
[REDACTED]
PAN Ex. 5025 at 2, 18 (Pomerantz).
[REDACTED]
NAB Ex. 4129 at 41-2 (Rubinfeld).
[REDACTED]
PAN Ex. 5025 at 18, 21 (Pomerantz); see NAB Ex. 4129 (Rubinfeld)
([REDACTED]); 5/5/15 Tr. 1956-58, 1946-47 (Rubinfeld) (quoting PAN
Ex. 5345 (June 22 letter to the FTC) (``[REDACTED].'').
[REDACTED]
PAN Ex. 5349 at 17 (Universal) (emphasis added); see PAN Ex. 5025 at
16 ([REDACTED]).
Additionally, iHeart's economic experts, Drs. Fischel and Lichtman,
relied upon a [REDACTED] document submitted to the FTC in connection
with the Universal/EMI merger, contrasting the ``must have'' nature of
the interactive service market with the more competitive noninteractive
service market: ``[REDACTED]'' IHM Ex. 3054 ]41 n.70 (Fischel/Lichtman
WRT) (quoting SNDEX 0266588-665) (emphasis added).
Sixth, according to the Services, the foregoing points demonstrate
that Dr. Rubinfeld's proffered interactive benchmark market not only
fails to be competitive, but also is even worse than a market
controlled by a single monopoly supplier. Shapiro WRT at 18; see also
Katz WDT ]] 41-43 (By logic first identified by Antoine Cournot in
1838, firms offering complementary products tend to set higher prices
than would even a monopoly seller of the same products, illustrating
that suppliers of complements do not compete with one another.); PAN
Ex. 5349 at 19 (Universal White Paper to FTC explaining that
``[REDACTED]'').
Seventh, the Services note that the Majors structure their
contracts with the interactive services to avoid any price competition
with the other labels and to prevent the on-demand services from
attempting to steer users away from their repertoires. See 4/28/15 Tr.
441-42 (Kooker); 4/30/15 Tr. 1142 (Aaron Harrison); 5/7/15 Tr. 2473
(Wilcox). Even more particularly, the Services note that the Majors'
agreements with the leading interactive services contain provisions
that effectively prevent the services from favoring the artists or
repertoires of one label over another. These provisions apply variously
to playlists, artist or album features, editorial content, home-page
placements, advertisements, album recommendations, and/or other ways
the interactive services may promote particular content to their users.
See 4/28/15 Tr. 455-56 (Kooker); 4/30/15 Tr. 1144-45 (Harrison); 6/2/15
Tr. 7202-05 (Harrison); 5/7/15 Tr. 2487-88, 2490-93 (Wilcox).
The Services disagree with SoundExchange's assertion that
downstream competition causes Dr. Rubinfeld's interactive benchmark to
reflect ``effective competition.'' In fact, Dr. Katz asserts that
SoundExchange's conclusion is 180 degrees wrong:
[W]hen you have a highly competitive downstream industry,
there's going to be a smaller markup of [retail] price over cost
because the competitive pressures are going to tend to drive
[retail] price to cost. So what that means is . . . for any . . .
license fees set by the record companies, we have a highly
competitive downstream market. There's going to be a smaller markup.
That then makes it profitable, more profitable to set a higher price
upstream. So, actually, the more intense the competition downstream,
the greater the incentive to charge a high price upstream because
you don't have to worry about so-called double marginalization.\98\
---------------------------------------------------------------------------
\98\ ``Double marginalization'' occurs when the upstream
supplier has upstream market power and its buyer, the downstream
seller, has downstream market power. In that situation, ``the price
of the input is marked up twice: By the upstream firm and, in terms
of the final product price, by the downstream firm.'' W. Kip
Viscusi, et al. Economics of Regulation and Antitrust 239 (2005). In
the absence of downstream market power on the part of the upstream
buyers/downstream sellers, the upstream firms with market power can
capture the full benefit of single marginalization, i.e., of price
above marginal cost.
5/11/15 Tr. 2819 (Katz) (emphasis added).
The Services take Dr. Talley and SoundExchange to task for failing
to do any empirical work to confirm whether and to what extent piracy
and other downstream alternative music delivery competitors may have
affected upstream interactive rates. The NAB notes that Dr. Talley
admitted that he had performed no empirical analysis to ascertain
whether or to what degree ``downstream competition is, in fact,
impacting the upstream negotiations'' in the interactive market. 5/27/
15 Tr. 6092-93 (Talley); see id. at 6058 (``I haven't done an empirical
analysis of that market. . . .''). Dr. Tally further admitted that he
had not studied either the downstream interactive service market or the
upstream market in which the record companies license interactive
services. Id. at 6080-83. Finally,
[[Page 26343]]
although Dr. Talley made certain suppositions regarding the elasticity
of demand flowing from the downstream market into the upstream market,
the Services note that Dr. Talley admitted that he had not attempted to
calculate any elasticity of demand whatsoever, because ``within the
ambit of how I was retained as an expert, I did not view that as part
of my charge.'' 5/27/15 Tr. 6093 (Talley).
The Services also note that their own experts, contrary to
SoundExchange's assertions, had not acknowledged that piracy and other
forms of downstream competition had or would reduce upstream
interactive rates to an ``effectively competitive'' level. Rather, as
the NAB notes, for example, Dr. Katz testified that even if piracy
imposes some constraint, ``that doesn't render the market effectively
competitive . . . it may be pressure on the monopoly price, but,
nonetheless, it's a monopoly price.'' 5/11/15 Tr. 2823 (Katz). As Dr.
Katz further explained, the merger submissions made by Universal argued
that the merger would lead to lower prices because it would remove the
Cournot complements pricing effect between UMG and EMI, and that would
not have been true if prices had already been squeezed by piracy to
near the competitive level:
[T]he parties were saying, if we're allowed to merge, we would
find that it would increase our profits to lower our price. So
clearly, piracy had not pushed them down to such a low price that
going lower would reduce their profit. They actually say, going
lower would raise our profits. And what that's telling you is, along
with the fact that the other majors are must have[s] as well, is
[that] they were actually concerned they were pricing above the
monopoly level.
5/11/15 Tr. 2825 (Katz) (citing PAN Ex. 5025 at 22).
Additionally, the NAB, again through Dr. Katz, notes that
identifying a hypothetical increase in the elasticity of demand in the
upstream market arising from competition in the downstream market is
not the same as identifying a competitive price in the upstream market.
Thus, the Services assert that, although Dr. Katz testified that piracy
and other forms of downstream competition could have ``some sort of an
effect, and I believe it's in a downward direction,'' 5/11/15 Tr. 2973
(Katz), he was not opining how far such competition might have pushed
down the price. They point out that, when Dr. Katz noted the
hypothetical possibility that downstream competition could push
upstream prices down to competitive levels, he was not suggesting that
such a hypothetical circumstance exists in the interactive market.
Rather, he was simply saying something is ``conceivable, if you're
talking about hypotheticals'' or ``possible,'' which does not imply
that it is likely, or in any way true in this case. See 5/11/15 Tr.
2976-78 (Katz).
The Judges find that the impact of piracy and other downstream
competitors (such as YouTube) does not serve to promote ``effective
competition'' in any of the relevant upstream markets, including the
upstream market for sound recordings licensed for use by interactive
subscription services. SoundExchange, through the testimony of Dr.
Talley, did note persuasively that in theory these downstream
competitors would depress the upstream price. SoundExchange also
correctly noted that Drs. Katz and Shapiro concurred with that
theoretical point. However, a close reading of the testimony of Drs.
Talley, Katz, and Shapiro reveals that none of them concluded that the
impact of such downstream competition would necessarily depress any
upstream price to a level that would offset the upward pricing effect
of complementary oligopoly. Rather, Dr. Talley and SoundExchange invoke
the vague idea that any monopoly effects--after assuming the upstream
impact of downstream competition--would be ``benign'' or ``pedantic,''
and Drs. Katz and Shapiro acknowledged only the hypothetical
possibility that downstream competition in some circumstance could
eliminate the anticompetitive power of upstream monopolists or
complementary oligopolists.
In the present case, though, the Judges are not left with mere
hypotheticals regarding whether the anticompetitive elements of the
interactive market are ``benign'' or ``pedantic.'' Nor are the Judges
hamstrung, as SoundExchange suggests, by the alleged absence of
``bright line'' demarcations as to when effective competition is
present and when it is not. Rather, the Judges were presented with hard
and persuasive evidence that competitive steering has reduced royalty
rates in the noninteractive market and would do so in the hypothetical
market as well. This evidence of steering (provided by Pandora and
iHeart) demonstrates a measurable range of adjustment to the prices
that would be set in a market for those streaming services if the
services could inject price competition via steering. Thus, the rate
set in Dr. Rubinfeld's upstream interactive benchmark market should be
adjusted to reflect such price competition, so that it is usable as an
``effectively competitive'' rate in the segment of the market to which
that benchmark applies: The noninteractive subscription market.\99\
---------------------------------------------------------------------------
\99\ It appears that SoundExchange may be making an implicit
argument that the rates in its interactive benchmark market have
been so reduced by downstream competition that all supranormal
profits have been eliminated. However, SoundExchange did not produce
evidence sufficient to show record company profits overall to
support such an argument. Also, as the Judges have previously noted,
and note again in this determination, the rate-setting process under
section 114(f)(2)(B) is not intended to preserve any parties'
profits. Moreover, if the Judges were to go down that evidentiary
road and base their rate decision on profits and reasonable rates of
return, the process would in essence become a public-utility style
proceeding and, as noted elsewhere in this determination, no party
has suggested that section 114(f)(2)(B) proceedings could be
conducted in such a manner.
---------------------------------------------------------------------------
The evidence of a range of potential steering adjustments also
rebuts SoundExchange's argument that the concept of ``effective'' or
``workable'' competition is ``fuzzy'' and that no ``bright line'' can
be drawn between effectively competitive and non-competitive rates. The
Judges find that this ``line'' needs to be drawn on a case-by-case
basis, from the evidence and testimony adduced at the hearing. Here,
the range of steering adjustments from direct noninteractive licenses
has been introduced in evidence, steering experiments have confirmed
the reasonableness of such an endeavor and expert testimony has
explained how steering is a mechanism by which to offset the
complementary oligopoly power of the Majors (while not reducing their
firm-specific and copyright-specific market power).
The Services dismiss the idea that the record companies'
negotiations with interactive services are evidence of an effectively
competitive market. The Judges agree with the Services criticism of
this assertion. As Dr. Shapiro explained, the mere existence of such
negotiations is uninformative as to whether the rates negotiated
between the interactive services and the Majors are competitive.
Pandora PFF ] 237 (and citations to the record therein). Moreover, the
Services note that Dr. Rubinfeld conceded that the existence of such
negotiations is not evidence of a competitive market, because even
monopolists negotiate with their customers. See 5/28/15 Tr. 6487-88
(Rubinfeld) (``Q. Do firms with monopoly power ever bargain with their
customers? A. Yes. Q. Do firms with monopoly power ever make
concessions or change their bargaining position in response to
positions taken by buyers with which they are dealing? A. Yes.'').
Pandora further notes that, when questioned on this issue by the
Judges, Dr. Rubinfeld conceded that ``the fact
[[Page 26344]]
that they're in negotiations, per se, doesn't mean the market is
competitive. . . .'' 5/5/15Tr. 1861-63 (Rubinfeld).
On this issue, the Judges also agree with Dr. Katz, who noted that
negotiations over price can occur between a monopolist and its
customers in order to facilitate price discrimination and increase
monopoly profits rather than to concede to more competitive prices.
Specifically, Dr. Katz testified:
Bargaining with your customers and having some of the give and
take can even be a form of price discrimination in a way to get
additional monopoly profits, so the mere fact that your customer
asks for something and you say, okay, I will give that to you,
particularly if that is going to help you get more money, the fact
that you do that doesn't show you lack monopoly power. It shows you
are economically rational.
5/26/15 Tr. 5715-16 (Katz).
The Judges reject SoundExchange's argument that evidence of its
negotiations with interactive services demonstrates that the
interactive market is effectively competitive. As the Judges pointed
out in their Commencement Notice in this proceeding, price
discrimination is a feature of markets such as sound recording markets,
where the marginal physical cost of licensing a sound recording is
essentially zero, and is also a relatively common feature in many
markets. 79 FR 412, 413 (January 3, 2014).
Further, the Judges cannot ignore the testimony from several record
company witnesses, discussed in this determination, in which they
acknowledged that they never attempted to meet their competitors'
pricing when negotiating with interactive services. Thus, the existence
of the negotiations noted by SoundExchange cannot override this more
specific testimony.
The Judges were presented with substantial, unrebutted evidence
that the interactive services market is not effectively competitive.
The Services conclude from this that the interactive services
benchmarks are wholly uninformative with regard to the rates that would
be negotiated in an effectively competitive noninteractive market. See
Shapiro WRT at 47 (explaining that Professor Rubinfeld is requesting
that the Judges ``replicate and extend the excessive royalty rates from
interactive services market--where competition is manifestly not
working--into the market for the licensing . . . to statutory
webcasters. . . .''). The Judges disagree.
The Services' own evidence demonstrates persuasively that
competitive steering has reduced royalty rates in the noninteractive
market and would do so in the hypothetical market as well. This
evidence of steering (provided by Pandora and iHeart) demonstrates a
measurable range of adjustment to the prices that would be set in a
market for those streaming services if the services could inject price
competition via steering. Thus, the rate set in Dr. Rubinfeld's
upstream interactive benchmark market can and should be adjusted to
reflect such price competition, in order to render it is usable as an
``effectively competitive'' rate in the segment of the market to which
that benchmark applies--the noninteractive subscription market.\100\
---------------------------------------------------------------------------
\100\ SoundExchange may be implying that the rates in its
interactive benchmark market have been so reduced by downstream
competition that all supranormal profits have been eliminated.
However, SoundExchange did not produce evidence sufficient to show
record company profits overall to support such an argument. Also, as
the Judges have previously noted, and note again in this
determination, the rate-setting process under section 114(f)(2)(B)
is not intended to preserve any parties' profits. Moreover, if the
Judges were to base their rate decision on profits and reasonable
rates of return, the process would in essence become a public-
utility style proceeding and, as noted elsewhere in this
determination, no party has suggested that section 114(f)(2)(B)
proceedings could or should be conducted in such a manner.
---------------------------------------------------------------------------
The evidence of a range of potential steering adjustments also
rebuts SoundExchange's argument that the concept of ``effective'' or
``workable'' competition is ``fuzzy'' and that no ``bright line'' can
be drawn between effectively competitive and non-competitive rates. The
Judges find that this ``line'' needs to be drawn on a case-by-case
basis, from the evidence and testimony adduced at the hearing. Here,
the range of steering adjustments from direct noninteractive licenses
has been introduced in evidence, steering experiments have confirmed
the reasonableness of such an endeavor, and expert testimony has
explained how steering is a mechanism by which to offset the
complementary oligopoly power of the Majors (while not reducing their
firm-specific and copyright-specific market power).
b. Dr. Rubinfeld's Interactive Benchmark Is Applicable Only to the
Subscription Market
The Judges find that the interactive benchmark proposed by
SoundExchange (adjusted as discussed in the previous section) is
informative--but only to a particular segment of the noninteractive
marketplace. The foundational aspect of Dr. Rubinfeld's interactive
benchmark is his assumed equality between two ratios: (1) Subscription
revenues to royalties in the interactive market; and (2) subscription
revenues to royalties in the noninteractive market. The Services claim,
however, that Dr. Rubinfeld provided no economic basis for this
``assumption.'' For example, the NAB asserts that Dr. Rubinfeld
admitted that he was only ``follow[ing] past practices'' of Dr. Michael
Pelcovits, an economic witness for SoundExchange in Web II and Web III.
Rubinfeld CWDT ] 207 n.124, 5/6/15 Tr. 2026-27 (Rubinfeld). This
criticism was echoed by Pandora's economic expert, Dr. Shapiro, who
testified ``there is simply no plausible economic rationale that would
support the use of Professor Rubinfeld's interactivity adjustment.''
PAN Ex. 5023 at 29-30 (Shapiro WRT).
However, Dr. Rubinfeld's oral testimony, and the testimony of the
Services' economic experts, indicated that an economic principle indeed
underlies his assumed equivalency in these ratios. More particularly,
Dr. Rubinfeld acknowledged that his ``ratio equivalency'' was intended
to create a rate whereby every marginal increase in subscription
revenue would result in the same increase in royalty revenue, whether
that marginal increase in subscription occurred in the interactive
market or the noninteractive market. 5/5/15 Tr. 1767 (Rubinfeld). This
result, Dr. Rubinfeld agreed, reflected an application of rational
profit maximizing behavior by a willing seller, as explained in
colloquy with the Judges:
[THE JUDGES]
[T]hat's an application . . . of a fundamental economic process
of profit maximization. . . . [The record companies] would want to
make sure that the marginal return that they could get in each
sector would be equal, because if the marginal return was greater in
the interactive space than the noninteractive . . . you would want
to continue to pour resources, recordings in this case, into the
[interactive] space until that marginal return was equivalent to the
return in the noninteractive space. Would that be correct?
[DR. RUBINFELD]
It would. You said that just the way I would like to have said
it when I was teaching that subject. Yes, I agree with that.
5/7/15 Tr. 2325 (Rubinfeld); see Rubinfeld CWRT ] 172 (``All else
equal, the interactivity adjustment sets statutory rates that represent
the same fraction of subscription prices as paid by the on-demand
services. . . .'').
Thus, Dr. Rubinfeld's ``ratio equivalency,'' assumes a 1:1
``opportunity cost'' for record companies, whereby, on the margin, a
dollar of revenue spent on a subscription to a noninteractive service
is a lost opportunity for royalties from
[[Page 26345]]
a dollar to be spent on a subscription to an interactive service.
Accordingly, and contrary to the Services' criticism, Dr. Rubinfeld's
``ratio equivalency'' does possess an underlying economic rationale.
However, the unwarranted assumptions lurking behind Dr. Rubinfeld's
economic rationale were noted by the Services' economic expert
witnesses. For example, Dr. Lichtman, an economic expert for iHeart,
testified:
[Dr. Rubinfeld] assum[es], I think, a perfect substitution . . .
assumptions about substitution, competition how all of these markets
interrelate. . . . [I]t's intuitive. I understand why he was drawn
to it. It's so nice to say, yes, roughly these will all be the same,
revenue to royalty, revenue to royalty.
5/16/15 Tr. 4043-44 (Lichtman).
Dr. Rubinfeld's ``ratio equivalency''--as a means toward profit
maximization--was more than a theoretical abstraction. The desire of
the record companies to achieve such pricing parity across markets was
confirmed by a senior Warner executive who testified on behalf of
SoundExchange:
Our goal, aspirationally and in actual results, has been a
[REDACTED] percent rev[enue] share in this area generally. . . . So
we've been kind of struggling, if you will, to pull these business
models up to what we think is the level of consideration that we
find appropriate for essentially all of these music models, which is
the [REDACTED] range. So it was a combination of trying to be
realistic and make major progress towards our ultimate goal.
6/3/15 Tr. 7406 (Wilcox) (emphasis added).
Mere assumptions as between interactive and noninteractive services
regarding substitution, competition, market interrelationships and the
like are inadequate, and thus limit the applicable scope of Dr.
Rubinfeld's ``ratio equivalency'' approach. The unsupported and
unrealistic assumptions in the ``ratio equivalency'' approach are
considered below.
As Dr. Lichtman noted, the ``ratio equivalency'' in Dr. Rubinfeld's
model makes assumptions regarding substitution, and how these markets
interrelate. 5/6/15 Tr. 4043-44 (Lichtman). That is, the ``ratio
equivalency'' approach assumes that the listeners who willingly pay for
a subscription to a service have a WTP equal to the WTP of those who
use ad-supported (free-to-the-listener) services. However, the record
evidence is overwhelming that there is a sharp dichotomy between
listeners who have a positive WTP and therefore may pay a subscription
fee each month for a streaming service and those listeners who have a
WTP of zero.
The most persuasive evidence on this point is found in the results
of the conjoint survey conducted by a SoundExchange witness, Dr.
McFadden. Dr. McFadden performed his conjoint survey to determine the
WTP of consumers who were provided with a menu of bundled features that
reflected bundles that existed in the marketplace. His findings
revealed the dichotomy regarding the WTP of consumers of noninteractive
services:
I find that consumers of streaming services divide between those
who are willing to pay for these services (and the extra features
they offer) and those who are averse to paying for music streaming
services. . . .
McFadden WDT ] 10 (SX Ex. 15) (emphasis added).
This dichotomy was examined in detail by another economist, Dr.
Steven Peterson, who was a joint witness for the NAB and Pandora. Dr.
Peterson noted a critical bimodality in Dr. McFadden's data (consistent
with Dr. McFadden's finding) that reflected two classes of listeners;
those who would pay a positive sum for various features available in a
noninteractive service and those who refused to pay any money for any
features. As Dr. Peterson explained, SoundExchange and Dr. Rubinfeld
rely on the average WTP among the survey participants (to confirm Dr.
Rubinfeld's interactivity adjustment), but that average obscured the
clear bimodality of Dr. McFadden's results:
Dr. McFadden presents only the estimated average willingness to
pay for each feature addressed in his survey. However, it is
possible to estimate each survey participant's willingness to pay
for the features addressed in the survey. Based on the information
for individual respondents, Dr. McFadden notes that there is a group
of users who are averse to paying for music streaming services. . .
. Thus, Dr. McFadden's results are consistent with the record
labels' documents that indicate many consumers have a low
willingness to pay for subscription streaming services. . . .
Moreover, the distribution is bimodal, meaning it has two peaks. . .
. [T]he average willingness to pay for a service with no ads masks
the fact that there is a bimodal distribution . . . of preferences
over the willingness to pay for a service with no advertisements and
that the peaks occur so that consumers at the peaks have divergent
preferences (i.e., would respond in opposite ways) regarding a
service with or without advertisements.
NAB Ex. 4013 at 32-34 (Peterson CWRT) (emphasis added; footnotes
omitted).
This point is consistent with Dr. McFadden's own testimony, in
which he stated: ``Most users regard their use of [streaming] services
as free in the sense that they require no out-of-pocket expenses to
listen to music.'' McFadden WDT ] 56 (emphasis added). Dr. McFadden
then testified that his own survey data confirmed ``a group of
consumers who place a high value on no out-of-pocket expenses . . . who
are likely to remain [on] or adopt free plans.'' Id.
The Judges cannot disregard this bimodal chasm. Moreover, the
record is replete with evidence corroborating this point. For example,
testimony from industry witnesses underscored the unwillingness of a
substantial percentage of listeners to pay any price to listen to
noninteractive services. A Sony executive testifying on behalf of
SoundExchange stated: ``It's challenging to convince a consumer to open
their [sic] wallet and pay for something that is similar to something
that is available to them for free. . . .'' 4/28/15 Tr. 376-77
(Kooker). Even when the Majors provide incentives and disincentives to
services in the form of royalty reductions and increases, they are
unable to induce more than a minority of listeners to convert from a
``free'' service to a paid subscription service. One of the most
successful interactive services, Spotify, has only been able to induce
approximately [REDACTED]% of its listeners to pay for a subscription
streaming service. Id. at 404-05; see id. at 430 (Mr. Kooker
acknowledging no evidence of a meaningful group of users willing to pay
to subscribe to Pandora beyond those who currently subscribe).
Another industry witness, Aaron Harrison of Universal, acknowledged
that he had no data to support a conclusion that there is ``some
meaningful group of users who would be willing to pay to subscribe to
Pandora beyond those who already have. . . .'' 4/30/15 Tr. 1115 (A.
Harrison). This was consistent with a broader aspect of Mr. Harrison's
testimony, in which he noted, ``the music-buying public has never been
a huge market. . . .'' Id. at 990.
Pandora's Chief Financial Officer similarly testified that
``approximately an 80 percent slice of the market . . . is unwilling to
spend significant money on music,'' as reflected in ``numerous
studies'' [that] show that about half of Americans will never spend
another dollar and another . . . 35 percent will spend . . . $15 per
year.'' 5/13/15 Tr. 3553-54, 3356-57 (Herring). This portion of the
dichotomized market comprises the core of Pandora's customers:
``[T]hat's the group that we target . . . people that aren't going to
be able to be monetized through a $10 a month subscription or even a $5
a month subscription but want a free lean-
[[Page 26346]]
back experience.'' Id. at 3554. Accordingly, Mr. Herring noted that 95%
of Pandora's customers listen through the ad-supported free-to-the-
listener, and only 5% are subscribers, which he understood to reflect
``user preference'' for ``free sources,'' rather than a ``bias'' on the
part of Pandora toward ``growing market share.'' 5/13 Tr. 3435-36
(Herring).
Further supporting this dichotomy from the record company
perspective, an internal Warner strategy document noted that ``[a]d-
supported services have proven to primarily be additive and to be
targeting a different demographic than paid services.'' IHM Ex. 3118 at
11; see 5/7/15 Tr. 2405-06 (Wilcox) (noting that Pandora weaned
listeners from terrestrial radio whose listening, therefore, had not
previously been responsible for revenues that could be monetized into
upstream royalties).
Expert testimony further confirmed this dichotomy. One of
SoundExchange's own witnesses, Dr. David Blackburn, acknowledged that,
at one end of the spectrum, consumers were willing to pay a lot of
money, and at the other end of the spectrum are people who are
unwilling to pay anything for music. 5/4/15 Tr. 1679 (Blackburn). An
expert survey witness for Pandora, Larry Rosin, surveyed consumers and
found that, annually, for any sort of music, physical or digital, 45%
of respondents paid zero; 21% spent between $1 and $30, and 18% spent
between $31 and $60. Further, when asked if they would pay for a
Pandora subscription if the free-to-the-listener service was
discontinued, 54% said it was ``not at all likely'' that they would pay
for a subscription, and 25% said it was ``not very likely'' that they
would pay for a subscription. Rosin WRT Figures 2 and 9 (PAN Ex. 5021);
see 5/14/15 Tr. 3727 (Rosin). Mr. Rosin concluded from his survey that
``the majority of people are essentially . . . seeking free services.''
Id. at 3742.
Despite the overwhelming evidence of this dichotomy in WTP, Dr.
Rubinfeld's model is based solely on the subscription platform. Thus,
it is not reasonable to conclude that the ratio of subscription rates
to royalties in the interactive market is relevant to the opportunity
cost to a record company of listeners who opt instead for ad-supported
noninteractive listening. Rather, ad-supported (free-to-the-listener)
internet webcasting appeals to a different segment of the market,
compared to subscription internet webcasting, and therefore the two
products differentiated by this attribute (``ads and free'' vs. ``no
ads and subscription fee'') cannot be compared to perform a 1:1 measure
of opportunity costs as is the case in Dr. Rubinfeld's ``ratio
equivalency'' model.
Even SoundExchange acknowledges, ``directly licensed interactive
services . . . allow users to select their programming . . . whereas .
. . statutory services can [only] . . . influence what they hear. SX
PFF ] 278 (emphases added). As a SoundExchange economic expert witness
acknowledged, the consumer who values sound recordings highly is apt to
have an interest in particular sound recordings, and will be more
willing to pay for a subscription that allows him or her more
``functionality,'' including the ability to select songs on demand. By
contrast, the more casual listener, with a number of free alternatives
such as terrestrial radio, lacks the same desire to select a particular
song at a particular time. See 5/4/15 Tr. 1677, 1679 (Blackburn)
(distinguishing ``music aficionados'' who ``are willing to spend a lot
of money on music'' and ``additional functionality'' from ``people who
are unwilling to pay anything for music.''
This undisputed distinction drives in part the bimodal nature of
the distribution between listeners with a positive WTP for streaming
and those with a zero WTP.
c. The Irrelevance of SoundExchange's ``Convergence'' Argument
The Services dispute the assertion that the increased overlap among
the features of the statutory and non-statutory services constitutes a
convergence that is meaningful in this rate setting proceeding. In
support of this position, the Services make several specific arguments.
i. Fundamental Differences in the Services
The Services note a fundamental difference between interactive
services and noninteractive services. They suggest a ``bright line''
difference between statutory services and non-statutory services that
legally prevents convergence with regard to the most critical
distinction, i.e., the inability of listeners to statutory
noninteractive services to choose the exact song or playlist of songs
to which they will listen, as they would if accessing their own music
collections. 5/13/15 Tr. 3445-46 (Herring) (noting this ``bright line''
between statutory and non-statutory service); 5/7/15 Tr. 2304-05
(Rubinfeld) (none of Pandora's features ``enhance the Pandora users'
ability to select a particular song for listening at the time he or she
wants to listen to it.''); see also 5/15/15 Tr. 3397-98 (Lichtman)
(``on-demand . . . [t]hat's the key thing that makes the services
different, not the little features that have been added. . . .'');
Fischel/Lichtman WRT ] 11 (``Clearly, the most important difference
between interactive and noninteractive services is . . . on-demand
functionality. . . .'').\101\
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\101\ This criticism relates to the distinction between a
listener's ability to ``select'' a song and a listener's more
limited ability to ``influence'' the song that is played, as
emphasized supra, note 76.
---------------------------------------------------------------------------
In addition to the above ``bright line'' difference, statutory
licensees are subject to the various other limits imposed by the DMCA
performance complement. 5/27/15 Tr. 6136-37 (Fleming-Wood) (``[P]andora
adhere[s] to the performance complement for sound recordings. . .'');
see 17 U.S.C. 114(j)(13). Specifically, statutory services cannot offer
to their listeners a pre-designated song; an entire album; more than
four songs by the same artist or three songs from the same album in any
given three-hour period; caching for off-line playback; a listener-
created playlist played at the listener's discretion; the rewinding or
fast-forwarding of songs; and a preview of upcoming songs. 5/6/15 Tr.
2016-18; 2049; 2088-89 (Rubinfeld).
Additional differences highlighted by the participants in this
proceeding include:
Pandora's ``thumbs up/thumbs down'' feature, which does
not provide a listener with the ability to select the actual artist or
song that is played. 5/13/15 Tr. 3446-47 (Herring).
The increased use of mobile devices, which does not
address the lack of convergence between the essential functionalities
of the two services. 5/7/15 Tr. 2304-05 (Rubinfeld); 4/28/15 Tr. 432-33
(Kooker).
Spotify's mobile Shuffle service, which is not a
noninteractive service but rather has numerous on-demand features. See
IHM Ex. 3371 ] 14 (Fischel & Lichtman SWRT).
ii. Convergence Does Not Create Relevant Competition
The Services also take issue with the notion that functional
convergence is probative of competition relevant to this proceeding.
Specifically, the Services argue:
The ``convergence theory'' focuses entirely on competition
between services in the downstream consumer market, and therefore
offers no insight into the lack of competition in the interactive
upstream market that SoundExchange seeks to use as its benchmark
market. Shapiro WRT at 46-
[[Page 26347]]
47; 5/18/15 Tr. 4469-71; 4474-75 (Shapiro).
The alleged convergence in the downstream market does not
address the question of whether the upstream market is effectively
competitive. Shapiro WRT at 46.
Dr. Rubinfeld failed to consider: (1) Substitution
patterns among the various modes of music consumption; and (2) market
shares in the downstream market. PAN Ex. 5022 at 10 (Shapiro WDT).
Attempts by on-demand services to offer some radio-like
functionality do not demonstrate competition between interactive and
noninteractive services in the upstream market, but rather indicate
only that on-demand services seek to ``cross- over'' and enter the
``lean-back'' market. 5/13/15 Tr. 3555-57 (Herring).
The fact that some consumers want both lean-back and lean-
forward functionality does not mean that each type of service is
competing with the other. IHM RPFF ] 296 (and record citations
therein).
When Pandora imposed listening caps in 2013 and 2014, it
lost listeners to other noninteractive services, not to interactive
services, indicating that the competition did not crossover into the
interactive market. Fischel/Lichtman WRT ]] 17-18 and Exs. A & B.
Statutory noninteractive services compete in the market
for radio listening, which is distinct from the interactive market, and
about 80% of music consumption in the United States occurs via ``lean-
back'' radio-listening experience. Fleming-Wood WDT ] 14 n.2; 5/27/15
Tr. 6138 (Fleming-Wood); 5/13/15 Tr. 3397-99 (Herring); Pandora Ex.
5016 ] 9 and Figure 2 (Herring AWRT) (showing 76.2% of consumers listen
to lean-back services); see Shapiro WRT at 9 & Figure 2; 5/18/15 Tr.
4478-79 (Shapiro) (terrestrial radio, noninteractive webcasting and
satellite radio comprise 63% of time spent listening to music, and
interactive services account for 7%).
iii. The Supposed ``Interactive'' Features Made Available by the
Noninteractive Services Do Not Demonstrate Convergence
The Services claim that SoundExchange misrepresents the nature of
their offerings in a manner that falsely implies a convergence of
features available on noninteractive services with features available
on an interactive service. The Services make the following points.
The experiment that Mr. Kooker performed failed to
demonstrate the purported convergence between interactive and
noninteractive services. The services note that, on cross-examination,
Mr. Kooker admitted to a number of acts that increased the chances of
the desired artist playing during his experiment: (1) He created a new
account for the experiment, meaning Pandora had no information on what
tracks or types of music the creator liked other than the ``seed''
artist (unlike the typical Pandora listener who has created many
stations, used the thumbs-up/thumbs-down button, skipped tracks, and
provided Pandora a host of information on his/her tastes above and
beyond the first ``seed'' artist); (2) he indicated that the new
account user was a 25-year-old female, a demographic which Mr. Kooker
admitted was specifically chosen because it was ``the typical
demographic, from Sony's experience, that would be looking for pop hit
type of playlists'' (and who would then be more likely to receive those
playlists); and (3) he skipped songs until he had listened to five
songs, even though he acknowledged that such activity could influence
Pandora's playlist algorithms. See 5/29/15 Tr. 6589-92 (Kooker).
iHeart's on-demand video service represents a very minor
element of total listenership for iHeart's service. Fischel/Lichtman
WRT ] 11 n.14.
``Pandora Premieres'' is not a statutory feature and does
not operate pursuant to the statutory license. 5/15/15 Tr. 3444
(Herring); see 5/6/15 Tr. 2006 (Rubinfeld).
Even though noninteractive services compete with
interactive services ``for music listening generally,'' it is
``marginal,'' i.e., at that line between 80 percent [lean back] and 20
percent [lean in],'' and the ``core businesses are very different. . .
. They're not substitutes for each other.'' 5/13/15 Tr. 3397-99
(Herring).
The Judges find that there is significant evidence of functional
convergence (up to the limits prescribed by the DMCA) between
interactive and noninteractive services. Further, the Judges find that
downstream competition exists between such services, based on the
evidence relied upon by SoundExchange.
However, such convergence and competition are swamped by the
overwhelming evidence of the dichotomy regarding the WTP among
listeners. Therefore, Dr. Rubinfeld's subscription-based benchmark
approach does not demonstrate how convergence and competition affect
the relative royalties in the ad-supported, free-to-the listener
market. The Judges note, though, that such convergence in the
subscription market is suggested by the fact that the subscription-
based rate derived by Dr. Rubinfeld from 2014 data, $0.002376, is
proximate to Dr. Shapiro's high-end proposed rate for the subscription
market of 0.00215. When Dr. Rubinfeld's proposed rate is adjusted
downward to reflect an effectively competitive market (as calculated in
the Rate Conclusion section), the two rates are even more proximate.
Those two benchmark subscription rates therefore indicate that
competition and convergence indeed do cause interactive and
noninteractive royalty rates to be similar in the subscription market.
Thus, the impact of functional convergence and downstream
competition is relevant only in the subscription market. Therefore,
once Dr. Rubinfeld's benchmark is limited to the subscription market,
the Judges find that SoundExchange's emphasis on the functional
convergence of, and downstream competition between, interactive and
noninteractive services is pertinent.
Another important change in opportunity cost arises when the
upstream purchaser (the noninteractive webcaster in the present
context) has the ability to: (1) Purchase a substitute input and
``bypass'' the input from the complementary oligopolists or monopolist;
and/or (2) the ability to ``use proportionately less'' of the input of
the complementary oligopolists or monopolist. In the present case, both
Pandora and iHeart have demonstrated that, by steering,\102\ a
noninteractive service can: (1) Partially ``bypass'' one or more Majors
and substitute an increased proportion of songs from Indies or other
Majors; and (2) thereby reduce their ``proportion'' of purchases from
higher priced Majors up to a certain level.
---------------------------------------------------------------------------
\102\ The concept of ``steering'' is discussed at length in
connection with Pandora's rate proposal.
---------------------------------------------------------------------------
Another important adjustment necessary to render Dr. Rubinfeld's
``ratio equivalency'' useful is to make certain that the outcome does
not simply maintain or import supranormal prices that are the
consequence of the absence of effective competition. The need to adjust
for undue market power dates back to Web I, in which the CARP stated:
Perhaps . . . a showing that the record companies themselves, or
even the Majors, could exert oligopolistic power would tempt the
panel to import a device . . . to alleviate the market power
problem.
Web I CARP Decision at 23 (emphasis added).
Additionally, Dr. Rubinfeld's model treats the complementary
oligopoly
[[Page 26348]]
pricing in the input supplier's market as its potential opportunity
cost. Thus, his ``ratio equivalency'' will simply sustain whatever
complementary oligopoly price distortions are present in the
interactive marketplace. In the present case, the ability of
noninteractive services to steer away from higher priced recordings and
toward lower priced recordings (or threaten to do so) serves as a
buffer against the supranormal pricing that arises from the impact of
complementary oligopoly pricing that was well-documented and admitted
in the filings with the Federal Trade Commission (FTC) by Universal,
its economic expert and its counsel in connection with the Universal-
EMI merger. Thus, the Judges must (to borrow language from the CARP
decision in Web I) ``import a device''--a steering adjustment derived
from Pandora's benchmark, as discussed at length infra--to lower Dr.
Rubinfeld's interactive subscription benchmark to reflect the effect of
price competition and thus excise the complementary oligopoly power and
reflect an effectively competitive noninteractive subscription market.
This adjustment is not unlike the adjustments the Judges make to
proposed benchmarks in proceedings under Sec. 114, in that the
adjustment is made to align the benchmark rate with the statutory rate.
4. Other Critiques of Dr. Rubinfeld's Interactive Benchmark
a. Dr. Rubinfeld's Use of Revenues Instead of Service Profits
According to Dr. Katz, the ``ratio equality'' assumption is also
contrary to a fundamental economic principle. The buyer, i.e., the
noninteractive service, will determine its valuation based on the
profits it expects to realize from using the input, i.e., the sound
recording, not merely the revenue it may earn. Of course, the buyer's
consideration of profits necessitates the buyer's consideration of
``cost,'' since, broadly stated, profits equal revenues less costs.
Katz AWRT ]] 50-51, 70-71; 5/11/15 Tr. 2861 (Katz). Utilizing Pandora's
non-license fee costs as an example (other noninteractive services'
cost data were not readily available), and assuming that the non-
licensing costs of interactive services were the same, Dr. Katz
concluded in rebuttal that Dr. Rubinfeld's interactivity adjustment
would increase to 7.9 to equalize the ratio of profits per play to
royalties per play across the two markets. Katz AWRT ]] 74-76 and
Tables 6 and 7; 5/11/15 Tr. 2870-73 (Katz); 5/12/15 Tr. 3123-25
(Katz).\103\
---------------------------------------------------------------------------
\103\ Dr. Katz did not claim that his own cost estimates or
assumed equivalencies across the two markets were necessarily
accurate. Rather, he emphasized that his cost-based/profit-based
adjustment was premised on his estimates showed the invalidity of
Dr. Rubinfeld's decision simply to ``assume[ ] the costs were
zero.'' 5/12/15 Tr. 3123-24 (Katz).
---------------------------------------------------------------------------
The Judges reject this criticism as it pertains to the narrow
segment of the market to which the Judges apply the interactive
benchmark. When the segment of the market at issue consists of willing
buyers/licensees who are providing access through subscription-based
listening to listeners who have a WTP for either interactive or
noninteractive services that are close substitutes, then Dr.
Rubinfeld's ``ratio equivalency'' is reasonably based on revenues. Dr.
Katz's critique of the revenue-based approach notes that Dr. Rubinfeld
failed to factor into his analysis how profit, or lack thereof, to be
realized by the noninteractive service would affect the royalty it
would agree to pay in the hypothetical market.
However, in the segment of the marketplace described above, a
``willing seller'' would not be concerned with the service's calculus
of its own profits. If those profits were too low to pay a royalty as a
percentage of revenue equal to the royalties paid by the interactive
services, the ``willing seller'' simply would not supply the
noninteractive service in that hypothetical subscription marketplace.
That decision by the ``willing seller'' may foreclose one or more
services from participation in the subscription market, but, as the
Judges noted in the Web II, they are not obliged to set the statutory
rate at a level that permits a noninteractive service to realize any
particular profit in the market.\104\ 72 FR at 24088 n. 8.
---------------------------------------------------------------------------
\104\ Even in the ad-supported market, the Judges are not
setting a rate in order to provide a service with any level of
profits or revenues.
---------------------------------------------------------------------------
b. Failure To Adjust for Supposed ``Noninteractive'' Services
Prohibited by the DMCA
Dr. Katz further criticized Dr. Rubinfeld's attempt to rely on the
equivalence of the aforementioned ratios because Dr. Rubinfeld's
noninteractive numerator [C] is calculated from revenue received by
services that were not actually ``noninteractive,'' but rather offered
functionality that rendered them non-DMCA compliant and hence
``interactive.'' 5/16/15 Tr. 2042-50 (Rubinfeld) (Rhapsody unRadio
offered on-demand plays, caching, and unlimited skips, and two other
services; Slacker Radio Plus and MixRadio Plus, offered caching as well
as unlimited skips). Thus, Dr. Katz, argues, the numerator [C] should
have been adjusted downward to reflect an additional interactivity
adjustment, which, ceteris paribus, would have reduced the
noninteractive royalty rate proposed by Dr. Rubinfeld.
Dr. Katz correctly notes that the numerator in Dr. Rubinfeld's so-
called ``noninteractive'' ratio contains revenues from services that
are not DMCA-compliant. Dr. Rubinfeld should have made a further
interactivity adjustment to reflect whatever marginal value was
attributable to the additional functionality of his stand-ins for the
services that he used as proxies for truly DMCA compliant services.
However, the Judges find that, given the degree of convergence among
all services in terms of functionality, as discussed supra, as it
pertains to this subset of the noninteractive market in which listeners
subscribe, the marginal additions to functionality that Dr. Rubinfeld
may have improperly captured in his ``noninteractive'' revenue
numerator do not disqualify the use of that benchmark in this
subscription market context.\105\
---------------------------------------------------------------------------
\105\ The Judges find that such differences in functionality are
of relatively low importance in the subscription market in light of
the evidence of downstream functional convergence. In this regard,
it is noteworthy that even Pandora's expert Dr. Shapiro (the only
Service expert to propose a separate subscription rate) has proposed
a rate quite similar to the rate proposed by Dr. Rubinfeld based on
a purely subscription-based model (Those rates are even closer to
each other after an ``effectively competitive'' steering adjustment
is applied to Dr. Rubinfeld's proposed subscription rate). If there
was truly a material issue as to how WTP, convergence and
functionality gradations impacted royalty rates in the
noninteractive subscription market, the Judges would have expected
to see a much wider gulf between the SoundExchange and Pandora
subscription-based proposals.
---------------------------------------------------------------------------
c. Failure To Rely on the Advertising-Based Noninteractive Model That
Predominates in the Market
An important and fundamental problem with Dr. Rubinfeld's analysis,
according to Dr. Katz, lies in Dr. Rubinfeld's failure to acknowledge
in his benchmark analysis that the advertising-based revenue model,
rather than the subscription-based revenue model, is the dominant
business model for noninteractive services. Katz AWRT ] 53 (quoting
Rubinfeld CWDT ] 170 (stating that Dr. Rubinfeld's ``analysis does not
explicitly account for `free' ad-supported services.''). Katz AWRT ]
55.
This criticism was also leveled by one of iHeart's economic
experts, who testified, ``certainly there is no basis to assume that
subscribers are a reasonable proxy for all listeners to noninteractive
services,'' given that subscribers account
[[Page 26349]]
for only four percent of Pandora's listenership and zero percent of
iHeart's. Fischel/Lichtman WRT ] 55; 5/15/15Tr. at 3989-90
(Lichtman).\106\
---------------------------------------------------------------------------
\106\ Dr. Rubinfeld declined to use advertising-only interactive
services as benchmarks in his original WDT. He noted that
interactive services use ad-supported (``free-to-the listener'')
alternatives as tools to convert listeners into paid subscribers
(the so-called ``freemium'' model), thereby distorting (through
``upsell incentives'') the reliability of ad-supported interactive
service agreements as benchmarks. Rubinfeld CWDT ]] 126, 128; see
also Rubinfeld CWRT at 39, n128 (no ``apples to apples'' comparison
could be made between noninteractive services, on the one hand, and,
on the other, interactive services that offered an ad-supported
(free-to-the listener) service using obtrusive advertising as a tool
to convert listeners to subscription services.). However, in his
11th hour supplementation to his WDT, Dr. Rubinfeld attempted to
analyze certain ad-supported services, contained in section
``III.E'' of his CWDT, that he classified as more like statutory
noninteractive services. The Judges' analysis of SoundExchange's
arguments relating to these so-called ``III.E'' licenses is set
forth in section IV.B.4.l.ii, infra.
---------------------------------------------------------------------------
Dr. Katz also criticized Dr. Rubinfeld's attempted rebuttal of this
criticism. Dr. Rubinfeld, in rebuttal, noted that he had estimated a
1:1.01 ratio of advertising-only revenue to royalties in the
interactive service market, which he concluded was confirmatory of
SoundExchange's proposed rates as determined by the interactive
subscription revenue to royalty ratio. Rubinfeld CWRT ]] 161-169.
According to Dr. Katz, it is incorrect to compare only the revenues
of the ad-supported tiers of the two types of services. Rather, the
proper approach, according to Dr. Katz, would be to compare the overall
revenue (ad-supported and subscription) per play as between the
interactive and noninteractive services. Otherwise, gross disparities
in average revenue per play (resulting from the number of plays in each
model (ad-based or subscription) and in revenue per play in each such
model) would be camouflaged. 5/11/15 Tr. 2854-57 (Katz).
When such an overall revenue approach was applied by Dr. Katz to
the actual service data, he found that the ratio of interactive service
revenue to noninteractive service revenue per play was not 1:1, but
rather 3.96:1. Katz AWRT ] 58, Table 2. This adjustment alone would
have the effect of reducing the proposed rate derived by Dr. Rubinfeld
from $0.002668 to $0.001347, approximately a 50% reduction. Katz AWRT ]
59, Table 3. In similar fashion, iHeart's experts compared overall per
play (or performance) data for Spotify and Pandora and calculated an
interactivity adjustment of 3.2, Fischel/Lichtman WRT ] 69, also
reducing the rate below the rate implied by the 1.01 adjustment
calculated by Dr. Rubinfeld when he utilized advertising revenue alone
in his rebuttal testimony.
As already noted, the Judges acknowledge the validity of this
criticism by limiting Dr. Rubinfeld's noninteractive benchmark analysis
to the segment of the market in which listeners are subscribers to
noninteractive services. Accordingly, there is no reason to apply this
criticism further to reduce the interactive benchmark in the segment
where it is otherwise applicable.
d. The Alleged Circularity of Dr. Rubinfeld's Methodology
Pandora's economic expert, Dr. Shapiro, levies another overall
criticism of Dr. Rubinfeld's interactive benchmark, characterizing it
as ``circular'' and thus ``uninformative.'' Dr. Shapiro noted that Dr.
Rubinfeld asserted that the royalty rates contained in the interactive
benchmark agreements ``can be expected to reflect the incremental value
of the granted functionality over-and-above what can be achieved with
the statutory rights.'' Rubinfeld CWDT ] 145. Thus, according to Dr.
Shapiro, backing out the incremental value to make an interactivity
adjustment would simply return the analysis to the subscription rates
and royalties that are predicated on the existing statutory rates.
Therefore, Dr. Shapiro criticizes Dr. Rubinfeld's entire interactive
benchmarking exercise as circular, revealing nothing about the rate
that would be set absent the statutory rate. Shapiro WRT at 28-29; 5/8/
15 Tr. 2723-24 (Shapiro); accord, 5/5/15 Tr. at 4047-48 (Lichtman)
(iHeart's' economic expert noting that the noninteractive service
revenue figure that is the numerator in Dr. Rubinfeld's noninteractive
ratio is (and must be) dependent upon the statutory rates that serve as
an input cost).
The Judges need to consider this criticism in tandem with the
Services' prior criticism that the so-called ``noninteractive''
webcasters selected by Dr. Rubinfeld actually offered non-DMCA
compliant features as well. Consequently, when Dr. Rubinfeld backs out
the interactive value of these non-DMCA compliant services (by
comparing the ratio of interactive to noninteractive subscription
prices) he is not simply returning to the existing statutory rates, as
Dr. Shapiro asserted, because the royalty rates for those non-DMCA
compliant services (as the Services argue) are not merely predicated on
the prior statutory rates. Simply put, the Services cannot have it both
ways. If Dr. Rubinfeld's ``noninteractive'' services have some features
that render them imperfect benchmarks, then the Judges must consider
whether and how to weigh those imperfections. But those imperfections
also cut in the other direction, and indicate that the royalty rates
negotiated by those services reflect market forces in the subscription
sector, rather than merely the statutory rates for DMCA-compliant
noninteractive services.
e. Assumed Equivalence of Demand Elasticities in the Interactive and
Noninteractive Markets
Dr. Katz notes that Dr. Rubinfeld at one point conceded that the
``elasticities of demand'' by the interactive services and the
noninteractive services would differ inter se. However, Dr. Rubinfeld
failed to address or account for this difference. Moreover, according
to Dr. Katz, Dr. Rubinfeld later equivocated as to whether, in his
methodology, he was assuming an equal elasticity of demand for both
types of services. Katz AWRT ] 47; compare 5/16/15 Tr. 2029-34 with NAB
Ex. 4233.
Given that the Judges have dichotomized between the subscription
and the ad-supported (free-to-the-listener) markets, the Judges do not
believe that there are any significant uncertainties regarding the
approximate equivalence of the elasticities between the interactive and
noninteractive upstream markets for the right to acquire licenses to
play sound recordings for subscribers.\107\ As Dr. Rubinfeld testified,
when the downstream subscription market is competitive, the ``Hicks/
Marshall relationship'' \108\ provides that if the elasticities in the
downstream market are the same then, ceteris paribus, pursuant to the
Lerner Equation the mark-up of price over cost will be the same in both
the upstream and downstream subscription markets, thereby supporting
Dr. Rubinfeld's ``ratio equivalency'' in the subscription market. 5/28/
15 Tr. 6310-11 (Rubinfeld).
---------------------------------------------------------------------------
\107\ In fact, when the dichotomy in WTP is applied, a
discussion of overall differences in elasticities is beside the
point. Elasticity measures percentage change in quantity demanded
divided by percentage change in price. For the ad-supported
services, the listeners have already demonstrated an unwillingness
to pay for internet webcasting. Economically, their demand curve is
far below the demand curve for subscription listeners (reflecting
the differences in WTP). It is the difference in location of the
demand curve, not just the difference in elasticities that is
important. In the subscriber market though, the price-elasticity of
the listeners vs. the noninteractive listeners is of some relevance.
\108\ See infra, note 109.
---------------------------------------------------------------------------
[[Page 26350]]
In the present case, because: (1) The WTP downstream is positive
(which it is by definition in the subscription market); and (2) the
products are converging in terms of functionality; and (3) an
interactivity adjustment is applied to reflect the critical limits of
convergence (no on-demand plays on statutory services), it was not
unreasonable for Dr. Rubinfeld to conclude that the elasticities of
demand would be approximately the same in both the interactive and
noninteractive subscription markets.\109\ However, although this likely
approximate equivalence in downstream elasticities would tend to
equalize the upstream impact on the derived demand of the
noninteractive services, it would not be the only factor affecting the
upstream market, i.e., the market for which the Judges are setting
rates. More particularly, the inability of listeners to statutory
services to select a particular song combined with the noninteractive
services' ability to (competitively) steer music toward or way from
record companies, serve to distinguish the hypothetical noninteractive
subscription rate from the benchmark interactive subscription rate
proposed by Dr. Rubinfeld.
---------------------------------------------------------------------------
\109\ Dr. Shapiro acknowledged that the Hicks/Marshall
relationship would serve to import the downstream elasticities into
the upstream market (the ``derived demand'' effect), unless the
price effects of those downstream elasticities were swamped by other
factors. See 5/20/15 Tr. 5044-45 (Shapiro). The principal ``swamping
factor'' is the unwillingness of a substantial segment of streaming
listeners to pay a positive price to listen to noninteractive
services. Since, by definition, subscribers have a positive WTP,
that ``swamping factor'' does not come into play if the analysis is
limited to the market for subscription services.
---------------------------------------------------------------------------
f. Failure To Use a Mix of All Interactive Revenues (Advertising and
Subscription) in the Ratios
The Services argue that Dr. Rubinfeld, rather than isolating
subscription revenue ratios from ad-supported ratios, should have
determined the value of his interactivity adjustment by comparing all
of the actual revenue in both markets (i.e., a mix of subscription and
advertising revenue. See Katz AWRT ]] 58-59 NAB PFF ] 368. The Judges
would find that argument meritorious if they were to attempt to apply
Dr. Rubinfeld's ``ratio equivalency'' outside of the subscription
market. The criticism is inapposite, however, given the Judges'
application of Dr. Rubinfeld's methodology only to subscription
services. In the subscription market where a positive WTP is self-
evident from the presence of subscribers, convergence and downstream
competition are particularly relevant. Record companies would want to
equalize marginal returns across the interactive and noninteractive
spaces, which would be accomplished by focusing on subscription
revenues. Thus, given the Judges' finding that the market is segmented
by a dichotomized WTP, this criticism is simply not relevant to the
Judges' determination.
g. Dr. McFadden's Survey Results Are Unnecessary To Confirm the Value
of Dr. Rubinfeld's Interactivity Adjustment, Based on the Limited
Applicability of Dr. Rubinfeld's Benchmark
The Services offered numerous criticisms of Dr. McFadden's conjoint
survey, which was intended by SoundExchange to confirm Dr. Rubinfeld's
interactivity adjustment. See, e.g., Peterson Corrected WRT ] 110
(survey measures potential subscribers' WTP rather than actual
subscription prices); 4/29/15 Tr. 924, 926, 929-33, 936, 938 (McFadden)
(survey does not measure value of certain features); 5/22/15 Tr. 5562-
63, 5572-73, 5579-80, 5588-89 (Hauser) (survey contains confusing
feature descriptions); id. at 5570-71 (survey had a high participant
attrition rate, especially among teenagers); IHM Ex. 3124 ] 12 (Hauser
WRT) (survey participants were confused by incentive alignment
language). The Services asserted that Dr. McFadden's survey would have
supported a rate much lower than the benchmark rate proposed by Dr.
Rubinfeld had he corrected for Dr. McFadden's purported errors.
Fischel/Lichtman WRT ] 75 and IHM Ex. 3060 (Fischel/Lichtman WRT, Ex.
E.).
The Judges note initially that, in this narrow context of this
subscription market, Dr. Rubinfeld's methodology for calculating the
interactivity adjustment is not inappropriate. Dr. Rubinfeld reasonably
determined the concept of a ``ratio equivalency'' between revenues and
subscription royalties in a market with both: (1) A WTP sufficient to
generate subscriptions in each market; and (2) a downstream convergence
of features as between the two markets, except for the nonconvergence
arising from the statutory restrictions on noninteractive
services.\110\ Thus, Dr. McFadden's attempt to confirm Dr. Rubinfeld's
2.0 interactivity adjustment is unnecessary.\111\ Consequently, the
Judges need not address the Services' criticisms of Dr. McFadden's
conjoint survey.
---------------------------------------------------------------------------
\110\ Also by way of repetition (and emphasis), the existence of
a sharp dichotomy between listeners with a positive WTP for streamed
music and those who have essentially a zero WTP for streamed music
precludes an extension of this ``ratio equivalency'' beyond the
subscription market.
\111\ Of course, Dr. McFadden's conjoint survey and his findings
regarding the bimodal nature of listeners' WTP are relevant to this
determination, and have been considered in this determination.
---------------------------------------------------------------------------
h. Dr. Rubinfeld's Equalization of the Number of Plays in the
Interactive and Noninteractive Markets Was Appropriate
Dr. Katz asserts that Dr. Rubinfeld underestimated the number of
``skips'' for which an interactive service is not required to pay a
royalty under the typical interactive service contracts with record
companies. By contrast, a statutory service must pay a royalty for all
plays, including such ``skips.'' (SoundExchange requests that the
Judges continue this requirement. See SoundExchange Proposed Rates and
Terms, Attach. A at 2-3.). Dr. Rubinfeld utilized an adjustment factor
of 1.1 for skips, but, according to Dr. Katz, actual data revealed in
discovery demonstrated that the adjustment factor should have been 1.2,
a 9.1% increase in the adjustment that would further lower the rate
proposed by SoundExchange. Katz AWRT ]] 101-102
The Judges find that Dr. Rubinfeld accurately adjusted for the
number of plays across the interactive and noninteractive spaces. The
criticism leveled by Dr. Katz focused only on the number of ``skips.''
However, Dr. Rubinfeld made a further adjustment for the fact that
interactive services typically paid royalties for pre-1972 recordings,
whereas the noninteractive services did not. This fact required an
increase in the noninteractive royalty rate relative to the interactive
royalty rate (i.e., a smaller interactivity adjustment in the
denominator [D] in the ratios discussed in section I.A.1.c, supra).
For example, assume there were 100 plays in each market and in each
market 10 of those plays were pre-1972 recordings. If the royalty rate
(assumedly) was 0.3 cents in each market, then the interactive average
rate would be 0.3 cents. However, in the noninteractive market, where
no royalty was paid on the 10 pre-1972 recordings, the average royalty
rate was only 0.27 cents.\112\
---------------------------------------------------------------------------
\112\ (90 royalty bearing songs x 0.3 cents) + (10 pre-1972
songs x 0 cents) = (0.27 cents + 0 cents) = 0.27 cents.
---------------------------------------------------------------------------
Thus, to equalize the markets on a per-play basis, the
noninteractive average rate must be increased. That increase made the
downward interactivity adjustment smaller, when it was combined with
the fact that--on the other side of the coin--the noninteractive
services were required to
[[Page 26351]]
pay royalties for skips as though they were plays, unlike the typical
interactive service.
i. Incorrectly Weighting Average Royalties by Revenue Instead of by
Play
Another defect in Dr. Rubinfeld's approach, according to Dr. Katz,
was Dr. Rubinfeld's decision to compute his average per-performance
royalty by weighting that average according to the revenue per play
earned by a service. See Rubinfeld CWDT ] 203; 5/5/15 Tr. 1824
(Rubinfeld). According to Dr. Katz, weighting the per-play average by
service revenue, as done by Dr. Rubinfeld, created an upward bias
compared to the revenue actually earned by on-demand services that
comprised Dr. Rubinfeld's benchmarks. Katz AWRT ]] 42-44, 162; 5/11/15
Tr. 2830-34; 2837-40 (Katz).
Dr. Katz maintained that the more realistic approach would have
been to weight the individual on-demand services in the benchmark
market by the number of plays per service, not by the revenue per
service. Applying actual data, Dr. Katz demonstrated that using Dr.
Rubinfeld's revenue weighting approach would have implied that in the
period considered by Dr. Rubinfeld, the on-demand services would have
received $112.2 million more (42% more) in revenues than they actually
received. Katz AWRT ] 162.
The Judges find this criticism irrelevant as applied to the
subscription market. In the interactive sphere, record company
agreements with interactive services are configured pursuant to the
``freemium'' model, designed to convert ``free'' listeners into paying
subscribers, who generate user revenue. See 5/7/15 Tr. 2401-02
(Wilcox); 5/13/15 Tr. 3509 (Herring). In the subscription market where
the positive WTP and functional convergence engenders strong
competition for paying listeners, a willing seller in the subscription
market seeks to maximize subscriber revenue and focuses on average
revenue per user (ARPU), not revenue per play. See, e.g., 4/28/15 Tr.
374 (Kooker); 4/30/15 Tr. 970 (A. Harrison); see also supra, section
IV.B.2.c.
j. The Number of Adjustments Does Not Disqualify Dr. Rubinfeld's
Interactive Benchmark
One of the economic experts for iHeart, Dr. Lichtman, asserted that
the sheer number of adjustments, as discussed supra, needed ``to draw
any analogy'' between the interactive and noninteractive markets is so
``overwhelming'' that the result is a ``mess'' and not reliable. 5/15/
15 Tr. 4053-54.
The Judges reject the notion that there may be some quantum of
adjustments to proposed benchmarks that disqualifies them from
consideration. Some variant of a ``three strikes and you're out''
approach seems decidedly devoid of legal or economic reasoning. The
Judges are more concerned with the importance, or weight, of any given
criticism of a benchmark than they are with the number of potential
adjustments. Trivial or measurable adjustments may be relatively great
in number, yet pale in comparison to one or two critical assumptions
that might necessitate the qualification or rejection of a benchmark.
This determination is evidence of that point. Dr. Rubinfeld's
benchmark fails to account for the fact that a large cohort of the
listening public simply will not pay for streamed music. Thus, his
subscription benchmark fails to capture the very market of listeners
who flock to ad-supported (free-to-the-listener) noninteractive
services. That single qualification circumscribes the usefulness of Dr.
Rubinfeld's benchmark. One other criticism of his benchmark, viz., its
failure to capture an ``effectively competitive'' market, permits an
adjustment within the subscription market rate and does not require the
Judges to reject the use of Dr. Rubinfeld's benchmark in the
noninteractive subscription market.
k. SoundExchange's Proposed Annual Rate Increases From 2016-2020 are
Not Supported by the Evidence
The Services object to annual increases in the royalties as
arbitrary and incompatible with the willing buyer-willing seller
standard, for the following reasons.
First, the Services contend that there is no basis to assume,
without supporting theory or evidence, that rates would necessarily
increase during the next rate period. In that regard, the Services note
that Professor Rubinfeld admitted that there is no ``theoretical reason
why we would expect prices just to go up.'' 5/5/15 Tr. 1761
(Rubinfeld).
Second, he acknowledged the absence of any basis for his self-
described ```empirical judgment' where we think rates are likely to be
going for competing products.'' Id. Moreover, as Dr. Rubinfeld,
testified, his proposed escalating rates are not based on anticipated
inflation, anticipated increases in music industry inputs, or the
consumer price index. 5/6/15 Tr. 2226 (Rubinfeld).
Third, none of the benchmarks on which SoundExchange relied
contained annual rate escalators. Moreover, out of all the potential
benchmarks that SoundExchange examined, only one has an escalating rate
provision. Id. at 2227-28. That lone agreement with an escalating rate
provision--the iHeart/Warner Agreement--was the subject of substantial
criticism and ultimate rejection by Dr. Rubinfeld, as inappropriate for
use as a benchmark in the current proceeding. Id. at 2229.
Fourth, the record evidence indicates that rates in SoundExchange's
own proposed benchmark market, interactive streaming services, have
decreased in recent years. Rubinfeld WDT, Ex. SX 0017, ] 140; 5/8/15
Tr. 2736-37 (Shapiro); 5/15/15 Tr. 4142 (Lichtman); 5/19/15 Tr. 4611
(Shapiro). Further, Dr. Rubinfeld testified that he ``actually saw . .
. decreases in the noninteractive rate'' in the data he reviewed. 5/6/
15 Tr. 2231 (Rubinfeld). Thus, if there were to be annual rate changes,
the Services argue, the record supports a decrease in webcasting rates
during the upcoming rate period.
The Services do note Dr. Rubinfeld's assertion that interactive and
noninteractive services are converging, id. at 2225-2226, but they
respond by arguing that this purported (and dubious) convergence does
not support the conclusion that the Judges should impose on
noninteractive webcasters what Dr. Rubinfeld himself characterized as a
``serious increase'' during the rate period. Id. at 2223. Moreover, Dr.
Rubinfeld admitted that his proposed annual increases were not due to
past convergence, but to his ``anticipation that the technology will
create even more convergence going forward.'' 5/5/15 Tr. 1829
(Rubinfeld). He admitted that this ``anticipation'' was ``not based on
hard data,'' and he conceded that ``I can't prove to you for sure where
we're going to be because we are talking about the future.'' Id. 1829-
30.
For the foregoing reasons, the Services conclude that
SoundExchange's interactive benchmark does not provide a basis to set
the statutory rates for commercial webcasters in this proceeding.
The Judges find that SoundExchange has failed to make a sufficient
factual showing that would support the linear $0.00008 annual rate
increase proposed by Dr. Rubinfeld. The Judges find it dispositive that
Dr. Rubinfeld acknowledged that his opinion in this regard was neither
based on theory nor on empirical analysis. Further, the fact that some
agreements in the benchmark markets have annual escalators and some do
not renders those agreements unhelpful, absent some explanation as to
the bases for the inclusion or exclusion of such escalators.
[[Page 26352]]
Additionally, market forces in the future may cause rates to move
in either direction, or to stay constant, and the record does not
suggest a basis for a credible prediction. So too is the record devoid
of any sufficient predictive evidence as to whether there will be
further convergence and/or competition between interactive and
noninteractive services or, if so, what impact that might have on the
rates. That is, the record does not indicate why convergence would not
occur through a reduction in interactive rates, rather than through (in
whole or in part) an increase in noninteractive rates. In sum, the
record does not contain a sufficient basis to adopt any prediction
about the future direction of noninteractive rates.
l. Dr. Rubinfeld's Analysis of Noninteractive Agreements Does Not
Corroborate His Interactive Benchmark
The Services oppose SoundExchange's use of agreements with Apple
and several interactive services for what Dr. Rubinfeld described as
noninteractive offerings, and argue that if the Judges consider the
agreements, a proper analysis corroborates their own rate proposals and
not SoundExchange's. See, e.g., Pandora PFF ] 344; Shapiro SWRT at 12-
16 & Table 1.
For the reasons set forth below, the Judges will not consider these
agreements in establishing or corroborating a willing-buyer, willing-
seller royalty rate.
i. Apple Agreements
The Services contend that Dr. Rubinfeld's analysis of the Apple
agreements is deeply flawed and unreliable for several reasons. First,
the Services argue that Dr. Rubinfeld improperly allocates [REDACTED]
and other compensation to the licenses for the iTunes Radio service
rather than to other licensed services that Apple provides. See, e.g.,
Fischel/Lichtman SWRT ] 36. Second, the services argue that Dr.
Rubinfeld should have analyzed the parties' ex ante expectations,
rather than ex post performance, in determining what a willing buyer
and seller would agree to. See, e.g., 5/19/15 Tr. at 4526 (Shapiro).
Finally, the services critique other adjustments that Dr. Rubinfeld
makes (or fails to make) to the headline rates in the Apple agreements
to account for non-statutory functionality in Apple's service.
The Judges credit Dr. Shapiro's observation that Dr. Rubinfeld's
conclusion that Apple was willing to pay substantially in excess of the
statutory license rate for what is essentially a statutory service
``just doesn't make any sense.'' 5/19/15 Tr. at 4526 (Shapiro).
Economists for both licensors and licensees agreed that the statutory
rate effectively sets a ceiling on rates for statutory services, since
a service can always fall back on the statutory rate if it is unable to
negotiate an equal or lower rate with the copyright owner. See, e.g.,
id.; 5/27/15 Tr. at 6025-26 (Talley). The fact that Dr. Rubinfeld
concludes that the effective rates under the Apple agreements are
substantially higher than the statutory rates strongly suggests that
something is amiss in his analysis.
One possible reason Dr. Rubinfeld's analysis finds effective rates
under the Apple agreements that exceed the statutory rates is that he
attributes compensation to the iTunes Radio service that should have
been attributed to other services licensed by Apple. The license
agreements for the iTunes Radio service between Apple, on one hand, and
Sony and Warner, respectively, on the other, are one part of a complex
business relationship between Apple and the record companies, covering
a number of different services. At or near the time that Apple entered
into its iTunes Radio agreements with Sony and Warner, the parties
amended some of their existing agreements for other services, and
specified that some compensation that Apple was to have paid out under
other agreements would be characterized as payments for the iTunes
Radio service. Shapiro SWRT at 4; SX Ex. 2072 ] 2 (Amendment [REDACTED]
to Apple/Warner Sound Recording cloud Service Agreement); Ex. 2073 ] 2
([REDACTED] Amendment to Amended and Restated Apple/Sony Digital Music
and Video Download Sales Agreement).
SoundExchange argues that the Judges are bound by the parties'
characterization of these payments as unambiguously expressed in their
agreements. SoundExchange Reply PFF ] 487. If the Judges were resolving
a contract dispute between the parties, SoundExchange's argument might
have merit. However, the Judges' task is to determine the economic
significance of the compensation that changed hands between the
parties, and the contracts are but one (albeit vitally important) piece
of evidence of that economic significance. Where, as here, a
transaction is part of a complex, interlocking business relationship,
it is appropriate--even necessary--for the Judges to consider other
evidence and analysis to determine the true economic value of the
transaction. See Fischel/Lichtman SWRT ] 31. This is particularly true
when one party is agnostic as to how certain payments should be
characterized, and the other party has a strong incentive to
characterize the payments in a particular way to influence the course
of a future rate proceeding.
That additional evidence is lacking here. The Services raise
sufficient doubt as to the characterization of the compensation flowing
from Apple to Warner and Sony to persuade the Judges that they cannot
rely on Dr. Rubinfeld's analysis of the Apple agreements. There is
insufficient evidence in the record to support SoundExchange's analysis
and use of the Apple agreements.\113\
---------------------------------------------------------------------------
\113\ In light of this determination, the Judges need not reach
the licensee services other arguments concerning the Apple
agreements.
---------------------------------------------------------------------------
The uncertainty resulting from a lack of evidence cuts both ways.
The Judges will not consider the licensee services' alternative
analyses that seek to demonstrate that the Apple agreements support
their rate proposals. See, e.g., Pandora PFF ] 344; Shapiro SWRT at 12-
16 & Table 1.
ii. Other Noninteractive Agreements
The Services urge the Judges to reject Dr. Rubinfeld's analysis of
four additional agreements for allegedly noninteractive services: Beats
Music's The Sentence; Spotify's ``Shuffle'' service; Rhapsody's
``Unradio''; and Nokia's ``MixRadio.'' The Services argue that each
service has features that exceed what a service operating under the
statutory license would be permitted to offer. The Judges agree, and
find that, as with the Apple agreements, there is insufficient record
evidence to support a useful analysis of these four agreements.
(A) Extra-Statutory Functionality
(1) Beats ``The Sentence''
The Sentence was a free (to the user) feature offered by Beats
Music (Beats) as a means of encouraging users to pay for Beats'
subscription service.\114\ Rubinfeld CWRT ] 179. It allowed users to
generate a playlist by providing contextual inputs such as location,
mood, setting and genre. It was subject to limited functionality, such
as limited skips, no use of off-line or cached content, and no rewind
feature. Id. ] 179-180. Dr. Rubinfeld describes The Sentence as
``effectively a noninteractive service involving functionality that is
closely comparable to other statutory services.'' Id. ] 180.
---------------------------------------------------------------------------
\114\ Beats was acquired by Apple and, as of December 1, 2015,
no longer exists as a separate service.
---------------------------------------------------------------------------
The Services contend the record demonstrates that The Sentence
includes extra-statutory functionality.
[[Page 26353]]
Specifically, the record company agreements with Beats [REDACTED].
Fischel/Lichtman SWRT ] 11. This additional functionality would be
expected to push the royalty rates up. See id. ([REDACTED] adjusted
rates upward expressly to account for additional functionality that
[REDACTED]'') (quoting IHM Ex. 3543 at 8 (1/1/2014 Email from
[REDACTED] to [REDACTED] and [REDACTED])). Dr. Rubinfeld does not
account for extra-statutory functionality in his analysis of Beats'
license agreements.
(2) Spotify ``Shuffle''
Spotify's Shuffle service is a free-to-the-consumer streaming
service that permits the user to select a certain number of songs (a
minimum of 20 songs or a single album) and hear only those songs in a
random order. Fischel/Lichtman SWRT ] 14. The ability to select
specific songs and be assured that only those songs will be played
distinguishes Shuffle from noninteractive services. The increased
degree of interactivity would be taken into account in setting royalty
rates. Id. Dr. Rubinfeld does not account for this functionality in his
analysis of Spotify's agreements with the record companies.
(3) Rhapsody ``Unradio''
Rhapsody's Unradio service offers users personalized playlists
based on the users' favorite artists or songs. It is a paid
subscription service, with a 14-day free (ad-supported) trial period.
Rubinfeld CWRT ] 196. Unlike statutory services, Unradio permits
unlimited skips and permits users to play up to 25 favorites and seed
tracks on an on-demand basis. Fischel/Lichtman SWRT ] 9. Again, this is
extra-statutory functionality that would be expected to affect the
royalty rate, and that Dr. Rubinfeld did not account for in his
analysis.
(4) Nokia ``MixRadio''
Mobile phone manufacturer Nokia bundled MixRadio, a free-to-
consumer streaming service, with its handsets.\115\ MixRadio provides
customized, ad-free noninteractive streaming. Unlike statutory
services, MixRadio permits users to play radio stations that are cached
on their mobile phones. Rubinfeld CWRT ] 199. In addition, MixRadio
permits users to share music with non-subscribers. Fischel/Lichtman
SWRT ] 12.
---------------------------------------------------------------------------
\115\ The service is now simply ``MixRadio,'' as a result of
Microsoft's acquisition of Nokia, and subsequent sale of the
MixRadio service to Line Corporation.
---------------------------------------------------------------------------
MixRadio thus has significant extra-statutory functionality. Dr.
Rubinfeld does not account for this in his analysis.
(B) Lack of Analysis of Business Context
Like the Apple agreements, the record companies' agreements with
Beats, Spotify, Rhapsody and Nokia, respectively, are part of broader
economic relationships that include other services. Id. ] 30. Beats,
Spotify and Rhapsody each license content from the record companies for
their respective subscription services. Nokia at one time licensed
music that it offered for unlimited download (bundled with its mobile
phones). As discussed in connection with Apple, the Judges must
consider evidence and analysis of context to determine the true
economic value of a transaction when that transaction is part of a
complex business relationship. Dr. Rubinfeld does not analyze that
context.
(C) Conclusion Regarding Corroborative Agreements
Because Dr. Rubinfeld failed to account for extra-statutory
functionality, and failed to analyze the broader context of these
services within the business relationship between the service providers
and the record companies, the Judges determine that they cannot rely on
the analyses of these agreements to corroborate SoundExchange's
interactive benchmark analysis.
5. Conclusion Regarding SoundExchange's Interactive Benchmark Per-Play
Proposal
For these reasons, the Judges find that Dr. Rubinfeld's interactive
benchmark is only applicable when:
Revenues in both markets are derived from subscription
revenues and are thus reflective of buyers with a positive WTP for
streamed music;
functional convergence and downstream competition for
potential listeners indicate a sufficiently high cross-elasticity of
demand as between interactive and noninteractive services, provided the
noninteractive subscription rate is reduced to reflect the absence of
the added value of interactivity; and
a steering adjustment is made to eliminate the
complementary oligopoly effect and thereby provide for an effectively
competitive market price.\116\
---------------------------------------------------------------------------
\116\ The Judges find as well that Dr. Rubinfeld's interactivity
analysis failed to cure all of the defects that the Judges found to
exist in the similar interactivity analysis proffered by Dr.
Pelcovits and rejected by the Judges in the Web III Remand. First,
and of greatest importance, Dr. Rubinfeld's interactivity model
fails to take account of, or adequately adjust for, the dominant ad-
supported (free-to-the-listener) segment of the noninteractive
market. See Web III Remand, 79 FR at 23118. This defect has even
greater resonance in this proceeding, given the abundant evidence,
discussed supra, that the vast majority of listeners do not have a
positive WTP for access to sound recordings on streaming services.
However, the Judges have ``ring-fenced'' this defect by limiting the
applicability of Dr. Rubinfeld's analysis to the noninteractive
subscription market. Second, the Judges also criticized Dr.
Pelcovits in the Web III Remand for failing to analyze agreements
between the interactive services and independent labels. Id. As
discussed supra, Dr. Rubinfeld looked at certain independent deals,
but only made an adjustment on the assumption that Indies' royalties
would be lower by the absence of the value of [REDACTED] found in
some of the Majors' agreements with interactive services. Third, the
Judges also criticized Dr. Pelcovits in the Web III Remand for
failing to adjust for the downward trend in rates in the interactive
benchmark market. Id. Both Dr. Pelcovits and Dr. Rubinfeld used
periods ending during the year in which the proceeding started (2009
and 2014 respectively). Dr. Pelcovits used an 18-month period, while
Dr. Rubinfeld used a 12-month period. Compare id. with Rubinfeld
CWDT ] 32. However, Dr. Rubinfeld acknowledged--but failed to
account for--the continuing downward trend in his interactive
benchmark rates. Instead, he merely assumed that the interactive and
noninteractive rates would converge through an increase in
noninteractive rates in the hypothetical market and a decrease in
rates in the interactive market. Again, such an assumption may be
reasonable in the subscription market, where convergence in
functionality appears to exist (as nonetheless limited by the DMCA
performance complement). Again, the Judges' decision to ``ring-
fence'' a subscription rate eliminates any improper use of this
assumed convergence in the ad-supported (free-to-the listener)
noninteractive market. Finally, in the Web III Remand, the Judges
also observed that the value of Dr. Pelcovits' benchmark analysis
was ``diminished by [the] lack of sufficient data'' relating to the
number of noninteractive performances per subscriber. Id. Dr.
Rubinfeld essentially avoided this problem by not accounting for
differences in the number of performances made by subscribers to
interactive and noninteractive services, respectively. Again, the
Judges find that because a willing seller in the streaming
subscription markets would seek to equalize Average Revenue per User
(ARPU) (through Dr. Rubinfeld's ratio equivalency approach) this
issue as well has been adequately addressed by the Judges through
their ``ring-fencing'' of Dr. Rubinfeld's benchmark analysis to the
subscription market only.
---------------------------------------------------------------------------
The rate derived from this analysis is set forth in the Rates
Conclusion, infra.
C. GEO's Rate Proposals
In this Web IV proceeding, the Judges had the opportunity to hear
directly from a singer-songwriter who produces and markets his own
music. Mr. George Johnson, dba GEO Music, filed a Petition to
Participate in the proceeding. He filed all the necessary papers and
testified on both direct and rebuttal, as well as delivering an opening
statement and closing argument.
Mr. Johnson eloquently stated the plight of the singer-songwriter-
artist who is self-published and self-produced. He also proposed an
overarching reform to the way in which rights owners of music--written,
[[Page 26354]]
published, performed, recorded, broadcast--would be paid for their
artistic creations. However, the current law thoroughly segments both
the copyrights and the licensing mechanisms. The rights and their
treatment have evolved over time, barely keeping pace with the
technology that uses them. Further, part of the music royalty process,
i.e., royalties for use of published ``musical works'' is managed by a
U.S. District Court in New York, with statutory admonition to the court
not to consider the effect of the rates set by the Judges. See 17
U.S.C. 114(i). The complete picture urged by Mr. Johnson can only come
into focus with a new copyright law.
Nonetheless, by comparing an artist's revenues from physical
phonorecords to the current ten-thousandths of a cent ``per spin''
calculations for digital performances, Mr. Johnson highlighted very
effectively one of the paramount factors complicating this proceeding.
The music makers, the music recorders, and the music ``consumers''--
both broadcasters and listeners--are struggling with how to address and
``monetize'' the change of the music product paradigm from an ownership
model (purchase of physical recordings) to an access model (log in to
Internet services and use as much or as little control as one wants to
direct the music programming).
GEO makes three separate rate proposals.
1. GEO Proposal 1
GEO proposes that royalty rates for nonsubscription webcasting be
the greater of a per-performance rate and a percentage revenue rate:
------------------------------------------------------------------------
Per-
Year performance Percentage
rate of revenue
------------------------------------------------------------------------
2016......................................... $0.10 70
2017......................................... 0.12 68
2018......................................... 0.14 66
2019......................................... 0.16 64
2020......................................... 0.18 62
------------------------------------------------------------------------
Introductory Memorandum to the Amended Testimony and Written Direct
Statement of George D. Johnson at 4 (Jan. 13, 2015).
GEO proposes that royalty rates for subscription webcast streams be
the greater of a per-performance rate and a percentage revenue rate:
------------------------------------------------------------------------
Per-
Year performance Percentage
rate of revenue
------------------------------------------------------------------------
2016......................................... $0.22 70
2017......................................... 0.24 68
2018......................................... 0.26 66
2019......................................... 0.28 64
2020......................................... 0.30 62
------------------------------------------------------------------------
Id.
2. GEO Proposal 2
As an alternative, GEO proposes a combination of a one-time fee
(described as a ``cloud locker'' fee) and a ``usage'' fee that is the
greater of a per-performance royalty and a percentage of revenue. As
with Proposal 1, GEO proposes separate rates for subscription and
nonsubscription webcast streams.
GEO's proposed nonsubscription rates are:
----------------------------------------------------------------------------------------------------------------
Copyright cloud Per-
Year locker-- one performance Percentage of
time fee rate revenue
----------------------------------------------------------------------------------------------------------------
2016........................................................... $0.50 $0.01 70
2017........................................................... 0.55 0.02 68
2018........................................................... 0.60 0.03 66
2019........................................................... 0.65 0.04 64
2020........................................................... 0.70 0.05 62
----------------------------------------------------------------------------------------------------------------
Id. at 5.
GEO's proposed subscription rates are:
----------------------------------------------------------------------------------------------------------------
Copyright cloud Per-
Year locker-- one performance Percentage of
time fee rate revenue
----------------------------------------------------------------------------------------------------------------
2016........................................................... $0.50 $0.10 70
2017........................................................... 0.55 0.12 68
2018........................................................... 0.60 0.14 66
2019........................................................... 0.65 0.16 64
2020........................................................... 0.70 0.18 62
----------------------------------------------------------------------------------------------------------------
Id.
3. GEO Proposal 3
As a third alternative, GEO Proposal 3 consists of a one-time
``cloud locker'' fee and a per-performance rate. Proposal 3, which GEO
describes as being derived from the inflation-adjusted cost of a record
album in 1964, would apply to both subscription and nonsubscription web
streams. Id. at 6-7.
------------------------------------------------------------------------
Copyright cloud Per-
Year locker-- one Performance
time fee rate
------------------------------------------------------------------------
2016................................... $0.50 $0.01
2017................................... 1.00 0.02
2018................................... 1.50 0.03
2019................................... 2.00 0.04
2020................................... 2.50 0.05
------------------------------------------------------------------------
Id. at 6.
4. Judges' Conclusions With Respect to GEO's Rate Proposals
GEO requests that the Judges adopt either Proposal 3 or Proposal 2,
``or in between.'' Id. at 23.\117\ As discussed above, the Judges
conclude that the evidence in the record before us does not support a
greater-of rate structure or a percentage-of-revenue rate in the
current proceeding. GEO provided no evidence to change that holding.
---------------------------------------------------------------------------
\117\ See also id. at 5 (``the Per-Performance Rate and
Copyright Cloud Locker One-Time Fee Rate are what GEO is
proposing'').
---------------------------------------------------------------------------
[[Page 26355]]
Likewise, the Judges find no persuasive evidence to support a
``cloud locker'' fee of the type that GEO (and only GEO) proposes. Mr.
Johnson presented no expert testimony to support a ``cloud locker''
rate, nor did he provide any evidence that such a rate structure even
exists in the market. What he did provide is his statement: ``The
streamer's economic model leaves out one crucial element--the customer,
and the bundled copyright cloud locker or `streaming account' forces
payment for all music copyrights up-front, one time, like all other
products.'' Id. at 5-6. The rates the Judges adopt must be based on
substantial evidence in the record. As Mr. Johnson is the only
participant to propose a cloud locker rate and he provided no evidence
to support such a rate, the Judges find that there is insufficient
evidence in the record to support a cloud locker rate.
Therefore, the Judges are left with Mr. Johnson's proposed per-
performance rates. The per-performance rates he proposes range from a
low of $0.01 per stream ((2016 in Proposal 2 (nonsubscription) and
Proposal 3) to $0.30 per stream (2020 Subscription). As with the cloud
locker proposal, Mr. Johnson provides no evidence, other than his
personal view, that such rates are reasonable, or reflect what a
willing buyer and a willing seller would agree to.\118\ In the absence
of such evidence, the Judges cannot adopt Mr. Johnson's proposed per-
performance rates.
---------------------------------------------------------------------------
\118\ See, e.g., id. at 7 (``[w]hoever says that songs are too
expensive in this rate hearing at $.00 are nothing more than con-men
since they expect American music creators to work literally for $.00
per-song when a song really costs $5 dollars [sic] per song using
government low-end inflation calculations and a real world 1964
benchmark.''). To establish his proposed cloud locker rate, Mr.
Johnson requests that the Judges adopt as a benchmark a 2-cent
mechanical (section 115) license rate for musical works in effect in
1909, which Mr. Johnson would then adjust for inflation and round to
50 cents per song). Id. at 7-8. Mr. Johnson also estimates that a
Beatles record purchased for $5 in 1964 would have cost, after
adjusting for inflation, $38 in 2014. Id. at 6. Since the Judges
decline to adopt a cloud locker rate, they need not decide whether
the mechanical rate in effect in 1909, adjusted for inflation, would
be a suitable benchmark for Section 114 and 112 rates for 2016-2020.
Interestingly, the Beatles released two albums in 1964, ``Beatles
for Sale'' and ``A Hard Day's Night,'' both of which are still (or
again) available, in vinyl, on Amazon.com for prices generally
ranging from $15 to $20. See beatlesbible.com, referenced on Dec.
14, 2015; Amazon.com, referenced Dec. 14, 2015.
---------------------------------------------------------------------------
D. Pandora Rate Proposal
1. Proposed Royalties
Pandora is a noninteractive licensee, and it represents itself as
``the leading Internet Radio Service in the United States.'' PAN Ex.
5002 ] 5 (Fleming-Wood WDT). Like SoundExchange, Pandora proposes a
greater-of rate structure. Commercial webcasters would pay the greater
of 25% of revenue from eligible transmissions and a range of per-
performance royalty rates. Pandora proposes separate ranges of royalty
rates for subscription and nonsubscription (advertisement supported)
commercial webcasting as follows:
Low End of Proposed Range 119
------------------------------------------------------------------------
A royalty equal to the greater of (i) or (ii) below:
-------------------------------------------------------------------------
Per-performance Per-performance
Year (nonsubscription) (subscription)
------------------------------------------------------------------------
(i) Per-Play Rate:
2016........................ $0.00110 $0.00215
2017........................ 0.00112 0.00218
2018........................ 0.00114 0.00222
2019........................ 0.00116 0.00226
2020........................ 0.00118 0.00230
------------------------------------------------------------------------
(ii) 25% of Revenue from
Eligible Transmissions
------------------------------------------------------------------------
High End of Proposed Range
------------------------------------------------------------------------
A royalty equal to the greater of (i) or (ii) below:
-------------------------------------------------------------------------
Per-performance Per-performance
Year (nonsubscription) (subscription)
------------------------------------------------------------------------
(i) Per-Play Rate:
2016........................ $0.00120 $0.00224
2017........................ 0.00123 0.00228
2018........................ 0.00125 0.00232
2019........................ 0.00127 0.00236
2020........................ 0.00129 0.00240
------------------------------------------------------------------------
(ii) 25% of Revenue from
Eligible Transmissions
------------------------------------------------------------------------
Pandora's Second Amended Proposed Rates and Terms at 2-3.
2. Pandora's Noninteractive Benchmark
Pandora relies upon the Pandora/Merlin Agreement to support its
rate proposal. On June 16, 2014, Pandora and Merlin entered into the
Pandora/Merlin Agreement, which established terms and conditions under
which Merlin granted Pandora the right to perform of all the sound
recordings in the catalogs of those Merlin record companies that would
ultimately decide to opt-in to the Pandora/Merlin Agreement. PAN Ex.
5014; Shapiro WDT at 23, 26; PAN Ex. 5007 ] 24 (Herring WDT).
---------------------------------------------------------------------------
\119\ The low and high ends of the proposed range correspond to
levels of overspinning (or ``steering'') of Merlin-member tracks
under Pandora's benchmark agreement. The issue of steering and the
rate calculations derived from steering are described elsewhere in
this determination.
---------------------------------------------------------------------------
a. Merlin
Merlin is a global rights agency that represents and collectively
negotiates on behalf of thousands of independent
[[Page 26356]]
record companies in the United States and 38 other countries. Van Arman
WDT at 10; 6/1/15 Tr. 6865 (Lexton); see also 5/18/15 Tr. 4204
(Herring). Merlin's members include numerous prominent independent
labels, which produce commercially and critically successful music. See
Pandora PFF ]] 123-126 (and record citations therein).
These independent record companies negotiate with digital services
collectively through Merlin in order to obtain more favorable terms and
transaction cost savings than they otherwise could achieve on an
individual basis. Van Arman WDT at 10; 4/28/15 Tr. 626-7 (Van Arman);
6/1/15 Tr. 6856-7 (Lexton). Pandora notes that one of the Majors has
acknowledged that Merlin is a ``virtual [ ] major.'' PAN Ex. 5349 at 9
(``[REDACTED]); 5/5/15 Tr. 1969:19-23, 1975:8-1977:4 (Rubinfeld).
Merlin established a procedure for its members to either opt-in or
opt-out of the Pandora/Merlin Agreement (most members could [REDACTED],
whereas a small number of members reserved the right to [REDACTED]).
Members who were represented by independent distributors (i.e.,
distributors unaffiliated with the Majors) delegated the decision as to
whether to opt-in to these distributors. In total, [REDACTED] of
approximately [REDACTED] members, covering approximately [REDACTED]
tracks--opted in to the Pandora/Merlin Agreement. 5/18/15 Tr. 4221,
4235 (Herring); 6/1/15 Tr. 6870 (Lexton).
Pandora notes that, by statute, the opting-in Merlin members could
have declined to enter into the Pandora/Merlin Agreement and thus
remained bound in 2014 and 2015 by the statutory rates that
incorporated the Pureplay settlement rates. See PAN Ex. 5014 ] 1(r);
Herring WDT ] 25.\120\
---------------------------------------------------------------------------
\120\ The statutory Pureplay settlement rates for 2014 and 2015,
respectively, are 13[cent] and 14[cent] per 100 plays for
advertising-supported services (or 25% of revenue, whichever is
greater), and 23[cent] and 25[cent] per 100 plays, respectively, for
subscription services in 2014 and 2015. Notification of Agreements
Under the Webcaster Settlement Act of 2009, 74 FR 34796, 34799 (July
17, 2009).
---------------------------------------------------------------------------
b. Key Provisions of the Pandora/Merlin Agreement.
According to Pandora, the key terms of the Pandora/Merlin Agreement
are those that set forth the rate structure, royalty payments, and
steering provisions:
Rate Structure and Royalty Payments
The agreement employs a greater-of royalty structure, with
Pandora paying the greater of a per-play prong and a percent-of-revenue
prong. The percent-of-revenue prong specifies 25% of Pandora's revenue,
prorated based on the share of performances on Pandora accounted for by
the Merlin Labels.
The 2014 ``headline'' per-play rates are $0.[REDACTED] for
each ad-supported performance and $0.[REDACTED] for each subscription
performance. The 2015 ``headline'' per-play rates are $0.[REDACTED] for
each ad-supported performance and $0.[REDACTED] for each subscription
performance. PAN Ex. 5014 ] 3(a); Herring WDT ] 26; Shapiro WDT at
26.\121\
---------------------------------------------------------------------------
\121\ There is no separate fee in the agreement for ephemeral
copies of the recordings; such copies are covered under and included
within the performance fees above. PAN Ex. 5014 ] 3(d); Herring WDT
] 26.
Steering Provisions
Steering is the term Pandora uses to describe a licensee's
``ability to control the mix of music that's played on the service in
response to differences in royalty rates charged by different record
companies.'' 5/8/15 Tr. 2683-4 (Shapiro). Just as the ``ratio
equality'' is foundational to SoundExchange's rate proposal, the
concept of ``steering'' is foundational to Pandora's rate proposal.
Shapiro WDT at 27 (``This reduced per-play rate in exchange for
increased plays is the central piece of the Merlin Agreement.'').
According to Pandora, steering and the concomitant discounting
terms are feasible in the noninteractive market because Pandora has now
tested and proven its ability to modify its playlist-selecting
algorithms to rely more or less heavily on the music of particular
record companies so that it can steer its listeners toward or away from
the music from any one record company, thereby permitting ``workable
competition'' to emerge in the relevant, noninteractive webcasting
market. 5/19/15 Tr. 4557 (Shapiro). By contrast, Pandora notes, no
evidence of such a steering capability existed at the time of the Web
II or Web III proceedings. Shapiro WDT at 16.
Pursuant to the Pandora/Merlin Agreement, the ``headline'' per-play
rates can be reduced by steering as follows.
For Pandora's Ad-Supported Nonsubscription Service
------------------------------------------------------------------------
------------------------------------------------------------------------
2014
------------------------------------------------------------------------
Headline Rate............................. Steered Rate.
$0.[REDACTED]......................... $0.[REDACTED].
------------------------------------------------------------------------
2015
------------------------------------------------------------------------
Headline Rate............................. Steered Rate.
$ 0.[REDACTED]........................ $0.[REDACTED].
------------------------------------------------------------------------
For Pandora's Subscription Service
------------------------------------------------------------------------
------------------------------------------------------------------------
2014
------------------------------------------------------------------------
Headline Rate............................. Steered Rate.
$0.[REDACTED]......................... $0.[REDACTED].
------------------------------------------------------------------------
2015
------------------------------------------------------------------------
Headline Rate............................. Steered Rate.
$0.[REDACTED]......................... $0.[REDACTED].
------------------------------------------------------------------------
Thus, Pandora claims that steering reduced the headline rates for
its ad-supported, nonsubscription service by [REDACTED]% in 2014 and
would reduce those headline rates by [REDACTED]% in 2015. Moreover,
Pandora claims that steering reduced the headline rates for its
subscription service by [REDACTED]% in 2014 and would reduce that
headline rate by [REDACTED]% in 2015. PAN Ex. 5014 ] 4; Herring WDT ]
27; Herring AWRT ] 48; Shapiro WDT at 27.
The calculation of these effective steered rates is explained in
paragraph 4 of the Pandora/Merlin Agreement, which sets forth the
following provisions for calculating the rates resulting from steering,
using the 2014 ad-supported headline rate of $0.[REDACTED] as an
example.
Pandora promises to increase ``quantity'' (spins) by at least
[REDACTED]% in the aggregate above Merlin's ``Natural Performance
Rate.'' \122\ However, Pandora will not pay a ``price'' equal to the
$0.[REDACTED] headline rate for these additional spins. Instead, in
exchange for its promise to play at least [REDACTED] % additional
spins, Pandora will receive a ``discount'' on the price paid for
[REDACTED].
---------------------------------------------------------------------------
\122\ The Pandora/Merlin Agreement defines ``Natural Performance
Rate'' as [REDACTED]. PAN Ex. 5014 ] 1(k). More specifically,
Pandora promised an aggregate increase of Merlin-label spins of at
least [REDACTED]%, while promising to [REDACTED] to increase the
spins of individual Merlin member labels by at least that amount.
Id. ] 4(a).
---------------------------------------------------------------------------
That discount is calculated as [REDACTED]. PAN Ex. 5014 ] 4(a)-(c).
In support of a statutory rate based on the steering aspects of the
Pandora/Merlin Agreement, Pandora advances several arguments. First,
Pandora maintains that steering embodies ``price competition at work,''
and therefore reflects an ``effectively competitive'' market. 5/19/15
Tr. 4561-64 (Shapiro). Effective competition results from the power to
steer because, according to Dr. Shapiro, a streaming service that
possesses an ability to ``steer'' towards certain recordings, and away
from others, will have ``much more
[[Page 26357]]
bargaining power and be able to negotiate a lower royalty rate.''
Shapiro WRT at 19.
In theoretical terms, a service's ability to steer increases its
price elasticity of demand, reducing the extent to which a licensor can
mark up its price over marginal cost. 5/19/15 Tr. 4561-64 (Shapiro); 5/
8/15 Tr. 2725-27 (Shapiro); Pandora PFF ]] 147-148, 152-157 (and record
citations therein). The relationship among elasticity, price and costs
as a basis to measure market power is described by the Lerner Equation
(or Lerner Index)--a fundamental economic pricing rule. Shapiro WDT at
5. In mathematical terms, the Lerner Equation \123\ can be expressed
as:
---------------------------------------------------------------------------
\123\ The Lerner Equation states that there is an inverse
relationship between the firm's margin (the gap between price and
marginal cost) and the firm's elasticity of demand. That is, the
increase in a buyer's (licensee's) own elasticity of demand (n)
reduces the price (P) paid by the licensee over the licensor's
marginal cost (MC) pursuant to the Lerner Equation. Thus, an
increase in own-elasticity n (holding MC constant) reduces the value
of each side of the equation. See generally Edwin Mansfield and Gary
Yohe, Microeconomics 376 (11th ed. 2004) (``Economists often use the
Lerner Index . . . to measure monopoly power or market power.'').
[NB: The formula for the Lerner Equation appeared in a footnote in
the determination as issued to the parties and the public, but it
appears here in the body of the publication because of Federal
Register drafting requirements.]
[GRAPHIC] [TIFF OMITTED] TR02MY16.001
Second, Pandora asserts that steering is not only theoretical and a
contractual commitment, it is occurring under the Pandora/Merlin
Agreement. Specifically, Pandora is actually steering [REDACTED]% above
Merlin's ``natural performance rate'' of sound recordings, greater than
the [REDACTED]% it has contractually committed to steer--evidencing
that Pandora's steering behavior is motivated by ``price differences,''
not merely by the contractual ``steering commitment.'' Shapiro WRT at
41; see 5/18/15 Tr. 4229 (Herring); Herring AWRT ] 50.
Dr. Shapiro noted that when steering is possible, the mere threat
(explicit or implicit) by the service to divert performances from one
record company to another gives the service negotiating leverage.''
Shapiro WRT at 20 (emphasis added). In such a market, he opines, ``[a]
record company facing a webcaster with considerable ability to steer
customers away from its music has a strong incentive to discount its
music to increase the number of performances of its music made by that
webcaster.'' Shapiro WDT at 9-10. Thus, according to Pandora, the
ability to steer creates price competition that can obviate the need
for any actual steering in the hypothetical market. Shapiro WDT at 9
(``The net result in a workably competitive market may well be
relatively little actual steering . . . .'').
Pandora avers that the Pandora/Merlin Agreement's steering
provisions reflect these competitive forces, i.e., a supplier offering
a lower price in an attempt to gain volume. Shapiro WDT at 27 (``This
reduced per-play rate in exchange for increased plays is the central
piece of the Merlin Agreement. This feature plainly demonstrates that
the Merlin Agreement is embracing the workings of a competitive
market.''); Shapiro WRT at 19; see 5/19/15 Tr. 4574-5 (Shapiro).
According to Pandora, from the ``willing buyer'' perspective, the
ability to steer provides Pandora with the ``competitive incentive to
play directly-licensed tracks more heavily than [it] would otherwise.''
Herring AWRT ] 48. On the other side of the transaction, according to
Pandora, the record shows that for a ``willing seller,'' i.e., a Merlin
member who opted-in, this steering-based agreement, constituted a
``good competitive move,'' taken in the record company's ``self-
interest.'' 4/28/15 Tr. 610-11 (Van Arman).
Pandora further avers that its ``overspinning'' of Merlin tracks by
[REDACTED]% has not resulted in any negative feedback from Pandora
listeners or any negative financial impact. 5/18/15 Tr. 4229-33
(Herring) (explaining that Pandora increased plays of Merlin tracks, on
an aggregate basis, by approximately [REDACTED]% in 2014, but this
change in the mix of spins did not cause any increase in ``complaints
about song quality from Pandora listeners).
c. Pandora's Steering Experiments
In support of its assertion that the effects of potential steering
can be pervasive in the noninteractive market, Pandora relies in part
on its own internal ``steering experiments.'' More particularly, in
2014, at Dr. Shapiro's direction, Pandora conducted a set of steering
experiments to test its ability to overspin recordings owned by each of
the Majors.
The 2014 steering experiments were conducted by Pandora's in-house
``Science Team'' which has primary responsibility for designing and
analyzing ``controlled experiments.'' PAN Ex. 5020 ] 7 (McBride WDT).
Pandora witness Dr. Stephen McBride is a member of Pandora's Science
Team, which performs research and analyses to measure the effectiveness
of features offered by Pandora. McBride WDT ]] 1, 5. The Science Team
is composed of 15 individuals, 13 of whom hold doctorate degrees in
computer science, engineering, statistics, or economics from leading
academic institutions. Id. ] 5.
Pandora's controlled experiments (including the steering
experiments) consist of comparisons between randomly selected groups of
listeners, one group receiving a manipulated experience (the
``treated'' group) and the other group receiving the standard Pandora
experience (the ``control'' group). Id. These experiments are
randomized, controlled, and blind. Id.\124\
---------------------------------------------------------------------------
\124\ ``Randomized'' means listeners are assigned randomly to
either the ``treated'' group or the ``control'' group, to ensure
valid causal inference. Id. at n.1. ``Controlled'' means the outcome
is a comparison between those receiving the exposure and those not
receiving the exposure, to account for the ``placebo effect.'' Id.
``Blind'' means experimental subjects are unaware of their
participation in an experiment and, therefore, are also unaware of
whether they have been assigned to the treatment group or the
control group. Id.
---------------------------------------------------------------------------
Pandora initiated the steering experiments because: (1) It had the
general technological capability to perform more of one record
company's sound recordings and/or fewer of another record company's
sound recordings; and (2) it recognized that, as a noninteractive
service it has the economic incentive to ``steer'' its performances
toward music owned by a particular record company if that music is
available at a lower royalty rate. Shapiro WRT at 22-25. Therefore,
Pandora decided to determine through its steering experiments whether
and to what extent it could use this technological ability to steer
performances without negatively affecting listenership. Herring WDT ]]
22, 31-32; McBride WDT ]] 12-22; Shapiro WDT at 27; Shapiro WRT at 22-
25.
Thus, from June 4, 2014, to September 3, 2014 (13 weeks), Dr.
McBride and his colleagues at Pandora conducted a series of steering
experiments in order to answer two questions: (1) Whether increases or
decreases in performances of sound recordings owned by a particular
record company would have a measurable impact on a key listener metric
(average hours listened per registered user; and (2) whether Pandora's
engineers could precisely manipulate the share of music played
according to the record company that owns the recordings. McBride WDT
]] 7, 12, 15.
The Steering Experiments consisted of a group of 12 experiments.
Each experiment involved a combination of one of three target ownership
groups
[[Page 26358]]
(UMG, Sony or WMG) and a target ``deflection'' in share of spins
(treatment group) as compared to spins that would occur according to
the standard Pandora music recommendation results (control group).
McBride WDT ] 15.\125\ The spin share deflections (the ``steering'')
were: -30%, -15%, +15%, and +30% for each of the three ownership groups
manipulated. Id. The experimental subjects of the Steering Experiments
were all Pandora listeners, each of whom was randomly assigned to one
of the 12 treatment groups, to the single control group, or were
included in the portion of listeners excluded from all experiments.
McBride WDT ] 16.
---------------------------------------------------------------------------
\125\ The Steering Experiments operated through Pandora's ``A/B
Framework,'' by which the Science Team intentionally changes one
aspect of the Pandora experience for a sample group of listeners
(the ``B'' group, or treated group) and then compares the effects to
groups of listeners who did not experience the change (the ``A''
group, or control group). McBride WDT ]] 7-8 and 16.
---------------------------------------------------------------------------
The experiments demonstrated that Pandora was able to steer -15% or
+15% for all three Majors without causing a statistically significant
change in listening behavior. McBride WDT ] 21. However, Pandora was
unable to steer -30% or + 30% for Universal or Sony without creating a
statistically significant change in listening behavior. Id.
d. Additional Terms in the Pandora/Merlin Agreement \126\
---------------------------------------------------------------------------
\126\ Dr. Shapiro's decision as to whether and to what extent to
adjust his benchmark to reflect such additional terms is considered
elsewhere in this determination.
---------------------------------------------------------------------------
The Pandora/Merlin Agreement contains the following additional
terms that are specifically addressed by Dr. Shapiro in his benchmark
analysis:
[REDACTED]: Pandora also agreed to provide the Merlin
members who opted in with a [REDACTED] in the event Pandora [REDACTED].
PAN Ex. 5014 ] 3(e); Herring WDT ] 26; Shapiro WDT at 28-29. This
provision has not been triggered, 6/1/15 Tr. 6897 (Lexton), and
Merlin's negotiators understood it was unlikely ever to be triggered.
Id. at 6956-57; PAN Ex. 5110.
Compensable Performances: Performances of [REDACTED] are
non-compensable. All other performances are subject to a fee. 5/18/15
Tr. 4227 (Herring). Certain tracks designated as [REDACTED] are
compensable at only [REDACTED] the headline rates. 5/18/15 Tr. 4227
(Herring).
[REDACTED]: The Merlin members who opt-in are [REDACTED]
to receive a specified [REDACTED]. PAN Ex. 5014 ] 5; Herring WDT ] 29.
Ancillary Promotional Benefits: Additional non-pecuniary
promotional benefits for Merlin, including [REDACTED]. See PAN Ex. 5014
]] 6-11.
See Herring WDT ] 30; Shapiro WDT at 29.
e. Pandora's Conclusion Regarding the Benchmark Status of the Pandora/
Merlin Agreement
Based on the foregoing, Pandora asserts that the Pandora/Merlin
Agreement is the best benchmark in this proceeding because
it constitutes a competitive and arms-length direct
license between a noninteractive webcaster and thousands of record
companies;
it concerns the same rights as are covered by the
statutory license;
it covers the same type of products at issue in this
proceeding--public performances of sound recordings on noninteractive
Internet radio; and
it involves the same ``willing sellers'' (record companies
that own sound recording copyrights) and a ``willing buyer'' (Pandora)
that exist in the hypothetical market.
PAN Exs. 5014-5015; Shapiro WDT at 24-25; see also 5/28/15 Tr. 6323-24
(Rubinfeld) (agreeing that the Pandora/Merlin Agreement satisfied each
such criterion).
3. Pandora's Calculation of Royalty Rates Implied by Its Proposed
Benchmark
Pandora and its economic expert, Dr. Shapiro, did not simply apply
the steering-adjusted rates implied by the Pandora/Merlin Agreement,
but rather also considered potential further adjustments that might be
required for an ``apples-to-apples'' comparison of the terms in the
Pandora/Merlin Agreement with the statutory terms applicable to
noninteractive licenses. See Shapiro WDT at 20-21, 23-37, Appendix D
(``Analysis of Merlin Agreement'').
a. Potential Additional Adjustments
The three principal aspects of the Merlin Agreement that Dr.
Shapiro considered for potential additional adjustments were:
1. Differences in the determination of which performances are
compensable as compared to the statutory license (i.e., consistent
treatment of [REDACTED] and [REDACTED]);
2. additional financial terms of the Pandora/Merlin Agreement,
including [REDACTED]; and
3. non-pecuniary terms in the Pandora/Merlin Agreement.
5/19/15 Tr. 4592-93 (Shapiro); Shapiro WDT Appendix D at D-1-D-9; see
Shapiro WDT at 30.
i. Adjustment for Royalty Bearing Plays ([REDACTED])
This adjustment is required, according to Dr. Shapiro, because, on
the one hand, the Pandora/Merlin Agreement treats [REDACTED] as non-
compensable and the performance of [REDACTED] as compensable, but the
statutory licenses takes the opposite tack on both issues--treating
[REDACTED] as compensable and the performance of [REDACTED] as non-
compensable. Id. To adjust for both of these factors Dr. Shapiro took
the following steps.
First, he calculated the total payment Pandora expected to make to
the opting-in Merlin members for all sound recordings under the
Pandora/Merlin Agreement.
Second, he divided that total payment by the number of performances
of Merlin Label recordings that would be compensable under the
statutory license (as currently defined). Shapiro WDT at 30-31;
Appendix D.
Dr. Shapiro describes this calculation as yielding a per-play rate
that the Pandora/Merlin Agreement would establish if Pandora and Merlin
had negotiated an agreement with a fixed per-play rate that treated
[REDACTED] as compensable and performances of [REDACTED] as non-
compensable. Id. To make the point more clearly, Dr. Shapiro offered
the following example:
----------------------------------------------------------------------------------------------------------------
Calculation Value
----------------------------------------------------------------------------------------------------------------
Pandora Performances of Merlin Music........... [a].............................. 1,000,000
Number of [REDACTED]....................... [b].............................. 200,000
Number of [REDACTED]....................... [c].............................. 100,000
Compensable Performances Under Merlin License.. [d] = [a]-[b].................... 800,000
Payment Per Compensable Play Under Merlin [e].............................. $0.00125
License.
Total Royalty Payment Under Merlin License..... [f] = [d] x [e].................. $1,000
[[Page 26359]]
Compensable Performances Under Statutory [g] = [a]-[c].................... 900,000
License.
Effective Per-Play Rate Under Statutory License [h] = [f] / [g].................. $0.00111
----------------------------------------------------------------------------------------------------------------
Shapiro WDT at 30-31; 5/19/15 Tr. 4589-92 (Shapiro); see id.at 4594
(noting that $0.[REDACTED] rate was ``an illustrative example,'' and
``not a rate proposal'').\127\
---------------------------------------------------------------------------
\127\ Dr. Shapiro also made a small adjustment in his effective
royalty rate calculation to reflect that certain tracks [REDACTED].
PAN Ex. 5014 (1)(c) and 3(c) . Dr. Shapiro assumed that [REDACTED]
would represent [REDACTED]% of Merlin tracks overall. Shapiro WDT at
App. D-7.
---------------------------------------------------------------------------
ii. Potential Adjustments for Additional Financial Terms
The Pandora/Merlin Agreement contains additional financial terms
not permitted in the statutory license. Dr. Shapiro attempted to
determine whether it was appropriate to increase his proposed rate to
reflect values for these items. Dr. Shapiro ultimately found no basis
to increase his proposed rates to reflect these items. Shapiro WDT at
28-29 (Appendix D); see 5/19/15 Tr. 4592-93 (Shapiro). Broadly, Dr.
Shapiro found no value in these additional terms because neither
Pandora nor Merlin had calculated or even estimated any value
attributable to these items. More particularly, Dr. Shapiro analyzed
these additional financial terms in the following manner.
(A) The [REDACTED] Provision
Dr. Shapiro assigned no separate value to Merlin's contractual
right to receive [REDACTED]. According to Dr. Shapiro, he made no
adjustment to his proposed rate to reflect this term because Pandora's
financial projections did not show that Pandora would [REDACTED] in
2014 or 2015. Id. at 4689-90.
(B) The [REDACTED]
Dr. Shapiro also assigned no separate value to the [REDACTED] that
provided Merlin with [REDACTED]. He testified that he declined to add a
separate value for [REDACTED] because:
[The] rate proposal is based on payments that Pandora is making
and will be making to Merlin where the guarantee is binding. So the
insurance is coming in. And those payments are included and, of
course, raise the amounts of money that Pandora is paying and,
therefore, they raise the rate that's in my proposal, so it includes
that.
Id. at 4696.
iii. Potential Adjustments for Non-Pecuniary Terms
The Pandora/Merlin Agreement also contains non-pecuniary financial
terms that are not permitted in the statutory license. Dr. Shapiro
attempted to determine whether it was appropriate to increase his
proposed rate to reflect any values for these items. Shapiro WDT at 29-
31; Appendix D at D-10-19 (``Non-Pecuniary Terms in the Merlin
Agreement''); see 5/19/15 Tr. 4595-98 (Shapiro).
(A) [REDACTED] on Pandora
Dr. Shapiro did make an adjustment to increase his calculated
``steered'' rate by 0.0002[cent] (i.e., $0.000002) per-performance to
reflect [REDACTED] made available by Pandora to Merlin in [REDACTED] of
the Pandora/Merlin Agreement. Shapiro WDT at 31; Shapiro WDT at 31;
Appendix D at D-11 to D-12.
(B) [REDACTED]
Pursuant to the Pandora/Merlin Agreement, Pandora agreed to allow
each Merlin member that had opted-in to [REDACTED]. PAN Ex. 5014 Sec.
7. Dr. Shapiro did not make an adjustment to increase the value his
benchmark for this non-statutory benefit, because Pandora personnel
told him that ``[REDACTED] are mutually beneficial to the Merlin Labels
and to Pandora.'' Shapiro WDT at D-12. With regard to the benefit to
Pandora, Dr. Shapiro was informed by Pandora personnel that ``Pandora
considers that [REDACTED] strengthen artist engagement with Pandora and
thereby drive incremental listening and listeners to the service, build
brand loyalty, and enhance listener retention.'' Id.; see Westergren
WDT ] 38. Accordingly, Dr. Shapiro could not determine that the value
of such [REDACTED] was greater to the Merlin members than to Pandora,
and, consequently, he concluded that no adjustment to the effective
royalty rate was necessary. Shapiro WDT at D-13.
(C) [REDACTED]
Each Merlin member that opted-in to the agreement could elect to
[REDACTED]. PAN Ex. 5014 (Pandora/Merlin Agreement Sec. 8).
According to Dr. Shapiro, [REDACTED] are mutually beneficial to the
opting-in Merlin members and to Pandora. Shapiro WDT at D-13. Dr.
Shapiro took note that Pandora believed the presence of [REDACTED]
might be ``accretive to the listener experience'' as well as a form of
advertising, and that Pandora was in fact planning controlled tests to
measure listener responses and solicit listener feedback in order to
determine the appropriate nature and frequency of [REDACTED] on
[REDACTED] stations.'' Id. In light of the mutually beneficial nature
of bumpers, Pandora personnel informed Dr. Shapiro that, even without a
contractual obligation to do so, Pandora offered [REDACTED], gratis,
along with Pandora Premieres tracks. Shapiro WDT at D-13 & n.26.
In light of the foregoing, Dr. Shapiro could not conclude that the
[REDACTED] provision on balance created more value for Merlin than for
Pandora, and therefore he made no adjustment to his proposed effective
royalty rate on that basis.
(D) Access to Pandora Metrics
Pursuant to the Pandora/Merlin Agreement, opting-in Merlin members
will receive [REDACTED] metrics regarding [REDACTED]. PAN Ex. 5014
Sec. 9 (Pandora/Merlin Agreement) see also Shapiro WDT at D-14 &
n.29); Herring WDT ] 30.
However, Dr. Shapiro noted that, at the time he prepared his
testimony, Pandora was also developing a service called the Artist
Marketing Platform (``AMP''), expected to launch in October 2014,
through which Pandora proposed to provide these same metrics to all
artists, not only to artists on the labels of Merlin members. Pandora
did not plan to charge for AMP. Shapiro WDT at D-14 & n.30; see Herring
WDT ] 30.
Since Pandora stated that it intended to make its AMP available to
all artists at no charge, Dr. Shapiro concluded that no adjustment to
the effective royalty rate was necessary to account for the Pandora
Metrics to which Merlin Labels would have access. Shapiro WDT at D-14.
(E) [REDACTED]
Under the Agreement, Pandora, [REDACTED], may create a [REDACTED].
PAN Ex. 5014 Sec. 10 (Pandora/Merlin Agreement); see also Shapiro WDT
at D-14, D-15 & n.31.
Pandora personnel explained to Dr. Shapiro that such [REDACTED]
were potentially mutually beneficial to the Merlin members and to
Pandora. Id. at
[[Page 26360]]
n.32. The Merlin members benefit from [REDACTED], generating benefits
to the Merlin members in the form of enhanced royalties and discovery
of their other artists. Id. For Pandora, these [REDACTED] offer another
context for engaging listeners and, by increasing the number of Merlin
member plays on Pandora, these [REDACTED] work in tandem with the
steering provisions in the Pandora/Merlin Agreement.
By way of comparison, Dr. Shapiro noted that Pandora is working
with another entity to [REDACTED] that will feature specific artists.
Id. at n.34; see Herring WDT ] 30 n.11. Pandora personnel informed Dr.
Shapiro that neither Pandora nor the entity [REDACTED] is [REDACTED],
which suggested to Dr. Shapiro that such [REDACTED] create ``mutual and
roughly equalized benefits for both Pandora and the [REDACTED]
creator.'' Shapiro WDT at D-15.
For these reasons, Dr. Shapiro concluded that no adjustment to the
effective royalty rate was necessary to account for the [REDACTED]
provision in the Merlin Agreement. Id. at D-15 to D-16.
(F) Pandora Presents and Pandora Premieres Events
Pursuant to the Pandora/Merlin Agreement, opting-in Merlin members
receive [REDACTED] in ``Pandora Presents'' and ``Pandora Premieres''
events. PAN Ex. 5014 Sec. 11 (Pandora/Merlin Agreement). Dr. Shapiro
considered these two types of events separately.
(1) Pandora Presents
Pandora Presents is a program launched in December 2011, through
which artists perform live before an audience of fans that Pandora
identifies and invites without charge. Fleming-Wood WDT ] 29. Each of
these events is designed for and sponsored by an advertiser. Pandora
essentially plays the role of a concert producer and promoter, choosing
artists to feature in Pandora Presents events that will best speak to
the target audience of the sponsoring advertiser. Id. Pandora
identifies and matches advertisers and artists that appeal to a
particular demographic, then books a location for the event and markets
the event to Pandora listeners with a demonstrated interest in the
featured artist. Pandora [REDACTED]. Pandora [REDACTED]; sometimes
Pandora [REDACTED]. Shapiro WDT D-17 n.43.
There have been between [REDACTED] Pandora Presents events per year
featuring artists on Merlin labels. Id. Pandora estimates that Merlin
member artists [REDACTED]. Id.
Pandora acknowledges that Pandora Presents generates promotional
benefits for the featured artists. However, Pandora also understands
that Pandora Presents also generates marketing benefits for Pandora
with respect to advertisers, listeners, artists, and labels. Id. More
particularly, Pandora not only views the program as a marketing
platform that adds value for Pandora's service, but Pandora has also
required that Pandora Presents events [REDACTED]. Fleming-Wood WDT ] 29
& n.5; see Westergren WDT ] 38. Pandora Presents events thus generate
additional advertising revenue for Pandora as well as promotion of the
Pandora brand with Pandora listeners. Over the long run, Pandora
considers that Pandora Presents events lead to increased listener
satisfaction and retention, and thus to greater advertising and
subscription revenue. Id.
Because of the foregoing, Dr. Shapiro likened Pandora's role in
coordinating Pandora Presents events to that of an independent concert
producer and promoter. Therefore, Dr. Shapiro concluded that the
[REDACTED] Pandora Presents events, on balance, did not call for any
adjustment to the effective royalty rate he had calculated. Shapiro WDT
at D-17.
(2) Pandora Premieres
Pandora Premieres is a program through which Pandora promotes
albums in the week prior to their release. Fleming-Wood WDT ] 30.
Pandora sends an email inviting certain listeners (selected based on
their listening tastes and profiles) to listen to a new album during
the week prior to its release date. Id.; see also Shapiro WDT at D-17
n.45. When selecting albums to feature on Pandora Premieres, Pandora
reviews albums and artists proposed by the record companies to ensure
``a good fit with the program'' and to ``generate a high volume of
listening.'' Fleming-Wood WDT ] 30. Pandora provides these selected
Pandora Premieres listeners with ``click-to-buy functionality.'' Id. at
n.46.
Pandora requires the labels to waive royalties for the one-week
period that an album is on Pandora Premieres. Shapiro WDT at D-18.
Pandora personnel informed Dr. Shapiro that Pandora has never charged
labels for their participation in Pandora Premieres and has no plans to
do so. Id. at D-18 n.49.
Pandora Premieres features two to five albums per week, or about
150 albums annually. Fleming-Wood WDT ] 30. Pandora personnel informed
Dr. Shapiro that approximately [REDACTED] percent of these albums are
by artists whose labels are Merlin members and Pandora estimates that
participation by artists whose labels are Merlin members will
[REDACTED] to [REDACTED] percent. Shapiro WDT at D-18 nn.51, 52.
Pandora also estimates that the number of Merlin label albums featured
on Pandora Premieres will [REDACTED] from around [REDACTED] per year to
around [REDACTED] per year. Id. at n.53.
Dr. Shapiro acknowledges that Pandora Premieres generates
promotional benefits for the featured artists and their labels, but
that benefit is offset by (and evident from) the fact that labels waive
royalties for the one-week period that an album is on Pandora
Premieres. Shapiro WDT at D-18. Pandora also receives significant
benefits from Pandora Premieres, because it offers a benefit to Pandora
listeners, who receive an early opportunity to listen to entire new
albums from artists they like and to buy the music. Fleming-Wood WDT ]
30.
On balance, therefore, Dr. Shapiro concluded that Pandora Premieres
generates significant benefits both to the artists and label, on the
one hand, and to Pandora as well. Because the program is mutually
beneficial, and because Pandora [REDACTED], Dr. Shapiro concluded that
the [REDACTED] in Pandora Premieres does not call for an adjustment to
the effective royalty rate he had calculated. Shapiro WDT at D-19.\128\
---------------------------------------------------------------------------
\128\ Dr. Shapiro also considered two factors enumerated in the
statutory willing buyer/willing seller formulation--Pandora's
potential role in promoting or substituting for other Merlin label
revenue streams, and Pandora and Merlin's ``relative contribution.''
He concluded that, as rational economic actors with access to
information regarding such factors, the parties would attempt to
make sure that such elements were ``fully baked in'' and
``automatically included'' in the negotiated rates. 5/19/15 Tr.
4605-06 (Shapiro). Given this fact, Dr. Shapiro made no further
adjustments to the rates he derived from the Pandora/Merlin
Agreement.
---------------------------------------------------------------------------
iv. Adjustments Over the 2016-2020 Period
Dr. Shapiro adjusted his proposed rates higher to reflect
anticipated inflation over the 2016-2020 statutory period. Shapiro WDT
at 35. However, at the hearing, Dr. Shapiro testified that he would
have preferred not to predict future inflation, but rather to include a
statutory term requiring the rates to be adjusted annually to reflect
actual inflation. 5/19/15 Tr. 4608-10 (Shapiro). Dr. Shapiro did not
make any other adjustments to reflect anticipated or predicted changes
over the statutory
[[Page 26361]]
period. His adjusted rates are set forth in the table below: \129\
---------------------------------------------------------------------------
\129\ The rates in the table differ from the rates proposed by
Pandora because the proposed rates are rounded.
\130\ Dr. Shapiro blended the ad-supported and subscription
rates to create his ``blended'' rate. However, Pandora does not
propose that the Judges adopt such a ``blended'' rate.
Effective Per-Play Royalty Rates After Adjustments
[2016 Through 2020 ([cent])]
----------------------------------------------------------------------------------------------------------------
Inflation rate Advertising-
* (%) supported Subscription Blended \130\
----------------------------------------------------------------------------------------------------------------
30% Steering:
2016........................................ 2.20 0.1105 0.2146 0.1225
2017........................................ 1.73 0.1124 0.2183 0.1246
2018........................................ 1.74 0.1144 0.2221 0.1268
2019........................................ 1.76 0.1164 0.2260 0.1290
2020........................................ 1.78 0.1185 0.2300 0.1313
12.5% Steering:
2016........................................ 2.20 0.1205 0.2238 0.1324
2017........................................ 1.73 0.1226 0.2276 0.1347
2018........................................ 1.74 0.1247 0.2316 0.1370
2019........................................ 1.76 0.1269 0.2357 0.1394
2020........................................ 1.78 0.1291 0.2399 0.1419
----------------------------------------------------------------------------------------------------------------
* The inflation rate reported for 2016 accounts for expected inflation from the mid-point of the period Q4 2014
through 2015 (May 2015) to the midpoint of 2016 (August 2016). The other inflation rates account for annual
expected inflation to the mid-point (August) of each calendar year listed.
Dr. Shapiro explained why he proposed two alternative rates: ``[The
rate selected] depends on how much steering Pandora is doing. If they
do more steering, that lowers the rate they're going to be paying, in
fact, and so then that lowers the corresponding statutory rate derived
from the Merlin Agreement.'' 5/19/15 Tr. 4603-04 (Shapiro).
b. Pandora's Proposed Greater-of Rate Structure Including a 25% of
Revenue Prong
In addition to the proposed per-play rates, Dr. Shapiro's rate
proposal employs a greater-of structure, with the second prong set at
``25 percent of the revenue attributable to the licensed music,'' as
such revenue is defined in the regulations proposed by Pandora. Shapiro
WDT at 20 & n.30; 5/19/15 Tr. 4608:16-23 (Shapiro). This is the same
greater-of rate structure adopted by the parties to the Pandora/Merlin
Agreement. PAN Ex. 5014 ] 3(a). According to Dr. Shapiro, a greater-of
formula with a ``percent-of-revenue'' prong is proper for the following
reasons.
[T]he Merlin Agreement . . . specifies that Pandora's royalty
payments to the participating Merlin Labels . . . will be at least
25 percent of its revenue attributable to the music of those labels.
These agreements show that, as a practical matter, royalties for
recorded music can indeed be based on webcaster revenues, at least
in the case of Pandora. Furthermore, webcasters and many other types
of music users pay royalties to music publishers and composers,
through ASCAP and BMI that are set as a percentage of revenue. For
example, the ASCAP rate court recently established a royalty rate
for Pandora of 1.85 percent of revenue for the period 2011-2015 for
its performance of musical compositions in the ASCAP repertoire.
This indicates to me that webcasting revenues can serve as a
practical basis for royalty payments.
Shapiro WDT at 23.\131\
---------------------------------------------------------------------------
\131\ Dr. Shapiro assigned no separate value to the 25% of
revenue prong for adjustment of the per-play prong, because he
understood that the per-play prong would result in a payment by
Pandora to Merlin of approximately [REDACTED]% of revenue
attributable to Merlin, thus not triggering the lower 25% prong. 5/
19/15 Tr. 4683-4 (Shapiro). Further, because Dr. Shapiro included a
second prong incorporating the 25% of revenue royalty payment, he
concluded that it would be ``double counting or just nonsensical''
to add the value of that prong into the per-play prong. Id. at 4686.
---------------------------------------------------------------------------
c. Pandora's Proposed Application of the Pandora/Merlin Rates to the
Majors
Pandora avers that the effective rates established by the Pandora/
Merlin Agreement are not only representative of the rates that Indies
would receive as willing sellers in the hypothetical marketplace, but
are also representative of the rates that the Majors would receive in
the hypothetical marketplace. Pandora's explanation as to why this
extrapolation is warranted is based on its distinction between greater
revenue derived from a higher number of plays as opposed to greater
revenue from a higher per-play rate. As Dr. Shapiro opined, Majors have
a higher share of the overall plays on Pandora than the Merlin Labels
do, and thus they receive more in royalty income because that ``occurs
automatically under a per-play rate structure or a percent-of-revenue
structure with payments prorated according to label share.'' Shapiro
WDT at 37-38. The relevant question for purposes of rate-setting,
therefore, according to Dr. Shapiro, ``is whether the repertoires of
the [Majors] would command a higher rate per play or a higher percent-
of-revenue than the Merlin Labels in a workably competitive market.''
Id.
Pandora answers this question in the negative, for two reasons.
First, according to Dr. Shapiro, the empirical evidence demonstrates
that there is no greater promotional effect on the sale of songs from
the Majors (as compared to the Indies) from performances on Pandora to
support an upward adjustment to the Merlin benchmark. 5/19/15 Tr. 4623-
64 (Shapiro). Second, Pandora has the same ability to steer toward and
away from the repertoires of each of the Majors, just as it has done
with the Merlin Labels. See 5/19/15 Tr. 4624-30 (Shapiro); Shapiro WDT
Appendix F at F-6.\132\
---------------------------------------------------------------------------
\132\ Dr. Shapiro's conclusion that noninteractive services can
steer away from the Majors as well as the Indies is based upon
Pandora's ``steering experiments.''
---------------------------------------------------------------------------
To bolster this argument, Pandora notes that Dr. Rubinfeld's
analysis vis-[agrave]-vis his own interactive benchmark reveals that
Merlin receives essentially the same level of monetary consideration as
the Majors in the interactive market. Pandora concluded therefore that
the effective rates derived from the Pandora/Merlin Agreement
[[Page 26362]]
indeed can serve as benchmarks for the rates to be paid by the Majors.
See Pandora PFF ]] 158-163 (and citations to the record therein).
4. SoundExchange's Criticisms of the Pandora Rate Proposal
SoundExchange opposes the use of the Pandora/Merlin Agreement as a
benchmark in this proceeding. Its opposition is based upon several
principal arguments.
a. The Pandora/Merlin Agreement Creates New Rights and New Obligations
That Are Unavailable Under the Statutory License
SoundExchange asserts that the Pandora/Merlin Agreement does not
cover the same rights that are available under the statutory license
and also creates new obligations that are unavailable under the
statutory license. Specifically, SoundExchange avers that the Pandora/
Merlin Agreement contains the following extra-statutory rights and
duties:
[REDACTED];
[REDACTED];
[REDACTED];
[REDACTED];
[REDACTED];
[REDACTED];
[REDACTED]; and
[REDACTED].
See PAN Ex. 5014, Sec. Sec. 1(c)(v), Sec. 2(c) and 13; see generally
SX PFF ]] 559-562 (and record citations therein).
Given these differences between the Pandora/Merlin Agreement and
the statutory license, SoundExchange concludes that the former at best
is but a weak benchmark for the latter. See SX PFF ] 558 (quoting SDARS
II, 78 FR at 23064 (Apr. 17, 2013)) (Additional considerations and
rights granted in [a proposed benchmark] that are beyond those
contained in the Section 114 license weaken the [benchmark's]
``comparability as a benchmark.'').
b. Dr. Shapiro Failed Adequately To Value the Non-Statutory
Consideration and Thus Wrongly Failed To Increase His Benchmark
According to SoundExchange, not only is the Pandora/Merlin
Agreement a deficient benchmark, Dr. Shapiro also wrongly failed to
increase the value of that benchmark to reflect the value of the non-
statutory consideration in the Pandora/Merlin Agreement. SoundExchange
asserts that Dr. Shapiro instead focused only on the lack of value
attributed by Pandora to these other forms of consideration. See
Shapiro WDT App. D at 1; 5/19/15 Tr. 4670 (Shapiro). However,
SoundExchange notes that Dr. Shapiro acknowledged on cross-examination
that he thought it would be important to know Merlin's expectations as
to value in order to do a ``proper analysis'' of the value of the
Pandora/Merlin Agreement.'' Id. at 467-71. Moreover, SoundExchange
notes that the value analysis undertaken by Dr. Shapiro is not based on
Pandora's expectations that existed before the execution of the
Pandora/Merlin Agreement, but rather on the valuation evidence he
obtained from Pandora after the Pandora/Merlin Agreement had been
executed. Id. at 4669.
SoundExchange asserts that, had Dr. Shapiro considered the value
placed on these extra-statutory elements of consideration by Merlin and
its members, the total value of the consideration would have at least
equaled the existing Pureplay statutory settlement rates for 2014 and
2015. In support of this point, SoundExchange relies in substantial
measure on the testimony of one of Merlin's two chief negotiators of
the Pandora/Merlin Agreement, Charlie Lexton, Merlin's Head of Business
Affairs and General Counsel. SX Ex. 13 ] 1 (Lexton WRT). Mr. Lexton
testified that, in Merlin's view, the consideration provided to Merlin
members by the Pandora/Merlin Agreement was, ``at worst, no lower than
the compensation under the existing statutory rate paid by Pandora.''
Id. at 17.
More particularly, SoundExchange relies on the following evidence
and testimony with regard to items of extra-statutory consideration.
i. The [REDACTED] Provision and Merlin's [REDACTED]
According to SoundExchange, the evidence shows that Merlin and its
members placed a value on the [REDACTED] provision, because Merlin
obtained this provision through its negotiations with Pandora. 6/1/15
Tr. 6894-95 (Lexton). Specifically, Merlin had initially asked for
[REDACTED], which Pandora refused to provide, leading to this
[REDACTED] provision as an alternative to [REDACTED]. Id. Further, Mr.
Lexton testified that Merlin ``definitely'' would not have entered into
the Pandora/Merlin Agreement if the [REDACTED] provision had not been
part of the agreement. Id. at 6898-99.
Mr. Lexton said that this provision was important because Merlin
believed, after considering [REDACTED], that there was a reasonable
chance that [REDACTED] provision would be triggered, particularly
during Pandora's fourth quarter of 2014. 6/1/15 Tr. 6896-98 (Lexton).
Mr. Lexton further noted that Pandora offered Merlin the [REDACTED] the
Pandora/Merlin Agreement as a counterproposal to Merlin's proposal to
[REDACTED]. SX Ex. 310 at 1; 6/1/15 Tr. 6986 (Lexton). In the same
vein, Mr. Van Arman, co-founder and co-owner of the Indie record
company (and Merlin member) Secretly Group, testified that the presence
of the [REDACTED] provision was one of the reasons his labels opted-in
to the Pandora/Merlin Agreement. 6/2/15 Tr. 7172 (Van Arman).
ii. The [REDACTED] Provision
The Pandora/Merlin Agreement obliges Pandora to [REDACTED] to the
opting-in Merlin members. PAN Ex. 5014 Sec. 5. These [REDACTED] are
not available under the statutory license and are not replicated in
Pandora's rate proposal. SoundExchange notes that Mr. Lexton testified
that Merlin would not have entered into the Pandora/Merlin Agreement if
it had not contained these [REDACTED] commitments. 6/1/15 Tr. 6906
(Lexton). SoundExchange also notes that Pandora itself viewed the
[REDACTED] as a valuable [REDACTED] provision. See SX Ex. 310 at 2 (a
contemporaneous Pandora negotiating document, in which Mr. Herring
wrote: ``[REDACTED]'').
iii. Advertising/Promotional Benefits
Mr. Lexton testified that Merlin would not have entered into the
Pandora/Merlin Agreement if it had not included the advertising and
promotion benefits ultimately embodied in the agreement. 6/1/15 Tr.
6909 (Lexton). According to Mr. Lexton, these benefits clearly were of
value to Merlin's members. Id. at 6880. He explained that these
advertising and promotion provisions ``provided considerable value that
could not be replicated by the statutory license.'' SX Ex. 13 ] 43
(Lexton WRT).
In like fashion, Simon Wheeler, Director of Digital for another
Merlin member, Beggar's Group, testified that one of his company's
motivations for opting-in to the Pandora/Merlin Agreement was that it
afforded Beggar's Group the ability to ``tap into'' these promotional
opportunities that were unavailable under the statutory license. SX Ex.
31 ] 23 (Wheeler WRT).
SoundExchange also notes that Mr. Herring, one of Pandora's
negotiators, likewise recognized that these promotional tools had
potential value to Merlin, and, indeed, he acknowledged his awareness
that ``Merlin believed that [these provisions] added value.'' 5/18/15
Tr. 4275-76 (Herring). He further acknowledged his awareness that
Merlin had ``sold'' the promotional
[[Page 26363]]
benefits of the Pandora/Merlin Agreement ``pretty strongly'' to its
members. Id. at 4279; see SX Ex. 2237 at 1.
iv. Access to Data
When Pandora first proposed a direct license to Merlin, Pandora
offered Merlin and its members access to Pandora's internal data. SX
Ex. 104 at 5. The right to such access was embodied in the final
Pandora/Merlin Agreement. PAN Ex. 5014 Sec. 9. Mr. Lexton testified
that licensors do not have access to this type of data under the
statutory license. Lexton WRT ] 40.
Both Pandora and Merlin acknowledged that such data are valuable to
record labels generally. Westergren WDT at 16-17; SX Ex. 1736 at 5; 6/
2/15 Tr. 7157 (Van Arman); see 6/1/15 Tr. 7099-7100, 7106-07 (Simon
Wheeler) (Access to data is something Beggar's Group ``expect[s] of
[its] major direct licenses'' and is ``a part of every negotiation.'').
SoundExchange also criticizes the usefulness of the Pandora/Merlin
Agreement as a benchmark for more general reasons:
c. The Pandora/Merlin Agreement Is Unrepresentative of the Larger
Market
SoundExchange asserts that the Pandora/Merlin Agreement pertains
only to record companies that represent less than [REDACTED]% of
Pandora's performances and therefore cannot represent what the record
companies--including all three Majors--comprising Pandora's other
[REDACTED]% of performances, would negotiate for in the hypothetical
marketplace. SX RPFF ] 753; SX PFF ] 507 (both relying on Shapiro WDT
at 76). SoundExchange also avers that the Pandora/Merlin Agreement is
not sufficiently probative of the rates that Indies would agree to
voluntarily because the bulk of the Indies who opted-in [REDACTED]. 6/
1/15 Tr. 6860, 6865-66 (Lexton). SoundExchange also notes that roughly
30% of the Merlin labels that opted-in do not regularly operate in the
United States. 6/1/15 Tr. 6863-64 (Lexton). Additionally, Mr. Lexton
estimates that of the [REDACTED] or so Merlin members that opted-in
directly (rather than through distributors or aggregators),
approximately [REDACTED] have been affirmatively rejected by Pandora
for inclusion in the Merlin license, based on Pandora's [REDACTED]. Id.
at 6871.
d. The Pandora/Merlin Agreement Applies Only to a Single Webcaster With
Substantial Market Power
SoundExchange notes that the Pandora/Merlin Agreement applies to
only one licensee, Pandora, and the terms of that license were not
replicated in any other contract with any other licensee. SoundExchange
finds this point relevant because of Pandora's ``significant
competitive strengths'' among webcasters, including its 77.6% share of
internet radio listening. PAN Ex. 5012 at 11. According to
SoundExchange, this large market share afforded Pandora with market
power that was a meaningful factor in the negotiations of the license
with Pandora. See SX Ex.19 at 6, 24-27 (Talley WRT) (noting that Dr.
Shapiro failed to perform any analysis of meaningful allocations of
buyer-side power, including, for instance, whether Pandora's unique
position in the market affected the terms of the Merlin license.).
e. The Pandora/Merlin Agreement Was ``Experimental''
SoundExchange asserts that the Pandora/Merlin Agreement was merely
an ``experimental'' modification of the restrictions created by the
sound recording performance complement. SX PFF ]] 576-580 (and record
citations therein). At the hearing, Merlin characterized the Pandora/
Merlin Agreement as ``experimental.'' SX Ex. 13 ] 27 (Lexton WRT)
(describing the license as ``an exercise in experimenting with direct
licensing derived from the existing statutory rates''); see id. ] 25
(``Due to the fact Pandora offered us so many additional benefits and
other added value that is not required by their statutory license, we
understood this as an opportunity for experimentation given and within
the constraints imposed by Pandora's existing statutory rates.'');
Wheeler WDT ] 9 (``We knew from the start that this was a short-term
experiment. . . .'') (emphases added).
f. No Major Has Accepted a Similar Direct License With Pandora
SoundExchange emphasizes the absence of what might otherwise be an
important piece of evidence: No major record company has agreed to a
direct license with Pandora or any other webcaster on the same rates
and terms of the Merlin license. SoundExchange notes that this is
unsurprising, in that Pandora's C.F.O. Mr. Herring, acknowledged that
Pandora regularly had conversations with the Majors, but did not
replicate the terms of the Pandora/Merlin Agreement. 5/18/15 Tr. 4203
(Herring). In fact, Mr. Herring recognized that Pandora would have been
unable to negotiate the same terms with the Majors and would have to
offer the Majors better terms. 5/18/15 Tr. 4253 (Herring)
(acknowledging that he ``expected [to] . . . have to give more
favorable economic terms to a major record company than you would have
to give to an independent record company.'').
To drive home this point, SoundExchange contrasts the absence of
evidence of any agreement between a Major and Pandora with the record
evidence of the iHeart/Warner Agreement. SoundExchange notes that,
pursuant to the iHeart/Warner Agreement, SX Ex.33, per-play rates
(i.e., even before any potential inclusion of the value of other
consideration) range from $0.[REDACTED] to $0.[REDACTED] over the
[REDACTED] period, greater than the rates in the Pandora/Merlin
Agreement.\133\ From this evidentiary distinction, SoundExchange
concludes that the Services have not demonstrated that the rates in
licenses between noninteractive services and Majors would match the
lower rates in the Pandora/Merlin Agreement. SX PFF ] 654; see also id.
] 656 (asserting iHeart/Warner Agreement ``confirm[s] that major record
companies receive more consideration than independent record companies
when negotiating directly for licenses covering noninteractive
services.'').
---------------------------------------------------------------------------
\133\ SoundExchange also notes that [REDACTED]'s licenses with
[REDACTED], [REDACTED], and independent record companies for its
[REDACTED] service likewise demonstrate that the major record
companies receive considerably more consideration than independent
record companies. SX PFF ] 655, and Section XI.A therein (and record
citations therein).
---------------------------------------------------------------------------
g. The Steering Provisions in the Pandora/Merlin Agreement Are Not
Useful in Setting the Statutory Rate
SoundExchange rejects Pandora's foundational assumption that the
steering provisions of the Pandora/Merlin Agreement can be used to
determine the statutory rate. SoundExchange's rejection of steering as
a relevant benchmarking tool is based on several factors:
i. Steering Allegedly Creates ``First Mover'' Advantages That Cannot Be
Replicated for All Licensees
SoundExchange argues that as a matter of simple arithmetic a
webcaster cannot commit to steer to every record company or label,
because there is only a total of 100% subject to steering. As one of
its economic experts noted:
[[Page 26364]]
[A]n affirmative obligation to steer just can't be implemented
on a market-wide basis. It's just not possible for a service to say
I'm going to steer listenership towards each label that I contract
with.
5/27/15 Tr. 6070 (Talley).
Similarly, SoundExchange notes that an iHeart executive, Mr.
Cutler, recognized the impossibility of promising steering to all
record companies: ``Certainly, the share has to--its math has to add up
to--a hundred, so if someone goes from 20 to 30, the rest of the pool
must--those ten points must come from somewhere else.'' 6/2/15 Tr. 7239
(Cutler).
Thus, as Dr. Rubinfeld noted, the steering provisions provided
Merlin with ``first mover'' advantages. Rubinfeld CWRT ] 70.
SoundExchange concludes therefore that Pandora cannot escape from this
``quandary'' by discarding the [steering commitment], yet retaining the
[discounted rates] from the Pandora/Merlin Agreement. According to
SoundExchange, discarding the [steering commitment] would separate the
rate in the agreement from the specific bargained-for consideration
that Merlin obtained in exchange for that rate. SX RPFF ] 764.
ii. Revenue From Steering Is a Valuable Benefit Not Available Under the
Statutory License
SoundExchange asserts that the steering provision provides Merlin
with a financial advantage that cannot be duplicated under the
statutory scheme. Therefore, SoundExchange avers, Pandora's proposed
benchmark must be adjusted upward to reflect that this non-statutory
value, like all non-statutory consideration, permitted a reduction in
the benchmark royalty rate. See SX PFF ]] 701-708 (and citations to the
record therein).
iii. Pandora Has Not Provided Support for Its Claim That a ``Threat''
of Steering Will Lead to Lower Rates
SoundExchange challenges Dr. Shapiro's assertion that, in the
hypothetical market, the ability of a noninteractive service to steer
among record companies would necessarily create a ``threat'' of
steering that would cause rates to decline to an effectively or
workably competitive level. SoundExchange asserts that the record is
bereft of any benchmark agreement that reflects a ``threat of
steering,'' let alone that a ``threat of steering'' had allowed a
noninteractive service to obtain a lower rate. See SX PFF ]] 609, 709.
iv. Pandora Did Not Test Steering Under ``Real-World'' Conditions
SoundExchange argues that Pandora failed to test steering under
real-world conditions, because there is no evidence that listeners were
ever aware that steering was occurring. More particularly,
SoundExchange points out that Pandora has yet to experience any
potential negative listener reaction that may arise if and when
competitors advertise that Pandora has modified its algorithm in a
manner that contradicts its long-standing claim to play ``only the
music listeners want'' \134\ in order to save money on royalty rates.
See 5/19/15 Tr. 4775 (Shapiro) (admitting that Pandora did not test how
people would react to learning ``that Pandora was factoring in royalty
rates [in] how they constructed the playlist.''). Indeed, Dr. Shapiro
``worried about'' the question whether a competitor could use such an
advertisement to ``magnify'' a negative reaction to steering. Id. at
4635-36. Because successful steering in the real world depends on
consumer reactions, SoundExchange concludes that Pandora has failed to
demonstrate a credible threat of steering.
---------------------------------------------------------------------------
\134\ Timothy Westergren, Pandora's founder, had publicly stated
that Pandora's recommendations would ``be based on the genome, they
will never be based on somebody buying the space.'' SX Ex. 2369 at
1. In fact, Mr. Westergren explained in 2013 that ``[t]he only thing
that drives what song [Pandora] play[s] next for a listener is
trying to deliver the best possible listening experience for that
individual.'' Id. at 3.
---------------------------------------------------------------------------
Additionally, SoundExchange notes that Pandora has been unable to
generate as much ``real world'' steering as it intended under the
Pandora/Merlin Agreement. Specifically, the evidence actually shows
that Pandora has not achieved the [REDACTED]% steering target for most
Merlin labels. 5/19/15 Tr. 4676-16 (Shapiro). Dr. Shapiro also admitted
that, as of November 2014, Pandora had been unable to achieve the
[REDACTED]% target for ``a good number'' of record labels. Id.
Moreover, for [REDACTED]% of Merlin labels, Pandora's steering has been
negative. SX Ex. 2310.
From these facts, SoundExchange concludes that Pandora has failed
to provide sufficient real world evidence regarding its ability to
steer, demonstrating a disconnect between the theoretical case it has
presented and the realities it faces in the marketplace.
v. A Record Company Could Rebuff a Steering Proposal by Withholding Its
Entire Repertoire
SoundExchange argues that a record company could respond to a
steering threat by refusing to license 100% of its repertoire to
Pandora. In support of this position, SoundExchange quotes Dr. Shapiro,
who acknowledged that ``a record company with market power'' could use
that power to disable a webcaster's threat of steering. 5/19/15 Tr.
4576-77 (Shapiro). Dr. Talley similarly noted that, ``in the
hypothetical market where there is no background statutory rate . . . a
label might say, okay, if you're going to [steer against us], we may
just walk away. . . .'' 5/27/15 Tr. 6074 (Talley); see also 5/1/15 Tr.
1429 (Harleston) (``If a service were to say we're just not going to
play your records because it costs too much, the reality is we can go--
we have other choices. We could lean into other services.'').
SoundExchange finds support for this position because the Services'
economic experts declined to conclude that the Majors were not ``must
haves'' for noninteractive service. See 5/11/15 Tr. 2989-90 (Katz)
(``Q. Is it fair to say that you . . . believe that the [M]ajors are
must-haves for customized services such as Pandora? A. I would say I
believe that's a possibility, yes.''); 5/19/15 Tr. 4582 (Shapiro) (Dr.
Shapiro testified that he was ``offering no opinion whether the
[M]ajors are must-have for Pandora.'').
vi. Record Companies Can Utilize Contract Clauses To Thwart Steering
SoundExchange asserts that it can contract around a noninteractive
service's proposal or threat to steer by insisting upon a specific
anti-steering clause or a more general ``Most Favored Nation'' (MFN)
clause.\135\ See SX Ex. 25 ]] 14-19 (A. Harrison WRT) (``UMG has long
recognized in our negotiations with interactive services that they have
the ability to steer users away from UMG music through the music they
feature and recommend through the service thereby decreasing our plays
on the service and the revenue that flows to UMG and its artists. . . .
We therefore have negotiated for protections against such steering. . .
. [I]f we did not have these commitments the interactive services could
effectively steer users toward other record labels artists and sound
recordings through the music they highlight.''); accord, 4/28/15 Tr.
455-56 (Kooker); 4/30/15 Tr. 1144-45 (Harrison); 6/2/15 Tr. 7202-05
(Harrison); 5/7/15 Tr. 2487-88, 2490-93 (Wilcox) (all acknowledging on
behalf of major record companies that anti-steering provisions are
commonly used
[[Page 26365]]
in their agreements with the on-demand services).
---------------------------------------------------------------------------
\135\ ``In general, an MFN clause is a contractual provision
that requires one party to give the other the best terms that it
makes available to any competitor.'' U.S. v. Apple, Inc., 791 F.3d
290, 304 (2d Cir. 2015).
---------------------------------------------------------------------------
Several such anti-steering contract clauses were in evidence in the
proceeding:
The agreement between [REDACTED] and [REDACTED] contains
an anti-steering clause that prevents [REDACTED] from steering towards
lower-priced music, including on playlists, if that steering would
result in lowering [REDACTED]'s share of total plays to a level that is
less than [REDACTED]'s market share. SX Ex. 37; see also 6/2/15 Tr.
7202-06 (Harrison);
The agreement between [REDACTED] and [REDACTED] contains
an anti-steering provision to prevent [REDACTED] from steering
listeners away from [REDACTED] content and towards that of another
label. 4/30/15 Tr. 1145 (Aaron Harrison);
Mr. Harrison testified that [REDACTED]; 6/2/15 Tr. 7206
(Aaron Harrison); see Harrison WRT ]] 15-16; SX Ex. 36 ] 7;
The agreement between [REDACTED] and [REDACTED] prohibits
[REDACTED] from promoting another label's repertoire if it would then
exceed its market share, unless Spotify offers the same increase in
market share to [REDACTED]. SX Ex. 80 at 25537-38; see 4/28/15 Tr. 455-
56 (Kooker). The practical effect of the clause is to prohibit
[REDACTED] from increasing another label's promotional opportunities
above its market share if that would lower [REDACTED]'s promotional
opportunities to below its market share. 4/28/15 Tr. 456 (Kooker);
The agreement between [REDACTED] and [REDACTED] contains
an anti-steering provision that guarantees [REDACTED] will get
[REDACTED] equivalent to its market share [REDACTED]. The provision
further provides that if any other record company receives an
``uplift'' over its Soundscan market share, [REDACTED] will receive the
same ``uplift.'' SX Ex. 343 at 20; SX Ex. 1814 at 26; SX Ex. 346 at 5;
see 5/7/15 Tr. 2490-93 (Wilcox).
More broadly, as noted above, SoundExchange asserts that, as in the
interactive market, the Majors could insist upon a general MFN clause
in each contract with a service, which would ensure that each Major
gets the benefit of the rates and terms set forth in the service's
contracts with the other Majors. See 4/28/15 Tr. 449-450, 542 (Kooker);
4/30/15 Tr. 1142 (Harrison); 5/7/15 Tr. 2473 (Wilcox). Several such MFN
contract clauses were in evidence in the proceeding:
The agreement between [REDACTED] and [REDACTED] contains
an MFN provision providing that if [REDACTED] enters into an agreement
with another major record label that provides more favorable terms for
that label regarding specified key provisions (including [REDACTED]),
then [REDACTED] must notify [REDACTED] of those more favorable terms
and give [REDACTED] the option to avail itself of those terms. SX Ex.
80 at 25542-43; PAN Ex. 5091; see also 4/28/15 Tr. 447-50 (Kooker);
The agreement between [REDACTED] and [REDACTED] contains
an MFN providing that if [REDACTED] grants another label more favorable
financial terms, then [REDACTED] must also offer those terms to
[REDACTED]. SX Ex. 36; see also 4/30/15 Tr. 1142-44 (Harrison)
(``[REDACTED]'');
The agreement between [REDACTED] and [REDACTED] contains
the equivalent of an MFN provision (an ``equal treatment'' clause) by
which [REDACTED] warrants that it has not provided [REDACTED] to
another label. In the event that [REDACTED] has violated this warranty,
the [REDACTED] clause permits [REDACTED] to receive an immediate
[REDACTED] to match the superior terms. SX Ex. 343; see also 5/7/15 Tr.
2474-79 (Wilcox).
vii. Record Companies Could Thwart Steering by Requiring Up-Front Lump
Sum Royalties
SoundExchange notes that, as Dr. Katz candidly acknowledged, a
record company could neutralize a steering threat by seeking a lump sum
payment instead of per-play rates. 5/11/15 Tr. 3015-6, 3019-20
(Katz).\136\
---------------------------------------------------------------------------
\136\ The dynamic economic effect of an up-front lump-sum
royalty payment is discussed elsewhere in this determination.
---------------------------------------------------------------------------
h. Merlin's Economic Interests Were Not Fully Aligned With Those of Its
Members
SoundExchange addresses what it suggests may be conflicts of
interest as between Merlin and its distributor/aggregator-members, on
the one hand, and the Merlin label members, on the other. First, Merlin
and the distributors/aggregators typically receive [REDACTED] from
members only if that member has opted-in. Second, Pandora paid Merlin a
license fee directly that would vary, up to $375,000 (but in any event
no less than $250,000), depending upon the Merlin members [REDACTED].
SX Ex. 13 ] 56 (Lexton WRT). Thus, SoundExchange avers that Merlin had
economic incentives to complete the Pandora/Merlin Agreement and to
urge its members to opt-in--incentives that were not necessarily
consistent with the interests of its members.
i. Pandora Has Been Unable To Perform Its Contractual Obligations
SoundExchange avers that, even assuming the Pandora/Merlin
Agreement otherwise had merit as a potential benchmark, Pandora has
been unable to perform its contractual obligations. In this regard,
SoundExchange notes the following problems that have hindered Pandora's
ability to perform its contractual duties.
Staffing and capacity constraints;
lack of reporting and payments,
a low fraction of labels who are receiving payments
pursuant to deal;
a low participation in the [REDACTED] program; and
a low percentage of labels receiving steering at or above
[REDACTED]%.
SX Ex.1748 at 2 ; SX Ex. 2310.
SoundExchange further notes that Mr. Herring candidly acknowledged
that Pandora had waited until after it executed the Pandora/Merlin
Agreement to determine the actual cost to Pandora of performing its
contractual duties. 5/18/15 Tr. 4280 (Herring). Afterward, Pandora's
Chief Scientist estimated that Pandora would incur an annual cost of
$[REDACTED] for the ``initial build'' and $[REDACTED] annually in
``ongoing support maintenance.'' Id. at 4282; SX Ex. 1706 at 1. Pandora
calculated internally that, just to provide the opting-in Merlin
members with the contractually promised access to data, Pandora would
incur $[REDACTED] in initial costs and $[REDACTED] in ongoing annual
costs. Id. at 20. Similarly, Pandora would need to spend almost
[REDACTED] dollars in initial costs and $[REDACTED] in annual costs to
[REDACTED], two of the advertising benefits contained in the Pandora/
Merlin Agreement. Id.
SoundExchange notes that these implementation issues have
``impacted negatively'' the willingness of Merlin members who opted-in
to consider entering into this license in any future period. For
example, Mr. Van Arman testified that, [REDACTED] 6/5/15 Tr. 7158 (Van
Arman); see also 6/1/15 Tr. 7104-10 (Simon Wheeler) (detailing
implementation issues and concluding [REDACTED].
5. Judges' Conclusions Regarding Pandora's Benchmark Evidence
For the reasons set forth below, the Judges find that the
noninteractive benchmark proposed by Pandora is informative as to the
rates they shall set in this proceeding for a particular segment of the
noninteractive marketplace. That is, the Pandora benchmark is probative
of the two distinct royalty rates that a
[[Page 26366]]
noninteractive service would pay to Indies in the: (1) Ad-supported
(free-to-the-listener) market; and (2) the subscription market,
respectively.
Pandora's proposed benchmark is premised principally on the
provisions of the Pandora/Merlin Agreement. SoundExchange raises two
principal challenges to Pandora's benchmark: (1) The ability, vel non,
of a noninteractive service to ``steer'' or credibly ``threaten'' to
steer in the hypothetical market; and (2) the potential value of other
(non-steering) elements of consideration Pandora provided to Merlin
that might offset the lower stated rates, thus leaving the effective
rate unchanged from the nonprecedential statutory Pureplay Settlement
rate.
In light of the importance of these two issues, the Judges first
analyze these two contentious points, followed by a discussion of
SoundExchange's other objections to Pandora's benchmark proposal.
a. ``Steering'' as a Mechanism for Achieving Effective Competition in
the Hypothetical Market
i. Could a noninteractive service steer and credibly threaten to steer
in the hypothetical market?
SoundExchange argues that steering creates merely a ``first mover''
advantage for those licensors who are able to enter into steering
arrangements before their competitors are able to obtain such
advantages. This argument is seductively simple: In its essence, it is
based on the elementary proposition that no noninteractive service can
steer more than 100% of its sound recordings. To take a simple example,
assume there are three Majors, U, S, and W, and one Indie, M. Assume
the ex ante steering allocation of plays was 40% for U, 30% for S, 20%
for W and 10% for M, and all plays were priced at $0.0020. Now, the
noninteractive service strikes a deal with M to increase plays of M's
sound recordings by 50% over the ex ante percentage, in exchange for,
say, a 10% reduction in per-play rates to only M. Then, M's
noninteractive market share increases by 50% from 10% to 15% (while its
per-play rate declines by only 10%, resulting in more revenue for M ex
post steering). As a ``first mover,'' M thus benefits.
However, the noninteractive licensee cannot promise all three other
licensors, U, S, and W, the same 50% increase in plays via steering in
the same contract period. If it did, U would realize a market share
increase from 40% to 60%; S would realize a market share increase from
30% to 45%; and W would realize a market share increase from 20% to
30%. All four licensors, including M, would thus be promised 60% + 45%
+ 30% + 15% = 150%.
SoundExchange's point is that, by definition, it is mathematically
impossible for a noninteractive licensor to allocate more than 100% of
its plays. Thus, SoundExchange concludes, steering can only work in a
non-statutory setting and, even then, never for all licensors. See 5/
28/15 Tr. 6301 (Rubinfeld); see also 5/27/15 Tr. 6070 (Talley)
(``[I]t's almost like a Lake Wobegon effect, that not everyone can be
above average, not everyone can receive steering.'').
This argument of course, in the static sense, is mathematically
correct. But, in the dynamic sense, is it economically correct? Dr.
Shapiro, for Pandora, responded to this argument in the following
colloquy with the Judges regarding the ``threat'' of steering:
[THE JUDGES]
Let's . . . take . . . the market we're dealing with here [and]
address the first-mover criticism . . . that well, sure, you can
steer to . . . record company A . . . but you can't steer to all of
them because you can't play more than 100 percent of the music. Is
it . . . the threat of steering that pushes everybody . . . towards
their original percentages to avoid being that odd man out who was
the holdout for the higher price?
[DR. SHAPIRO]
That's exactly--yes, absolutely. The competitive outcome is when
each of the record companies is at a rate where they're . . . not
disadvantaged relative to the other guys . . . . This notion that
you can't steer, the 100% thing, it's kind of offensive to an
antitrust economist . . . because it's basically saying . . . price
competition is some horrible thing.
5/19/15 Tr. 4561-63 (Shapiro); see Shapiro WDT at 9 (noting that the
``net result'' of steering ``in a workably competitive market may well
be relatively little actual steering.''). Dr. Shapiro further notes
that, in the absence of steering, ``[y]ou would be basically going to
the rate that a cartel or monopolist would set.'' 5/19/15 Tr. 4575
(Shapiro).
The Judges find that steering in the hypothetical noninteractive
market would serve to mitigate the effect of complementary oligopoly on
the prices paid by the noninteractive services and therefore move the
market toward effective, or workable, competition. Steering is
synonymous with price competition in this market, and the nature of
price competition is to cause prices to be lower than in the absence of
competition, through the ever-present ``threat'' that competing sellers
will undercut each other in order to sell more goods or services.
This process does not result, as some record industry witnesses
suggested, in a ``race to the bottom.'' \137\ Rather, it typifies a
``race'' to a workably or effectively competitive price. On the
licensees' side of the market (the buyers' side), the limit on the
demand for lower rates through steering is reached when the
noninteractive service is no longer in a position to make further
substitutions of one record company's sound recordings for another's
because the potential for lost revenues exceeds the cost savings.\138\
On the licensors' side of the market (the sellers' side), the limit on
the willingness to supply recordings at reduced rates is reached when
the licensor determines that any further reduction in the rate will not
be sufficiently to cover all marginal and recurring fixed costs
(including opportunity costs) for its particular repertoire. (This is
essentially stating in words the fundamentals of the Lerner Equation
discussed at note 123 supra).
---------------------------------------------------------------------------
\137\ See, e.g., Van Arman WDT at 14.
\138\ The existence and identification of such a limit was the
point of Pandora's steering experiments.
---------------------------------------------------------------------------
Because the Judges are utilizing the benchmark approach to rate
setting--as both SoundExchange and Pandora endorse--the limits to
steering (like the value of promotion and substitution) are implicit in
(``baked-in'') the terms of the relevant benchmarks. That is, Pandora
and Merlin entered into their agreement because each concluded that its
steering terms were advantageous.\139\
---------------------------------------------------------------------------
\139\ Likewise, iHeart and Warner entered into their steering-
based agreement because it was mutually advantageous. By
``advantageous,'' the Judges are noting the essence of the willing
buyer/willing seller paradigm--that sophisticated commercial buyers
and sellers are presumed to act rationally in their self-interest
when entering into agreements that are not coercive.
---------------------------------------------------------------------------
SoundExchange argues that, even if the threat of steering could
cause a reduction in rates in the hypothetical noninteractive market,
the Services have not provided any proof of an actual threat of
steering in the direct noninteractive licensing market, but rather have
presented only evidence of actual (not threatened) steering. See, e.g.,
5/27/15 Tr. 6076 (Talley) (``[N]ot one of these transactions . . . is
either negotiated in the shadow of a threat to steer away or negotiated
with an undertaking to steer away. It's in the opposite direction . . .
a promise to steer towards . . . as opposed to away from. . . .'').
SoundExchange's argument is unpersuasive, for two reasons. First,
the evidence shows that Merlin members opted-in to the Pandora/Merlin
Agreement specifically because they anticipated that Pandora might
enter
[[Page 26367]]
into steering agreements with other record companies, including the
Majors. In fact, SoundExchange's' own witness testified that it was in
his record company's self-interest to act ``defensive[ly]'' to enter
the Pandora/Merlin Agreement, in light of the fact that Pandora might
enter into ``similarly structured deals'' with other record companies.
4/28/15 Tr. 610-11 (Van Arman); see 6/1/15 Tr. 6963 (Lexton). These
facts reflect the general power of steering as a threat in the
marketplace.
The Judges also find unpersuasive the criticism by SoundExchange
that there is no record evidence of direct noninteractive agreements
that were forged solely through a threat of steering. The point of the
steering argument is to demonstrate what would transpire in the
hypothetical effectively competitive market in which no statutory rate
existed--not to demonstrate that a particular form of agreement is
pervasive in the market with the extant statutory rate.\140\ It is
imperative not to confuse the hypothetical market with the actual
regulated market.\141\
---------------------------------------------------------------------------
\140\ One reason why steering is not yet more widespread in the
market, as Dr. Shapiro noted, is that noninteractive services have
developed the steering technology only in the past few years since
the Web III proceeding. Shapiro WDT at 15 (``Pandora has now tested
and proven its ability to modify its playlist-selecting algorithms
to rely more or less heavily on the music of particular record
companies.'') (emphasis added). Now that this technological genie is
out of the bottle, the Judges cannot minimize its impact in the
hypothetical market.
\141\ By way of comparison, Dr. Rubinfeld's ``ratio equality''
benchmark royalty rate likewise does not ``exist'' in the actual
market. Rather, he derived that benchmark rate by: (1) Looking at
market data from direct licenses; and (2) applying his economic
expertise to express certain economic opinions regarding the
necessary equality of the revenue-to-royalty ratio in the
interactive and noninteractive markets. (As noted infra, Dr.
Rubinfeld's ``assumption'' was revealed at the hearing to be
premised on a model that serves to limit its applicability.). So too
the steering-based proposed royalty rate is based on a benchmark
analysis that is tied to certain expert economic opinions regarding
market behavior. The Judges must weigh and apply ``economic . . .
information presented by the parties'' as the bases for their rate
determinations, 17 U.S.C. 114(f)(2)(B), and therefore the expert
opinions set forth by the parties' economists as to how the
hypothetical market will perform are vital aspects of the record to
be considered by the Judges. More broadly, the Judges note that the
benchmarking approach, while highly instructive, is not the sole
method for ascertaining the statutory rate--indeed, the statute does
not require the Judges to utilize the benchmark approach. Here, the
threat of steering has been demonstrated by a combination of
benchmarks, experiments and expert economic theorizing using
fundamental principles of profit maximization and opportunity cost.
This combination of proofs and arguments is actually more persuasive
to the Judges than a mere benchmark standing alone.
---------------------------------------------------------------------------
Moreover, the Judges find the economic opinion expressed by Dr.
Shapiro--equating steering with price competition--to be correct. The
ability of noninteractive services to steer toward lower priced
recordings (and, by necessity therefore, away from higher priced
recordings) is the essence of price competition. With Pandora (and
iHeart) having demonstrated the capacity and willingness to steer in
this manner, it would be economically irrational for the other record
companies (that had not agreed to steering) to maintain their position
and incur losses. To assume that record companies would ignore the
``opportunity cost'' of steering away from their repertoires would be a
fundamental economic mistake. See 5/4/15 Tr. 1516-17(Lys) (emphasizing
that ``opportunity costs are real costs'').
Dr. Shapiro's point regarding the economic ``threat'' posed, now
that steering is technologically possible, can be made clear through a
hypothetical example:
Assume a Licensee was paying a market price of $0.0020 and
historically (``naturally'') played 1,000,000 of its total number of
songs from Licensor A, thus paying $2,000 to Licensor A.
Now, assume the Licensee and Licensor A enter into a
``steering'' deal, whereby Licensee promises to play an additional
200,000 songs whose copyrights are owned by Licensor A, representing a
20% increase over the historical (``natural'') quantity of 1,000,000
noted above.
In exchange, Licensee demands, and Licensor agrees, that
Licensor A will receive less than $0.0020 per play, specifically, 10%
less, i.e., only $0.0018.
Compare the two scenarios:
Before steering, the money exchanged equaled $2,000.
After steering, the money exchanged is more, $2,160
(1,200,000 units x $0.0018).
That is clearly a benefit to Licensor A, who has made an additional
$160 ($2160-$2000).
The corresponding benefit to Licensee arises from the fact that it
can now--ex post steering--play 1,200,000 songs at $0.0018 per song for
a total cost of $2160. Ex ante steering, Licensee would have been
required to pay the old market price of $0.0020 per song to another
Licensor (call it Licensor B) for those 200,000 songs (which equals
$400), plus the $0.0020 Licensee also paid to Licensor A ex ante
steering for 1,000,000 songs (which equals $2,000), for a sum of $2,400
for 1,200,000 songs. Thus, Licensee has saved $240 in costs ($2,400-
;$2,160). Since there is no ``free lunch,'' who loses? The loser is
Licensor B, who has lost the revenue from the foregone licensing of
200,000 songs.
How can Licensor B avoid this loss? By responding to this steering
by competing on price and lowering its own price to $0.0018.
How can Licensee obtain the lower price of $0.0018 without any
actual steering? By threatening to steer and thereby compelling
Licensors A and B to compete for Licensee's business by offering to
accept a price of $0.0018. Moreover, if Licensor B incurs the loss
described above in one contracting period, that loss serves as the
``threat'' necessary to avoid such losses in the subsequent contracting
periods by also entering into an appropriate steering arrangement.
Will there be a ``race to the bottom?'' No. The so-called
``bottom'' will be marked by the rate that equates: (1) An acceptable
return to the Licensors given their costs (including opportunity costs)
and the differentiated values of their repertoires; and (2) an
acceptable return to the Licensee by steering as far as possible (but
no further), as limited by the potential loss of revenue if steering
interferes with revenue as a consequence of an inferior mix of sound
recordings.
ii. Is steering in the hypothetical market sufficient to establish an
``effectively competitive'' rate?
The Judges conclude, based on the record evidence and expert
testimony, that the injection of steering into the hypothetical market
provides for the ``effective competition'' that the law requires. Both
Dr. Shapiro and Dr. Katz opined, and the Judges agree, that effective
or workable competition arises when licensees have the reasonable
(albeit still constrained) ability to select sound recording inputs
based upon price.
The injection of steering into the hypothetical market can occur in
two ways, as it has in this determination. First, as in the case of the
Pandora/Merlin Agreement (and the iHeart/Warner Agreement discussed
infra), steering is incorporated by adopting a benchmark that
explicitly includes steering. Second, a steering adjustment can be made
to a benchmark rate that is not otherwise effectively competitive. Such
is the case with SoundExchange's interactive benchmark, which needs a
steering adjustment in order to eliminate the ``complementary
oligopoly'' effect discussed supra. The Judges note that adjustments to
benchmark rates have regularly been made in Sec. 114 proceedings--and
indeed are required to be made--in order to allow the benchmark to
correspond to the hypothetical market required by the statute. Here, as
concluded supra, the
[[Page 26368]]
Judges have found as a matter of law that Sec. 114 requires that they
set a rate which is effectively competitive. Thus, the steering
adjustment is of a class with any other adjustments necessary to
harmonize the benchmark rate with the statutory requisites. See Web II,
72 FR at 24092 (noting the Judges' duty ``to determine if the benchmark
agreements require any further adjustments based on any evidence of
differences between the benchmark market and the target hypothetical
market.'').
It is important to emphasize the limited nature of this sort of
effective competition. Price competition through steering does not
diminish the stand-alone monopoly value of any one sound recording.
Further, effective competition through steering does not diminish the
firm-specific monopoly value of each Major's repertoire taken as a
whole. Although Dr. Katz urged the Judges to reduce the statutory rate
to eliminate that market power as well, Katz WDT ] 43, the Judges
decline to do so. There is absolutely no record evidence to suggest
that the market power that a Major enjoys individually by ownership of
its collective repertoire is in any sense the consequence of improper
activity or that it is being used individually by a Major to diminish
competition. That is, the Judges have no evidence before them to
demonstrate that the Majors' size and individual market power is not
the result of the efficiencies and economies of scale and/or their
superior operations. See generally, Harold Demsetz, Industry Structure,
Market Rivalry, and Public Policy, 16 J.L. Econ. 1, 3 (1973) (noting
that ``scale economies,'' ``[n]ew efficiencies'' and ``superior
ability'' can form a ``competitive basis acquiring a measure of
monopoly power''). In the absence of evidence that the Majors' market
shares preclude effective competition, the Judges have no basis on this
record to adjust rates lower to reflect that market concentration.
This holding must not be confused with the Judges' holding
regarding the anticompetitive effects of the complementary oligopoly
that exists among the Majors. Because the Majors could utilize their
combined market power to prevent price competition among them by virtue
of their complementary oligopoly power--as proven by the evidence of
the pro-competitive effects of steering and the admissions of Universal
and its agents discussed supra, section IV.B.3--the Judges must
establish rates that reflect steering, in order to reflect an
``effectively competitive'' market.\142\ Indeed, even economists quite
unwilling to assume that a given monopoly or oligopoly structure is
inefficient and anticompetitive bristle at the idea that supranormal
pricing arising from a complementary oligopoly is reflective of a well-
functioning competitive market. See, e.g., Francesco Parisi and Ben
DePoorter, The Market for Intellectual Property: The Case of
Complementary Oligopoly in The Economics of Copyrights: Developments in
Research and Analysis (W. Gordon and R. Watt eds. 2003) (noting the
economic benefits of blanket licenses in reducing the greater-than-
monopoly pricing of complementary oligopolists); Mark Lemley and Philip
Weiser, Should Property or Liability Rules Govern Information? 85 Tex.
L. Rev. 784, 786-87, 824 (2007) (comparing the ``hold up'' (``rent
seeking'') strategies of copyright owners seeking supranormal
complementary compensation and of the owner of a parcel of real
property that is complementary to multiple other parcels required for a
large scale development, and noting that a compulsory license with a
royalty rate set by a regulatory authority (noting the CRB by name) can
``minimize the opportunity for rent-seeking behavior'').
---------------------------------------------------------------------------
\142\ The Judges' findings on this issue are not only consonant
with the expert opinions of Drs. Shapiro and Katz, but are also
consistent with the expert economic testimony of SoundExchange's own
witness in Web III, Dr. Ordover. See Web III Remand at 23114
(summarizing Dr. Ordover's testimony as concluding that ``if the
repertoires of all [Majors] were each required by webcasters (i.e.,
if the repertoires were necessary complements) . . . each [Major]
would have an incentive to charge a monopoly price to maximize its
profits . . . constitut[ing] higher monopoly costs . . . paid by
webcasters to each of the [Majors].'') (emphasis added). The Judges
in this determination adopt this economic reasoning and will not
allow such complementary oligopoly power to be incorporated into the
statutory rate.
---------------------------------------------------------------------------
iii. Did Pandora test steering under ``Real World'' conditions?
The Judges do not agree with SoundExchange's criticism that the
impact of steering is uncertain because listeners were unaware that
such steering was being undertaken. The Judges reach this conclusion
for three reasons.
First, there is no evidence that Pandora, or any noninteractive
service, obtains and retains listeners by describing in any detail the
technical methodology it uses to select songs. The purpose of a
streaming service is to provide songs to listeners--if they enjoy the
music they will be satisfied, if they do not enjoy the music they will
be unsatisfied, to the commercial detriment of the service. While it is
true that Pandora promotes its service as playing only the music the
listener wants to hear, the proof of the pudding, so to speak, is in
the listening, not in the puffery used in advertising.
Second, it is clear that Pandora has not taken any steps to conceal
that it has engaged in such steering or that it intends to do so going
forward. In the present proceeding, the parties had the ability, which
they exercised with regularity, to enter into closed session to avoid
public disclosure of commercial information they intended to maintain
as confidential. However, at no time did Pandora attempt to close the
proceedings to prevent the public from learning of the introduction of
steering into its music delivery model. The Judges note that no
competing service has advertised against Pandora or iHeart, attacking
its use of steering. 5/19/15 Tr. 4775-76 (Shapiro). Thus, the evidence
is not sufficient to indicate that Pandora would suffer an economic
loss merely from listener awareness that Pandora engages in steering.
Third, although the extent of the steering may be economically
significant to the licensors and licensees, the extent of steering at
issue in this proceeding may have little noticeable impact on
listeners. For example, consider the result if, hypothetically, a
noninteractive service were to steer away from Major A (which had a
pre-steering natural (historic) play rate of 40% on that service) by
12.5%.
Ex ante steering, the copyright on 4 in every 10 songs played on
that noninteractive service was owned by Major A. Steering away from
Major A by 12.5% would reduce Major A's play rate by 5 percentage
points (12.5% of 40% is 5 percentage points). Thus, ex post steering,
Major A's songs would constitute 35% of the plays on this
noninteractive service instead of 40% of the plays.
Consider a consumer who listened to this noninteractive service for
a period of time sufficient to hear 20 songs.
Ex ante steering, the consumer would have heard 8 songs from Major
A's repertoire (40% x 20 songs = 8 songs).
Ex post steering, the consumer would have heard 7 songs from Major
A's repertoire (35% x 20 songs = 7 songs).
The one replacement song from another record company's repertoire
would not be a random song, but rather would be the song the algorithm
or tastemaker selected after disqualifying the eighth song from Major
A.\143\ The
[[Page 26369]]
issue thus is whether such a change in song delivery would diminish
listenership to a noninteractive service to a point that would be
economically harmful to the service, thus dissuading the service from
steering. In fact, Pandora presented evidence regarding this issue, to
which the Judges now turn.
---------------------------------------------------------------------------
\143\ In his oral testimony, Dr. Shapiro utilized another
example, assuming a 15% steering ``boost'' to a Major with a prior
``natural'' performance rate of 20%. According to Dr. Shapiro, such
a steering change would have ``almost no perceptible impact on the
listening experience, as it would entail a change in ``one [song]
out of 30'' or ``one song every couple hours.'' 5/19/15 Tr. 4630-35
(Shapiro) (and also explaining that steering need not result in a
change with regard to the seeded song or artist, but rather would
affect only subsequent songs played on the listener's station).
---------------------------------------------------------------------------
iv. What is the impact of Pandora's Steering under the Pandora/Merlin
agreement and in Pandora's Steering experiments?
Pandora's steering under the Pandora/Merlin Agreement, which
guarantees a [REDACTED]% level of steering, has not resulted in any
negative feedback or other deleterious consequence for Pandora.
Likewise, the series of steering experiments conducted by Pandora
indicated that Pandora could steer away from or toward a Major's
repertoire by a change of 15% without causing a
statistically significant change in listening behavior. McBride WDT ]
21.
Importantly, SoundExchange levels no criticisms at Pandora's
steering experiments, save to make the point, rejected above, that the
experiments did not reflect ``real world'' conditions. See SX RPFF ]]
780-784 (and record citations therein).\144\ The Judges likewise fail
to identify any problems with regard to Pandora's steering experiments.
Thus, the evidence is undisputed that Pandora can steer at least 15% of its music toward or away from the Majors without a
negative impact on listenership.\145\
---------------------------------------------------------------------------
\144\ This is a curious criticism of an economic experiment. By
its very nature, an economic experiment, or an economic model, is
intentionally not designed to replicate real world conditions, but
rather to isolate certain conditions of the real world for testing
and to hold the other conditions constant. The particular condition
that SoundExchange claims the steering experiments held constant--
listener knowledge of steering in the algorithm--seems wholly beside
the point to the Judges. To state the obvious, consumers listen to
noninteractive services because of the quality of the music, not
because of their interest in what goes into the algorithmic ``black
box.'' If the music is of poor quality, then listeners will vote
with their feet--or, more correctly,--with their ears.
\145\ iHeart did not run experiments regarding its steering of
sound recordings [REDACTED]. However, iHeart [REDACTED] and received
complaints from noninteractive custom listeners that [REDACTED]. See
6/2/15 Tr. 738-51 (Cutler); SX Ex. 1037 [REDACTED]'').
---------------------------------------------------------------------------
v. Is the value of steering available under the statutory license?
SoundExchange argues that any benefits from steering must be
treated like any other consideration in a direct license that is not
authorized under the Act. That is, SoundExchange asserts that steering
must be independently valued, and the separate value must be added to
the statutory rate. The Judges disagree.\146\
---------------------------------------------------------------------------
\146\ The Pandora/Merlin Agreement allows for a very limited and
conditional [REDACTED]. See PAN Ex. 50141(c)(v) and (2)(c). However,
there is no evidence in the record to suggest that such a limited
and conditional [REDACTED] would be exercised and, if so, how often.
There is also no evidence in the record to demonstrate the extent
this [REDACTED] would impact the effective rate under the Pandora/
Merlin Agreement. Therefore, this contractual safeguard does not
constitute a basis to adjust the Pandora/Merlin benchmark.
---------------------------------------------------------------------------
Steering, as Dr. Shapiro emphasized, is simply an example of price
competition at work. Further, Sec. 114(f)(2)(B) of the Act and prior
decisional law require that the commercial rate reflect an
``effectively competitive'' market. Therefore, the value of steering is
a component of the statutory license--not extraneous to it--and should
not be excluded through an adjustment process or otherwise from the
rate ultimately set by the Judges.\147\
---------------------------------------------------------------------------
\147\ SoundExchange attempts to impeach Dr. Shapiro on this
point by seeking to use his rebuttal testimony against him. See SX
PFF ] 705 (``[Dr.] Shapiro also acknowledged that steering
commitments have value. In response to [Dr.] Rubinfeld's statement
that ``a direct license containing a binding steering commitment is
unsuitable as a benchmark unless some adjustment is made to reflect
the value of the commitment to the record company,'' [Dr.] Shapiro
agreed with [Dr.] Rubinfeld that ``some adjustment is appropriate.''
Shapiro WRT at 41. However, SoundExchange omitted the remainder of
Dr. Shapiro's testimony, which omission seriously distorts his
opinion: Without the omission, Dr. Shapiro's full testimony on this
point states: ``[Dr.] Rubinfeld takes the position that a direct
license containing a binding steering commitment is unsuitable as a
benchmark unless some adjustment is made to reflect the value of the
commitment to the record company. I agree that some adjustment is
appropriate, but only to the extent that the steering commitment
exceeds the amount of steering that the webcaster would engage in
just based on price differences. Id. (emphasis in original).
---------------------------------------------------------------------------
b. Does the Pandora/Merlin Agreement contain non-statutory value that
either (i) disqualifies the Pandora/Merlin Agreement as a benchmark; or
(ii) diminishes the value of steering in the Pandora/Merlin Agreement?
i. The Potential Presence of Non-Statutory Value Does not Disqualify
the Pandora/Merlin Agreement as a Benchmark
SoundExchange and Pandora both note that several additional
elements of potential value are present in the Pandora/Merlin
Agreement. Dr. Shapiro, on behalf of Pandora's direct case, went
through each item of additional consideration and explained why he
either adjusted his benchmark value higher (as in the case of certain
advertising consideration) or declined to adjust the benchmark for
other elements of potential value.
The Judges do not find that the mere presence of other items of
potential value serves to disqualify the Pandora/Merlin Agreement as a
suitable benchmark. Benchmarks may be imperfect in the sense that they
include features that are ill-suited for adoption in the statutory
rate. To reject a proposed benchmark for that reason alone would be--to
put it colloquially--throwing out the baby with the bathwater. Because
there is no single undifferentiated market for the statutory service,
benchmarks must be borrowed from other markets or sub-markets and will
always be imperfect to some degree and either in need of adjustment or
limited in their applicability. But to ignore a benchmark for that
reason alone would be an inappropriate indictment of the benchmarking
process itself.
Further, Dr. Shapiro testified that he found these elements of
additional consideration to either: (1) Provide joint value to Pandora
as well as Merlin members; (2) be unlikely to be achieved; or (3) be
already incorporated into his valuation. There was no sufficient
rebuttal by SoundExchange witnesses to these points. As the Judges
explain infra in their discussion of the same issue in connection with
the iHeart/Warner Agreement, an important general consideration
relating to this issue is the absence of evidence of value from a party
with regard to such additional terms, when that party has the incentive
(as well as the means) to provide the Judges with such evidence.
Additionally, SoundExchange's assertion that the additional items
created sufficient value to offset the lower rate in the Pandora/Merlin
Agreement strikes the Judges as economically irrational. If the
supposed additional value of the non-steering items in the Pandora/
Merlin Agreement equals the difference between the non-steered rates
and the lower steered rates, then what is the point of the parties
incurring the transaction costs associated with negotiating such a
deal? Why would Pandora commit to incur significant expenses to begin
to set up an infrastructure necessary to perform the steering function?
[[Page 26370]]
ii. The Evidence Does not Support a Lessening in the Usefulness of the
Pandora/Merlin Agreement as a Benchmark for the Rates Indies Would Pay
in the Hypothetical Market Beyond the Adjustments Made by Dr. Shapiro
In rebuttal to Dr. Shapiro's item-by-item consideration of the
potential additional items of value in the Pandora/Merlin Agreement,
SoundExchange did not introduce expert testimony to establish
alternative values. Rather, SoundExchange relied on the narrative
testimony of industry witnesses Glen Barros, Darius van Arman and Simon
Wheeler to support the position that these other items had some
unquantified value to the Merlin members. Although such after-the-fact
assertions can carry some weight, the Judges find such testimony to be
inconsistent with Merlin's conduct during the negotiations.
More particularly, although Merlin has the ability to negotiate and
evaluate agreements in a sophisticated manner, it failed to value these
additional elements of consideration. See, e.g., 5/1/15 Tr. 125-52
(Simon Wheeler) (Merlin, is ``just as capable of understanding the
complexity of the rights and licenses at issue in digital streaming as
major record labels.''); 5/28/15 Tr. 6513 (Barros) (agreeing that
independent label ``Concord's assessment of the value it receives from
licensing its repertoire is just as sophisticated as any other
label.''); 6/1/15 Tr. 6924-25 (Lexton) (``Merlin brings expertise to
bear on its negotiations with digital music services.''). If the extra-
statutory items were of particular and essential value to Merlin, the
Judges would have expected to be presented with evidence as to how
Merlin valued these several items. However, as noted, no such evidence
was presented.\148\
---------------------------------------------------------------------------
\148\ In fact, with regard to one of the unquantified items of
alleged value--the [REDACTED] provision--contemporaneous
correspondence among Merlin members and personnel discounted any
value in the [REDACTED] provision in the Pandora/Merlin Agreement.
PAN Ex. 5110 at SNDEX0374284 (Correspondence from [REDACTED] stating
that ``[REDACTED]'').
---------------------------------------------------------------------------
Additionally, one Merlin member presented as a witness by
SoundExchange, Glen Barros, President and C.E.O. of Concord Record
Group, testified that ``in all likelihood'' he would have opted-in to
the Pandora/Merlin Agreement even if these other elements of value had
not been included in that agreement. 5/28/15 Tr. 6537-39 (Barros)
(emphasis added).\149\
---------------------------------------------------------------------------
\149\ SoundExchange asserts that Mr. Barros' subsequent
testimony that he found the ability for his record company to
receive royalties on pre-1972 royalties to be a ``gating'' issue and
that such testimony undercut the testimony quoted in the text,
supra. The Judges find Mr. Barros' testimony as cited in the text,
supra, to be credible, and they find that his subsequent attempt to
qualify that testimony to be lacking in credibility.
---------------------------------------------------------------------------
Although Mr. Barros represents only one Indie, SoundExchange
selected him as a representative of the Indies' position regarding the
value of the Pandora/Merlin Agreement. Clearly, SoundExchange could not
present the testimony of more than [REDACTED] opting-in Merlin members,
and the Judges therefore find the testimony against interest by this
Merlin member selected by SoundExchange to be particularly probative.
Additionally, a May 15, 2014 internal email written by Mr. Lexton
appeared to the Judges to reference Merlin's strategy to attempt to
obfuscate the usefulness of the Pandora/Merlin Agreement as a benchmark
in this proceeding:
[REDACTED]
SX Ex. 102. Thus, it appears to the Judges that Merlin's negotiation
of additional terms was intended (at least in part) ``to
facilitate'' the very argument SoundExchange now asserts through Mr.
Lexton's testimony regarding the purported significance of the
unvalued additional terms.
In a subsequent email to Pandora dated June 3, 2014, Mr. Lexton
made Merlin's position in this regard even more explicit, by asking
Pandora to include the following proposed language in the final
agreement:
[REDACTED]
PAN Ex. 5116 at SNDEX0315243. That request was rejected by Pandora and
the requested language was never included in the final Pandora/Merlin
Agreement. Id. Nonetheless, Merlin proceeded to enter into the Pandora/
Merlin Agreement, anticipating that it would be used by Pandora as
evidence in this proceeding. See, e.g., 6/1/15 Tr. 6962, 6966 (Lexton);
id. at 7095 (Wheeler); SX Ex. 102 at 3 (5/14/15/14 email among Merlin
executives); PAN Ex. 5117 at SNDEX0437582 (6/9/14 internal email from
Mr. Lexton).
The foregoing emails and testimony, combined with Merlin's and
SoundExchange's failure to separately value the other elements of
consideration either during negotiation or during the proceeding,
strongly indicate to the Judges that Merlin found the value in the
Pandora/Merlin Agreement to lie in the steering--that is, the trade-off
of more plays at a lower rate for more total revenue.
In sum, if there was any additional value to Merlin from the other
items sufficient to reduce the overall value of steering as adopted for
a statutory license, the record evidence fails to provide a basis for
such an adjustment. For these reasons, the Judges decline to increase
the Pandora/Merlin benchmark to reflect any extra-statutory
consideration that was not already accounted for by Dr. Shapiro.
c. Is Merlin sufficiently representative of a segment of the sound
recording market?
The Judges reject SoundExchange's argument that Merlin is not
sufficiently representative of the independent sector of the sound
recording industry. The Judges rely on several facts in reaching this
conclusion.
First, the Judges note that between [REDACTED] and [REDACTED]
Merlin members, out of approximately [REDACTED] total members opted-in
to the Merlin Agreement. Thus, it is accurate to state that the
evidence regarding the Pandora/Merlin Agreement relates--to use Dr.
Talley's term--to [REDACTED] to [REDACTED] ``dyads'' between licensors
and a licensee. The Judges find this quantity of contracts to be
significant and probative with regard to: (1) Steering rates that
Indies would accept; and (2) the principle that steering can be
utilized as means of price competition in the noninteractive market.
In addition, the Judges do not find persuasive SoundExchange's
argument that a majority of Merlin members who opted-in to the Pandora/
Merlin Agreement did so through their agreements with aggregators and/
or distributors. These opting-in members delegated the decision whether
to opt-in to these distributors and aggregators and there was certainly
no evidence or testimony to suggest that these arrangements were
coerced or that any Merlin members who opted-in through this process
disagreed with the decision. Thus, the decision by Merlin members to
delegate the decision whether to opt-in to its agents is a component of
the business model these Merlin members chose to follow. The Judges
cannot criticize the decision of these Merlin members, and by
extension, call into question their intention to be bound by the
Pandora/Merlin Agreement, merely because they have arranged their
licensing affairs in this manner. By way of analogy, just as
SoundExchange's criticism of Pandora's business model is not relevant
to the setting of rates in this proceeding, the Judges do not find
relevant the business judgments of Merlin members to utilize
aggregators and/or distributors as their agents in this regard.
Relatedly, the Judges find that the fact that Merlin negotiated
collectively on behalf of its members does not diminish the value of
Merlin as a party capable of entering into an agreement that is
[[Page 26371]]
otherwise an appropriate benchmark. Merlin members utilize the
collective capacities of Merlin in order to transact licensing business
in a more efficient manner, as described by a Merlin's testifying
executive, Mr. Lexton:
Merlin's purpose is to allow independent record companies to
benefit from direct deals negotiated by Merlin on a collective
basis. As such Merlin is a one stop shop for recorded music rights
licensing. It represents recorded music rights owned and/or
controlled by independent record labels and distributors who are
eligible and choose to join Merlin. . . . Merlin's core remit is to
represent its members in negotiating licenses with digital music
services in the hope of overcoming market fragmentation issues that
have historically challenged the independent music sector
particularly in the digital domain.
Lexton WRT ]] 11-12. Indeed, Merlin apparently is sufficiently
successful in this endeavor that one of the Majors, [REDACTED], has
characterized Merlin as the ``fifth Major.'' PAN Ex. 5349 at 9
([REDACTED] approvingly noting to [REDACTED] that Merlin publicly
presents itself as a ``fifth major'').\150\
---------------------------------------------------------------------------
\150\ At the time, there were four Majors, Universal, Sony,
Warner, and EMI.
---------------------------------------------------------------------------
Further, the Judges reject SoundExchange's assertion that Merlin as
a collective had different incentives than its members that somehow
diminish the value of the Pandora/Merlin Agreement as a benchmark.
These incentives included financial and status benefits to Merlin if
its members opted-in, which were distinct from whatever benefits
individual members might obtain by opting in to the Pandora/Merlin
Agreement. The Judges understand this criticism to be based upon the
classic principal-agency problem, in which the interests of the
principals (Merlin members) may not be fully aligned with the interests
of the agent (Merlin). However, this is a common problem when
principals delegate functions to agents. Unless the evidence
demonstrates that the agent (Merlin) has engaged in a breach of duty
toward its principals (Merlin members), the lack of a complete
alignment of interests does not invalidate the benchmark status of the
agreement entered into by the principal. Indeed, because this is the
principal-agent arrangement that the Merlin members voluntarily
created--including whatever misalignments in incentives might
theoretically exist--it is especially representative of a marketplace
transaction. The fact that approximately [REDACTED]-[REDACTED]% of
Merlin's [REDACTED] members opted-in to the Pandora/Merlin Agreement is
compelling evidence that the Merlin members found the terms of the
agreement beneficial to them, notwithstanding any alleged separate
benefits to Merlin as a collective organization.
The Judges also reject the criticism that Merlin has not uniformly
represented its members because Pandora has used its editorial
discretion to exclude (as of the time of the hearing) from its playlist
sound recordings owned by some of the opting-in Merlin members. There
is no allegation that Pandora promised to make all sound recordings
available on its service, and therefore each Merlin member accepted the
risk that Pandora, in its editorial judgment, might not include some or
all of its sound recordings.
Finally, the Judges do not find merit in SoundExchange's argument
that Merlin is not a sufficient representative of Indies in the
marketplace. SoundExchange did not produce any witnesses from Indies
who were not members of Merlin to testify to this effect. Rather,
SoundExchange produced witnesses whose Indie record companies did opt-
in to the Pandora/Merlin Agreement. Given Merlin's capacity to
negotiate and its well-regarded industry status, the fact that non-
Merlin Indies are not covered by the Pandora/Merlin Agreement, in the
absence of other evidence, is not sufficient to call into question the
usefulness of this benchmark.
d. Did Pandora have substantial market power that is reflected in lower
effective rates in the Pandora/Merlin Agreement?
The Judges reject SoundExchange's assertion that Pandora had
significant market power that caused the effective rates in the
Pandora/Merlin Agreement to be lower than effectively competitive
rates. Initially, the Judges note that this assertion is not supported
by any empirical market data, analysis, or comparison with other
negotiated comparable interactive rates.
More importantly, the issue of Pandora's ``market power,'' vel non,
was anticipated and addressed by Pandora's economic expert, Dr.
Shapiro, who explained:
Pandora is the largest noninteractive webcaster. I have
considered specifically whether Pandora had undue market power in
its negotiations with Merlin. In the language of antitrust
economists, I have considered whether Pandora has monopsony power
over Merlin. Pandora's share of listening among noninteractive
webcasters is not the key variable for determining whether or not
Pandora has monopsony power over Merlin. Rather, the correct
variable upon which to focus is the share of the Merlin Labels'
revenues that comes from Pandora. If a very large share of the
Merlin Labels' revenues came from any single music user, then that
music user could well have monopsony power over Merlin. But this is
demonstrably not the case for Pandora. The Merlin Labels generate
revenues from many different users of their sound recordings,
including other noninteractive webcasters, interactive services, and
from the sale of physical albums and digital downloads. In fact, I
estimate, based on data for the recorded music industry overall,
that Pandora accounted for roughly 5 percent of the revenues
received by the Merlin Labels in 2013 for the licensing of their
music in the United States. Thus, Pandora's share of the Merlin
Labels' revenues is far short of the level that would be necessary
for Pandora to have undue market power in its negotiations with
Merlin.
Shapiro WDT at 24-25 (emphasis added). The Judges find this explanation
sufficient to contradict the assertion that Pandora exercised undue
market power in negotiating the terms of the Pandora/Merlin Agreement.
There is an additional and separately sufficient reason why
SoundExchange's claim of Pandora's monopsony power cannot be adopted.
The assertion that Pandora exercised market power in these negotiations
ignores the fact that Merlin did not have to accept any of Pandora's
terms--Merlin and its members could have fallen back on the Pureplay
statutory settlement rates rather than accede to any demand by Pandora.
That is, by this particular assertion, SoundExchange is assuming
arguendo that the effective Pandora/Merlin rates are below an
appropriate market rate because of Pandora's market power.\151\ But why
would Merlin and its members voluntarily enter into an agreement to
accept rates lower than the statutory alternative and lower than what
would exist in a competitive market?
---------------------------------------------------------------------------
\151\ SoundExchange is thus assuming here that, under section
114(f)(2)(B), a benchmark rate must reflect an adequate level of
competition.
---------------------------------------------------------------------------
Therefore, the Judges reject the assertion that Pandora exercised
undue market power in negotiating the effective rates contained in the
Pandora/Merlin Agreement.
e. Was the Pandora/Merlin Agreement merely ``experimental?''
Two of SoundExchange's witnesses characterized the Pandora/Merlin
Agreement as an ``experiment,'' as distinguished from an actual
marketplace agreement. The Judges reject this attempt to characterize
this real agreement, involving the exchange of actual consideration, as
an ``experiment.''
An economic experiment is undertaken under controlled laboratory
conditions, as distinguished from
[[Page 26372]]
market transactions that take place in the real world. See Guillaume R.
Frechette and Andrew Schotter, Handbook of Experimental Economic
Methodology 21 (2015) (``[T]o run an experiment . . . experimenters are
of necessity engaged in market design in the laboratory.'') (emphasis
added). Quite clearly, the Pandora/Merlin Agreement was not and is not
an ``economic experiment.''
SoundExchange's witnesses may have used the word ``experiment'' to
suggest a tentative or impermanent relationship between Pandora and
Merlin. If so, that criticism proves too much, as all benchmark
agreements--indeed virtually all agreements--could be characterized as
``experiments,'' in that they have stated durations, and the parties
are free to vary the terms of their economic relationship after the so-
called ``experiment'' has expired. In this sense, the word
``experiment'' is misused to cast a wide disqualifying net on all
benchmark agreements.
f. Has Pandora's performance under the Pandora/Merlin Agreement
compromised the usefulness of that benchmark? \152\
---------------------------------------------------------------------------
\152\ A general issue of proof arose in this proceeding as to
whether a benchmark's value can be measured by the parties'
performance under a proposed benchmark agreement, in addition to the
parties' expectations of value when the benchmark was created. This
issue arose in a different context, regarding whether iHeart's
``incremental'' rate analysis of its iHeart/Warner Agreement
benchmark should be analyzed by reference only to the parties'
expectations at the time of contracting, or whether the Judges
should also consider the parties' performance under the iHeart/
Warner Agreement. As discussed in detail infra, the Judges have
rejected iHeart's ``incremental'' rate analysis, thereby mooting the
issue of whether the parties' performance under that agreement
affected the so-called ``incremental'' rate. With regard to the
Pandora/Merlin Agreement, SoundExchange argues that Pandora's
performance under the Pandora/Merlin Agreement indicates that the
agreement is not usable as a benchmark. Because--as explained in the
text, infra--the Judges find that Pandora's performance does not
cause them to reject the Pandora/Merlin Agreement as a usable
benchmark, the question of whether evidence of performance is
generally appropriate to consider when setting rates need not be
decided by the Judges in this determination.
---------------------------------------------------------------------------
Even assuming that the Pandora/Merlin Agreement is, in principle, a
useful benchmark, SoundExchange asks the Judges to look to Pandora's
alleged poor performance of its obligations under the Pandora/Merlin
Agreement. As detailed supra, SoundExchange alleges that Pandora has
failed to perform certain contract obligations (such as, e.g.,
[REDACTED]) and that the cost of performance is daunting for Pandora,
which combine to create what one might call ``seller's remorse'' among
Merlin participants with regard to the licensing of rights under the
Pandora/Merlin Agreement.
Pandora does not dispute that it had not (as of the hearing date)
been able to implement all the benefits promised in the Pandora/Merlin
Agreement. However, the Judges note that SoundExchange did not produce
any correspondence from Merlin or its members complaining about the
failure of Pandora to perform, or any threat to terminate the agreement
or sue Pandora for nonperformance. Rather, the evidence suggests that
Merlin recognized that the structuring of performance needed to be an
ongoing and collaborative effort. As Pandora's Chief Financial Officer,
Mr. Herring, testified:
[REDACTED]
5/18/15 Tr. 4318 (Herring); see also PAN Ex. 5014 (Pandora/Merlin
Agreement, ``Feature Implementation Timeline''), Exhibit C thereto
([REDACTED]'' (emphasis added). SoundExchange did not produce evidence
to call into question Pandora's performance under this [REDACTED]
clause.
More importantly, the evidence indicates that Pandora has performed
its core obligation under the Pandora/Merlin Agreement: The increase in
spins of Merlin recordings, in the aggregate, by at least [REDACTED]%,
above their collective ``natural'' rate. In fact the evidence shows
that Pandora is overspinning Merlin member recordings collectively by
[REDACTED]%. On the individual Merlin label level, the results have
been uneven--some Merlin labels have been overspun by [REDACTED]-
[REDACTED]% of their natural rate, see 5/18/15 Tr. 4229-30, 4291-4293
(Herring); SX Ex. 2310 (showing hundreds of Merlin Labels with rates of
overspinning exceeding [REDACTED]%)--but other Merlin Labels are
spinning at less than a [REDACTED]% increase their above their prior
levels. SX Ex. 1748 at 2; SX Ex. 2310.\153\
---------------------------------------------------------------------------
\153\ Labels owned by Beggars Group (whose officer, Simon
Wheeler claimed the Pandora/Merlin Agreement was a failure)--
including XL Recordings, Matador and Nation Records--are being
overspun on Pandora by as much as [REDACTED]%. SX Ex. 2310.
---------------------------------------------------------------------------
However, the only specific promise by Pandora of increased spins in
the Pandora/Merlin Agreement was its promise [REDACTED] to increase
Merlin spins collectively by [REDACTED]%, and it appears undisputed
that Pandora has performed this obligation and, in fact, has far
exceeded the [REDACTED]% minimum. With regard to the underspinning of
individual Merlin Labels, Pandora represented in the Pandora/Merlin
Agreement only to [REDACTED] to increase spins by at least [REDACTED]%
above the natural rate. Thus, the individual members objectively cannot
complain about the level of overspinning at any point in time, unless
they can also claim that Pandora had not been [REDACTED]. As noted
above, SoundExchange did not produce any evidence suggesting that any
individual members had lodged such a complaint.
With regard to SoundExchange's claim that Pandora has incurred
substantial unexpected capital costs in implementing a steering system,
Mr. Herring testified that these investments, although motivated in the
short-term and in part by the Merlin Agreement, in fact laid the
groundwork for Pandora to implement steering more broadly across the
non-interactive webcasting market. 5/18/15 Tr. 4313-17 (Herring)
(``some of these costs are fixed costs to be amortized over time with
the anticipation of being applied to other direct licenses with other
record companies, and expensed at the time that the costs are incurred,
and therefore ``spread over those deals.''). Thus, the existence of
these costs does not establish any fact to contradict the Judges'
finding that the Pandora/Merlin Agreement is a useful benchmark. In
fact, Pandora's commitment to incur substantial build-out costs to
create the steering architecture underscores that this agreement (and
the iHeart/Warner Agreement) represents the cutting-edge of a
technological advance that can ameliorate the anticompetitive effects
of a complementary oligopoly.
g. Do the steering experiments and the Pandora/Merlin Agreement
demonstrate the rate to which a major would agree?
The Judges find this SoundExchange criticism to be meritorious.
These steering experiments reflect only a quantity adjustment that
could be attempted with regard to the Majors, not a rate adjustment
arising from steering to or from a Major. By contrast, the Pandora/
Merlin Agreement does reflect the impact of steering on negotiated
rates (as does the iHeart/Warner Agreement). Thus, while the Judges
find the steering experiments to be probative of the general principle
that steering can be effected to some extent without a negative impact
on listenership, the Judges do not accept that this constitutes direct
evidence sufficiently probative of the rates that would result
[[Page 26373]]
from steering writ large in the marketplace.\154\
---------------------------------------------------------------------------
\154\ The use of benchmarking serves to tie the quantity aspect
of steering to its impact on rates, and the absence of a relevant
Majors' benchmark in Pandora's evidence prevents the Judges from
determining a steered price for Majors from that evidence. Although
Dr. Shapiro asserts that the steering experiments demonstrate that
the Majors should receive the same rate as the Indies in a market
with steering, that opinion is contradicted by the higher rate set
forth in the [REDACTED] Agreement which also contains a significant
steering component. Dr. Shapiro attempts to explain the higher
[REDACTED] rate as a function of a so-called ``focal point,''
``anchor'' or ``magnet'' effect created by the extant applicable
statutory rate, that allegedly raises the negotiated rate toward
(yet still below) the statutory rate. However, although this
theoretical effect is discussed in the economic literature, Dr.
Shapiro acknowledged that it is not an ``ironclad'' economic law,
and there is scant evidence in this proceeding why such a potential
``focal point'' or ``magnet'' effect would cause unconstrained
licensors to eschew a lower market rate that would produce greater
revenue.
---------------------------------------------------------------------------
Moreover, Pandora's own witness testified in a manner that
contradicts Pandora's attempt to bootstrap the Pandora/Merlin rates
onto the Majors. Mr. Herring, Pandora's C.F.O., testified that Pandora
would have to offer a higher steering-based rate to a Major than
Pandora obtained in the Pandora/Merlin Agreement. 5/18/15 Tr. 4253
(Herring). The Judges have noted previously that the Majors'
repertoires must be distinguished from those of the Indies. See SDARS
II, 78 FR at 23063 (the Majors are distinguishable from the Indies ``by
virtue of the depth and breadth of their music catalogues [which] make
up a critical portion of the sound recording market.'').\155\
---------------------------------------------------------------------------
\155\ Dr. Shapiro opines that the Majors' advantage in the
hypothetical market would be reflected economically solely through
the greater number of noninteractive plays, rather than also in a
higher per-play rate. See, e.g., 5/20/15 Tr. 5058 (Shapiro)
(testifying that the larger repertoires of the Majors ``does not
mean'' that the Majors deserve a ``greater value per-
performance.''); 5/19/15 Tr. 4730 (Shapiro) (rejecting use of market
share alone in determining ``value per spin''). However, Dr. Shapiro
ignores the fact that there is apparently a greater per-song value
overall for songs in the Majors' repertoire, as evidenced by
Pandora's own data--showing that the Majors account for [REDACTED]%
of ``top 5% weekly spins,'' [REDACTED]% of the ``top 10% weekly
spins,'' and [REDACTED]% of the ``top 20% weekly spins''--despite
the fact that the Majors account for only [REDACTED]% of the total
spins on Pandora. Compare SX Ex. 269 at 74 with SX Ex. 269 at 73.
These ``top spin'' figures are indicative of the ``must have''
aspect of the Majors' repertoire (leaving aside the anticompetitive
complementary nature of their combined repertoires). Indeed, the
record suggests to the Judges that the popularity of the Majors'
spins is the reason why steering away from their repertoires cannot
be pursued beyond a certain level, and why Dr. Shapiro candidly
declined to reject the idea that the Majors' repertoires were ``must
haves'' even though noninteractive services could steer away from
them to an extent. To use an imperfect yet helpful analogy: A
regular restaurant diner might prefer steak to chicken, to the
extent that she orders steak 7 out of every 10 meals at the
restaurant. This greater demand for steak versus chicken can result
in both: (1) More revenue to the restaurant for each steak dinner
compared with each chicken dinner; and (2) more total revenue
attributable to the greater number of steak dinners arising from the
patron's more frequent visits to the restaurant to eat steak. In
more formal economic terms, the typical listener (or the restaurant
patron) gets more ``utility'' from the Majors' songs (or from the
steak) each time one is ``consumed,'' and also consumes those songs
(and steaks) more often. The seller can benefit from both the
greater ``utility'' and the frequency of purchases.
---------------------------------------------------------------------------
Therefore, the Judges consider the rate established by the Pandora/
Merlin Agreement to establish only one guidepost (i.e., a relevant
financial point of reference) to a statutory rate. The Judges are
informed as to the limited weight of this rate in the ultimate
statutory rate they shall set, by the fact that Indie sound recordings
reflect approximately [REDACTED]% of the sound recordings played on
Pandora. SX Ex. 269 at 73.
h. Can the Majors avoid steering in the hypothetical market?
SoundExchange argues that any attempt by a noninteractive service
to impose steering on the record companies would be rebuffed by the
Majors. In particular, SoundExchange argues that the record companies
would respond to a steering threat by: (1) Withholding their entire
repertoires; (2) imposing Anti-Steering or ``Most Favored Nation''
contract clauses; and/or (3) requiring up-front lump sum royalty
payments from the noninteractive services.
i. Withholding the Entire Repertoire
A Major could respond to a threat of steering by threatening to
withhold its entire repertoire from that noninteractive service. There
appears to be a consensus that the repertoire of each of the three
Majors is a ``must have'' in order for a noninteractive service to be
viable. See 5/18/15 Tr. 4254 (Herring) (admitting that without the
repertoire of a Major, it would be a much different service); 5/18/15
Tr. 4472 (Shapiro) (declining to state the majors are not ``must
haves'' for noninteractive services); see also SX Ex. 269 at 74 (noting
disproportionate share of top spins from Majors' repertoires).
However, the ability of the Majors to utilize such a boycott to
defeat steering would be a function of their complementary market
power. Simply put, demands by the Majors to prevent steering by
insisting that a noninteractive service not deviate from an historical
(``natural'') division of market shares would be a classic example of
anticompetitive conduct. See, e.g., Blue Cross & Blue Shield United of
Wisconsin v. Marshfield clinic, 65 F.3d 1406, 1415 (7th Cir. 1995)
(Posner, J.) (``It would be a strange interpretation of antitrust law
that forbade competitors to agree on what price to charge, thus
eliminating price competition among them, but allowed them to divide
markets, thus eliminating all competition among them.'').\156\
---------------------------------------------------------------------------
\156\ The Judges emphasize that their analysis in the text,
supra, is not intended to suggest any antitrust violations by any
actor in the interactive or noninteractive market. The Judges'
concern under section 114(f)(2)(B) is to set rates that reflect a
hypothetical market that is effectively competitive. If the
hypothetical market posited by one of the parties to this action
would result in rates that were not effectively competitive, then
such a hypothetical market must be rejected--even if it would be the
result of tacit or other conduct that might not rise to the level of
a violation of the antitrust laws.
---------------------------------------------------------------------------
While the Majors' individual market power is not in itself
necessarily improper, the hypothetical exercise of that power in this
manner in the noninteractive market would be antithetical to the
``effective competition'' requirement inherent in the Sec.
114(f)(2)(B) standard. That is, each Major may well be entitled by its
firm-specific market power to higher rates than the Indies, but the
Majors cannot bootstrap that power into a further capacity to reap the
benefits of a complementary oligopolist by brandishing such power as a
sword against steering.
Thus, in the present case, the hypothetical use by one or more of
the Majors of its power to boycott a noninteractive service--one that
had sought to inject some price competition into the market via
steering--would undermine the ``effective competition'' standard that
the D.C. Circuit, the Librarian of Congress and the Copyright Royalty
Judges have declared to be an essential element of the Sec.
114(f)(2)(B) standard.
ii. Anti-Steering or MFN Clauses
In the interactive market, the Majors commonly include anti-
steering or MFN clauses in their agreements with the services. The
Judges find that such clauses have no purchase vis-[agrave]-vis
steering in exchange for lower rates in the noninteractive market. In
the noninteractive market, an insistence by a Major that a
noninteractive service abide by an anti-steering clause, or a MFN
clause that has the same effect, is tantamount to importing the
anticompetitive complementary oligopoly power of the Majors from the
interactive market into the noninteractive market. Dr. Rubinfeld's
rebuttal testimony at the hearing is telling:
[[Page 26374]]
Q: Now [Dr.] Shapiro has testified that the threat of steering,
alone, would lead to lower rates from record companies. What's your
view of that opinion?
[DR. RUBINFELD]
I don't think it's likely to happen because I don't think the threat
. . . is a credible threat--that would be the term we use in
economics--and the reason is . . . that, first of all, the record
companies, as I have said a number of times before, do have
substantial bargaining power and they have responses to the threat
that takes away its credibility. In the rather strong version, they
could . . . look to other sources of listeners and say we're going
to consider not using your service, but . . . they could say we're
not going to feature all of the same artists, maybe we'll take some
of our top artists off our offerings . . . .
* * *
[THE JUDGES]
Professor, do you think that the smaller independents have that same
bargaining power . . . to respond to the threat of steering . . . ?
[DR. RUBINFELD]
No. They wouldn't have . . . quite the same bargaining power.
* * *
[THE JUDGES]
What do the independents lack that the [M]ajors have that makes the
independents unable to exercise that threat?
[DR. RUBINFELD]
[T]ypically, they're only going to have a few artists that have
really the name recognition and the power to make a difference.
[THE JUDGES]
So if the record company industry was more atomistic, the threat of
steering would be more credible, but because it's not that atomistic
. . . it makes the ability of the [M]ajors to rebut the threat . . .
more likely to be successful?
[DR. RUBINFELD]
I think that's true. . . . [T]hat's a harder world for me to imagine
because I have been in the world of seeing three or four major
companies having a pretty big impact.
5/28/15 Tr. 6302-05 (Rubinfeld) (emphasis added).
This testimony underscores the point that the Majors' capacity to
undermine ``price competition-via steering'' is a function of their
complementary oligopoly power. Once again, the Judges do not find that
the mere size of the Majors or their share of the noninteractive market
is in itself anticompetitive (especially on this record), but the
Judges find that the ability of the Majors to leverage that market
power to create the complementary oligopoly pricing problem can neither
be imported into the noninteractive market nor assumed to be part of
the hypothetical effectively competitive noninteractive market. Indeed,
in the hypothetical market without a statutory rate, such anti-steering
clauses (and other anti-steering tools) would be ripe for judicial
invalidation. See U.S. v. American Express Co., 88 F. Supp. 3d 143,
189, 194 (E.D.N.Y. 2015) (``anti-steering rules'' can ``block pro-
competitive efforts'' to the extent that ``the market is broken,'' when
such rules prevent ``price competition,'' by not permitting buyers ``to
use their lowest cost supplier, as they can in other aspects of their
businesses.''); United States v. Apple, 791 F.3d at 320 (``we are
breaking no new ground in concluding that MFNs, though surely proper in
many contexts, can be ``misused to anticompetitive ends in some
cases.''). The Judges likewise find the hypothetical use by the majors
of anti-steering clauses in response to the threat of price
competition-via-steering would thwart ``effective competition.'' \157\
---------------------------------------------------------------------------
\157\ Dr. Rubinfeld also speculated that in the hypothetical
market the Majors could ``take some of our top artists off our
offerings'' in response to an attempt at price competition-via
steering. 5/28/15 Tr. 6302 (Rubinfeld). But in that hypothetical
market, such an attempt by an entity with rights to collectively
license a substantial market share would invite scrutiny as
anticompetitive. See ``Dept. of Justice Sends Doc Requests,
Investigating UMPG, Sony/ATV, BMI and ASCAP Over Possible
`Coordination,' '' Billboard.com (July 13, 2014). (``The Department
of Justice has sent out CIDs (Civil Investigative Demand for
Documents) to ASCAP, BMI, Sony/ATV Music Publishing and Universal
Music Publishing Group in connection with their review of . . .
whether partial withdrawals of digital rights should be allowed.'').
Thus, such behavior would not necessarily be consonant with
``effective competition,'' but rather an anticompetitive leveraging
of market power. The Judges thus decline to incorporate such
licensor responses in the hypothetical effectively competitive
market.
---------------------------------------------------------------------------
iii. Up-Front Royalty Payments
SoundExchange asserts that a record company could frustrate an
attempt at steering by requiring noninteractive services to pay their
royalties up-front in a lump sum, instead of on a per-performance
basis. Such a lump-sum requirement would frustrate steering in the
following manner: If a licensee has already paid Record Company A a
required, large up-front fee (equal to its natural/historic play level
multiplied by the old, higher per-play rate) then the marginal cost
going forward to the noninteractive service of playing a sound
recording from Record Company A would be zero. By contrast, Record
Company B--even if it offered a reduced steering rate--would still be
insisting on a rate greater than the marginal rate of zero the licensee
would be paying to Record Company A. The noninteractive service would
thus be compelled to either pay the up-front lump sum and lose the
benefits of price competition, or refuse to pay the lump sum and lose
access to 100% of the repertoire of Record Company A.
This up-front lump sum strategy in actuality is merely another way
in which a Major could bootstrap its otherwise unobjectionable market
power to preserve complementary oligopoly power in the noninteractive
market. The Judges note that SoundExchange's expert economic witness,
Dr. Rubinfeld, has written that ``[i]n dynamically competitive
industries, where new product and features are an important part of
competition, even licenses that include only fixed, or lump-sum
payments, can result in an anticompetitive lessening of competition.''
Daniel L. Rubinfeld and Robert Maness, ``The Strategic Use of Patents:
Implications for Antitrust,'' reprinted in Francois Leveque and Howard
Shelanski, Antitrust, Patents and Copyright 85, 91-92 (2005). In the
present context, the noninteractive service that would be compelled to
pay to a Major an up-front lump-sum license based on the old per-play
rate (or lose access to 100% of the Major's repertoire) would need to
recover those fixed and sunk costs and thus forego price competition-
via steering.\158\
---------------------------------------------------------------------------
\158\ The Judges are not stating that a requirement of an up-
front payment lump-sum royalty type provision is per se inconsistent
with effective competition. For example, in the [REDACTED]
Agreement, discussed infra, [REDACTED] is obligated to pay
[REDACTED] to [REDACTED] even if [REDACTED]. SX Ex. 33 at 14-17, ]]
3(a) and (d). However, there is no evidence that this provision
would frustrate effective competition.
---------------------------------------------------------------------------
In sum, each of the three contract devices relied upon by
SoundExchange to defeat steering are dependent upon the exercise of
market power to preserve the power of complementary oligopoly, which
would thwart effective competition in the noninteractive market. Thus,
all three contracting devices would be inconsistent with the statutory
direction to set rates, based on competitive information, that would be
set between willing buyers and willing sellers in an effectively
competitive marketplace in the absence of a statutory license.
i. Conclusion Regarding the Pandora Benchmark
For the foregoing reasons, the Judges will utilize Pandora's
steering-based benchmark as a guidepost to establish the zone of
reasonableness for the noninteractive royalty rates that would be paid
by Indies in the ad supported (free-to-the listener) and subscription
markets. Pandora has proposed two sets of such benchmarks, depending
upon the level of steering the Judges find to be appropriate for rate-
setting purposes.
The Judges find that this guidepost should be established by
applying a rate
[[Page 26375]]
premised upon the lower of the two steering alternatives presented by
Pandora: the [REDACTED]% steering figure, rather than the higher 30%
figure.\159\ The lower [REDACTED]% level is appropriate because it is
the level to which Pandora was willing to commit [REDACTED]. PAN Ex.
5014 ] 4(a). The Judges recognize the relatively nascent nature of
steering. Although these factors certainly do not invalidate the
Pandora/Merlin Agreement as a usable benchmark, they do suggest to the
Judges that the more prudent course is to incorporate only the
guaranteed 12.5% level of steering, and use the resultant rates as the
appropriate guideposts for the rates attributable to the Indies portion
of the statutory market.\160\
---------------------------------------------------------------------------
\159\ The lower steering level results in a higher per-play
rate.
\160\ Pandora attempted to corroborate its Pandora/Merlin
benchmark by introducing, in rebuttal, its agreement with a
classical music record company, Naxos of America, Inc. (Naxos), that
had been entered into as of January 1, 2015. PAN Ex. 5018 (the
Pandora/Naxos Agreement). However, the Judges reject the Pandora/
Naxos Agreement as a corroborating benchmark for several reasons.
First, Naxos, as a classical music label, is at best representative
of a narrow genre and therefore its agreement cannot serve to be
representative of a wider variety of sound recordings. 5/13/15 Tr.
at 3512 (Herring). Second, the Pandora/Naxos Agreement does not
contain any steering terms, but rather sets a statutory per-play
rate ($0.[REDACTED]), lower than the default rate ($0.0014)
established by the Pureplay settlement. PAN Ex. 5018. Although this
difference, ceteris paribus, would create an incentive for Pandora
to play more classical music owned by Naxos, there was evidence,
acknowledged by Dr. Shapiro, that Pandora was constrained in any
potential steering toward Naxos by the fact that there was only one
other classical label, Decca, which would make it hard for Pandora
to steer away from the latter given its share of the market. 5/17
Tr. 4706-07 (Shapiro) (considering Naxos's and Decca's presence in
classical music market and acknowledging ``there are issues with
some specialized areas of music where it might be harder to
steer.'') Further, Pandora did not conduct any steering experiments
with regard to steering away from Decca, as it did with regard to
steering away from the Majors. Third, Dr. Shapiro opined that, if
steering did occur at the 30% level, Naxos would pay two different
rates for plays on Pandora's ad-supported and subscription services,
respectively. Shapiro WRT, at 37-38. However, the Pandora/Naxos
Agreement does not bifurcate rates in this manner, but rather sets a
single per-play rate of $0.[REDACTED] that would apply to Pandora's
ad-supported and subscription services. PAN Ex. 5018.
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E. iHeart Rate Proposal
1. Introduction
iHeart proposes a per-play rate of $0.0005 for the Sec. 114
license. In support of this proposal, iHeart relies on the analysis
undertaken by its expert witnesses, Drs. Daniel Fischel and Douglas
Lichtman, of rates set forth in certain agreements entered into by
iHeart in the market for noninteractive services.
2. The Fischel/Lichtman Proposed Benchmark
a. The iHeart/Warner Agreement
Effective October 1, 2013, iHeart and Warner entered into an
agreement (the iHeart/Warner Agreement) that addressed, inter alia, the
rates that iHeart would pay to Warner for iHeart's plays of Warner
sound recordings on iHeart's custom noninteractive service. SX Ex. 33
(iHeart/Warner Agreement). As it pertained to these noninteractive
plays, the iHeart/Warner Agreement provided that iHeart would pay the
greater of: (1) A per-performance fee on custom performances; and (2)
Warner's pro rata share of a specified percentage of iHeart's non-
simulcast noninteractive revenue. Specifically, the iHeart/Warner
Agreement calls for the following rates:
iHeart/Warner Per-Performance Royalty Rates
------------------------------------------------------------------------
Calendar year Per-performance rate
------------------------------------------------------------------------
2013...................................... $0.[REDACTED].
2014...................................... $0.[REDACTED].
2015...................................... $0.[REDACTED].
2016...................................... $0.[REDACTED].
Each calendar year during the Renewal Term $0.[REDACTED].
if any.
------------------------------------------------------------------------
iHeart/Warner Percentage Revenue Royalty Rates
------------------------------------------------------------------------
Period Percentage
------------------------------------------------------------------------
First [REDACTED] months after Effective [REDACTED]%.
Date.
Months [REDACTED] after Effective Date.... [REDACTED]%.
Each month during the Renewal Term if any. [REDACTED]%.
------------------------------------------------------------------------
SX Ex. 33 at 15-16 (iHeart/Warner Agreement).
The iHeart/Warner Agreement incorporates the same economic steering
logic as the Pandora/Merlin Agreement. Specifically, at the time of the
execution of the iHeart/Warner Agreement, Warner's actual share of
iHeart's custom noninteractive webcasts was approximately [REDACTED]%.
However, under the iHeart/Warner Agreement, iHeart is obligated to
[REDACTED]. Drs. Fischel and Lichtman concluded that this provision
created an incentive for iHeart to increase Warner's share of
performances substantially [REDACTED]. Fischel/Lichtman AWDT ] 36.
The iHeart/Warner Agreement also contains the following additional
elements that, according to iHeart: (1) Were not independently valued
by the parties on a monetary basis; (2) benefited both parties; and (3)
therefore had an uncertain net value:
Warner's grant to iHeart of sound recording rights
[REDACTED];
iHeart's commitment to provide Warner with no less than
[REDACTED] percent of total airplay devoted to a music advertising
campaign that iHeart provides on its webcast stations, known as the
Artist Integration Program (``AIP''); \161\
---------------------------------------------------------------------------
\161\ According to Drs. Lichtman and Fischel, under the AIP
program, iHeart dedicates airtime to promoting particular artists or
songs, typically new artists or recently-released songs. These
promotions may include [REDACTED]. SX Ex. 33 at 19.
---------------------------------------------------------------------------
Warner's [REDACTED] right to [REDACTED] and iHeart's
[REDACTED] right to [REDACTED]); and
iHeart's ``most favored nation'' protection vis-[agrave]-
vis [REDACTED], such that, if Warner were to enters into an agreement
to license sound recording rights for [REDACTED]'s [REDACTED] and
provide [REDACTED] with terms that are more favorable than those
offered to iHeart, then iHeart would be afforded the option to adopt
those [REDACTED] terms.
Fischel/Lichtman AWDT ] 38.
Drs. Fischel and Lichtman described the [REDACTED] as an
``insurance policy'' that benefited iHeart in the event it would
[REDACTED]. Likewise, they described the AIP provision as an
``insurance policy'' that benefited Warner, because iHeart's commitment
to continue to provide the AIP benefit meant that Warner did not have
to assume the risk that iHeart might charge Warner for the right to
access the benefits of AIP. See iHeart PFF ]] 179-180 (and record
citations therein).
Drs. Fischel and Lichtman recognized the difficulty in quantifying
the values of what they described as these ``insurance policy''
equivalents. However, they aver that neither party assigned any values
to these (and the other) non-rate terms and that the net value of these
items therefore can only be set at zero. Fischel/Lichtman AWDT ] 39. As
Dr. Fischel further testified:
We followed the . . . real-world example of the parties . . .
who did not price any of these terms. . . . [T]here was no separate
pricing in the agreement or separate valuation in the agreement in
terms of the spreadsheets . . . that I reviewed as background for
the contract. . . . For that reason . . . the best answer, given the
real-world data that we have, is to place a net value of zero on
them because that's what the parties themselves did.
5/21/15 Tr. at 5336-40 (Fischel).
Moreover, according to iHeart, even SoundExchange's economic
expert, Dr.
[[Page 26376]]
Rubinfeld, admitted that none of the experts in this proceeding
likewise ``actually put[ ] a numerical value on these additional
items.'' 5/28/15 Tr. 6289 (Rubinfeld). In addition, iHeart notes, Dr.
Rubinfeld acknowledged that several of these items were ``terms that
favor iHeart,'' and yet were not separately valued and priced by the
parties. Id. at 6435.
However, iHeart does not conclude from the foregoing that the
iHeart/Warner Agreement sets forth a usable benchmark rate that mirrors
the stated rates of $0.[REDACTED] to $0.[REDACTED], or even the
purported lower rates of $0.[REDACTED] to $0.[REDACTED] resulting from
the [REDACTED] adjustment applied by Drs. Fischel and Lichtman (as
discussed infra). Rather, according to Dr. Fischel, the foregoing rates
reflect only the average rates in or derived from the iHeart/Warner
Agreement. Dr. Fischel asserts that such an average rate ``does not
necessarily reflect the rate . . . that a willing buyer and willing
seller would have reached in a marketplace'' unconstrained by
government regulation or interference.'' Fischel/Lichtman AWDT ] 44.
In an attempt to correct for this alleged defect, Dr. Fischel
conceptualizes the Warner plays on iHeart as comprising two distinct
economic bundles. Dr. Fischel states:
As an economic matter, the [iHeart]-Warner agreement reflects a
bundle of two distinct sets of rights. The first set provides a
license for iHeartMedia to play the same number of Warner
performances as it would have played absent the agreement. The
second set of rights provides a license for iHeartMedia to play
additional Warner performances, above and beyond those it would have
played absent the agreement.
Id. ] 45.
Accordingly, Dr. Fischel opines that compensation for the first
``bundle'' of rights is directly affected by the existing statutory
rate, and therefore ``provides essentially no information about the
rate willing buyers and sellers would negotiate in the absence of
government regulation.'' Id. ] 48.
However, Dr. Fischel opines that the second ``bundle'' he
conceptualizes is ``highly relevant to what willing buyers and willing
sellers would negotiate if unconstrained by government regulation.''
Id. ] 49. In support of this opinion, Dr. Fischel testified:
This part of the bundle involves a license for iHeart to play
additional Warner performances, above and beyond those it would have
played absent the agreement. Those additional performances are not
directly influenced by the existing statutory rate, because absent
the agreement, iHeart wouldn't play them and Warner wouldn't receive
any compensation for them. The royalty rate negotiated for this
second part of the bundle, therefore, is a more appropriate measure
of what a willing buyer and a willing seller would negotiate if
unconstrained by government regulation. Warner licensed the rights
to those performances to iHeart, and iHeart compensated Warner for
that license, at rates that were acceptably profitable for both
parties. The rate here was not determined by regulation; it was
determined by the give-and-take of a true negotiation.
Id.
Thus, Dr. Fischel needed to distinguish between the two bundles
that he had conceptualized, which required him to consider the
projected number of Warner plays in each bundle. To perform this
analysis, he relied upon a set of projections that iHeart's Board of
Directors used when evaluating and approving the iHeart/Warner
Agreement. Fischel/Lichtman AWDT ] 40 (projections also served as basis
for iHeart Board's approval of stated rates in iHeart/Warner
Agreement). According to iHeart's Head of Business Development and
Corporate Strategy, Steven Cutler, this set of projections, referred to
by iHeart as the ``Today's Growth'' model, was [REDACTED], representing
the parties' ``best estimates'' of performance under the iHeart/Warner
Agreement. 6/2/15 Tr. 7247-48 (Cutler); see Fischel/Lichtman AWDT ] 40;
5/21/15 Tr. 5365 (Fischel).
The Today's Growth model projected that iHeart would play
[REDACTED] total performances of all labels' sound recordings over the
[REDACTED] term of the agreement. Fischel/Lichtman AWDT ] 41 and Ex. A
thereto (``Projected Performances During Initial Term of iHeartMedia
Agreement with Warner''); IHM Ex. 3034 at 170. iHeart estimated
Warner's share of those performances under two key scenarios: (1) The
[REDACTED] scenario, which reflected iHeart's expectations if no
agreement with Warner was reached; and (2) the ``Warner Direct License
Terms'' scenario, which reflected its projections under the terms and
conditions of the Warner agreement as signed. Fischel/Lichtman AWDT ]
42 and Ex. B thereto (``Projected iHeartMedia/Warner Royalty Rates'');
IHM Ex. 3034 at 172.
Under scenario (1), iHeartMedia expected Warner music to constitute
[REDACTED]% of total performances, or [REDACTED] performances, on the
iHeart custom service. Under scenario (2), iHeart expected to increase
Warner's share of performances to [REDACTED] percent, and thus expected
to play [REDACTED] Warner performances over the duration of the
agreement. Fischel/Lichtman AWDT ] 42; IHM Ex. 3034 at 172 (``Projected
iHeartMedia-Warner Royalty Rates'').
Under scenario (1), without the steering of additional plays at
lower average rates, iHeart expected to pay Warner a total of
$[REDACTED] in royalties. Under scenario (2), with the steering of
additional plays at lower average rates, iHeart expected to pay Warner
a total of $[REDACTED]. Fischel/Lichtman AWDT ]] 43, 51.
Dr. Fischel then divided the total expected compensation under the
Today's Growth Model ($[REDACTED]) by the total number of performances
projected in that model ([REDACTED]). This calculation projected an
average per-play rate of $0.[REDACTED], rounded to $0.[REDACTED].
Fischel/Lichtman AWDT ]43; IHM Ex. 3034 at 172 (``Projected iHeart
Media/Royalty Rates'').
Even before Dr. Fischel attempted to determine his ``incremental
rate'' under the iHeart/Warner Agreement, he emphasized that this
average rate itself was [REDACTED]% lower than the statutory rate of
$0.0025 that iHeart would otherwise pay under the applicable NAB/
SoundExchange settlement. Fischel/Lichtman ] 43.
Additionally, Drs. Fischel and Lichtman opined that this
$0.[REDACTED] rate needed to be adjusted downward for a [REDACTED]
adjustment, to reflect the fact that, under the iHeart/Warner
Agreement, [REDACTED] are not subject to a royalty payment by iHeart to
Warner. Id. ] 35. They then noted that iHeart, had projected that an
adjustment for [REDACTED] would reduce the effective average per-play
rate under the iHeart/Warner Agreement ``to between $0.[REDACTED] and
$0.[REDACTED].'' Id.
Dr. Fischel then turned his analysis toward the calculation of his
so-called ``incremental rate.'' He noted the simple math demonstrating
that, according to the Today's Growth Model, the difference in the
number of Warner plays on iHeart's custom noninteractive service
between Scenario (2) ([REDACTED] plays) and Scenario (1) ([REDACTED]
plays) equaled [REDACTED] plays. He further noted that the difference
in royalties--again according to the Today's Growth Model--between
Scenario (2) ($[REDACTED]) and Scenario (1) ($[REDACTED]) equaled
$[REDACTED]. Fischel/Lichtman AWDT ]] 50-51; IHM Ex. 3034 at 172
(``projected iHeart Media/Warner royalty rates.
Dr. Fischel then divided the $[REDACTED] additional revenue by the
additional [REDACTED] plays to
[[Page 26377]]
derive his ``incremental rate'' of $0.0005. Id. As noted supra, Dr.
Fischel opined that his so-called ``incremental rate of $0.0005 was a
better benchmark than the average rate of $0.[REDACTED] implied by the
Today's Growth Model or the rates actually set forth in the iHeart/
Warner Agreement, because the so-called ``incremental rate'' was not
tainted by the upward influence of the statutory rate. Accordingly, Dr.
Fischel opined, ``this $0.0005 per-performance rate is the best
available evidence on the question at issue in this proceeding.''
Fischel/Lichtman AWDT ] 52.\162\
---------------------------------------------------------------------------
\162\ Dr. Fischel then speculates as to whether even the non-
incremental plays would be priced higher or lower than $0.0005, but
he comes to no conclusion in that regard. Fischel/Lichtman AWDT ]
53.
---------------------------------------------------------------------------
As noted at the outset of this section, the iHeart/Warner Agreement
contains a greater-of rate structure. However, Drs. Fischel and
Lichtman declined to incorporate any greater-of formula into their rate
structure and they did not include any percentage-of-revenue
alternative rate in their proposed benchmark. Dr. Lichtman explained
this deviation from the iHeart/Warner Agreement: ``[N]o one thought
that provision would be binding. So they have a number that both
parties looked at and said that number would never actually be used in
the real world, so who cares what the number is . . ..'' 5/15/15 Tr.
4016-17 (Lichtman); see also 5/21/15 Tr. 5334 (Fischel) (same).\163\
---------------------------------------------------------------------------
\163\ iHeart speculates that the percentage-of-revenue prong was
added to the iHeart/Warner Agreement by Warner to set a precedent
for future rate-setting proceedings for sound recordings and points
to a document pertaining to Warner's negotiations with [REDACTED]
for support. See IHM Ex. 3435 at 5; 5/15/15 Tr. 4024-25 (Lichtman).
However, iHeart does not identify any sufficiently similar evidence
that suggests the percentage-of-revenue prong in the iHeart/Warner
Agreement was included for this reason.
---------------------------------------------------------------------------
b. The 27 iHeart/Indies Agreements
iHeart also relies upon its separate agreements with 27 Indies
that, as of July 2014, accounted for approximately [REDACTED] percent
of performances on its custom service. Fischel/Lichtman AWDT ] 57 and
Ex. C thereto; IHM Exs. 3340, 3342, 3343, 3345, 3347, 3349, 3351-3370,
3642. Despite this relatively small percentage of plays (compared to
Warner), Drs. Fischel and Lichtman opine that ``these 27 deals provide
important additional evidence as to the rates negotiated by willing
buyers and willing sellers.'' Fischel/Lichtman AWDT ] 57.
The principal custom noninteractive rate in these 27 agreements is
[REDACTED]. Indeed, the 27 Warner/Indies Agreements contain the
following provision:
[REDACTED]
See generally IHM Exs. 3340, 3342, 3343, 3345, 3347, 3349, 3351-
3370, 3642. However, iHeart states that [REDACTED] of these 27
webcasters has paid royalties under the percentage of revenue prong,
because the per-play rate has generated the higher royalty. Fischel/
Lichtman AWDT ] 61.
Each of these 27 iHeart/Indies Agreements contains a [REDACTED]-
year term. Id. These iHeart/Indies Agreements also contain other rates
that are not applicable to custom noninteractive webcasting. Id.; see
Fischel/Lichtman AWDT ] 58.
As in the iHeart/Warner Agreement, the iHeart/Indies Agreements
contain various additional items, some of which iHeart claims inure to
its benefit, and some of which benefit the labels. iHeart points, by
way of example, to the provision in all 27 agreements that iHeart
received a license for [REDACTED] and thereby avoided the risk of
[REDACTED] Additionally, in many of those agreements, the Indies agreed
[REDACTED]. Fischel/Lichtman AWDT ] 62.
As they analyzed the iHeart/Warner Agreement, Drs. Fischel and
Lichtman concluded that the value of these terms cannot be determined
in isolation, and found that there was no evidence indicating that the
parties had explicitly assigned value to them when analyzing whether to
enter into these 27 agreements. Accordingly, they concluded that it is
appropriate to assign a zero net value to the non-pecuniary terms. Id.
Therefore, Dr. Fischel proceeded to derive a so-called
``incremental rate'' for the 27 iHeart/Indies Agreements. He determined
that, between 2012 and 2014, and prior to the execution of these 27
agreements, iHeart expected to pay to all these Indies $[REDACTED] (of
which $[REDACTED] was for custom webcasts) covering [REDACTED]
performances (of which [REDACTED] were custom webcasts), resulting in
an average royalty rate of $0.[REDACTED] (iHeart was subject to the
SoundExchange/NAB settlement rates). IHM Ex. 3034 (Fischel/Lichtman
AWDT, Ex. D).
Dr. Fischel then determined that, after the execution of these 27
iHeart/Indies Agreements, total performances would increase to
[REDACTED] (of which [REDACTED] were custom webcasts) and total
royalties would increase to $[REDACTED] (of which $[REDACTED] was for
custom webcasts), resulting in an average royalty rate of
$0.[REDACTED]. Id.
As with the iHeart/Warner analysis, Dr. Fischel then calculated his
so-called ``incremental rate'' by applying his ``two bundles''
approach. He noted that iHeart expected to play an additional
[REDACTED] performances and expected to pay $[REDACTED] more in
royalties. This incremental difference yielded the so-called
``incremental rate'' of $0.[REDACTED] ($[REDACTED]/[REDACTED] plays).
Fischel/Lichtman AWDT ] 68; IHM Ex. 3034 (Fischel/Lichtman AWDT, Ex. D
thereto).
Unlike the iHeart/Warner Agreement, these 27 Warner/Indies
Agreements were not supported by an internal projection of expected
increased plays, such as the ``Today's Growth'' model upon which Dr.
Fischel relied for his iHeart/Warner ``incremental'' analysis. Rather,
Dr. Fischel testified that he and Dr. Lichtman ``assumed (consistent
with our understanding) that iHeart believed that, after signing each
of these deals, it would increase each label's share of all webcasts
([REDACTED]) by [REDACTED] percent.'' Fischel/Lichtman AWDT ] 66.
Apparently, Dr. Fischel did not use iHeart's or his own ``projections''
of increased performances, as he did for his iHeart/Warner analysis,
but rather ``assume[d] iHeart approximately met its projections for . .
. custom performances,'' and therefore ``the projections in [this]
category[y] [are] equal to the actual number of performances.''
Fischel/Lichtman AWDT ] 66 (emphasis added).
Drs. Fischel and Lichtman concluded from the foregoing that the
$0.[REDACTED] ``incremental rate'' that they estimated for the 27
iHeart/Indies Agreements ``demonstrates our main conclusion, regarding
the $0.0005 per-performance rate.'' Fischel/Lichtman ] 69.\164\
---------------------------------------------------------------------------
\164\ Drs. Fischel and Lichtman acknowledged the obvious--that
the $0.[REDACTED] ``incremental'' rate derived from the iHeart/
Indies Agreements was lower than the $0.[REDACTED] ``incremental''
rate derived from the iHeart/Warner Agreement. See 5/21/15 Tr. 5383
(Fischel). They opined that the Indies might receive a lower rate
because the Indies artists may be ``less well-known,'' and because
Indies may have repertoires that are not ``already familiar to
listeners.'' Fischel/Lichtman AWDT ] 69. This testimony is generally
consistent with the Judges' finding, supra, with regard to the
Pandora/Merlin Agreement, that Indies in fact receive lower royalty
rates than the Majors.
---------------------------------------------------------------------------
3. SoundExchange's Criticisms of the iHeart Rate Proposal
a. Introduction
SoundExchange attacks the iHeart rate proposal on six separate
fronts. First, SoundExchange sets forth an overview that purports to
provide a different and more accurate understanding of the terms of the
iHeart/Warner Agreement, compared with the presentation put forth by
iHeart. Second, SoundExchange
[[Page 26378]]
seeks to demonstrate the invalidity of Dr. Fischel's ``incremental
rate'' approach. Third, SoundExchange avers that iHeart's analysis is
also flawed because it fails properly to consider and give value to
other elements of consideration in the iHeart/Warner Agreement, which
would result in a significantly higher benchmark per-play rate. Fourth,
SoundExchange takes issue with iHeart's failure to account for the
parties' actual performance under the iHeart/Warner Agreement. Fifth,
SoundExchange takes issue with iHeart's reliance on a single projection
made by iHeart during negotiations (the ``Today's Growth'' model) to
establish a benchmark in this proceeding, and its failure to consider
other contemporaneous alternative projections. Sixth, SoundExchange
seeks to discredit the 27 Warner/Indies Agreements as proper
benchmarks.
b. SoundExchange's Overview of the iHeart/Warner Agreement
SoundExchange begins its critique by referring to the negotiation
period before the iHeart/Warner Agreement was executed. It notes that
iHeart originally offered Warner [REDACTED]. IHM Ex. 3114 at 10. Warner
rejected that proposal and according to Dr. Fischel, Warner ultimately
achieved a ``better deal than [REDACTED]. 5/22/15 Tr. 5542, 5551
(Fischel).\165\
---------------------------------------------------------------------------
\165\ SoundExchange also notes that Sony and Universal turned
down a similar offer from iHeart because ``[REDACTED].'' SX Ex.1139;
SX Ex. 25 at 12, ] 35 (Harrison WRT); 4/28/15 Tr. 509-510 (A.
Harrison) (describing iHeart's proposal as ``[REDACTED].'')
---------------------------------------------------------------------------
When SoundExchange turns its attention to the several non-
rate and non-steering aspects of the iHeart/Warner Agreement, it notes
the following provisions that were essentially ignored by iHeart.
iHeart agreed to provide to Warner the greater of [REDACTED]% of all
AIP inventory that iHeart offers in the marketplace and AIP having a
``fair market value,'' as stated in the iHeart/Warner Agreement, of at
least $[REDACTED] per agreement year. SX Ex.33 at 19-20 Sec. 5(a).
In addition to this ``[REDACTED] AIP,'' iHeart agreed to
provide Warner with another advertising opportunity, to participate in
two ``[REDACTED]'' campaigns each year. This ``[REDACTED]'' guarantees
at least [REDACTED] insertions of ads in duration up to [REDACTED]
seconds each on iHeart's terrestrial stations for artists selected at
Warner's discretion. Each advertisement also must include a [REDACTED].
SX Ex. 33 at 19-20 Sec. 5(a); 81, Exhibit F. Warner calculated the
value of a single [REDACTED] campaign at $[REDACTED], yielding a
combined value for [REDACTED] such campaigns of close to $[REDACTED]
over the initial term of the agreement. SX Ex. 32 at 14 n.9 (Wilcox
WRT); 6/3/15 Tr. 7403 (Wilcox).
iHeart also agreed to pay royalties to Warner for
[REDACTED]. SX Ex. 33 at 10 Sec. 1(pp); SX Ex. 32 at 14 (Wilcox WRT).
iHeart agreed to pay Warner a $[REDACTED] fee for a
[REDACTED] provision, the [REDACTED] agreement, which iHeart requested
be in a separate agreement but ultimately was included in the iHeart/
Warner Agreement. 6/3/15 Tr. 7387 (Wilcox).\166\
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\166\ In pertinent part, the [REDACTED] Agreement provided that,
in exchange for a $[REDACTED] to Warner by iHeart, Warner granted to
iHeart [REDACTED] SX EX. 1339.
---------------------------------------------------------------------------
Through testimony at the hearing, SoundExchange and Warner asserted
that Warner perceived the additional items it received, combined with
the rate and steering terms, as greater than what it would have
received under the statutory license. 5/7/15 Tr. 2370 (Wilcox) (Warner
received ``a package of consideration that is material and greater and
different in positive ways than what we would be obtaining just through
a compulsory statutory deal.''). Further, Mr. Wilcox testified that he
did not think this ``deal'' would ``go forward on the existing terms if
one of these were missing.'' 6/3/15 Tr. 7416 (Wilcox). However,
SoundExchange did not proffer evidence or testimony that was
contemporaneous with the negotiation of the iHeart/Warner Agreement
that was probative as to whether Warner required the other contract
terms in order to avail itself of the rate and steering terms.
SoundExchange notes, however, (regarding the additional contract items
of potential value to Warner) that iHeart did not produce a fact
witness who testified regarding the actual value of these terms to
iHeart.
SoundExchange also notes, as did iHeart, that the latter also
received additional contractual consideration beyond the right to
perform Warner's sound recordings under the agreement. See Fischel/
Lichtman AWDT at 20 (``insurance policy'' allowing iHeart to avoid
[REDACTED] if [REDACTED] and [REDACTED] protection if [REDACTED]
granted better terms to [REDACTED] for [REDACTED] service); SX Ex. 33
at 31.
However, despite the absence of any actual values being placed by
the parties on these additional items, Mr. Wilcox concluded that the
net value of all the other consideration provisions is ``heavily
weighted to the Warner Music Group.'' 6/3/15 Tr. 7385 (Wilcox).
SoundExchange also notes in this context, as it did in its
opposition to Pandora's rate proposal, that the steering elements of
the iHeart/Warner Agreement provide only ``first mover'' advantages''
that would be ``mathematically impossible'' to replicate across the
industry. 5/7/15 Tr. 2374 (Wilcox); Rubinfeld CWDT at 46 ] 183; 6/2/15
Tr. 7239 (Cutler). Moreover, SoundExchange noted that iHeart found its
ability to steer toward any particular record company to be limited. As
noted in the Judges' discussion of the Pandora rate proposal,
SoundExchange asserts that, when iHeart tried to [REDACTED] it created
``challenging listening experiences.'' For example, a listener's seeded
``[REDACTED] Radio Station'' [REDACTED] turned into a de facto
``[REDACTED] Radio Station,'' [REDACTED] and a listener's seeded
``[REDACTED] Radio Station'' [REDACTED] turned into a de facto
``[REDACTED] Radio Station [REDACTED]. Thus, iHeart concluded that too
much steering (to [REDACTED]%) was ``[REDACTED] all to the detriment of
our custom product.'' SX Ex. 1037.
c. SoundExchange's Criticism of the ``Incremental Rate'' Approach of
Drs. Fischel and Lichtman
SoundExchange begins its critique with these undisputed assertions:
None of these agreements--or any other agreement submitted
by any other party--has $0.[REDACTED] as the stated per-performance
rate or within any range of stated rates.
There is not a single document in evidence showing that
any parties--not just Warner and iHeart--ever had a ``meeting of the
minds'' as to a rate of $0.[REDACTED] per-performance.
There is not a single communication between iHeart and
Warner citing a rate of $0.[REDACTED] under the iHeart-Warner
agreement.
No internal iHeart document shows such a rate for the
iHeart-Warner agreement.
There is no evidence in the record showing that a willing
copyright owner would agree to license the performance of its sound
recordings at a rate of $0.[REDACTED].
None of the other economic experts who testified used such
an approach in his written testimony.
SX PFF ]] 768-69 (citing 5/22/15 Tr. 5489-90 (Fischel); Rubinfeld CWRT
] 23); Id. ]] 784-88 (and additional citations to the record therein).
Next, SoundExchange takes substantive aim at the ``two bundles'' of
[[Page 26379]]
rights approach. SoundExchange (accurately) summarizes this opinion as
stating that, according to Drs. Fischel and Lichtman, the only relevant
information regarding the rate to which willing buyers and willing
sellers would agree, absent a statutory license, can be found in the
number of performances and revenue in the second bundle.\167\ As
SoundExchange continues to correctly note, they then claim that
dividing the so-called ``incremental'' revenue by the ``incremental''
number of performances yields the precise per-play royalty rate to
which the parties would have agreed for 100% of the performances
expected under their agreement in a world without the statutory
license. See SX PFF ] 771 (and record citations therein).
---------------------------------------------------------------------------
\167\ SoundExchange also accurately summarizes the contents of
the two bundles: ``The first is a `bundle' for the purported right
to perform sound recordings up to the number of performances [Drs.]
Fischel [and]Lichtman say the parties expected to occur under the
statutory license in the absence of a direct license,'' and ``[t]he
second is a `bundle' for the purported right to make all the
additional performances over and above those in the first bundle
that [Drs.] Fischel [and]Lichtman say the parties expected to occur
because of the direct license.'' SX PFF ] 770.
---------------------------------------------------------------------------
The fundamental problem with this ``incremental'' approach,
according to SoundExchange, is that it artificially and erroneously
divides the royalty payments by breaking the single actual bundle of
performances under the agreement into two hypothetical bundles.
According to SoundExchange, that approach artificially and erroneously
divides consideration into separate bundles that the parties did not
negotiate. To make the point, Dr. Rubinfeld, on behalf of
SoundExchange, applied an analogy: In a ``buy one, get one free''
transaction, the price of the second product is not zero; the second
product could not be obtained without paying the full price for the
first. Accordingly, the appropriate price for each of the two products
is not the ``incremental price'' of the second item, but rather the
average price of the two items. Rubinfeld CWRT at 6, ] 24.
SoundExchange also notes that Drs. Fischel and Lichtman analyzed
the Pandora/Merlin Agreement through the lens of their so-called
incremental approach and concluded that the proper rate derived from
that agreement--for use as the statutory benchmark--is between $0.0002
and negative $0.0002 (i.e., a rate at which the record companies would
pay the noninteractive services rather than receive royalties from
these services). See Fischel/Lichtman AWDT at 40-41. In attempting to
highlight the purported absurdity of this result, SoundExchange notes
that, despite the clear economic appeal of such a range of rates to
Pandora, its own expert, Dr. Shapiro, did not adopt such an incremental
rate, but rather recommended a rate that was multiple times greater.
Rubinfeld CWRT at 22, ] 79.
For these reasons, SoundExchange asserts that the so-called
incremental per-play approach of Drs. Fischel and Lichtman must be
rejected, in favor of an approach that determines per-play rates on an
average royalty basis.
d. The Alleged Importance of the Value of Non-Rate/Steering Items in
the iHeart/Warner Agreement
SoundExchange criticizes Drs. Fischel and Lichtman for failing to
make a sufficient attempt to attach monetary values to provisions in
the iHeart/Warner Agreement. See Fischel/Lichtman AWDT ] 39. More
particularly, SoundExchange rejects their assumption that the non-
royalty rate term provisions benefiting Warner, and those benefiting
Heart, have a net value of zero. See 5/21/15 Tr. 5/21/15 Tr. 5340
(Fischel); (Fischel/Lichtman AWDT at 20-21).
Rather, SoundExchange asserts the record reflects that this ``net
zero value'' conclusion is inaccurate. The ``record'' to which
SoundExchange cites to support this position is a conclusory statement
made by Warner's testifying executive, Mr. Wilcox, who stated that the
net value of the non-royalty rate provisions is ``heavily weighted to
the Warner Music Group.'' 6/3/15 Tr. 7385 (Wilcox).\168\ SoundExchange
further seeks to buttress its argument that the iHeart benchmark fails
to adjust for the value of items that favored Warner by reciting the
list of such items and noting that Mr. Wilcox, in his oral and written
testimony, characterized such items as ``incredibly important''
([REDACTED]); ``so important'' ([REDACTED]); a ``floor valuation''
([REDACTED]); an ``immediate uptick'' in value ([REDACTED]). SX PFF ]]
810-814, 827 (and citations to the record therein).
---------------------------------------------------------------------------
\168\ Actually, Mr. Wilcox made this statement with regard to a
list of contractual items that would provide value only to Warner,
not the entirety of other non-royalty/steering items that Drs.
Fischel and Lichtman asserted had value to both parties and should
be weighed and deemed for rate purposes to have a net value of zero.
See id. at 7384-85 (Mr. Wilcox responding to a question regarding a
demonstrative list of contractual items and testifying that
``they're heavily weighted to the Warner Music Group. These were,
every one of them, things that were important wins for us, if you
will, in the negotiation and were key to getting to yes.''). Drs.
Fischel and Lichtman did not dispute that some contractual items had
value to Warner, but rather concluded that the absence of valuations
by the parties required an expert to net the offsetting values at
zero. Thus, the cited testimony does not support SoundExchange's
assertion in the text, supra, that ``the record'' reflects a net
value for these other items tilted toward Warner.
---------------------------------------------------------------------------
SoundExchange also takes issue with iHeart's claim, as asserted by
Dr. Fischel, that the absence of any projections or spreadsheets
detailing the value of these additional items is evidence that the
parties did not assign values to them. However, SoundExchange
acknowledges that ``when the Judges asked Mr. Wilcox whether Warner had
assigned a number value to . . . many of these provisions,'' his
``consistent'' response was that he ``could not be certain'' of the
number value. SX PFF ] 827.
i. AIP and [REDACTED]
Among the non-royalty and non-steering elements within the iHeart/
Warner Agreement, SoundExchange emphasizes iHeart's failure to adjust
its benchmark to reflect the value of two items referred to supra, AIP
and [REDACTED].
(A) AIP
SoundExchange notes that the iHeart/Warner Agreement itself states
that AIP has a ``fair market value'' of at least $[REDACTED] over
[REDACTED] years. SX PFF ]] 807-808 (and citations to the record
therein). Thus, according to SoundExchange, it is irrelevant whether
the parties had internal projections or spreadsheets establishing the
value of AIP. See SX Ex 33 at 19, ] 5(a)(ii) (declaring that AIP has a
``fair market value of at least [REDACTED] Dollars USD $[REDACTED] per
Agreement Year'').
Additionally, SoundExchange points to internal iHeart documents in
which Bob Pittman, iHeart's C.E.O., asked of his employees, with regard
to AIP, [REDACTED]'' SX Ex. 207. SoundExchange further notes that, in
an attempt to bridge differences in the ongoing negotiations, Mr.
Pittman suggested that iHeart asked Warner if AIP has value to Warner,
because it has value to iHeart. SX Ex. 1372. Additionally,
SoundExchange points to Mr. Wilcox's written and oral testimony, in
which he claims to recall that [REDACTED] indicated that iHeart
intended to [REDACTED], but he cannot identify a document confirming
that alleged representation by [REDACTED]. Wilcox WRT ] 23, 6/3/15 Tr.
7460-61 (Wilcox)
SoundExchange also points to numerous documents in which iHeart
confirms the substantial value to record companies of AIP
participation. See, e.g., IHM Exs. 3114 at 5, 10; 3121 at 4; 3225 at 2.
Further, during negotiations, iHeart emphasized to Warner that AIP had
substantial stand-alone value. See
[[Page 26380]]
SX Ex. 93 at 1. Additionally, at the hearing, witnesses for both iHeart
and Warner acknowledged the significant value of AIP to a record
company. 5/21/15 Tr. 5194-95 (Poleman) (iHeart executive describing AIP
as ``invaluable''); 6/3/15 Tr. 7392 (Wilcox); Wilcox WDT at 12-13;
(Warner executive describing AIP as ``[REDACTED]'').
Based on such reasoning, iHeart estimated the quantity of AIP to be
given to Warner not only [REDACTED], but also [REDACTED], as set forth
on iHeart's rate card.'' See 5/20/15 Tr. 4885-86 (Pittman). As
SoundExchange further points out, Mr. Poleman also noted that access to
AIP slots could in the future be [REDACTED], and, if so, Warner would
[REDACTED]. 5/21/15 Tr. 5189-90 (Poleman). See also SX Ex. 1139
([REDACTED].
For these reasons, SoundExchange avers that iHeart erred in
declining to attribute value to AIP in its iHeart/Warner
benchmark.\169\
---------------------------------------------------------------------------
\169\ SoundExchange, noting one of iHeart's rebuttals on this
issue, acknowledges that in the past, iHeart provided AIP
[REDACTED]. Therefore, SoundExchange recognized that AIP provisions
could be construed as a form of ``insurance'' against [REDACTED].
SoundExchange asserts that the threat that iHeart would [REDACTED]
AIP was real, so any ``insurance'' value would be quite high, albeit
indeterminate. See SoundExchange PFF ] 823 (and citations to the
record therein).
---------------------------------------------------------------------------
(B) [REDACTED]
According to SoundExchange, the value of [REDACTED] is different
from [REDACTED] AIP in a way that enhances record company promotional
programs on iHeart. First, unlike AIP, Warner was not [REDACTED], and
iHeart did not [REDACTED]. 6/3/15 Tr. 7405 (Wilcox).
The iHeart/Warner Agreement's [REDACTED] provision guarantees
Warner at least [REDACTED] of up to [REDACTED] for [REDACTED] on all of
iHeart's [REDACTED] of [REDACTED] chosen by Warner. SX Ex. 33 at 19-20
Sec. 5(a); id. at 81, Exhibit F, Sec. Sec. 1-2. According to Warner,
both the [REDACTED] and the fact that [REDACTED] are unique to this
program, [REDACTED]. 6/3/15 Tr. 7401 (Wilcox). Further, the [REDACTED]
provisions require iHeart to include a [REDACTED] and give Warner the
right to [REDACTED], and to [REDACTED]. SX Ex. 33 at 82, Exhibit F,
Sec. 7.
Warner did not attempt to value [REDACTED] contemporaneous with the
negotiations, and did not include a stated value for [REDACTED] in the
iHeart/Warner Agreement. SoundExchange did not utilize an expert to
value [REDACTED] in the hearing. However, for this proceeding, a non-
expert, Mr. Wilcox, the Warner executive, calculated his understanding
of the value of a [REDACTED] campaign at $[REDACTED] per year, or
approximately $[REDACTED] for the [REDACTED] campaigns to which Warner
was entitled over the initial term of the agreement. Wilcox WRT at 14
n.9; 6/3/15 Tr. 7403 (Wilcox). SoundExchange notes that no iHeart fact
witness disputed this attempted valuation.
For these reasons, SoundExchange disputes the decision by Drs.
Fischel and Lichtman to assign no independent value to the [REDACTED]
benefits contained in the iHeart/Warner Agreement.
ii. [REDACTED] Agreement
Another non-royalty/steering provision identified in the iHeart/
Warner Agreement is a reference to a separate agreement--the
``[REDACTED] Agreement'' between the parties. SoundExchange avers that
Drs. Fischel and Lichtman wrongly omitted the value of this $[REDACTED]
payment from their calculation. According to SoundExchange, this
omission was improper because Mr. Wilcox testified that ``it was
``worth . . . $[REDACTED]'' 6/3/15 Tr. 7385 (Wilcox). Mr. Wilcox
further testified that iHeart had requested that this ``[REDACTED]
transaction be set forth in a separate agreement, but Warner preferred
that it be included--as it ultimately was--in the iHeart/Warner
Agreement. 6/3/15 Tr. 7387 (Wilcox). SoundExchange also notes that
iHeart does not dispute that the $[REDACTED] was executed on the same
day. 6/2/15 Tr. 7304 (Cutler); 5/22/15 Tr. 5505 (Fischel). Further,
SoundExchange points out that none of iHeart's fact witnesses testified
that the $[REDACTED] was not consideration tied closely to the
webcasting agreement.
SoundExchange acknowledges that the ``[REDACTED] Agreement''
contains an [REDACTED]. See SX Ex. 1339 at 1-2. However, SoundExchange
argues that iHeart is inconsistent by claiming that the Judges should
apply that express clause, yet they should ignore the express valuation
of AIP at $[REDACTED] in the iHeart/Warner Agreement. See SX PFF ] 830.
Additionally, SoundExchange avers that Warner would not have executed
the webcasting agreement (all else equal) absent the $[REDACTED]
payment. 6/3/15 Tr. 7388 (Wilcox) (``It was a material amount of money
and important to us as part of the total list of consideration we were
getting . . .'').
In sum, when Dr. Rubinfeld and SoundExchange account for all of the
value they claim was missing from the valuation undertaken by Drs.
Fischel and Lichtman, they conclude that under iHeart's ``Today's
Growth'' model, the benchmark per-play rate would equal or exceed
$0.[REDACTED]. See SX PFF ]] 846-853 (and record citations therein).
e. Performance Under the iHeart/Warner Agreement Has Not Matched the
Projections in iHeart's ``Today's Growth'' Model
In this proceeding, SoundExchange did not rely in its direct case
upon any of Warner's projections reflecting its expectations at the
time the iHeart/Warner Agreement was negotiated and executed. Rather,
SoundExchange relies upon an analysis by Dr. Rubinfeld of available
data regarding performances and royalties paid during the first eight
months of the iHeart-Warner agreement--from October 2013 to May 2014.
Dr. Rubinfeld relied upon this slice of performance data, rather than
the expectations of the contracting parties, because he found that
``performance data reflect actual experiences in the marketplace [and]
[t]he most recent performance data is likely to be the best predictor
of what will happen in the immediate future.'' Rubinfeld CWRT ] 27.
However, Dr. Rubinfeld also cautioned that ``review of a longer period
of performance data may offer additional value if the review reveals
important trends in the industry.'' Id. SoundExchange also points out
that Dr. Katz (the NAB's economic expert), Mr. Cutler (an iHeart
executive), and Aaron Harrison (a Universal executive) all recognized
the importance of using current performance data to update prior
projections or expectations. See SX PFF ]] 800, 803-04 (and citations
to the record contained therein).
From the 8-month slice of data that he reviewed and about which he
opined, Dr. Rubinfeld calculated an alternative average per-play
royalty rate. Rubinfeld CWDT at 57-59, ]] 229-236); SX Ex. 64
(Rubinfeld App. 1b, backup calculations).\170\ For custom
noninteractive performances, Dr. Rubinfeld calculated a per-play rate
of $0.[REDACTED] ($0.[REDACTED] rounded). When he attributed the value
of AIP to the per-play rate, his eight-month performance-based rate
rose to $0.[REDACTED] per play ($0.[REDACTED] rounded). SX Ex. 66. Dr.
Rubinfeld then attempted to equalize the iHeart/Warner and derived
potential statutory rate to equalize
[[Page 26381]]
royalty-bearing performances by adjusting for skips and for the playing
of [REDACTED]. To that end, he used the same adjustment factor, 1.1, as
he had used when performing his own interactive benchmarking analysis.
Rubinfeld CWDT at 58 ] 234; SX Ex. 66.
---------------------------------------------------------------------------
\170\ Dr. Rubinfeld also updated his calculations to include
June to September 2014). SX Ex. 133.
---------------------------------------------------------------------------
SoundExchange avers that Dr. Rubinfeld's calculations as they
relate to custom webcasting are conservative for the following reasons:
He makes no adjustment upward for the certainty of value
that Warner receives as a result of getting [REDACTED]. Rubinfeld CWDT
at 57, ] 229.
He does not account for any additional value from
[REDACTED].\171\
---------------------------------------------------------------------------
\171\ Dr. Rubinfeld claims his estimate is also conservative
because he applies the conservative pre-deal market share of
[REDACTED]% despite a claim by Warner that its actual market share
on iHeartRadio was approximately [REDACTED]%. Rubinfeld CWDT at 59
n. 135.
---------------------------------------------------------------------------
f. iHeart Relies on Projections From Only One Model--the ``Today's
Growth'' Model
SoundExchange avers that Drs. Fischel and Lichtman relied
exclusively on one specific projection that applied certain
``assumptions'' regarding future performance under the iHeart/Warner
Agreement. These expectations were contained in the ``Today's Growth''
model presented to iHeart's Board of Directors in mid-2013. Fischel/
Lichtman AWDT at 21 ] 40.
Although Drs. Fischel and Lichtman state that they chose the
``Today's Growth'' model because the iHeart Board purportedly ``relied
on [it] as the most realistic [case]'' when approving the iHeart-Warner
Agreement, 5/21/15 Tr. 5322 (Fischel), SoundExchange notes that iHeart
actually [REDACTED]. IHM Ex. 3338 (Cutler WDT); see also 6/2/15
Tr.7263-64 (Cutler).\172\
---------------------------------------------------------------------------
\172\ [REDACTED]. Cutler WDT, Ex. DD.
---------------------------------------------------------------------------
Although there is no evidence that the iHeart Board relied on the
``[REDACTED]'' or ``[REDACTED]'' models, SoundExchange avers (albeit
without supporting evidence) that because iHeart executives [REDACTED],
``it was wrong for Drs. Fischel and Lichtman to ignore them
completely.'' SX PFF ] 779. SoundExchange further notes that, although
Mr. Cutler testified that he viewed the Today's Growth model as the
best estimate, neither he nor any other iHeart witness testified that
[REDACTED]. Id. Consequently, SoundExchange asserts that the Fischel/
Lichtman analysis is compromised because they failed to test
[REDACTED]. See 5/22/15 Tr. 5496-97 (Fischel).
SoundExchange noted when it looked at actual performance under the
iHeart/Warner Agreement, one of the models that was [REDACTED]--the
``[REDACTED]'' Model--proved to be a more accurate estimate of
[REDACTED]. See 5/22/15 Tr. 5494 (Fischel); 6/2/15 Tr. 7264-65
(Cutler). This consistency between the ``[REDACTED]'' model and initial
actual performance existed, according to SoundExchange, because iHeart
had [REDACTED]. 5/22/15 Tr. 5522 (Fischel); 5/20/15 Tr. 4839-40
(Pittman) ([REDACTED]).
SoundExchange surmises that such [REDACTED] policies were put into
effect, and thus contributed to the actual initial performance under
the iHeart/Warner Agreement that resembled the ``[REDACTED]'' model
rather than the ``Today's Growth'' model. Whatever the reason, as Mr.
Cutler of iHeart acknowledged, iHeart's growth in Warner plays over the
initial contract period has been [REDACTED]. 6/2/15 Tr. 7264-65
(Cutler).
SoundExchange notes as well that Dr. Fischel admitted on cross-
examination that he had performed an analysis of the effective
incremental rates under the ``[REDACTED]'' model (but did not submit
evidence of that calculation or testify as to that calculation). On
cross-examination, Dr. Fischel further acknowledged that the
incremental rate he had calculated equaled $0.[REDACTED] per play under
the ``[REDACTED]'' model. 5/22/15 Tr. 5523 (Fischel).\173\
---------------------------------------------------------------------------
\173\ Although Dr. Fischel did not identify the average rate
derived from the ``[REDACTED]'' model, the basic math derived from
iHeart's ``[REDACTED]'' model projections reveal an average royalty
rate of $0.[REDACTED]. for the entirety of performances under the
iHeart/Warner Agreement if the ``[REDACTED]'' model had been
applied. SX Ex 207; See SX PFF ] 793.
---------------------------------------------------------------------------
SoundExchange additionally points to an effective per-play rate
that iHeart supposedly wrongly ignored--the rate derived from a model
[REDACTED]. See SX Ex. 367 at 005; 6/3/15 Tr. 7552-53 (Wilcox); see
also SX Ex. 92 at 15 (alternative model comparisons). Applying this
model, according to SoundExchange, yielded an average performance rate
above $0.[REDACTED], and an incremental rate of approximately
$0.[REDACTED]. Once again, these rates were mathematically derived by
SoundExchange, not its witnesses, based on ``the simple math that Prof.
Fischel described'' as applicable to calculating these rates. See SX
PFF ] 794.\174\
---------------------------------------------------------------------------
\174\ Although Mr. Wilcox testified that this model indicating
higher rates was [REDACTED], he did not clearly identify a model
upon which [REDACTED]. Indeed, Mr. Wilcox testified that that the
model that he identified as having been [REDACTED] ``was just one of
many sets of assumptions we used throughout the course of
negotiating this deal to stress-test the, you know, edge cases, you
know, trying to figure out that this deal would perform positively
for us in as many situations as we can throw at it. That's, sort of,
the point.'' 6/3/15 Tr. 7421 (Wilcox). Thus, it is unclear as to
exactly what model or models were [REDACTED]. Moreover, Mr. Wilcox
did not identify in his written testimony which model or models were
[REDACTED]. The Judges find Mr. Wilcox's oral testimony on this
subject to be neither credible nor informative.
---------------------------------------------------------------------------
g. The Alleged Deficiencies in the 27 iHeart/Indies Agreements and in
The Analysis of Their Terms by iHeart's Experts
SoundExchange raises several challenges to iHeart's attempt to use
the 27 iHeart/Indies Agreements as benchmarks in this proceeding.
First, SoundExchange avers that the status of these licensees as Indies
renders them unrepresentative of the rates and terms that a
noninteractive webcaster would negotiate with a major recorded music
company. SoundExchange notes that even Dr. Fischel acknowledged,
``Warner got a [[REDACTED]%] better deal than the Indies'' from iHeart.
5/22/15 Tr. 5542 (May 22, 2015) (Fischel).
Second, SoundExchange notes that the greater-of rate structure in
the iHeart/Indies agreements for custom noninteractive webcasting are
[REDACTED], and thus are unduly influenced by that statutory rate. See,
e.g., IHM 3340, Tab 7/Ex. F (agreement between Indie DashGo and iHeart
at 4, 8) Third, SoundExchange avers that these Indies comprise in total
no more than [REDACTED]% of plays on the service in July 2014, and most
account for less than [REDACTED]% of plays See SX PFF 863.\175\
---------------------------------------------------------------------------
\175\ SoundExchange does not provide a citation to the record
for these statistics, referring only to ``iHeart's data.'' SX PFF ]
863. By contrast, Drs. Fischel and Lichtman stated in their written
testimony that ``[a]s of July 2014, these 27 labels accounted for
approximately [REDACTED]% of webcast performances on iHeart,'' but
it was unclear from their testimony whether that percentage combined
custom and simulcast performances. See Fischel/Lichtman AWDT ] 57 &
n.51. Thus, the record is unclear what percentage of plays on
iHeart's custom noninteractive service is comprised of these 27
Indies' recordings.
---------------------------------------------------------------------------
SoundExchange notes that Drs. Fischel and Lichtman determined both
average and incremental rates related to these 27 iHeart/Indies
Agreements. iHeart calculated an average royalty rate of $0.[REDACTED]
from these 27 agreements, and an incremental rate of $0.[REDACTED] from
these 27 agreements. Fischel/Lichtman AWDT, Ex. D.
However, with regard to the incremental rate, SoundExchange notes
that Drs. Fischel and Lichtman did not possess the same contemporaneous
projections from iHeart (or the Indies) as
[[Page 26382]]
they had relied upon to determine the incremental rate under the
iHeart/Warner Agreement. 5/22/15 Tr. 5543 (Fischel). Accordingly, the
presumption by Drs. Fischel and Lichtman that iHeart would increase
performances by [REDACTED]% is not based on any iHeart projection, nor
is it supported by any provision of the 27 contracts. 5/22/15 Tr. 5544
(Fischel). Moreover, the starting point, pre-agreement performance
numbers were based upon iHeart's actual performances of Indie
recordings. Id. at 5545.\176\ From this number, Drs. Fischel and
Lichtman extrapolated an ``expectations''-based [REDACTED]% increase in
the number of post-execution performances. Id.
---------------------------------------------------------------------------
\176\ SoundExchange also points out that Drs. Fischel and
Lichtman only had performance data for [REDACTED] of the 27 Indies,
so they extrapolated the data that they had. Id. at 5548; see also
SX Ex. 2347.
---------------------------------------------------------------------------
Finally, SoundExchange notes the testimony of one Indie
representative, Mr. Barros of Concord, who stated that Concord would
not have entered into this agreement with iHeart to reduce custom
noninteractive webcasting rates to [REDACTED] if the agreement did not
also include the [REDACTED] and compensation for performances of
[REDACTED]. 5/28/15 Tr. 6506 (Barros).\177\ According to SoundExchange,
Drs. Fischel and Lichtman erred by failing to adjust their proposed
rates to account for this additional consideration.
---------------------------------------------------------------------------
\177\ As noted in the Judges' analysis of the Pandora/Merlin
Agreement, Mr. Barros did not indicate that Concord, or anyone on
its behalf, established a monetary value for these other contractual
items.
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4. The Judges' Analyses and Findings Regarding iHeart's Rate Proposal
a. The Judges Reject iHeart's ``Incremental'' Rate Analysis
The Judges agree with SoundExchange's critique that the
``incremental approach'' advanced by iHeart is an inappropriate method
for determining rates under Sec. 114. There are a number of reasons
why the ``incremental approach'' is improper.
First, the basic premise of the approach is erroneous. In an effort
to avoid the so-called ``shadow'' of the statutory rate, Drs. Fischel
and Lichtman essentially substitute a rate of zero for the number of
sound recordings played under the existing statutory rate. Then, they
conceptually divide the expected total of performances under the direct
license (the iHeart/Warner Agreement) into two value-bundles. The first
conceptual value-bundle (Scenario 1) consists of the lower number of
performances (without steering) that iHeart expected to be played under
the higher existing statutory rate. The second conceptual value-bundle
(Scenario 2) consists of the number of performances (with steering,
from [REDACTED]% to [REDACTED]% market share) iHeart expected to be
played under the lower direct deal rate. Drs. Fischel and Lichtman then
consider the expected difference between the higher revenues arising
from the direct deal. Finally, they divide the incremental revenue by
the number of incremental plays to determine their ``incremental
rate.''
This methodology intentionally attributes no market value to the
rate and revenue paid for the pre-incremental performances. Although,
as noted above, Drs. Fischel and Lichtman engage in this process in
order to remove the alleged impact of the ``shadow'' of the statutory
rate, they merely replace one supposed problem with a very real and
more serious problem. That is, they replace the statutory rate with an
effective rate of zero for the pre-incremental performances. There was
no evidence presented in this proceeding, indeed no logical evidence
could be presented, to support an assertion that the bulk of the pre-
incremental performances under iHeart's ``two bundle'' concept would be
priced at zero in an actual market. To state the obvious, the creation
of sound recordings is not costless, and prices are positive because
costs must be recovered.\178\
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\178\ It is also unsupported by the evidence that record
companies would forego all royalties in the hypothetical market
merely to obtain a promotional value from the playing of their
recordings on a noninteractive service.
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Relatedly, although iHeart would like the Judges to focus only on
the incremental number of performances and the incremental revenue,
those incremental values cannot exist without iHeart first paying for
the pre-incremental performances at pre-incremental rates. To put the
point colloquially, ``you cannot get there from here.'' That
tautological point is not avoided by arbitrarily attributing a zero
value to the pre-incremental performances.
SoundExchange makes this point well by analogizing to a ``buy one,
get one free'' offer. If a vendor offered an ice cream cone (to adopt
SoundExchange's demonstrative example at the hearing) for $1.00, but
offered two ice cream cones for $1.06, it would be absurd to conclude
that the true market price of an ice cream cone is the incremental six
cents. Rather, this offer indicates a market price of $0.53, the
average price for the two ice cream cones. Or, to take a common
example, tire sellers will often advertise a special offer: A buyer can
pay for three tires and get the fourth tire free. This is economically
(and mathematically) equivalent to a 25% reduction in the price of four
tires. No one could go to the automotive store and receive only the
``free'' fourth tire!
iHeart attempts to distinguish the ice cream cone example by noting
that, in the present case, Drs. Fischel and Lichtman are not
eliminating a market-based price for the pre-incremental bundle, but
rather are eliminating a government-set rate that casts a ``shadow'' on
the market. There are several errors in this reasoning. First, the
statutory rates were set after market participants provided the Judges
in the prior proceeding with market evidence. There is no a priori
reason to conclude that the rates set in that earlier proceeding failed
to reflect or approximate market forces, and iHeart does not provide
evidence as to why the Judges should re-litigate prior rates and reach
such a conclusion.\179\ Second, to use a zero rate in order to remove
the alleged shadow of the Judges' statutory rate or a settlement rate
would be, to put the matter colloquially, ``throwing out the baby with
the bathwater.'' A functionally zero rate for the pre-incremental
performances is no mere potential ``shadow;'' it is an ink blot that
obliterates any economic value inherent in the majority of the
performances for which the rates must be established.\180\
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\179\ Similarly, iHeart has not proffered evidence sufficient to
show why the rates set in settlements between parties, that both
parties agree may be evidence of a market rate, fail to reflect, or
at least approximate, market rates as of the time they were set.
\180\ On a less colloquial and more economic basis, iHeart has
confused an elasticity-type concept with price. iHeart calculates
the change in total revenue divided by the change in quantity. Such
a proportionate change is not equivalent to a unit price.
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Accordingly, the Judges reject iHeart's incremental approach and
they reject the $0.0005 rate its experts derived by using the
incremental approach. To be clear, that incremental $0.0005 proposed
rate does not constitute a benchmark or a guidepost which the Judges
have relied for any purpose, and that incremental rate and the analysis
from which it was derived has not influenced the Judges in their
determination of the statutory rate in this proceeding.\181\
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\181\ iHeart attempts to support its ``incremental'' analysis
with three arguments that it claims are confirmatory of the $0.0005
rate. See iHeart PFF ]] 236-260 (and citations to the record
therein). The Judges note that their rejection of this
``incremental'' analysis moots the relevance of any attempt to
confirm its purported contextual reasonableness. Further, the fact
that iHeart did not propose these approaches as benchmarks or as
other independent bases to set the rates makes them unhelpful and
inappropriate as evidence to support iHeart's rate proposal.
However, in the interest of completeness, the Judges note the
following with regard to those arguments. First, Drs. Fischel and
Lichtman undertook what they called a ``thought experiment,''
whereby they attempted to estimate a rate necessary for sound
recording copyright holders to maintain revenue at current levels if
100% of all listening to recorded music migrated to noninteractive
webcasting. (They concluded that the rate would be $0.[REDACTED] per
play.) They also did the same analysis on the assumption that only
25% migrated to noninteractive services. (They concluded that the
rate would be $0.[REDACTED] per play.) However, Drs. Fischel and
Lichtman acknowledge that this ``thought experiment'' is ``not
evidence of what a willing buyer and willing seller would
negotiate.'' Fischel/Lichtman AWDT ] 128 (emphasis added).
Therefore, such speculation is irrelevant to the Judges. Second,
Drs. Fischel and Lichtman performed an ``Economic Value Added
(``EVA'') analysis of the costs, revenues and necessary ROI of a
``hypothetical simulcaster'' to determine the rate necessary for it
to remain in business in the long-run, which they determined to be
between $0.[REDACTED] and $0.[REDACTED] per play. However, as the
Judges have repeatedly held, rate proceedings under section 114 are
not public utility style proceedings whereby parties are guaranteed
a rate of return. See, e.g., Web III Remand, 79 FR at 23107.
Further, their EVA model was based on a sample of terrestrial radio
firms that is not necessarily representative of simulcasters.
Additionally, their EVA analysis fails to consider the rates
necessary for record companies to obtain a sufficient rate of
return, so they have simply focused on the demand side of the market
and ignored the ``willing sellers'' on the supply side. Third, Drs.
Fischel and Lichtman compare the statutory rate for satellite
digital audio radio services (SDARS) and find that it suggests a
per-play rate of $0.[REDACTED] to $0.[REDACTED]. However, rates set
by the Judges in other types of proceedings are not probative of
rates that should be set in this proceeding, especially when the
standards in the two proceedings are different. The rate standard in
SDARS proceedings is different from the standard in section
114(f)(2)(B) for noninteractive services. See 17 U.S.C. Sec.
801(b)(1)(A)-(D) (setting forth particular objectives that the rates
must achieve).
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[[Page 26383]]
b. The Judges Find the Average per-Play Rate Indicated by the iHeart/
Warner Agreement to be a Useful Benchmark
Unlike the incremental rate derived by iHeart's experts, the
``average rate,'' i.e., the stated per-play rate contained in the
iHeart/Warner Agreement is a useful benchmark that, after adjustment,
is probative of the rate that would be paid by a Major, as a willing
seller/licensor, to a noninteractive service, as a willing buyer/
licensee.\182\
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\182\ In discussing the reasons why this average rate is a
useful benchmark, the Judges find it helpful to organize their
finding by adopting Dr. Rubinfeld's characterization of the elements
of the statutory test implicitly set forth in section 114. See
Rubinfeld CWDT ] 122(a)-(d).
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i. The Benchmark Passes the ``Four-Part Test'' Derived From the Judges'
Prior Decisions
The iHeart/Warner Agreement satisfies the sub-tests implicit in the
Judges' prior determinations, as outlined by Dr. Rubinfeld:
Willing buyer and seller test: The rates are intended to be those
that would have been negotiated in a hypothetical marketplace between a
willing buyer and a willing seller.
There is no dispute that Warner was a willing seller in connection
with the iHeart/Warner Agreement. As one of the three Majors, Warner is
a sophisticated entity capable of negotiating direct agreements in a
manner that it understands will advance its economic interests.
Likewise, iHeart is a leading noninteractive webcaster--not to mention
one of the largest transmitters of music across various platforms.
iHeart thus without dispute is also clearly capable of representing its
economic interests in negotiating direct agreements.
In the present case, the record is replete with voluminous
submissions and substantial testimony indicating the diligence of both
iHeart and Warner in negotiating this direct agreement. Clearly, each
party was a willing participant in the legal sense; that is, each party
was under no compulsion to enter into the iHeart/Warner Agreement, and
each party had the opportunity to avail itself fully of all facts that
it deemed pertinent before executing that agreement. See, e.g., Amerada
Hess Corp. v. Comm'r, 517 F.2d 75, 83 (3d Cir. 1975) (defining a
``willing buyer'' and a ``willing seller'' as parties not ``being under
any compulsion to buy or to sell and both having reasonable knowledge
of relevant facts.' '').
Same parties test: The buyers in this hypothetical marketplace are
the statutory webcasting services and the sellers are record companies.
In the iHeart/Warner Agreement, the buyer/licensee, iHeart, is a
statutory webcasting service. The seller/licensor, Warner, is a record
company. Clearly, this aspect of the benchmark test is satisfied.
Statutory license test: The hypothetical marketplace is one in
which there is no statutory license.
The iHeart/Warner Agreement is a direct agreement between the
parties. The rates established in this agreement are not statutory
rates. More particularly, at the time the iHeart/Warner Agreement was
executed, iHeart was obligated to pay royalties to Warner according to
the schedule of rates set forth in the SoundExchange/NAB
settlement.\183\
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\183\ See note 28, supra.
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SoundExchange asserts that, nonetheless, the rates in the iHeart/
Warner Agreement are too heavily influenced by the ``shadow'' of the
statutory rates to satisfy this ``statutory license test.'' The Judges
disagree. As with regard to the Pandora/Merlin Agreement, it is crucial
to appreciate that the adjusted effective rate \184\ in the direct
license is less than the default rate that would otherwise control (the
SoundExchange/NAB settlement rates for iHeart, and the Pureplay rates
for Pandora). Accordingly, Warner was under no compulsion to accept the
lower rate (compared to the SoundExchange/NAB settlement rate) set
forth in the iHeart/Warner Agreement; it could have rejected that rate
and defaulted to the higher SoundExchange/NAB settlement rate. Instead,
Warner agreed to the lower rate, in exchange for the anticipated
steering by iHeart of additional webcast performances of Warner sound
recordings (from approximately [REDACTED]% to [REDACTED]% of total
sound recordings). Accordingly, the Judges find that the ``statutory
license test'' has also been satisfied by the iHeart/Warner Agreement.
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\184\ The Judges' determination of the adjusted effective rate
under the iHeart/Warner Agreement is discussed infra.
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Further, and as discussed in connection with the Pandora/Merlin
Agreement, the steering aspects of the iHeart/Warner Agreement also
satisfy a statutory ``test'' omitted from Dr. Rubinfeld's four-part
approach: The ``effective competition'' test. The steering aspect of
the iHeart/Warner Agreement reflects price competition--an increase in
quantity (more performances) in exchange for a lower price (a lower
rate). All of the reasons set forth in this determination in the
analysis of the Pandora/Merlin Agreement regarding the pro-competitive
aspects of such steering, including the dynamic effect of a threat of
steering, apply with equal force to the iHeart/Warner Agreement.\185\
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\185\ iHeart notes that the threat of steering could cause
steering to occur in a number of differentiated ways, e.g., with one
service making steering deals with several licensors, several
licensees making similar deals with the same licensor(s), or a
licensee making different deals with different licensors over time.
See iHeart RPFF at 6 n.15. However, the Judges need not rely on such
specific predictions. In whatever ways in which the reality of
steering and the concomitant threat of steering-induced price
competition develop, it is clear to the Judges that, as Dr. Shapiro
explained, steering is the mechanism by which the complementary
oligopoly power of the Majors is offset, allowing the Majors to
realize only their considerable (non-complementary) oligopolistic
power generated by their repertoires and their organizational
acumen.
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Same rights test: The products sold consist of a blanket license
for digital transmission of the record companies' complete repertoire
of sound recordings, in compliance with the DMCA requirements.
[[Page 26384]]
It is not disputed that the iHeart/Warner Agreement provides in
pertinent part for a license from Warner to iHeart to play Warner sound
recordings on iHeart's noninteractive webcasting service. See SX Ex. 33
at 8 ] 1(y) (defining ``[REDACTED]''); id. at 11, ] 2(a)(1) (granting
right to play ``[REDACTED]'' on ``[REDACTED]''). Pursuant to the
iHeart/Warner Agreement, a ``[REDACTED]'' must ``[REDACTED]. Id. at 8,
] 1(y). In turn, Exhibit A to the iHeart/Warner Agreement permits
[REDACTED]; requires iHeart to [REDACTED]; and allows a listener
[REDACTED]. Id., Ex. A.
Accordingly, the Judges find that iHeart/Warner Agreement satisfies
the core of the ``same rights test.''
ii. The Average Rate in the iHeart/Warner Agreement
The Judges agree with SoundExchange that any use of the iHeart/
Warner Agreement as a benchmark must apply the effective average rate
contained in that agreement.\186\ See SX RPFF ] 844 (``The average
effective rate approach . . . is the proper analytical method. . . .'')
(emphasis in original). The iHeart/Warner Agreement sets forth
different per-play rates for [REDACTED]. The record does not reflect
the reason(s) why iHeart and Warner negotiated an increase in the rates
from a low of $0.[REDACTED] in [REDACTED] to a high of $0.[REDACTED] in
[REDACTED] (and for any renewal term thereafter). In any event, the
parties' inclusion of specific per-play rates paid to Warner in
exchange for the right granted to iHeart to play Warner's sound
recordings reflects the parties' WTA and WTP for the particular years.
In the absence of relevant evidence necessitating adjustments or legal
conditions extrinsic to the parties' agreement, the Judges cannot
second-guess the rates to which the parties have agreed in a benchmark
contract that otherwise satisfies the statutory test for a usable
benchmark.
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\186\ The stated per-play rate is the equivalent of the
``average'' rate because it is the same rate paid for each
performance. To use iHeart's parlance, there is only one ``bundle''
of rights, with each performance priced at the same rate. The issue
of how to adjust, if at all, that ``average'' rate into the average
``effective'' rate is discussed infra.
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By applying the average rate explicitly set forth in the iHeart/
Warner Agreement (subject to potential adjustments), the Judges have
obviated the protracted dispute between the parties regarding the
probative value of different models and projections of future growth of
performances and royalties. That is, in the absence of a ``two-bundle''
theory, the parties' expectations and projections are baked into the
single explicit annual rate contained in the iHeart/Warner Agreement.
Regardless of whether actual performance eventually resembles the
``Today's Growth Model'' relied upon by the iHeart Board, or some more
pessimistic or optimistic model of projections considered by iHeart or
Warner, iHeart was contractually bound to pay a fixed royalty per year,
and Warner had the duty to provide iHeart with access to Warner's sound
recordings if those fixed per-play payments were made. Accordingly, the
Judges look to the average rate agreed to by the parties in the iHeart/
Warner Agreement for 2016, which coincides with the first year of the
statutory 2016-2020 period. That agreed-upon rate is $0.[REDACTED] per
play.
However, that average, stated per-play rate is not necessarily
applicable, standing alone, as a benchmark, if it is subject to
necessary upward or downward adjustments to account for other forms of
consideration or to more accurately account for probative evidence
related to the rights available under the statutory license. The Judges
turn to these issues in the next section of this determination.
iii. Potential Adjustments to the Rate Derived From the iHeart/Warner
Agreement
(A) General Considerations
A potential benchmark can include terms that provide a licensor
with additional compensation, whether in cash or in kind, beyond the
simple receipt of money in exchange for the right to play sound
recordings. In similar fashion, a potential benchmark can also provide
a licensee with additional compensation, beyond the basic right to play
sound recordings in exchange for the payment of money. When the
parties' proposed benchmark agreement has bundled such other items with
the simple payment-for-plays obligation that mirrors the rate
provisions of Sec. 114, the issue arises as to whether and how, if at
all, to value these non-statutory items.
As an initial matter, the Judges note that the parties have a
strong self-interest to establish values for non-statutory items that
would support their positions. Thus, the Judges would anticipate that
the record companies and SoundExchange would present specific evidence
of the monetary value for the non-statutory consideration they received
under the contract that must be added to the stated (``headline'') rate
on a per-play basis. More particularly, the Judges would expect that
the record companies' internal valuations and spreadsheets would set
forth their understanding of these monetary values (not merely the
existence of some unquantified value). Similarly, the Judges would
anticipate receiving expert testimony from SoundExchange's economic
witnesses, ascribing a monetary value to such additional contractual
consideration allegedly benefiting the record companies, especially if
there were no contemporaneous internal valuations made by the record
companies themselves.
Reciprocally, the Judges would also expect to receive evidence from
the webcasters/licensees with regard to their contemporaneous
calculation of the monetary value of contractual consideration they
allege to have received in addition to the basic right to play sound
recordings. Also, and especially if such evidence did not exist, the
Judges would expect to receive evidence from the economic experts
testifying on behalf of the webcasters/licensees regarding the monetary
value of such additional forms of consideration supposedly benefiting
the webcasters/licensees.
The Judges' expectation that such evidence would be proffered is
heightened by the accurate accusations hurled by each side that the
other side was manipulating the terms of the potential benchmark in
order to influence the Judges in this proceeding. See, e.g., 4/30/15
Tr. 1141-42 (A. Harrison) ([REDACTED]); 4/28/15 Tr. 508-09 (Kooker)
[REDACTED]); 6/1/15 Tr. 6962 (Lexton) (acknowledging that any deal
Merlin concludes will be available as evidence in CRB hearings); SX
Ex.102 at 3 (5/14/14 email among Merlin executives); PAN Ex. 5117
(same); 5/19/15 Tr. 4760 (Shapiro) (``My working assumption is that
everybody is aware of this proceeding and how . . . deals they cut
might affect it.'') (emphasis added); IHM Ex. 3517 [REDACTED]). It
would be surprising, to say the least, if parties who anticipated that
a direct deal would be used by an adversary improperly in this
proceeding did not develop evidence sufficient to rebut that attack,
unless no such evidence--factual or expert--could reasonably be
presented. Thus, when a party fails to provide such important,
competent and probative factual or expert evidence, the Judges are left
with no evidentiary basis to support the assertion that the alleged
additional value of other contractual items is sufficient to alter the
rates and terms of
[[Page 26385]]
the benchmark agreements in which they are contained.
With those general considerations in mind, the Judges now analyze
particular issues disputed by the parties regarding the valuation of
certain items in the iHeart/Warner Agreement.
(B) AIP
AIP, iHeart's Artist Integration Program, allows Warner's artists
to benefit from particular advertising on iHeart's music-formatted
radio stations and iHeart's Web sites, in the form of [REDACTED].'' SX
Ex 33 at 19 Sec. 5(a)(i). Clearly, such advertising inures to Warner's
benefit.
Additionally, the iHeart/Warner Agreement contains an express
provision stating that this ``[REDACTED] AIP Commitment'' has an annual
``fair market value of [REDACTED] Dollars (USD $[REDACTED]).'' Id. at
Sec. 5(a)(ii) (emphasis added). SoundExchange argues that there is no
reason to require evidence of an internal valuation when the parties
have agreed to a ``fair market value'' on the face of their contract.
iHeart makes several arguments in an attempt to disavow this
agreed-upon valuation:
AIP provides value to iHeart and to Warner because AIP
content is valuable to listeners and therefore also ``helps build
[iHeart's] brand . . . as [a] trusted curator[] . . . .'' 5/21/15 Tr.
5189-92 (Poleman).
Warner received [REDACTED] AIP [REDACTED] and the
$[REDACTED] reference was intended to reflect [REDACTED]. 6/2/15 Tr.
7312 (Cutler).
iHeart's commitment to [REDACTED] AIP therefore was in the
nature of ``insurance,'' rather than a granting of an additional right.
See IHM RPFF ] 815 (and citations to the record therein).
Neither iHeart, Warner, nor Universal treated AIP as a
``[REDACTED],'' and iHeart [REDACTED]. Id. ] 817 (and citations to the
record therein).
The $[REDACTED] was derived from iHeart's advertising
``rate card'' as a means to measure that Warner got [REDACTED]. 5/21/15
Tr. 5190 (Poleman).
In its own projections, Warner declined to value AIP
because AIP ``[REDACTED].'' 6/3/15 Tr. 7500 (Wilcox).
The Judges find that the AIP provision in the iHeart/Warner
Agreement does not support an increase in the effective average per-
play rate derived from that benchmark. As an initial matter, the AIP
language in the iHeart/Warner Agreement does not state that the parties
agreed, inter se, that the value of the AIP terms is $[REDACTED].
Rather, the iHeart/Warner Agreement sets forth a purported general
economic fact regarding a ``market,'' i.e., that that there [REDACTED].
However, that assertion of supposed ``fact'' is belied by the record.
It is undisputed that iHeart provided AIP [REDACTED] to Warner (and to
Sony and Universal) prior to the formation of the iHeart/Warner
Agreement, and that iHeart continued to provide AIP--[REDACTED]--to
Sony and Universal after the execution of the iHeart/Warner Agreement.
5/21/15 Tr. 5343-44, 5348 (Fischel); 6/2/15 Tr. 7312, 7335 (Cutler). It
is also undisputed, and clear from the iHeart/Warner Agreement, that
[REDACTED], further negating the existence of any market value. SX Ex.
33 at 34, ] 18(g).
As Mr. Poleman, an iHeart witness, testified: ``these monetary
figures serve no other purpose than [REDACTED]. These monetary figures
do not reflect [REDACTED] Poleman WRT ] 22.
The Judges find these undisputed facts to demonstrate that there
was no actual ``market'' in which Warner procured AIP from iHeart. If
such a market existed, with a fair market value of $[REDACTED] for the
AIP provided to Warner, it would have been irrational for iHeart simply
to give away such substantial value (e.g., the equivalent of
[REDACTED]% of Dr. Rubinfeld's proposed rate for 2016 and of the NAB/
SoundExchange settlement rate for 2015). See 5/28/15 Tr. 6284
(Rubinfeld) (AIP at a value of $[REDACTED] per year would raise the
effective rate by $0.[REDACTED] per play).
Rather, the Judges find guidance for the meaning and of this
``$[REDACTED]'' figure as it relates to the setting of rates in this
proceeding in the context of the contractual clause in which the figure
is contained. The contract states: ``[iHeart] shall provide Warner AIP
insertions in each Agreement year . . . that (i) have a fair market
value of at least . . . $[REDACTED] per Agreement Year; and represent
at least . . . [REDACTED]% of all AIP inventory in each daypart and
market.'' SX Ex. 33 at 19 ] 5(a)(ii). This provision is consonant with
iHeart's explanation that the $[REDACTED] figure was used to establish
[REDACTED], and therefore is not a monetary value that the Judges may
simply pro-rate, and thereby grossly inflate the benchmark rate.\187\
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\187\ The Judges find that the contractual remedial provisions
relating to AIP support their findings in this regard. Performance
of the AIP terms required iHeart and Warner to [REDACTED]. Id. ]
5(a)(i). In turn, the iHeart/Warner Agreement provides that, if
Warner and iHeart disagree regarding [REDACTED], then ([REDACTED])
Warner may [REDACTED]. Id. Thus, as a remedy for breach [REDACTED].
This remedial provision further indicates that Warner had obtained
in the iHeart/Warner Agreement [REDACTED] which, upon an iHeart
breach, [REDACTED]. Additionally, [REDACTED]. See id.
(``[REDACTED]'').
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The Judges also find that iHeart's willingness to provide AIP
[REDACTED] to record companies was rational. As Mr. Poleman testified,
see supra, AIP campaigns provided information about sound recording
artists that served to build iHeart's brand as a trusted ``curator'' of
music for its listeners. Thus, AIP had value to both the record
companies and iHeart, which would explain why a sophisticated entity
such as iHeart would [REDACTED] AIP time [REDACTED] to record
companies. Relatedly, the Judges note internal iHeart communications
indicating that iHeart [REDACTED].
The Judges further find that the testimony by Warner's executive,
Mr. Wilcox, confirms that the ``$[REDACTED]'' figure was used as
[REDACTED] rather than a statement of value that the Judges could
simply add to the effective rate under the iHeart/Warner Agreement. The
following testimony on direct examination is telling:
Q: Did iHeart represent to you [AIP] had value, monetary value?
A: Yes.
Q: What was that amount?
A: Well, ultimately it was agreed on that we would say that it
was [REDACTED]. They were contending it was worth more and that was
a conservative estimate. Ultimately, they gave us the $[REDACTED]
CPM number as a way to value the different impressions that were
available to us through AIP. So that was ultimately where we agreed
to settle in terms of valuing it.\188\
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\188\ ``CPM'' is cost per thousand advertising impressions. 4/
28/15 Tr. 419 (Kooker). Thus, the $[REDACTED] per 1,000 impressions
factor can be used to determine the quantity of impressions if
$[REDACTED] is substituted for the $[REDACTED] figure. Impressions
are viewed or heard ads. 6/3/15 Tr. 7403-04 (Wilcox).
6/3/15 Tr. 7388-89 (Wilcox). This testimony reveals two points:
First, the valuation was negotiated to establish a quantity term for
AIP. Second, this testimony does not indicate any reference in the
negotiations to a ``fair market value'' for AIP that the parties later
simply plugged into the iHeart/Warner Agreement. See also 6/2/15 Tr.
7318 (Cutler) (``This is a sort of a quick-and-dirty formula where we
took a hugely averaged rate and applied it to what we--you know,
ultimately these promotional spots in these AIP programs.'').
The Judges also find credible and important the undisputed fact
that no party, and no record company,
[[Page 26386]]
considered that AIP could be valued as a cash equivalent. That is
consistent with the finding that the AIP term in the iHeart/Warner
Agreement was intended as an [REDACTED], rather than a valuing
mechanism for dramatically inflating the effective per-play rate in
that agreement.
The Judges' decision on this issue is also informed by the
negotiating position taken by Warner. In particular, under cross-
examination, Mr. Wilcox, the testifying Warner executive, when asked if
``you told the iHeart representatives during negotiations that you
thought AIP was worth zero,'' testified: ``I don't have a specific
recollection right now, but . . . that would have been consistent with
the negotiating posture that I might have taken.'' 6/3/15 Tr. 7466
(Wilcox) (emphasis added). This testimony undermines Warner's assertion
that the Judges should simply add $0.[REDACTED] to the per-play rate
derived from this benchmark, when Warner's own witness had claimed in
negotiations that AIP had no value. Moreover, even if Mr. Wilcox's
assertion represented only his ``negotiating posture,'' then the Judges
find that iHeart's representation of a positive value, including the
$[REDACTED] figure plugged into the agreement, was also the consequence
of negotiation rather a declaration of fact as to the existence of a
``fair market value'' of $[REDACTED].\189\ Finally, the Judges do not
find credible Mr. Wilcox's testimony that he was informed by iHeart
that it would [REDACTED] AIP, in light of the absence of any document
sufficient to corroborate that assertion, and in light of the fact that
iHeart has not [REDACTED] AIP. Moreover, even if iHeart had taken such
a negotiating position, the Judges do not find, after listening to Mr.
Wilcox's testimony, that he genuinely believed such a change in AIP
policy was forthcoming.
---------------------------------------------------------------------------
\189\ The irony surrounding this issue is not lost on the
Judges. In this proceeding, Warner claims AIP has significant value,
in order to inflate the benchmark, but claimed during negotiations
that AIP had no value, in order to [REDACTED]. 6/3/15 Tr. 7466
(Wilcox). Likewise, during negotiations, iHeart touted the benefits
of AIP, but minimizes its significance during this proceeding, in an
attempt to avoid an increase in the effective benchmark rate. Such
switching of positions, combined with the other issues discussed in
this section regarding AIP, underscore the indeterminacy of AIP's
impact, if any, on this benchmark.
---------------------------------------------------------------------------
The Judges do recognize that, by converting AIP from a
discretionary, voluntary program to a contractually binding commitment,
iHeart provided Warner with what Drs. Fischel and Rubinfeld both
considered to be ``insurance'' value. However, neither party through a
fact or expert witness presented any basis to create a monetary value
for this ``insurance.'' Therefore, the Judges are presented in this
context with the conundrum of an item of ostensible (insurance) value
that has not been valued by the parties, but is tendered to the Judges
without evidentiary guidance. The Judges return to the point made in
the General Considerations section. SoundExchange, through Dr.
Rubinfeld, acknowledges that there is some insurance value in the
conversion of AIP into a contractual commitment, yet SoundExchange did
not present a method for valuation. iHeart, through Dr. Fischel, avers
that this ``insurance'' value would be quite small, and he too did not
provide a monetary value. If a party had the understanding that an
element within a benchmark could be valued in a manner that would
further support its position, the Judges would expect that party to
present evidence in that regard. Here, SoundExchange declined to do so
with regard to the ``insurance'' value of the conversion of AIP into a
contractual commitment. The Judges therefore find that such
unquantified ``insurance'' value cannot be added to the effective per-
play rate under the iHeart/Warner Agreement.\190\
---------------------------------------------------------------------------
\190\ Also, the unquantified value of any ``insurance'' aspect
of the contractual AIP commitment would have had to be offset
against the value of other non-pecuniary items in the iHeart/Warner
Agreement that favor iHeart, as discussed infra.
---------------------------------------------------------------------------
(C) [REDACTED]
[REDACTED] the [REDACTED], is a program by which Warner may
[REDACTED]. See SX Ex. 33, Ex. F thereto. SoundExchange asserts that it
has a quantifiable value to Warner that must be pro-rated across the
number of performances and added to the per-play rate. However, the
record indicates that Warner did not engage in any valuation of
[REDACTED] contemporaneous with the negotiation of the iHeart/Warner
Agreement and that Dr. Rubinfeld did not perform any such expert
economic valuation. 5/28/15 Tr. 6437 (Rubinfeld).
Rather, SoundExchange's entire argument in support of a valuation,
in excess of $[REDACTED], for [REDACTED] is based upon the hearing
testimony of Mr. Wilcox. He derived this value from a single [REDACTED]
campaign undertaken by Warner after the iHeart/Warner Agreement had
been executed. Wilcox WRT at 14 n.9. However, as iHeart points out,
Warner's post-execution performance--or more accurately, non-
performance--contradicts this attempt at a performance-based valuation.
That is, Mr. Wilcox did not dispute that Warner had [REDACTED]. 6/3/15
Tr. 7452 (Wilcox). Thus, the Judges find that, even to the extent that
post-contract performance might be helpful in determining value, Mr.
Wilcox's testimony as to a value in excess of $[REDACTED] for
[REDACTED] is simply not credible.
In this context as well, neither party's negotiators nor its
economic experts set forth a monetary value. The rebuttal performance-
based testimony that SoundExchange relies upon from Mr. Wilcox to
demonstrate that [REDACTED] had value is simply insufficient when
considered against Warner's failure to [REDACTED], and in light of the
fact that the Judges did not find Mr. Wilcox to be a particularly
credible witness. Accordingly, the Judges do not find that the
inclusion of [REDACTED] rights in the iHeart/Warner Agreement supports
an increase in the effective average per-play rate derived from that
agreement.
(D) The [REDACTED] Agreement
The Judges decline to include in the average effective rate any
value derived from the $[REDACTED] payment by iHeart to Warner for
rights under the [REDACTED] Agreement. As an initial matter, this
agreement is not even part of the iHeart/Warner Agreement. Second, the
[REDACTED] Agreement contains an integration clause that, as iHeart
correctly notes, by its plain language declares that it is the entire
agreement between the parties and thus excludes reference to any other
agreement, such as the iHeart/Warner Agreement. SX Ex. 1339. The Judges
further note that the iHeart/Warner Agreement [REDACTED]. SX Ex. 33 ]
18(c). Third, the [REDACTED] Agreement provides for a payment of
$[REDACTED] in exchange for a specific set of rights unrelated to
iHeart's right to play Warner sound recordings on iHeart's
noninteractive service. Fourth, it is irrelevant that Warner was aware
of, and made reference to, the [REDACTED] Agreement value when it
considered the value of its forthcoming relationship with iHeart.
Indeed, as iHeart points out, Warner's internal models and other
documents identified the [REDACTED] Agreement's $[REDACTED] payment
obligation as a distinct payment for [REDACTED]. See iHeart RPFF ] 828
(and citations to the record therein).
The Judges also agree with iHeart's argument that the $[REDACTED]
payment obligation in the [REDACTED] Agreement presents the Judges with
an issue of allocation rather than valuation. See iHeart RPFF ] 830.
The fact that the [REDACTED] Agreement contains an
[[Page 26387]]
unambiguous integration clause underscores the fact that the rights and
payments under that contract must be allocated only to that contract.
The Judges therefore find that the $[REDACTED] payment to Warner by
iHeart under the [REDACTED] Agreement is properly allocated to that
agreement for the provision of [REDACTED], and cannot be attributed to
the valuation of the parties' rights--and rates--under the iHeart/
Warner Agreement.
(E) Other Unvalued Contract Items
As noted supra, SoundExchange asserts that the effective average
rate under the iHeart/Warner Agreement must be increased to reflect the
value of additional contract items, including:
The guarantee that iHeart would [REDACTED] even if such
steering fell short of that level.\191\
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\191\ The parties disputed whether the pre-agreement pro rata
level was [REDACTED]% or [REDACTED]%. That dispute related to a
measurement of the ``two bundles'' hypothesized by Drs. Fischel and
Lichtman, but rejected by the Judges in this determination. Under an
average rate approach with a steering-based [REDACTED]% pro rata
share, it is irrelevant whether the pre-contract pro rata Warner
share on iHeart was [REDACTED]% or [REDACTED]%.
---------------------------------------------------------------------------
The alternative percentage-of-revenue rate in the greater-
of formulation.
The additional $[REDACTED] payment guarantee by iHeart
even if it never played any Warner sound recordings.
The guarantee that Warner would receive at least the same
[REDACTED], as it did prior to the iHeart/Warner Agreement.
Warner's [REDACTED], which iHeart could [REDACTED].
Royalties paid for [REDACTED].
See SX RPFF ] 889 (and citations to the record therein).
With regard to all of these items, notwithstanding any potential
monetary value that might be associated with them, neither Warner nor
SoundExchange established values for these items. Indeed, SoundExchange
acknowledges that, when the Judges asked Mr. Wilcox whether Warner had
assigned a number value to ``these provisions,'' he admitted that
Warner ``could not be certain.'' 6/3/15 Tr. 7409 (Wilcox). As the
Judges noted in the General Considerations section of this analysis of
the iHeart proposal, if the party that seeks to increase (or decrease)
an otherwise effective benchmark rate to account for other items of
potential value cannot or has not provided evidence of such value, when
it was in its self-interest to do so, the Judges cannot arbitrarily
adjust or ignore that otherwise proper and reasonable benchmark.
(F) Offsetting Value to iHeart in the iHeart/Warner Agreement
iHeart points out that the iHeart/Warner Agreement also provides
value to iHeart in the form of: (1) A [REDACTED] royalty ceiling that
serves as de facto insurance against [REDACTED] and (2) most-favored-
nation status at least equalizing iHeart's terms with Warner's terms in
any agreement with [REDACTED] Fischel/Lichtman AWDT ] 38. However, the
chronic problem the Judges have referenced supra applies here as well:
iHeart did not attempt to place a value on such items. Id. ] 39 (``It
is difficult to precisely quantify the value of these various non-
pecuniary terms'' and iHeart ``made no explicit attempt to value these
terms.'').
However, Drs. Fischel and Lichtman point out that because both
parties failed to value such terms, it is acceptable to ``assume[] a
net value of zero for these terms.'' Id.; see 5/28/15 Tr. 6435-37
(Rubinfeld) (acknowledging that he failed to attribute numerical dollar
values to items in the iHeart/Warner Agreement that benefited each
party respectively).
The Judges disregard these unvalued items; not because, as Drs.
Fischel and Lichtman assert, they should be presumed to have a net
value of zero. Rather, as stated in the General Considerations section,
the Judges tie the indeterminacy of the net value of these offsetting
items to a (perhaps tactical) failure of proof of value by
sophisticated parties. As Dr. Rubinfeld acknowledged in a colloquy with
the Judges:
[JUDGES]
[I]f iHeart is paying a . . . rate based on dollar denominated
items and gets some other non-dollar denominated value--net value to
iHeart as if it was paying some lower rate because it got new items
of value--. . . we just can't value them because nobody did and we
don't have the evidence to do so.
[DR. RUBINFELD]
Yeah, that's possible.
5/28/15 Tr. 6439. Continuing, the Judges reiterated that for these
other items of value, ``the sign is moving plus and minus'' but
``without dollar values attached by the experts or the parties in their
contracts or their negotiations,'' and lamented that they ``have no way
of valuing them . . . .'' Dr. Rubinfeld responded by commiserating,
acknowledging that he too did not, and instead he simply fell back to a
non-sequitur: that his proposed rate was closer to the ``actual NAB
rates . . . than [Dr.] Fischel's proposed incremental rate.'' Id. at
6439.
(G) Adjusting the iHeart/Warner Benchmark Rate to Account for
[REDACTED] and Thereby Equalizing the Number of Royalty-Bearing Plays
Between the Benchmark and the Statute
Drs. Fischel and Lichtman note that an iHeart listener is entitled
to [REDACTED] \192\ per hour per station or channel, for which iHeart
is not required to pay royalties. Fischel/Lichtman AWDT ] 35; SX Ex 33
at 15 ] 3(b)(i); id. at 38 Ex A therein. They note, after setting forth
the number of [REDACTED] and performances that, ``[i]n July 2014,
[REDACTED] . . . constituted approximately [REDACTED] percent of all
iHeart custom performances, so that the functional per-performance rate
paid on these contracts is approximately [REDACTED]% lower than the
statutory per-performance pureplay rate.'' Fischel/Lichtman AWDT ] 61 &
n.9. This [REDACTED] adjustment is very close to Dr. Rubinfeld's skips
adjustment factor of [REDACTED], which also included an offset for
increased plays by virtue of the royalty value of [REDACTED] under his
interactive benchmark agreements).
---------------------------------------------------------------------------
\192\ [REDACTED] custom performances are defined in the iHeart/
Warner Agreement as performances ``that are [REDACTED].'' SX Ex. 33
at p. 15, ] 3(b)(i).
---------------------------------------------------------------------------
If Drs. Fischel and Lichtman had applied that [REDACTED]% reduction
to the otherwise stated average rate of $0.[REDACTED] for 2013 in the
iHeart/Warner Agreement, they would have equalized that rate to a
statutory rate of $0.[REDACTED]. However, Drs. Fischel and Lichtman
adjust their 2013 stated average rate from $0.[REDACTED] to
$0.[REDACTED]. SoundExchange avers that it appears from iHeart's own
documents however that this $0.[REDACTED] rate reflects an
incorporation of the Pureplay rate rather than a calculation to adjust
for [REDACTED] See SX Ex. 221 at 1, 4 & n.21.
In response to this criticism, iHeart does not refer the Judges to
any evidence of calculations it did to support a [REDACTED] reduction
from $0.[REDACTED] to $0.[REDACTED]. Rather, iHeart simply declares
SoundExchange's reliance on SX Ex. 221, iHeart's own document, is
insufficient to call into question the [REDACTED] adjustment proposed
by iHeart. See iHeart RPFF at 119-20.
The Judges find that SoundExchange's criticism is appropriate. In
order to reflect not only the [REDACTED] adjustment, but also to make
an
[[Page 26388]]
adjustment to reflect plays of [REDACTED], the Judges adopt Dr.
Rubinfeld's [REDACTED] adjustment to equalize the number of plays as
between this benchmark and the statutory rate. Thus, the 2013 rate of
$0.[REDACTED], as noted above, would equalize to $0.[REDACTED].
More importantly, for the first year of the statutory period at
issue, 2016, the stated average rate is $0.[REDACTED]. Applying a
[REDACTED] adjustment of [REDACTED] results in an equalized rate of
$0.[REDACTED]. (Even applying iHeart's proffered [REDACTED]% rate
reduction for this factor would result in an adjusted rate of
$0.[REDACTED], before any consideration of additional
[REDACTED].).\193\
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\193\ SoundExchange also takes issue with iHeart's alleged
application of a [REDACTED] adjustment to [REDACTED] webcasts
[REDACTED], which SoundExchange avers cannot be adjusted for
[REDACTED] because these stations, [REDACTED], do not [REDACTED].
See SX PFF ]] 849-850 (and citations to the record therein). iHeart
disputes that assertion. See IHM RPFF at 120 (and citations to the
record therein). SoundExchange also combined its [REDACTED]
criticism in this regard with a separate criticism regarding the
treatment of ``digital only'' transmissions by iHeart, leading Dr.
Rubinfeld to make a $0.[REDACTED] upward adjustment to account for
both of these issues. See SX PFF ] 851 (and citations to the record
therein). SoundExchange did not clearly and sufficiently explain its
position on these combined issues, and the Judges therefore decline
to make the $0.0001 upward adjustment advocated by Dr. Rubinfeld.
---------------------------------------------------------------------------
c. The Percentage of Revenue Provision in the iHeart/Warner and iHeart/
Indies Agreements
The iHeart/Warner Agreement contains a greater-of rate formula that
includes a [REDACTED]%-[REDACTED]% rate, depending upon the year of the
agreement. SX Ex. 33 at 15-16, ] 3(b)(ii).\194\
---------------------------------------------------------------------------
\194\ The iHeart/Indies Agreements contain a greater-of
structure that, as noted above, fixes the percentage-of-revenue
prong at [REDACTED]%. See, e.g., IHM Ex. 3353, at 7-8, ]
4(a)(iii)(A). However, as stated in the text, supra, the Judges find
these agreements not to be probative.
---------------------------------------------------------------------------
For the reasons set forth in the Judges' comprehensive rejection of
a greater-of structure with a percentage-of-revenue prong, the Judges
do not include these iHeart greater-of provisions in the benchmarks
they derive from the iHeart/Warner Agreement and the iHeart/Indies
Agreements.
d. The Judges Consideration of the 27 iHeart/Indies Agreements
iHeart has calculated an average royalty per play for Indies of
$0.[REDACTED]. Fischel/Lichtman AWDT Ex. D therein.\195\ However, the
iHeart/Indies Agreements apply the per-play rates that have a set
(i.e., average) per-play rate that controls for each year.\196\ Those
per-play rates are all equal to the [REDACTED] rates and therefore are
less than $0.[REDACTED]. See, e.g., IHM Ex. 3353 ] 1(w) (the iHeart/
Next Plateau Entertainment Agreement). Thus, iHeart apparently has
derived that $0.[REDACTED] rate by adding to the stated custom rates
its per-play calculation of additions to the rate arising from the
[REDACTED] revenue to which Indies are entitled under the iHeart/Warner
Indies Agreements. As the Judges noted with regard to the [REDACTED]
revenues in their analysis of the proposed rates for simulcasting,
these revenues are simply too indeterminate to support a rate analysis
by the Judges. The Judges incorporate those findings here, and find
that the 27 iHeart/Indies Agreements are not usable as benchmarks,
guideposts or other evidence to support the rates set in this
proceeding.\197\
---------------------------------------------------------------------------
\195\ Drs. Fischel and Lichtman also calculated an
``incremental'' per-play rate for Indies of $0.[REDACTED]. Id. The
Judges reject that rate for the same reason they rejected the
$0.0005 ``incremental'' rate they proffered under the iHeart/Warner
Agreement.
\196\ The greater-of percentage of revenue alternative was never
triggered. Fischel/Lichtman AWDT ] 61.
\197\ To be clear, the Pandora/Merlin effective rate is
$0.[REDACTED]--below the Pureplay rate because of the steering
provisions in that agreement. See supra. Pandora had been subject to
the Pureplay rates and utilized steering to induce the Merlin
members to agree to a lower rate in exchange for more plays. The
same concept (albeit with different rates) underlies the 27 iHeart/
Indies Agreements. These 27 Indies agreed to reduce the rate to
$0.[REDACTED] in [REDACTED], from the $0.[REDACTED] settlement rate
on which they could have insisted, in exchange for a lower rate that
incentivizes iHeart to steer more plays to them plus some
indeterminate amount of [REDACTED] revenues.
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F. Sirius XM Rate Proposal
1. Proposed Royalties
Sirius XM proposes that the Sec. 114 digital sound recording
public performance royalty rate applicable to commercial webcasters for
the 2016-2020 rate period be $0.0016 per-performance. Introductory
Memorandum to Sirius XM WDS at 1 (October 7, 2014). In support of this
rate, Sirius XM avers that a zone of reasonableness can be established
for the statutory rate. The high end of the zone, according to Sirius
XM, is the $0.0016 per-performance rate, which represents the lowest
rate contained in the 2009 WSA settlement agreement between
SoundExchange and Sirius XM. The low end of the zone, according to
Sirius XM, is represented by several ``guideposts,'' i.e., the low end
of the estimated range of proposed rates proffered by the economic
experts who testified on behalf of the other Services who participated
in this proceeding. That lower bound, according to Sirius XM, is
$0.0011. See Sirius XM PFF ]] 65-68.\198\
---------------------------------------------------------------------------
\198\ Although Sirius XM asks the Judges to rely on the low end
of these ``guideposts,'' it notes that the high end of these
``guidepost'' ranges from the other Service economic experts is
$0.0017, higher than the top of its proposed range and its proffered
benchmark of $0.0016.
---------------------------------------------------------------------------
Sirius XM did not produce an expert witness to testify in support
of its rate proposal. Rather, as noted above, Sirius XM relies upon the
lowest rate within its WSA with SoundExchange and the work of the other
Services' economic witnesses to support its range, endpoints and
proposed rate. Thus, the probative value of the Sirius XM rate is
dependent in large measure upon the Judges' analysis and conclusions
regarding the models proffered by these other experts. Indeed, Sirius
XM does not attempt to independently support the work of those other
experts. Instead, Sirius XM devotes the bulk of its independent
argument to an analysis of its WSA settlement agreement.\199\
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\199\ For this reason, the Judges need not discuss the merits of
Sirius XM's proposed range or, in particular, the low end of that
range. The relative merits of the benchmarks on which Sirius XM
relies are discussed in the sections of this determination dealing
directly with those other benchmarks.
---------------------------------------------------------------------------
2. Sirius XM's Arguments in Favor of Its Rate Proposal
Sirius XM's primary business is broadcasting on a subscription fee
basis over its two proprietary satellite systems. However, it also
provides a simulcast of its satellite broadcast over the Internet. SXM
Ex. 6000 ] 20 (Frear WDT). Thus, Sirius XM's Internet radio service is
primarily a simulcast of Sirius XM's satellite service. Id. ] 27
(emphasis added).
Sirius XM also offers as an Internet service a noninteractive
feature, ``My Sirius XM,'' at no extra charge to its Internet radio
subscribers. Id. ] 28. (Sirius XM also offers an on-demand service,
``Sirius XM On Demand,'' that is not subject to the Sec. 114(f)(2)(B)
rates). The noninteractive, non-simulcast service, My Sirius XM, allows
subscribers to slightly personalize a select group of music and comedy
channels from the satellite service, to adjust for characteristics like
library depth, familiarity, and music style. Id. ] 28.
Although introduced as a response to truly customized Internet
radio like Pandora, My Sirius XM does not provide the same amount of
customization. My Sirius XM begins from the same playlist created by
human curators for a satellite radio channel, and narrows that playlist
[[Page 26389]]
slightly by manipulating a few sliders, which emphasize or deemphasize
broad characteristics common to the relevant genre. 5/22/15 Tr. 5419-21
(Frear). For example, listening to the `60s channel through My Sirius
XM might allow the subscriber to emphasize more late `60s music, more
early `60s music, more electric music, or more acoustic music. Id. at
5419:19-25. My Sirius XM allows users to shrink the playlist by
adjusting for these characteristics--but does not permit users to
expand the playlist from that of the satellite radio channel. Id.
The Sirius XM Internet radio service is a minor part of Sirius XM's
overall business, with its self-pay subscription revenue (i.e.,
excluding trial subscriptions) accounting for only [REDACTED]% of
Sirius XM's total revenue. Frear WDT ] 29. Usage of the non-simulcast
My Sirius XM is low even in comparison to the usage of Internet radio
simulcast channels. Id. ] 28.
Sirius XM points out the relatively low importance of
noninteractive services to its overall business model in order to
explain why it entered into the WSA with SoundExchange in 2009--and why
that settlement agreement was and remains not probative of market value
and lacked the persuasive value attributed to it in the Web III Remand.
In this regard, Sirius XM avers:
As a result of the Webcasting II rates, Sirius XM made the
decision to drop all free streaming on both the Sirius and XM
platforms, a decision that resulted in a [REDACTED]- [REDACTED]% drop
in the Internet radio service's reported listening hours and a
resulting decrease in royalty payments to SoundExchange. Id. ] 35; 5/
22/15 Tr. 5416-17 (Frear).
By late 2008, Sirius XM had insufficient cash to repay
hundreds of millions of dollars of debt scheduled to come due in
February 2009, and was unable to access the capital markets to
refinance this, and other, debt. Frear WDT ] 40.
The pre-merger predecessors to Sirius XM, Sirius and XM,
had recently spent over $150 million on merger costs alone. Id. ] 46.
Sirius XM narrowly avoided filing for bankruptcy
protection when a potential lender agreed to provide a loan that
narrowly enabled Sirius XM to avert a default on its debt and
bankruptcy. Id.; 5/22/15 Tr. 5430 (Frear).
The Sirius XM stock price fell from over $4.00 per share
in January 2007 to a low of $0.05 per share on February 11, 2009. Frear
WDT ] 45. On September 15, 2009, Sirius XM received a delisting notice
from NASDAQ. Id.
In the context of the severe financial stress affecting Sirius XM's
entire business, and the Internet radio services' extremely low usage
and importance to its core business, Sirius XM believed it had no
sensible option other than to accept the deal offered by SoundExchange.
If it had not taken the deal, Sirius XM would have been required to
continuing paying the higher Webcasting II rates. At the same time, NAB
simulcasters with which Sirius XM's Internet radio service competes
would be paying the lower WSA settlement rates, and Pandora would be
paying a small fraction of the Webcasting II rates, putting Sirius XM
at a significant competitive disadvantage.
Although Sirius XM could have refused to sign the WSA with
SoundExchange and instead sought lower rates in the then-forthcoming
Web III proceeding, the low listenership to the Internet radio service
meant that the cost of participation in that proceeding could far
exceed any possible future savings in royalty payments. Although Sirius
XM attempted repeatedly to negotiate a more significant reduction,
SoundExchange consistently refused to materially move off its opening
offer of essentially matching the NAB rates. 5/22/15 Tr. 5435-36
(Frear). With no other option that would have a less costly net result,
Sirius XM entered into the WSA settlement agreement with SoundExchange.
Id. at 5434-35.
Then, according to Sirius XM, two days before the deadline on which
Sirius XM and SoundExchange were required to close negotiations--and
after the parties had already agreed on the rate schedule and finalized
their deal--Michael Huppe (the party negotiating on behalf of
SoundExchange) added an extra term into the Agreement, requiring that
it be precedential under the WSA. 6/3/15 Tr. 7627-29 (Huppe); 5/22/15
Tr. 5443-54 (Frear). Having already failed to advance its other
interests in negotiations, Sirius XM agreed to this new term requiring
its WSA settlement agreement to be precedential, concluding
negotiations and consummating the agreement before the statutory
deadline. Id. at 5444.
For the foregoing reasons, Sirius XM maintains that the rates in
the Sirius XM WSA settlement agreement do not reflect any industry-wide
fair market value for the license. Instead, it claims that the rates
are a product of: (1) The Web II rates, which, in Sirius XM's view,
Congress found to be so wildly supracompetitive as to warrant
Congressional intervention and which would continue to apply in the
absence of a settlement; (2) SoundExchange's monopoly power as the only
entity that could provide any effective relief from those rates; and
(3) the exacerbation of that imbalance in bargaining power caused by
various unrelated circumstances affecting Sirius XM at the time of the
negotiations. Sirius XM Ex. 6000 ] 52. Sirius XM further avers that, by
contrast, neither SoundExchange nor its constituent record companies
had similar countervailing pressures that could have mitigated this
extreme imbalance. Id. ] 57 (and citations to the record therein).
Nonetheless, Sirius XM proposes that the Judges rely on the WSA
settlement agreement between Sirius XM and SoundExchange, by adopting
its lowest rate, $0.0016, not only as the ``the outer boundary of a
range of reasonable rates,'' but also as the rate to be set in the
present proceeding. See Sirius XM PFF ] 64. Additionally, Sirius XM
does not propose any rate escalation or reduction over the 2016-2020
period, whether to reflect inflation, deflation, or any other factor.
Finally, Sirius XM does not propose a two-prong rate structure
embodying any other rate formula than the per-play structure.
3. SoundExchange's Opposition to the Sirius XM Rate Proposal
SoundExchange opposes the Sirius XM rate proposal on several
grounds. First, SoundExchange rejects Sirius XM's suggestion that its
settlement contained above-market rates, because Sirius XM voluntarily
agreed to those rates, even though it was under no compulsion to
negotiate with SoundExchange. See SX RPFF ] 1022. Second, SoundExchange
states that Sirius XM is flatly wrong to suggest that its negotiation
with SoundExchange did not ``mov[e] the needle with respect to royalty
rates.'' In fact, Sirius XM was not only able to negotiate rate lower
than the then-prevailing statutory rates for 2009, 2010, and 2011, but
it was also able to negotiate lower rates for 2013, 2014, and 2015 than
were contained in the NAB settlement. SX PFF ] 1079; SX RPFF ] 1027.
Third, when SoundExchange, through Mr. Huppe, informed Sirius XM
that SoundExchange wanted the settlement agreement to be precedential
under the WSA, Sirius XM voiced no objection whatsoever in its email
response less than an hour later. NAB Ex. 4235.
Fourth, SoundExchange argues that basic economics suggests that any
financial distress Sirius XM was experiencing at the time should have
reduced, not increased, its willingness to pay royalties for
webcasting. SX Ex. 29 ] 228 (Rubinfeld Corr. WRT).
Fifth, Sirius XM had a number of alternative options in addition to
[[Page 26390]]
agreeing to the settlement with SoundExchange. Specifically,
SoundExchange notes that Sirius XM instead had the option to:
litigate in the Web III proceeding and seek lower rates
from the Judges;
avoid the cost of litigating Web III and simply awaited
the Judges' rate determination (a ``costless option'' according to
SoundExchange); or
avoid the statutory license completely and enter into
direct licenses with the various record companies.
SX PFF ] 1077 (and citations to the record therein).
Sixth, SoundExchange notes that Sirius XM--despite its asserted
financial difficulties--continued and expanded its noninteractive
services, even though it asserted that such services were an
insignificant portion of Sirius XM's total subscribership revenue.
Moreover, SoundExchange notes, Sirius XM's internet revenue grew from
$[REDACTED] in 2010 to $[REDACTED] in 2014 while Sirius XM was paying
rates under its WSA settlement agreement with SoundExchange. SX PFF ]
1078 (and citations to the record therein).
Seventh, SoundExchange asserts that Sirius XM's rate proposal has
no sound basis. According to SoundExchange, the proposal was simply
plucked from the first year of the Sirius XM WSA settlement. Id. ] 61.
Moreover, according to SoundExchange, Sirius XM's reliance on the low-
end rate in an agreement that its principal witness, Mr. Frear, now
expressly disavows, is arbitrarily selective and internally
inconsistent. SX PFF ] 1081.
4. The Judges' Analysis of the Sirius XM Rate Proposal
The Judges reject Sirius XM's argument for a number of reasons.
First, the Judges decline to re-litigate the probative value of the
2009 WSA settlement agreement between Sirius XM and SoundExchange. That
agreement was entered into more than six years ago, and therefore does
not represent the present state of the noninteractive market, absent
affirmative evidence to the contrary. Whether Sirius XM was compelled
by its financial circumstances or not to enter into that settlement
might have affected the relevance of that agreement as a benchmark in
Web III, but it has no significance to the Judges in the present
proceeding. Indeed, as SoundExchange notes, it is inconsistent for
Sirius XM, on the one hand, to criticize the benchmark value of its
2009 WSA settlement agreement, and then to expressly adopt the lowest
rate from that agreement as its proposed rate in the present
proceeding.\200\
---------------------------------------------------------------------------
\200\ The Judges have also analyzed the impact, if any, of the
other 2009 WSA settlement agreement--between the NAB and
SoundExchange. See supra.
---------------------------------------------------------------------------
Second, the Judges are unpersuaded by the fact that Sirius XM
apparently can afford the $0.0016 rate it now proposes, in contrast to
earlier years when it was financially in extremis. As the Judges held
in the Web III Remand, and have consistently held, Sec. 114(f)(2)(B)
does not require the Judges to set a rate that ensures the financial
viability of any entity. Thus, the fact that Sirius XM may be able to
afford the $0.0016 rate now, but might not be able to afford any higher
rate, is simply not pertinent to the Judges' determination. Moreover,
the fact that Sirius XM acknowledges that noninteractive streaming is
only an ``ancillary'' part of its business (in contrast to its
satellite service) indicates that the impact of the rates on its
noninteractive service cannot be a driver of the statutory rate
determination. The Judges note that Sirius XM was willing to accept
rates in its 2009 WSA settlement at least in part because of the
ancillary nature of its noninteractive service. Because that
noninteractive service remains ancillary in nature to Sirius XM, the
Judges cannot conclude that impact of the rates set in this proceeding
have any greater particular importance to Sirius XM now.
G. NAB Rate Proposal
1. Proposed Rates
The NAB proposes a two-tiered rate structure for webcasts by
simulcasters. Broadcasters that transmit fewer than 876,000 ATH would
pay only the minimum fee. NAB Proposed Rates and Terms at 3 (October 7,
2014). All other broadcasters would pay a per-performance royalty rate
of $0.0005 to simulcast for each year of the rate term. Id. at 3-4.
NAB's rate proposal is limited to simulcasts (retransmissions by
broadcasters of programming transmitted over their AM or FM radio
stations), and does not cover other commercial webcasts. Id. at 2
(definition of Eligible Transmission). Having rejected the NAB's
proposal to apply a separate rate to simulcasters,\201\ the Judges
consider the NAB's proposed rate as a rate that would apply to all
commercial webcasters. For the reasons detailed below, the Judges
reject the NAB's rate proposal.
---------------------------------------------------------------------------
\201\ See discussion supra, section I.A.3
---------------------------------------------------------------------------
2. Analysis of Economic Evidence
The NAB presented its methodology for arriving at a rate proposal
through its economic expert witness, Professor Michael Katz. Dr. Katz
did not perform a benchmark analysis to arrive at a rate. Rather, he
selected guideposts that define the lower and upper bounds of what he
described as a range of reasonable rates that a willing buyer and a
willing seller would agree to in a workably competitive market. See
Katz WDT ]80. The NAB's proposed rate of $0.0005 per-performance
presumably falls somewhere within that range.\202\
---------------------------------------------------------------------------
\202\ As discussed below, the upper bound of the NAB's range of
reasonable rates is expressed as a percentage of revenue. The NAB's
proposed rate is expressed as a per-performance royalty, however,
and there is insufficient data in the record to convert the per-
performance rate to a percentage of revenue (and vice versa). Since
the Judges deem it highly unlikely that the NAB would propose a rate
that exceeds the upper bound of its own expert's zone of
reasonableness, the Judges presume that the proposed rate falls
below that upper bound.
---------------------------------------------------------------------------
Dr. Katz determined the low end of his ``zone of reasonableness''
by reference to terrestrial radio. See Katz WDT ]] 81-84. Radio
broadcasters are not required to pay royalties for terrestrial
broadcasts of sound recordings, and typically do not do so. See 17
U.S.C. 114(a); Katz WDT ] 82. Nevertheless, Dr. Katz points out, record
companies seek out radio airplay to promote other income streams, such
as sales of CDs and permanent downloads. See Katz WDT ] 82. He argues
that economic theory predicts that this promotional effect would drive
down royalty rates, possibly even resulting in negative royalty rates
if the law permitted record companies to pay broadcasters to play their
music (i.e., payola). Id. ]] 81-82.
Dr. Katz then argues ``available evidence indicates that
promotional benefits also arise from web simulcasts of terrestrial
broadcasts.'' Id. ] 83. In effect, he equates simulcasting with
terrestrial radio and concludes that the lower bound of the range of
reasonable rates for simulcasting is ``near zero.'' Id. ] 84.
To set an upper bound to his zone of reasonableness, Professor Katz
looked to the Judges' decision in SDARS II. Id. ] 85. According to
Professor Katz,
In SDARS II, the judges found that 13 percent [of gross revenue]
constitutes a sensible upper bound on the zone of reasonableness
before adjusting to account for Section 801(b) factors. The rate was
then reduced by an additional two percent for the third 801(b)
factor, which was specific to Sirius XM and the SDARS II proceeding.
Id. (footnotes omitted). He adopted 13 percent of gross revenue as ``an
initial guidepost'' for determining his range of reasonable rates for
simulcasters, subject to two adjustments to account for differences
between SDARS (satellite
[[Page 26391]]
radio) and simulcasters. Id. ]] 86-87. The first adjustment (the
``music-listening adjustment'') accounted for the fact that music
accounts for a lower percentage of listening on AM/FM radio than on
satellite radio. The second adjustment (the ``music-revenue
adjustment'') accounted for ``the fact that non-music-formatted
stations generally will not be paying royalties.'' Id. ] 89.
The net effect of the two adjustments essentially offset each
other, resulting in an adjustment factor of one. Id. ] 92.
Consequently, Dr. Katz determined that the upper bound to his zone of
reasonableness is 13 percent of gross simulcasting revenues.
Nevertheless, he argues ``there are strong reasons to conclude that the
actual upper bound of the zone of reasonableness is significantly lower
than 13 percent.'' \203\Id. ] 93.
---------------------------------------------------------------------------
\203\ Professor Katz's primary argument that the 13 percent
figure is too high is that it was derived in SDARS I from analysis
of a market that was not effectively competitive. Id.
---------------------------------------------------------------------------
Dr. Katz's approach is similar in some respects to the approach
that the Judges took (and the Court of Appeals affirmed) in SDARS II.
In that case, the zone of reasonableness that the Judges determined
based on the parties' benchmarks was extremely broad. In order to
narrow down the possible rates within that zone, the Judges referred to
several ``guide posts,'' including the 13 percent rate that had been
the basis for the rate that the Judges set in SDARS I.
SDARS II, however, is distinguishable from the present case. In
SDARS II the Judges had little confidence in the benchmark analyses
offered by the parties which, in any event, yielded a range of possible
rates that was too broad to provide useful guidance to the Judges. Thus
the Judges found it necessary to consider other available evidence as
guideposts. In the instant case, the Judges have sufficient confidence
in the available benchmark analyses to proceed without reference to
other guideposts.
In SDARS II, the Judges were not determining a market rate under
the willing-buyer, willing-seller standard. The Judges decided SDARS II
under the section 801(b) reasonable rate standard. As the Court of
Appeals emphasized, under that standard ``[t]he Copyright Act permits,
but does not require, the Judges to use market rates to help determine
reasonable rates.'' Music Choice v. Copyright Royalty Bd., 774 F.3d
1000, 1010 (D.C. Cir. 2014). That is not the case under Sec.
114(f)(2)(B). The Judges must determine market rates, yet the rates
used by Dr. Katz to determine the upper and lower bounds of his zone of
reasonableness are not market rates.
There is no market for licensing of sound recordings for
transmission by terrestrial radio stations, since there is no general
public performance right for sound recordings. That would be sufficient
reason to reject Dr. Katz's proposed lower bound of ``near zero'' that
he derived from terrestrial radio. Moreover, Dr. Katz relies on an
assumption that the promotional effect of simulcasting is essentially
the same as the promotional effect of terrestrial broadcasting, because
they carry the same content. As discussed above, broadcasters' use of
technologies to substitute songs in their simulcast streams destroys
the underlying premise that the content of a simulcast stream is the
same as the terrestrial broadcast. Even if the content is the same, the
Judges do not find sufficient persuasive evidence supporting the
conclusion that simulcasts have the same promotional effect as
terrestrial broadcasts.\204\
---------------------------------------------------------------------------
\204\ See discussion, supra section III.A.3.c.v.
---------------------------------------------------------------------------
As for Dr. Katz's use of the SDARS II rate to establish an upper
bound to his zone of reasonableness, that too is not a market rate. It
is a rate established by the government by means of a CRB proceeding.
Moreover, it is not even a rate that is intended to replicate market
conditions. It is a section 801(b) reasonable rate, albeit one that was
informed by marketplace evidence (though from a somewhat different
market). In short, neither end of Dr. Katz's zone of reasonableness is
anchored in the noninteractive streaming market that the Judges are
seeking to replicate in this proceeding. The Judges find Dr. Katz's
zone of reasonableness unhelpful in setting a rate for commercial
webcasters, and reject the NAB's proposed rate that it derived from Dr.
Katz's analysis.
V. Judges' Determination of Noncommercial Webcasting Rates
A. Parties' Proposals
1. SoundExchange
SoundExchange proposes that noncommercial webcasters pay a flat
annual fee of $500 per station or channel for all performances up to a
cap of 159,140 ATH per month. SoundExchange Rate Proposal at 4 (October
7, 2014) SoundExchange proposes that, in any month that a noncommercial
webcaster exceeds 159,140 ATH, the webcaster pay per-performance
royalties at the following rates for its transmissions in excess of
159,140 ATH:
SoundExchange Proposed Per-Performance Rates for Performances Above
159,140 ATH
------------------------------------------------------------------------
Per-
Year performance
rate
------------------------------------------------------------------------
2016.................................................... $0.0025
2017.................................................... 0.0026
2018.................................................... 0.0027
2019.................................................... 0.0028
2020.................................................... 0.0029
------------------------------------------------------------------------
Id. at 4-5. These are the same per-performance rates the
SoundExchange proposes for commercial webcasters.
2. NRBNMLC
The NRBNMLC proposes what it describes as a ``tiered and capped
flat fee structure.'' NRBNMLC PFF ] 80. Under the NRBNMLC proposal,
each noncommercial webcaster would pay a $500 annual fee for all
performances of sound recordings up to a threshold of 400 average
concurrent listeners (3,504,000 ATH) annually, and an additional $200
for each additional 100 average concurrent listeners (876,000 ATH)
annually, up to an annual fee cap of $1,500 per station or channel. See
Introductory Memorandum to Written Direct Statement of NRBNMLC at 3
(October 7, 2014) (NRBNMLC Introduction); The NRBNMLC's Proposed
Noncommercial Webcaster Rates and Terms at 3 (October 7, 2014) (NRBNMLC
Proposed Rates and Terms). The NRBNMLC would define ATH to include only
transmissions of recorded music. Id. at 1.
3. IBS and Harvard Broadcasting/WHRB
Section 351.4 of the Judges' procedural rules sets forth the
required contents of a participant's WDS, including the requirement
that, in a rate proceeding, ``each party must state its requested
rate.'' 37 CFR 351.4(b)(3) (required contents of WDS). The rule goes on
to permit participants to revise their rate proposals at any time up to
the filing of proposed findings of fact and conclusions of law. Id.
IBS's WDS does not contain a rate proposal, or anything that the
Judges could reasonably interpret as a rate proposal. It consists
solely of the three-page written testimony of Frederick Kass. Captain
Kass introduces himself and IBS, and briefly discusses the nature of
IBS members' webcasting activities:
[IBS member] stations operate as non-profit entities within the
meaning of the statute, as amended. They use digitally recorded
music as instructional media for announcers and programmers. The
instantaneous listenership to such music on member stations is
[[Page 26392]]
typically on the order of five listeners, with the exception of
course-related music and other on-campus events. In contrast,
audiences for live sports broadcast live musical performances, and
lectures and other live on-campus originations are typically much
larger than the audience for digitally recorded music.
IBS Members provide significant science, technology,
engineering, management, media, and communication skill set
training. The stations typically act as learning laboratories where
students may learn and perfect their skills.
IBS Ex. 9000 at 3 (Kass WDT).
Similarly, WHRB's WDS does not contain a rate proposal, or anything
the Judges could reasonably interpret as a rate proposal. WHRB's WDS is
comprised of the WDT of Michael Papish, one of the station's board
members. In three pages of written testimony, Mr. Papish merely
introduces himself and describes WHRB's operations. See generally WHRB
Ex. 8000 (Papish WDT).
Neither Captain Kass nor Mr. Papish presented a rate proposal in
the course of their respective live testimony at the hearing. The only
hint of a proposal might be gleaned from a colloquy between the Judges
and counsel \205\ during closing arguments:
---------------------------------------------------------------------------
\205\ William Malone, Esq., jointly represented IBS and WHRB in
this proceeding. In closing arguments Mr. Malone, on behalf of WHRB,
briefly discussed a matter related to terms. 7/21/15 Tr. at 7946.
The remainder of his closing argument, including the colloquy quoted
in the text, was apparently on behalf of IBS alone.
[THE JUDGES]: So what exactly is IBS proposing here?
MR. MALONE: All right. In our pleadings as early as the
agreement between SoundExchange and CPB, NPR became public when you
published it in the Federal Register, we have computed to the best
of our ability that there is a rate per ATH of 0.0011940. And we
think that this is a marketplace agreement entered into voluntarily
by one of the big companies in the market, and we think that sets
the appropriate rate.
Then when you scale that down to show the number of ATH that
these college stations, high school stations, academy stations, and
the like are operating, it works out to around $20 a year.
7/21/15 Tr. at 7949 (Kass).
In its proposed findings, IBS directed its efforts to arguing
against adoption of the SoundExchange/CBI settlement agreement \206\
and, once again, failed to propose a royalty rate.\207\ In short, the
only arguable reference by IBS to a rate proposal was made by counsel
in his closing arguments. The Judges do not credit this statement by
counsel as a rate proposal by IBS for three reasons. First, introducing
a rate proposal for the first time in closing arguments does not comply
with the Judges' rules and is grossly unfair to the other parties.
Section 351.4(b)(3) is extremely liberal regarding revisions to a
party's rate proposal, but it presupposes that the party has made a
proposal as part of its WDS, thus giving the other parties an
opportunity to analyze it prior to presenting their rebuttal evidence.
---------------------------------------------------------------------------
\206\ Those efforts were both untimely and not in accordance
with the procedures established in the Act, the Judges' rules for
submitting comments on a proposed settlement, and the Judges'
Federal Register notice. See 17 U.S.C. 801(b)(7)(A); 37 CFR
351.2(b)(2); 79 FR 65609 (November 5, 2014) (SoundExchange/CBI
agreement); 80 FR 15958 (March 26, 2015) (SoundExchange/NPR
agreement).
\207\ IBS goes through a series of computations in its PFF in an
effort to show that the proposed settlement rates ``in no way meet
the comparability test for noncommercial royalty rates.'' IBS PFF,
at 10. In the course of those computations, IBS comes up with a $20/
year figure, but it is unclear what that figure represents. Id.
---------------------------------------------------------------------------
Second, ``around $20 a year'' is not sufficiently definite or
specific to constitute a rate proposal. For example, which
noncommercial webcasters would pay ``around $20 a year''? All of them?
Only ones that transmit below a certain ATH threshold? What threshold?
IBS does not say.
Third, even if the Judges were to consider this to be a proposal,
IBS has offered only statements of counsel to support it. The record is
devoid of any evidence to support IBS's ``proposal'' or the analysis
from which it was purportedly derived. Nothing will come of nothing.
Neither IBS nor WHRB has offered a rate proposal that the Judges can
consider in this proceeding.
B. Analysis and Conclusions
1. Upper Threshold for Noncommercial Rate
The Judges have recognized noncommercial webcasting as a separate
submarket in prior decisions only ``up to a point.'' Web II Original
Determination at 24097. The Judges stressed that there must be limits
to the differential treatment for noncommercials to avoid ``the chance
that small noncommercial stations will cannibalize the webcasting
market more generally and thereby adversely affect the value of the
digital performance right in sound recordings.'' Id. (internal quotes
and citations omitted). The Judges concluded that any separate rate for
noncommercial webcasters must ``include safeguards to assure that, as
the submarket for noncommercial webcasters that can be distinguished
from commercial webcasters evolves, it does not simply converge or
overlap with the submarket for commercial webcasters and their
indistinguishable noncommercial counterparts.'' Id. at 24097-98. To
avoid this convergence or overlap, the Judges adopted a cap on the size
(as measured by audience size) of noncommercial webcasting stations or
channels that are eligible for the noncommercial rate. See 37 CFR
380.3(a)(2) (applying flat $500 royalty rate up to 159,140 ATH per
month).\208\
---------------------------------------------------------------------------
\208\ Although the Judges and the parties discuss the ATH
threshold as a ``cap'' on eligibility for a reduced noncommercial
rate, this is not entirely accurate. A noncommercial webcaster that
exceeds the cap in any given month does not pay commercial rates for
all of its transmissions in that month, but only those beyond the
cap. This results in noncommercial webcasters paying a lower average
per-play rate than a commercial webcaster (that pays at the
commercial rate for every performance).
---------------------------------------------------------------------------
SoundExchange's proposal to continue to impose of a limit on the
size of noncommercial webcasters that are eligible for a separate
noncommercial rate is supported by the testimony of Professor Thomas
Lys. Professor Lys noted that, as a matter of economic logic, ``there
is no real difference between a noncommercial and a commercial
broadcaster.'' SX Ex. 28 ] 256 (Lys WRT); 5/29/15 Tr. at 6738. The
Judges credit this testimony, but do not reach precisely the same
ultimate conclusion as Professor Lys. While Professor Lys apparently
argues that there should be no distinction between commercial and
noncommercial rates, he did not consider (and was apparently unaware
of) the revealed preference in the marketplace for a separate
noncommercial rate. The Judges resolve the tension between Professor
Lys's observation concerning economic logic and the revealed preference
in the marketplace by limiting the differential treatment of
noncommercial webcasters to smaller players that have a correspondingly
smaller impact on the commercial market. The Judges thus agree with
SoundExchange that eligibility for a noncommercial rate should be
limited to those noncommercial webcasters whose audience size falls
below a fixed threshold.
While SoundExchange proposes a threshold above which a
noncommercial webcaster ceases to be eligible for a noncommercial rate,
the NRBNMLC does not. The NRBNMLC does, however, propose a threshold
above which a noncommercial webcaster must pay an additional flat
royalty fee (this structure is described supra, section V.A.2). Under
either proposal a flat fee of $500 pays for all performances of sound
recordings up to the threshold.
SoundExchange proposes that the threshold remain the same as the
[[Page 26393]]
current threshold for noncommercial webcasters: 159,140 ATH per month
(218 concurrent listeners, on average, for a webcaster that transmits
24 hours per day). 307 CFR 380.3(a)(2). That is also the threshold in
the SoundExchange/CBI settlement agreement above which a noncommercial
educational webcaster (NEW) ceases to be eligible for the settlement
rate. See Digital Performance Right in Sound Recordings and Ephemeral
Recordings: Proposed Rule, 79 FR 65609, 65611 (November 5, 2014)
(proposed 37 CFR 380.22). By contrast, the NRBNMLC proposes a much
higher threshold of 400 average concurrent listeners, or 3,504,000 ATH
annually (292,000 ATH per month on average).\209\
---------------------------------------------------------------------------
\209\ This threshold effectively would be higher still as a
result of the NRBNMLC's proposal to exclude certain non-music
intensive programming from the definition of ATH.
---------------------------------------------------------------------------
The NRBNMLC argues that the existing threshold should be increased
because it was originally established in 2006 (based on 2004 survey
data). NRBNMLC PFF ] 143. In addition, the NRBNMLC argues that an
increase is necessary to provide noncommercial webcasters with
``breathing room.'' See Emert WDT ] 40. These arguments are
unpersuasive.
While it is correct that the current 159,140 ATH threshold was
adopted originally in Web II based on survey evidence presented in that
proceeding, that is not the only source for that number. See Web II, 72
FR at 24099. SoundExchange and CBI adopted 159,140 ATH as the threshold
in their settlement agreement, which is contemporaneous with this
proceeding and covers the same rate period. See NRBNMLC Ex. 7034,
Attachment at 2-3 (SoundExchange/CBI Joint Motion to Adopt Partial
Settlement). By contrast, the NRBNMLC cannot point to any marketplace
agreement (contemporaneous or otherwise) that employs the threshold it
proposes.
As to the NRBNMLC's argument that noncommercial webcasters need the
``breathing room'' that an increased threshold would provide, there is
no persuasive record evidence to support that proposition. Mr. Emert
did testify to this effect. Emert WDT ] 39; see also 5/21/15 Tr. at
5271-71 (Henes). However, that testimony was an expression of opinion,
unsupported by any factual evidence. Mr. Emert's and Mr. Henes'
testimony that that the dozen or so radio stations they operate stream
far below the existing threshold tends to contradict their statements
concerning the need to increase the threshold to accommodate future
audience growth. See Emert WDT ] 29; Ex. 7010; 5/21/15 Tr. at 5275-77
(Henes). Their stations could achieve significant audience growth under
SoundExchange's proposed rate structure without subjecting themselves
to additional royalty costs.
To the contrary, there is ample record evidence to demonstrate that
the vast majority of noncommercial webcasters do not exceed the
existing threshold. SoundExchange payment data show that between 2010
and 2014, noncommercial webcasters \210\ paid usage fees 112 times out
of 3917 noncommercial webcaster payments (2.86%). NAB Ex. 4141; NAB Ex.
4149; see also SX Ex. 2 at 14 (Bender WDT) (``approximately 97% of
noncommercial webcasters paid only [the] minimum fee''). The NRBNMLC
seeks to counter this evidence with testimony from Mr. Emert and Mr.
Henes that they were ``aware of'' some noncommercial broadcasters that
impose listener caps on their simulcast streams to avoid exceeding the
existing threshold. Emert WDT, ] 38; 5/21/15 Tr. at 5271 (Henes). The
NRBNMLC's evidence is vague and anecdotal. It was not derived from the
witnesses' own experiences, but rather from something they heard
elsewhere. Even if the Judges were to deem this testimony credible, the
most that it reveals is the existence of some isolated instances of
noncommercial webcasters that are constrained by the existing
threshold. The testimony emphatically does not demonstrate that a
substantial number of noncommercial webcasters are operating near the
threshold and taking steps to keep below it.\211\
---------------------------------------------------------------------------
\210\ These are webcasters that are coded ``NCW-CRB''
(noncommercial webcaster paying statutory rates), ``NCW-WSA''
(noncommercial webcaster paying WSA settlement rates) and ``NCEDW''
(noncommercial education webcaster paying under the SoundExchange/
CBI settlement) in the SoundExchange data. For purposes of this
analysis, the Judges have excluded noncommercial microcasters which,
by definition, stream far below the threshold and pay no usage fees.
See Noncommercial Microcasters, available online at http://www.soundexchange.com/service-provider/noncommercial-webcaster/noncommercial-microcaster-wsa/ (visited September 8, 2015). The
Judges consider a webcaster to be paying usage fees if the fees
collected by SoundExchange in a particular year (a) exceed the $500
flat fee, (b) do not equal $600 (which most likely represents the
$500 flat fee plus a $100 proxy fee in lieu of census reporting) and
(c) are not an even multiple of $500 (most likely representing
payment of the minimum fee for multiple channels). This is the
approach that the NRBNMLC employed in interpreting these data. See,
e.g., NRBNMLC PFF ] 95.
\211\ The NRBNMLC candidly admits that it does not know the
extent to which noncommercial webcasters impose listener caps,
noting that ``[t]here is no way of knowing exactly how many
Noncommercial entities have done this . . . .'' NRBNMLC PFF ] 23.
This statement is only partially correct: The NRBNMLC could have
surveyed its members or the broader noncommercial webcaster
community. While such a survey may not have provided a definitive
answer for the entire population of noncommercial webcasters, it
would have revealed far more about the current state of affairs
across the noncommercial webcasting market than the hearsay
testimony of these two witnesses.
---------------------------------------------------------------------------
The NRBNMLC's proposal to increase the threshold to 400 concurrent
listeners is unsupported by the record. By contrast, the evidence
demonstrates that the current threshold of 159,140 ATH per month that
SoundExchange proposes to retain has resulted, for the vast majority of
noncommercial webcasters, in no additional liability for royalties
beyond the minimum fee. Moreover, the willingness of SoundExchange and
CBI to adopt that threshold in their current settlement agreement,
after years of experience with the identical threshold under the
current rates, demonstrates that it is reasonable and workable. The
Judges hereby adopt it.
2. Consequences of Exceeding the Threshold
SoundExchange proposes that a noncommercial webcaster's
transmissions beyond the 159,140 ATH threshold should no longer enjoy a
reduced royalty rate. The NRBNMLC proposes that a reduced royalty rate,
structured in $200 increments for each 876,000 ATH annually, should
apply to transmissions beyond the threshold.
a. The NRBNMLC's Proposal
The Judges explained in Web II that the threshold on the
noncommercial webcasting rate serves as a ``proxy that aims to capture
the characteristics that delineate the noncommercial submarket.'' Web
II Remand, 72 FR at 24099. As discussed in section V.B.1, the Judges do
this to assure that the submarket for noncommercial webcasters does not
converge or overlap with the submarket for commercial webcasters.
SoundExchange's proposal is consistent with this rationale; the
NRBNMLC's is not. Not only would the NRBNMLC's proposal grant
substantially reduced rates to large noncommercial webcasters whose
operations compete with commercial webcasters', but the effective rate
for such large noncommercial webcasters would actually decline as they
grow larger due to the effect of the proposed $1,500 cap on royalties.
The NRBNMLC offers no economic rationale for this result. See Lys WRT,
]] 256-257.
The NRBNMLC does not address this issue directly. Instead, the
NRBNMLC argues that its proposed ``tiered and capped flat rate
structure'' is what a willing buyer and a willing seller would
[[Page 26394]]
agree to in an effectively competitive market (i.e., a market rate).
See NRBNMLC PFF ]80. The NRBNMLC cited the testimony of its two
witnesses as establishing the need of noncommercial webcasters for
rates that are affordable and predictable. NRBNMLC Ex. 7011 ]] 25-27,
30 (Henes WDT); Emert WDT ]] 31-32, 34-37, 41. The fatal flaw in this
argument is that it is unsupported by any marketplace evidence and any
evidence of sellers who would be willing to accept the NRBNMLC's
proposed structure. Mr. Henes and Mr. Emert may be willing, even eager
to license music on this basis, but their testimony tells the Judges
nothing about the sellers' side of the equation. As discussed in
greater detail in the following paragraphs, none of the marketplace
evidence that the NRBNMLC cites pertains to a rate structure remotely
similar to the one proposed by the NRBNMLC.
As additional evidence to support their argument that a ``tiered
and capped flat rate structure'' is a market rate, the NRBNMLC cites
the SoundExchange/CBI settlement agreement, the SoundExchange/NPR
settlement agreement, the rates established for musical works under 17
U.S.C. 118, and the position taken by SoundExchange on legislation to
create a public performance right for sound recordings that covers
transmissions over terrestrial radio. Id. The Judges reach different
conclusions based on this evidence.
The SoundExchange/CBI settlement agreement imposes a flat $500 fee
on NEWs that transmit up to 159,140 ATH per month. Any NEW that exceeds
that threshold loses its eligibility to operate under the settlement,
and thus becomes subject to the CRB rate for noncommercial webcasters
for the remainder of the year.\212\ The NRBNMLC concludes that ``no
usage fees apply under the agreement'' for a NEW that exceeds the
threshold, and cites the agreement as support for a flat-rate structure
with no usage fees. NRBNMLC PFF ] 93. The NRBNMLC's interpretation of
the agreement is not credible. The parties' decision not to specify
usage fees in the agreement does not mean that they contemplated that a
NEW that exceeded the ATH threshold would not pay any usage fees. The
existing CRB rates provide for usage fees above 159,140 ATH, and CBI
could reasonably assume that SoundExchange's rate proposal (filed with
the Judges on the same day as the proposed settlement) would also
contain usage fees. At most, the omission of usage fees from the
agreement reflected the parties' decision not to resolve the issue of
what rates would apply beyond the threshold, and to leave it for the
Judges to determine in the proceeding.
---------------------------------------------------------------------------
\212\ The NEW may operate under the settlement in the following
year, provided it takes affirmative steps (e.g., imposes listening
caps) to ensure that it will not exceed the threshold again.
---------------------------------------------------------------------------
The NRBNMLC is correct in pointing out that the SoundExchange/NPR
settlement agreement imposes a flat royalty rate with no additional
usage fee. However, the SoundExchange/NPR settlement differs so
fundamentally in so many ways from what the NRBNMLC is proposing that
it cannot serve as a support for that proposal. The SoundExchange/NPR
settlement entails a single annual payment by a single payer (CPB), in
advance, to cover over 500 NPR member radio stations. 80 FR at 59590-
91. The stations include a range of formats, some of which entail very
limited use of recorded music. Unlike the NRBNMLC's rate proposal, the
settlement does not include tiered payments above the flat royalty
rate, but does include a cap on the aggregate amount of recorded music
that may be performed. NPR consolidates the reports of use for all of
the stations covered by the agreement. The NRBNMLC's proposal does not
provide for consolidated reports of use. On the whole, the terms of the
SoundExchange/NPR agreement provide SoundExchange with significant
benefits--reduced risk of nonpayment; protection against large numbers
of uncompensated performances; reduced costs of processing usage data--
that the NRBNMLC proposal does not. To pluck out a single element of
the deal, the flat royalty rate, and cite it as support for the NRBNMLC
rate proposal simply lacks credibility.
The musical works rate under the Sec. 118 statutory license
suffers from a similar lack of comparability to the rates the Judges
must set in this proceeding. Rates under Sec. 118 are in a different
market, with different sellers and for different copyrighted works. The
NRBNMLC has presented no evidence to demonstrate how a rate structure
in that market, and with those sellers, reflects what a willing buyer
and a willing seller would agree to in the sound recordings market.
Finally, SoundExchange's position on legislation has little or no
bearing on what constitutes a market rate. The compromises and
tradeoffs that parties are prepared to make in the legislative arena
have only the remotest resemblance to the give and take of the
marketplace. The record industry does not currently enjoy any legal
right with respect to the transmission of its sound recordings over
terrestrial radio. There is no basis for the Judges to conclude that
what the industry may be willing to accept in legislation that
establishes such a right is the same as what it would bargain for in an
arms-length transaction against the backdrop of an existing statutory
right of remuneration.
b. SoundExchange's Proposal
Although SoundExchange's proposal to impose commercial rates above
the 159,140 ATH threshold is consistent with the Judge's rationale for
limiting the applicability of noncommercial rates, the NRBNMLC levels
multiple criticisms against it. These include:
SoundExchange's entire rate proposal for noncommercial
webcasters lacks evidentiary support;
The specific usage rates that SoundExchange proposes are
``inappropriate for commercial webcasters and even more inappropriate
for noncommercial webcasters''; and
The fact that few noncommercial webcasters have paid usage
fees confirms that the proposed fees are unreasonable.
NRBNMLC PFF ] 113.
i. Evidentiary Support (or Lack Thereof) for SoundExchange's Rate
Proposal
As Professor Rubinfeld readily conceded, there are no current
marketplace benchmarks from which to derive SoundExchange's entire rate
proposal for noncommercial webcasters. Rubinfeld CWDT ]] 33, 246. The
only contemporary agreements in evidence that cover noncommercial
webcasters are the two settlement agreements between SoundExchange, on
the one hand, and CBI and NPR, respectively, on the other hand. As
discussed in the preceding section, there are a number of elements of
the SoundExchange/NPR agreement that render it a poor benchmark for
setting noncommercial rates generally. The SoundExchange/CBI agreement
lends support for some elements of SoundExchange's rate proposal (e.g.,
a flat $500 rate for noncommercial webcasters that transmit up to
159,140 ATH), but not for the proposed rate for usage beyond the ATH
threshold.
That does not mean, however, that SoundExchange's rate proposal is
entirely without evidentiary support. As discussed, supra section
V.B.1, expert economic testimony supports treating transmissions by
noncommercial webcasters above a certain ATH threshold the same as
transmissions by commercial webcasters. This is what the SoundExchange
proposal seeks to
[[Page 26395]]
achieve. The rates that SoundExchange proposes for transmissions above
the ATH threshold are the same that SoundExchange proposes for
commercial webcasters.
ii. Inappropriateness of Specific Usage Rates Proposed by SoundExchange
The NRBNMLC pursues two lines of attack against the specific usage
rates that SoundExchange proposes. The first, concerning Professor
Rubinfeld's interactive benchmark analysis, essentially repeats the
licensee services' criticisms of SoundExchange's proposal for
commercial webcasting rates. See NRBNMLC PFF ] 122. The Judges discuss
those arguments supra. The Judges, in fact, do not adopt the specific
rates that SoundExchange proposes, precisely because they find
SoundExchange's benchmark analysis lacking in certain respects. Rather,
the Judges adopt the same rates for transmissions in excess of the
159,140 ATH threshold by noncommercial webcasters as they do for
commercial webcasters.
The second line of attack is that Professor Rubinfeld's benchmark
analysis is inapplicable to noncommercial webcasters because none of
the licensees under any of the benchmark agreements were noncommercial
webcasters. Id. ] 123. As discussed, supra section V.B.1, the Judges
apply commercial rates to noncommercial webcasters above the ATH
threshold because economic logic dictates that outcome, not because it
was observed in benchmark agreements.
iii. Small Number of Noncommercial Webcasters Paying Usage Fees
Confirms That the Fees Are Excessive
The NRBNMLC notes that few noncommercial webcasters pay usage fees
and, of those that do, most pay a lower settlement rate in lieu of the
rates set by the Judges for commercial webcasters. NRBNMLC PFF ] 131.
Based on this evidence, the NRBNMLC concludes that the commercial
webcaster rates are excessive, and that noncommercial webcasters are
imposing listener caps or taking other affirmative steps to avoid
paying them.
Of the 3,917 documented payments by noncommercial webcasters
between 2010 and 2014, 112 included payments for usage above the ATH
threshold. NAB Ex. 4141; NAB Ex. 4149. Of these, 13 were at the
commercial rate determined by the Judges and 99 were at a lower rate
established under a WSA settlement.\213\ Id.; see also 5/6/15 Tr. at
2099-100 (Rubinfeld) (25-30 noncommercial licensees pay lower rates
under settlement agreements).
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\213\ The noncommercial webcasters' WSA settlement agreement is
``nonprecedential.'' The Judges are not permitted to take into
account the rate structure, fees, terms and conditions of that
agreement in setting rates in this proceeding. 17 U.S.C.
114(f)(5)(C).
---------------------------------------------------------------------------
These facts do no support the NRBNMLC's conclusions. In itself, the
fact that more than 97% of noncommercial webcaster payments do not
include usage fees could just as easily support the conclusion that the
vast majority of noncommercial webcasters--like the noncommercial
webcasters that testified in this proceeding--operate well below the
159,140 ATH threshold. Without evidence that a substantial number of
noncommercial webcasters are operating near the threshold, or are
imposing listening caps, the Judges cannot conclude that the threshold
operates as a significant constraint or that the usage fees are
excessive.
The evidence that most noncommercial webcasters that paid usage
fees did so under an alternative rate structure also does not support
the NRBNMLC's conclusions. These webcasters made a rational choice to
pay an available lower rate. That tells the Judges nothing about their
willingness to pay the higher statutory rate in the absence of
settlement. Conversely, though, it strongly suggests that nearly all of
the webcasters that opted for the statutory rate structure or the NEW
settlement expected that they would not exceed the threshold.
3. Cap on Royalties
The NRBNMLC proposes that the total obligation of a noncommercial
webcaster to pay royalties should be capped at $1,500, regardless of
the number of sound recordings the webcaster performs. As with the
other elements of its rate proposal, the NRBNMLC contends that the cap
on fees is supported by marketplace evidence. Neither of the two
noncommercial agreements in evidence employs the cap that the NRBNMLC
proposes. The SoundExchange/CBI settlement imposes a flat royalty rate,
but caps eligibility for that rate at 159,140 ATH. Beyond that
threshold, the noncommercial webcaster must pay under the noncommercial
rate structure determined in this proceeding. The SoundExchange/NPR
settlement agreement employs a flat-fee structure (which serves as a
cap on royalties), but also imposes a cap on music usage. See 80 FR at
15961.
There is no other evidence of any kind that a copyright owner would
willingly license unlimited use of its sound recordings for a fixed fee
of $1,500. The Judges reject the NRBNMLC's proposed royalty cap.
4. IBS's Additional Arguments
IBS did not direct any criticism directly at either the
SoundExchange or the NRBNMLC rate proposal. IBS's rate-related
arguments were directed (or misdirected \214\) at the SoundExchange/CBI
settlement agreement. Nevertheless, had IBS applied those arguments to
the rate proposals before the Judges, the Judges would have rejected
them.
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\214\ See supra note 204.
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a. Lobbying Prohibition
Captain Kass testified that many IBS members are a part of state-
funded educational institutions that are barred by state law from
providing funds to organizations that lobby. IBS argues that these laws
prevent certain IBS members from paying royalties to SoundExchange.
This argument is unavailing for several reasons. First, IBS failed
to provide any legal authority or expert testimony to support Captain
Kass's interpretation of these state laws. Even if the Judges accept as
true the assertion that these state laws prohibit certain IBS members
from remitting funds to lobbying organizations, it is far from clear
whether those laws would prevent the same IBS members from paying
statutory license royalties to an organization designated by regulation
as a collective under a Federal statute.
Second, there is no evidence in the record concerning
SoundExchange's lobbying activities, vel non. The Judges have no basis
for concluding that the state laws to which IBS refers even apply to
SoundExchange.
Third, and most fundamentally, the entire question is not relevant
to the Judges' task of setting rates for noncommercial webcasters. If
IBS contends that its members may webcast sound recordings but are
forbidden under state law to pay royalties to SoundExchange, that is an
argument that must be resolved by a Federal District Court in an
infringement action. It has no bearing on the particular rate structure
that the Judges must determine for noncommercial webcasters.
b. Lack of ``Proportionality''
IBS argues that royalty payments for noncommercial webcasters must
be proportional to their use of sound recordings. While IBS's argument
has a superficial appeal, it suffers from several shortcomings.
[[Page 26396]]
IBS does not and cannot cite any statutory authority for its
argument. The statute directs the Judges to set willing buyer/willing
seller rates.17 U.S.C. 114(f)(2)(B). Willing buyers and willing sellers
may, and often do, agree to rates that are not strictly proportional to
usage. The SoundExchange/NPR and SoundExchange/CBI agreements are
examples of agreements that incorporate a flat-rate structure where
royalties are not strictly proportional to use.
The statutory requirement of a minimum fee also runs counter to
IBS's argument. By definition, a minimum fee (whatever its level) is
not proportional to usage.
IBS also fails utterly to provide any evidentiary basis for
concluding that the rates proposed by SoundExchange or the NRBNMLC are
so disproportional to noncommercial webcasters' usage as to be
unreasonable. To be sure, some noncommercial webcasters transmit a very
small number of performances of recorded music. See Kass WDT at 3
(``instantaneous listenership to such music on member stations is
typically on the order of five listeners, with the exception of course-
related music . . .''). Noncommercial webcasters--even those that are
IBS members--are a heterogeneous group, with some operating above
SoundExchange's proposed 159,140 ATH threshold. See supra, section
V.B.1. IBS has not even proposed, much less provided an evidentiary
basis to adopt, subcategories of noncommercial webcasters.
C. Conclusion
For the rate period 2016-2020 the Judges adopt an annual rate of
$500 per station or channel for all transmissions by noncommercial
webcasters up to a threshold of 159,140 ATH. For transmissions in
excess of 159,140 ATH, noncommercial webcasters shall pay royalties for
2016 at the commercial rate (i.e., $0.0017 per-performance), and for
such transmissions in excess of 159,140 ATH in the remainder of the
statutory term, at the commercial rate as adjusted annually for changes
in the Consumer Price Index, as set forth in the regulations.
VI. Minimum Fee
Sections 112 and 114 of the Act require the Judges to establish
minimum fees as part of any rate structure under the respective
statutory licenses. 17 U.S.C. 112(e)(3)-(4) and 114(f)(2)(A)-(B).
A. Commercial Webcasters
1. Parties' Proposals
a. SoundExchange
SoundExchange proposes a $500 per station or channel annual minimum
fee. The minimum fee would be nonrefundable, but would be credited
against royalties incurred during the applicable year. The minimum fee
would be capped at $50,000 annually for a webcaster with 100 or more
stations or channels. SoundExchange Rate Proposal at 2 (October 7,
2014).
b. Pandora
Pandora does not make an explicit proposal for a minimum fee.
Pandora does, however, propose that, apart from those terms for which
it proposes changes, ``the terms currently set forth in 37 CFR 380 be
continued.'' Proposed Rates and Terms of Pandora at 2 (Oct. 7, 2015).
Those terms include the current minimum fee of $500 per station or
channel (capped at $50,000) for commercial webcasters.
c. iHeartMedia
iHeartMedia does not propose a minimum fee.
d. Sirius XM
Sirius XM does not make an explicit proposal for a minimum fee.
Sirius XM does, however, propose that ``other than the royalty rate,
the terms currently applicable to commercial webcasters be retained in
their current form.'' Introductory Memorandum to the Written Direct
Statement of Sirius XM at 1-2 (Oct. 7, 2014). Those terms presumably
include the current minimum fee of $500 per station or channel (capped
at $50,000) for commercial webcasters.
e. NAB
NAB proposes a $500 annual minimum fee for each terrestrial AM or
FM radio station that a broadcaster webcasts. For purposes of
calculating the minimum fee, each individual stream (e.g., primary
radio station, HD multicast radio side channels, different stations
owned by a single licensee) is to be counted as a separate radio
station, except that identical streams for simulcast stations will be
treated as a single stream if the streams are available at a single
Uniform Resource Locator (URL). NAB Proposed Rates and Terms at 4.
The minimum fee would be nonrefundable, but would be credited
against royalties incurred during the applicable year. The minimum fee
would be capped at $50,000 annually for a webcaster with 100 or more
stations or channels. Id.
2. Analysis and Conclusion
All participants that proposed a minimum fee for commercial
webcasters asked the Judges to retain the current annual minimum fee
that the Judges adopted in Web III pursuant to a settlement. See Web
III Remand Decision, 79 FR at 23104. The minimum fee settlement in Web
III kept in place a settlement of the minimum fee for commercial
webcasters that the parties reached in Web II. See Digital Performance
Right in Sound Recordings and Ephemeral Recordings, final rule, 75 FR
6097 (February 8, 2010) (Web II Minimum Fee Settlement). That
settlement, in turn, retained a $500 minimum fee that was determined by
a CARP, and upheld by the Librarian, in Web I, see Determination of
Reasonable Rates and Terms for the Digital Performance of Sound
Recordings and Ephemeral Recordings, Final Rule and Order, 67 FR 45240,
45262-63 (July 8, 2002), but added a $50,000 cap for a webcaster with
100 or more stations or channels. See Web II Minimum Fee Settlement, 75
FR at 6098.
While there is no settlement of the minimum fee issue in the
current proceeding, the convergence of the parties' proposals on the
existing $500 minimum fee (capped at $50,000) counsels strongly in
favor of its retention. In addition, the Judges follow their earlier
determination that commercial and noncommercial webcasters alike should
have to pay a minimum fee that at least defrays a portion of
SoundExchange's costs to administer the statutory licenses. See Digital
Performance Right in Sound Recordings and Ephemeral Recordings, Final
Determination after Second Remand, 79 FR 64669, 64672 (Oct. 31, 2014).
Mr. Jonathan Bender, SoundExchange's Chief Operating Officer, testified
that ``SoundExchange does not track its administrative costs on a
licensee-by-licensee, station-by-station, or channel-by-channel basis
and, as a result, there is no precise way to determine exactly'' how
much SoundExchange spends on that basis. Bender WDT at 16-17. The costs
to SoundExchange vary depending on such factors as the quality of the
data a service submits. Id. at 16. In 2013, the average administrative
costs per licensee (i.e., the total administrative costs divided by the
number of licensees) were $11,778. Id. at 17.
SoundExchange's average administrative cost per licensee is
substantially higher than the minimum fee it proposes to charge each
licensee.
[[Page 26397]]
While a higher minimum fee could be justified on this record, no party
has requested anything higher than the current level of $500.
The current $500 minimum fee for commercial webcasters has been in
force for more than a dozen years,\215\ and has been voluntarily re-
adopted by licensors and licensees on two occasions. It has been
proposed by licensors and licensees in this proceeding. SoundExchange's
administrative costs (which the minimum fee is intended to defray, in
part) exceed the proposed minimum fee by a wide margin. The Judges find
the proposed minimum fee (including the $50,000 cap) to be reasonable
and supported by record evidence, and will therefore adopt it.
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\215\ The $50,000 cap has been in force since 2010 (applicable
to the rate period beginning January 1, 2006).
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B. Noncommercial Webcasters
1. Parties' Proposals
a. SoundExchange
SoundExchange proposes a $500 per station or channel annual minimum
fee for noncommercial webcasters. The minimum fee would be
nonrefundable, but would be credited against royalties incurred during
the applicable year. SoundExchange Rate Proposal at 4.
b. NRBNMLC
NRBNMLC proposes a $500 per station or channel annual minimum fee.
The minimum fee would be nonrefundable, but would be credited against
royalties incurred during the applicable year.
c. IBS and WHRB
As discussed supra, IBS and WHRB did not submit rate proposals.
2. Analysis and Conclusion
Both the SoundExchange and NRBNMLC rate proposals include a $500
annual per station or channel minimum fee for noncommercial
webcasters--i.e., retention of the current minimum fee. No other
participant proposed a minimum fee for noncommercial webcasters,\216\
although CBI and SoundExchange agreed to retain the existing $500
minimum fee as part of their settlement covering noncommercial
educational broadcasters. See Digital Performance Right in Sound
Recordings and Ephemeral Recordings, Final Rule, 80 FR 58201, 58206
(Sept. 28, 2015) (37 CFR 380.22(a)).
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\216\ As noted supra, neither of the other two noncommercial
webcasters that participated in this proceeding (WHRB and IBS)
submitted a rate proposal.
---------------------------------------------------------------------------
Although WHRB and IBS do not attack the SoundExchange and NRBNMLC
minimum fee proposals directly, they argued against adoption of the
SoundExchange/CBI settlement which incorporates the same $500 minimum
fee, and they repeat those arguments in this proceeding. The Judges
addressed their objections to the SoundExchange/CBI settlement in the
Federal Register notice adopting the settlement terms. See id. at
58203-04. The Judges have also addressed WHRB's and IBS's objections in
the context of the SoundExchange and NRBNMLC rate proposals. For the
same reasons articulated in the Federal Register notice and supra,
section V.B.4, the Judges reject WHRB's and IBS's objections as they
may apply to the proposed minimum fee for noncommercial webcasters.
The current $500 annual minimum fee for noncommercial webcasters
has been in force since Web I. See 37 CFR 261.3(e)(1) (2003). It was
adopted by SoundExchange and CBI in a settlement agreement covering the
rate period of this proceeding. It has been proposed by SoundExchange
and the NRBNMLC, the only noncommercial webcaster to file a rate
proposal in this proceeding. It constitutes a small (but nontrivial)
fraction of the costs that SoundExchange incurs in administering the
statutory license. The Judges find the proposed minimum fee to be
reasonable and supported by record evidence, and will therefore adopt
it.
VII. Ephemeral License Rate and Terms
Section 112(e) grants entities that transmit performances of sound
recordings a statutory license to make ephemeral recordings.
SoundExchange proposes that the Judges bundle the royalties for Section
114 and 112 and allocate five percent (5%) of the Section 114
performance right royalty deposits to the Section 112(e) ephemeral
recording right, a rate structure that would continue the extant
arrangement. SX PFFCL ] 1369. SoundExchange contends that its proposal
regarding the bundled rate for the Section 112 license is supported by
the designated testimony of Dr. Ford. SX PFFCL at 1370 & n.64.
SoundExchange also cites as support for its Section 112 proposal
certain license agreements that were introduced into evidence. SX PFFCL
] 1374 (citing agreements between [REDACTED] and [REDACTED], [REDACTED]
agreements with [REDACTED] and [REDACTED], [REDACTED]'s agreements with
[REDACTED] and [REDACTED] for the [REDACTED] service).
SoundExchange contends that no participant offered evidence of a
benchmark agreement that does not bundle performance rights and the
right to make ephemeral copies. SX PFFCL ] 1375. SoundExchange further
contends that ``[a]s of the Web III proceeding, recording artists and
record companies had reached an agreement that five percent of the
`payments for activities under Section 112(e) and 114 should be
allocated to Section 112(e) activities.' '' SX PFFCL ] 1377, quoting
Dr. Ford. According to SoundExchange, no participant has presented
evidence in support of a different allocation between artists and
record companies. SX PFFCL ] 1377. SoundExchange concludes that
``[b]ecause SoundExchange's Board represents both artists and copyright
owners, its proposed rate of 5% for ephemeral copies is appropriate
evidence and `credibly represents the result that would in fact obtain
in a hypothetical marketplace negotiation between a willing buyer and
the interested willing sellers under the relevant constraints.' '' SX
PFFCL ] 1378, quoting Dr. Ford.
Other participants that address the rate for the Section 112
license do not contradict SoundExchange's assertions. See iHeart Reply
PFFCL at 203 (``iHeartMedia supports the current bundling of the Sec.
112 and Sec. 114 royalties''); Sirius XM PFF ] 2 (``Sirius XM
maintains that the Section 112 ephemeral license has no value
independent of the Section 114 performance license, and consequently
proposed that the royalty for the Section 112 license be deemed
included within the Section 114 royalty payment. Sirius XM takes no
position at this time as to what, if any, percentage of the Section 114
royalty should be deemed attributed to the Section 112 ephemeral
license.''); NRBNMLC PFFCL ] 151 (``[t]here is no dispute between
SoundExchange and the NRBNMLC regarding how the royalties for the
ephemeral recording statutory license specified in 17 U.S.C. 112(e)
should be set. Both participants propose that those royalties for
ephemeral reproductions used solely to facilitate transmissions made
pursuant to the 17 U.S.C. 114(f) statutory license be deemed to be
`included within, and constitute 5% of' the Sec. 114(f) statutory
license payments made by a particular service'' quoting the respective
proposals of SoundExchange and NRBNMLC); NAB PFFCL ] 226 (``no dispute
between SoundExchange and NAB regarding how the royalties for the
[Section 112(e) license] should be set.'') and Pandora PFFCL ] 416
(``[c]onsistent
[[Page 26398]]
with past proceedings and the Merlin Agreement (which has no separate
ephemeral recording fee), Pandora proposes that the royalty payable for
ephemeral recordings be included within the Section 114 royalty. There
is no dispute on this point: SoundExchange has proposed the same.'').
The Judges accept SoundExchange's proposal to continue the current
bundling of the Section 112 and 114 rates. The Judges find persuasive
the designated testimony of Dr. Ford and the license agreements that
SoundExchange cites in its PFFCL that willing buyers and willing
sellers would prefer that the rates for the two licenses be bundled and
that they would be agnostic with respect to the allocation of those
rates to the Section 112 and 114 license holders.\217\ The Judges also
find that the minimum fee for the Section 112 license should be
subsumed under the minimum fee for the Section 114 license, 5% of which
shall be allocable to the Section 112 license holders, with the
remaining 95% allocated to the Section 114 license holders.
---------------------------------------------------------------------------
\217\ SX Ex. 1931 (designated testimony of Dr. George S. Ford).
Dr. Ford testifies that ``in the marketplace deals between record
companies and webcasters for non-statutory forms of licenses, it is
typical for ephemeral copy rights to be expressly included among the
grant of rights provided to the webcasters . . . [incorporating the
rate for the ephemeral copy] into the overall rate that the
webcaster pays for the ephemeral copy rights and performance
rights.'' Id. at 10-11. He also concluded that ``recording artists
and record companies have reached an agreement that five percent
(5%) of the payment for activities under Section 112(e) and 114
should be allocated to Section 112(e) activities [and] that appears
to be a reasonable proposal.'' Id. at 15.
---------------------------------------------------------------------------
SoundExchange and the services disagree, however, on the terms with
respect to the Section 112(e) license. CRB Rule 380.3(c), which
addresses ephemeral recordings, states: ``The royalty payable under 17
U.S.C. 112(e) for the making of Ephemeral Recordings used by the
Licensee solely to facilitate transmissions for which it pays royalties
shall be included within, and constitute 5% of, the total royalties
payable under 17 U.S.C. 112(e) and 114.'' 37 CFR 380.3(c), emphasis
added.
Pandora proposes that the Judges strike the italicized language and
replace it with the phrase ``made pursuant to 17 U.S.C. 114.'' Pandora
believes the current language ``creates the possibility (likely
unintended) that ephemeral copies of sound recordings that are used by
a service for non-compensable performances under Section 114 might not
be authorized under the regulations.'' Pandora PFFCL ] 416. Pandora
also proposes that the Judges add the following sentence to the current
amended regulation: ``A Licensee is authorized to make more than one
Ephemeral Recording of a sound recording as it deems necessary to make
noninteractive digital audio transmissions pursuant to 17 U.S.C. 114.''
Pandora PFFCL ] 417. Pandora contends that such ``as necessary''
language is consistent with industry practice. Id. ] 418. SoundExchange
proposes that the current regulation be carried over into the new rate
period but appears to acknowledge that authorizing the making of more
than one ephemeral copy is not inconsistent with current industry
practice.\218\
---------------------------------------------------------------------------
\218\ Compare SX Reply PFFCL ] 1247 (``SoundExchange believes
that Pandora's proposed changes [to CRB regulations] should be
rejected outright'') with SX PFFCL ] 1374 (referencing agreements
between labels and services wherein services are authorized to
create and store a reasonable, limited number of ephemeral copies).
---------------------------------------------------------------------------
The Judges adopt Pandora's proposed language and do not carry
forward the language ``for which it pays royalties'' in the current
regulation because they believe that the phrase could be construed in a
way that would limit the application of the Section 112 license to
certain transmissions made consistent with Section 114 that are not
royalty generating, such as skips. The Judges also are sympathetic to
the Services' contention that, in certain circumstances (e.g., where
different file format requirements may necessitate the creation of
multiple copies), it may be necessary to make more than one ephemeral
copy to facilitate transmissions made pursuant to Section 114.
Nevertheless, the circumstances must be necessary and commercially
reasonable. The language the Judges adopt includes this standard.
VIII. Terms
One of the purposes of this proceeding is to establish terms for
the administration of the rates the Judges determine for the rate
period 2016 to 2020. The parties proposed changes to Subchapter E of
Chapter III, title 37 CFR, relating to royalty rates and terms. The
Judges adopted some changes and rejected others in the initial
Determination. In its Petition for Rehearing (Rehearing Motion),
SoundExchange raised several issues relating to the Judges'
determinations regarding proper regulatory language to effect their
conclusions in the Determination. After considering the Rehearing
Motion \219\ and the responses thereto, the Judges issued a separate
order detailing SoundExchange's requests and the Judges'
conclusions.\220\ In the interest of making this final Determination a
complete and cohesive record of the Judges' findings and conclusions in
this proceeding, the Judges include additional material in this section
to reflect their rehearing ruling.
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\219\ In the Rehearing Motion, SoundExchange analyzed its
concerns regarding several substantive determinations, including the
provision for annual royalty rate adjustments. With regard to the
regulations, SoundExchange challenged the stated method of
calculation of annual royalty rate increases, if any. SoundExchange
also listed (without sufficient analysis) several other regulatory
concerns. The Judges permitted SoundExchange to detail the other
regulatory concerns in a Supplemental Motion (Supplement). The
Judges solicited and received responses from the Licensees to all
issues in the original Rehearing Motion and the Supplement.
\220\ See Order Denying in Part SoundExchange's Motion for
Rehearing and Granting in Part Requested Revisions to Certain
Regulatory Provisions (Feb. 10, 2016), issued in PUBLIC version on
February 22, 2016.
---------------------------------------------------------------------------
In addition to the proposed terms concerning licensing ephemeral
recordings discussed in the preceding section of this Determination,
the Judges have weighed the proposals and the arguments of the parties
in support of or opposed to various regulatory provisions and, after
due consideration of the rehearing papers, adopt the Terms as detailed
below this Supplementary Information section. The parties' proposals--
and the Judges' rulings--include the following.\221\
---------------------------------------------------------------------------
\221\ Section references are to the section numbers in the
regulations adopted by this Determination.
---------------------------------------------------------------------------
A. Section 380.1--Scope and Compliance
1. Legal Compliance--Sec. 380.1(c)
a. Sound Recording Performance Complement
iHeart proposed changes to the statutory definition of ``sound
recording performance complement'' to reflect the practice of waiving
the statutory performance complement in private agreements, IHM PFF ]
425. The provision would ``ensure[ ] that Broadcasters do not need to
alter the content of their radio broadcasts simply because they have
elected to simulcast those broadcasts over the Internet''. IHM Rate and
Terms Proposal at 2-3. According to iHeart, because programs on
terrestrial radio stations can play entire albums, iHeart should be
allowed to simulcast the programs without altering them to satisfy the
performance complement requirement, and the Judges have the authority
to modify such ``background terms of the statutory license'' where
willing buyers and sellers would negotiate such terms absent the
statute. IHM COL ] 34-35. SoundExchange argued that statutory changes
can only be made by Congress.
[[Page 26399]]
The Judges agreed. The Judges did not adopt this change.
b. Waiver of Requirement to Destroy Ephemeral Recordings After Six
Months
iHeart proposed to add a provision that exempts Broadcasters from
the statutory six-month limitation on the retention of ephemeral
recordings subject to certain conditions. SoundExchange argued that the
Judges are not authorized to make changes to the statute by enacting
regulations, and the Judges agreed. The Judges cannot and did not adopt
this proposal.
B. Section 380.2--Making Payment of Royalty Fees
1. Monthly Payments--Sec. 380.2(b)
a. Payment Period
SoundExchange proposed shortening the payment period from 45 days
to 30 days. Pandora and Sirius did not oppose the change, but the NAB,
NRBNMLC, and IHM did. SoundExchange argued that the shorter term would
allow them to distribute payments more quickly and that the majority of
agreements in the industry have payments terms of 30 days. The NAB and
IHM argued that because of the unique character of their respective
business models, shortening the term would cause additional burdens and
create inaccuracies and overpayments that potentially would not be
refunded. The Judges also are considering this issue in a rulemaking
proceeding that is currently pending before them. The Judges do not
believe the record before them in this rate-setting proceeding supports
the change that SoundExchange seeks, and therefore decline to adopt it.
The Judges can perceive the costs to the Services that the shortened
reporting period would impose, and it is less clear that the benefits
identified by SoundExchange from such a change would justify those
costs. Nevertheless, the Judges will consider revisiting this issue in
the broader context of the pending rulemaking proceeding.
b. Emails Acknowledging Receipt of Payment
NRBNMLC proposed that SoundExchange send emails (similar to those
that the musical works collectives send) with reminders that annual
payments are due, which would serve a function similar to an invoice.
NRBNMLC also proposed a provision requiring SoundExchange to email
acknowledgments of receipt of payment, which would function like a
receipt and which is a common business practice, including in the
nonprofit arena. SoundExchange argued there is no need for a regulation
because it already sends reminders. It also argued that an
acknowledgment email would be challenging because it does not have
current email addresses for each of its licensees, and the cost would
outweigh the benefit. SoundExchange countered that it will soon have an
online payment portal, a fact that NRBNMLC points out shows that
SoundExchange realizes that the receipts would be useful. The Judges
found that the online portal should address the receipt concern and
that the practice of sending reminders does not warrant a regulation.
Therefore, the Judges did not adopt this proposed change.
2. Late Fees--Sec. 380.2(d)
a. A Single Late Fee
Pandora proposed a single late fee for both a late payment and a
late Statement of Account. It argued that a late fee for each of these
is duplicative and unnecessary. SoundExchange countered that it incurs
duplicative costs when both items are late and that it is fair to hold
a late payor accountable for such costs. In addition, SoundExchange's
ability to enforce compliance and make efficient distribution relies on
late fees for each of these. The Judges agreed that such fees encourage
compliance for each required item. As a result, the Judges did not
adopt this proposed change.
b. Late Fee Rate
iHeart, the NAB, and NRBNMLC proposed that the late fee rate be
reduced from 1.5% (the equivalent of 18% per year) to a more
``reasonable'' fee; that is, one similar to statutory interest rates on
judgments and tax underpayments. iHeart pointed out that its agreements
with the Indies contain no late fee provision and that Warner has never
asked them to pay the late fee when they have submitted a late payment.
SoundExchange argued that the high fee provides an incentive for timely
payments and covers costs due to late payments. The evidence shows that
late fees in market agreements range from no fees up to the proposed
fee of 1.5%. The 1.5% rate is an accepted rate in the market, and the
services produced no evidence of actual hardship from the current rate
of 1.5%. For this reason, the Judges did not adopt this proposed
change.
C. Section 380.3--Delivering Statements of Account
1. Adjustments to Statements of Account--Sec. 380.3(a)
Pandora proposed a change to allow Licensees to make adjustments to
their Statements of Account. iHeart proposed changes that would allow
Licensees to recoup overpayments. SoundExchange argued that the
proposals are unreasonable because of, inter alia, the window of time
within which, and the number of occasions upon which, a Licensee could
make adjustments. In addition, SoundExchange complained that the
administrative burden of such a proposal could be excessive.
SoundExchange also noted that the money may not be recoupable once it
is paid to artists. Pandora argued that making good faith adjustments
are part of the normal course of business and that SoundExchange's
technological advances will make the administration of adjustments
manageable. Pandora RFF at 192-93. iHeart pointed out that
SoundExchange has a method for reversing its own inadvertent
overpayments. IHM PFF ] 433; IHM RFF ] 202; see PAN PFF ] 1300.
The Judges agreed with SoundExchange. The burden of submitting
accurate payments is on the Licensee, and the Licensee bears the risk
of overpayment. In addition, the record contained no evidence to guide
the Judges in determining a reasonable period for, or a reasonable
number of, adjustments. Therefore, the Judges did not adopt this
proposed change.
The parties also raised the issue of royalty fee payment
adjustments in the context of audits. See discussion regarding
overpayments and underpayments discovered at audit under section 380.6
below.
2. Signature Attestation--Sec. 380.3(a)(8)
Pandora proposed adding a sentence to the required language in a
Statement of Account--just below the sentence where the signatory
attests to the statement's accuracy and completeness--that would allow
Licensees to amend their Statements of Accounts. This proposal was
related to iHeart's proposal regarding overpayment and corrections to
payments. The proposed sentence contained no time limit for making
amendments to the Statements of Accounts and is therefore an
unreasonable addition to the Statement of Account. The Judges did not
adopt this proposed change.
D. Section 380.4--Distributing Royalty Fees
1. Best Efforts to Identify and Locate--Sec. 380.4(a)(2)
In this proceeding, the Licensees proposed, and the Judges adopted,
additional regulatory language regarding the Collective's duty to
locate parties
[[Page 26400]]
entitled to receive royalty distributions.\222\ SoundExchange objected
to the added language. A SoundExchange executive testified that the
Collective maintains an extensive database and can locate distributees
without the due diligence suggested by the new language. See SX Ex. 23
at 18-19, SX Ex. 2 at 5-11. As SoundExchange conceded, however, the
regulations contain similar language in section 370.5(d) regarding best
efforts to find copyright owners in order to make available reports of
use.
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\222\ In their post-Determination review, the Judges noted that
the due diligence language was misplaced in Sec. 380.2(e), which is
concerned with payment of royalty fees by Licensees. The Judges have
deleted the language from Sec. 380.2.
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If SoundExchange is able to make--and amenable to making--records
searches to assure proper distribution of reports of use, the Judges
should assure that SoundExchange makes no less of an effort to locate
copyright owners when the time comes to distribute royalty funds. It
would seem even more appropriate for SoundExchange to engage in best
efforts when distributing royalties to avoid any appearance of
impropriety or conflict of interest, in light of section 380.4(b),
which may permit retention of unclaimed funds by SoundExchange. This
minimal additional due diligence can do little other than assure the
currency and integrity of SoundExchange's distribution database.
Further, SoundExchange outlined its search capabilities, but did
not object expressly to the due diligence language proposed by NAB and
NRBNMLC. The Judges adopted the proposal of NAB and NRBNMLC.
2. Unclaimed Funds--Sec. 380.4(b)
Pandora proposed that the provision in the regulations dealing with
the Collective's use of unclaimed funds may not be consistent with
state escheatment laws. SoundExchange opposed changes to this
provision, which allows the Collective, under certain circumstances, to
use unclaimed funds for administrative purposes. SoundExchange argued
that the changes Pandora had proposed, which would have required the
Collective to use unclaimed funds in a manner consistent with
applicable law, could impose an unnecessary regulatory burden on the
Collective.
The Judges adopted the changes substantially as proposed by
Pandora. Although the Judges do not believe the unclaimed funds
provision in the current regulations runs afoul of any state law, in
abundance of caution and to avoid potential confusion in the upcoming
rate period, the Judges adopted the more neutral drafting that Pandora
proposed to ensure that the Collective's use of unclaimed funds
comports with applicable law.
In the Rehearing Motion, SoundExchange further objected to the
Judge's insertion of language to define the three-year holding period
for unclaimed funds. The extant regulations contain an internal
ambiguity concerning the measurement of the period for holding
unclaimed funds. When the Judges suggested reorganization of the Part
380 regulations, they highlighted this issue for the parties. See
Judges' letter to participants dated April 2, 2015. For example, in
Sec. 380.4 of the current regulations, the Collective is required to
hold funds if it is ``unable to locate a Copyright Owner . . . within 3
years from the date of payment by a Licensee . . . .'' 37 CFR
380.4(g)(2) (emphasis added). If the Collective is unable to locate the
rightful payee, then the funds become subject to Sec. 380.8, which
requires the Collective to retain ``unclaimed'' funds for ``a period of
3 years from the date of distribution.'' See, e.g., 37 CFR 380.8
(emphasis added). The Collective may apply those funds to offset its
costs at the end of the three-year holding period. Id.\223\
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\223\ Similar language is repeated in subparts B (Sec. Sec.
380.13(i)(2), 380.17) and C (Sec. Sec. 380.23(h)(2), 380.27) of the
extant regulations.
---------------------------------------------------------------------------
On its face, the ``date of payment by a Licensee'' is not the same
as the ``date of distribution,'' the latter of which is ambiguous, at
best. Despite the Judges' invitation, no party offered explanation for
the current regulatory discrepancy or suggested clarifying language to
eliminate the ambiguity. In section 380.2(e) of the regulations adopted
by the Judges as part of this proceeding, the Judges sought to resolve
the ambiguity by specifying that the three-year holding period
commences on ``the date of final distribution of all royalties.''
SoundExchange averred that the Judges' introduced uncertainty into the
regulation because it is unclear when a ``final distribution of all
royalties'' takes place when a copyright owner cannot be located and
the funds that copyright owner may be entitled to cannot be
distributed.
SoundExchange requested that the Judges amend the regulation to
specify that the three-year holding period commences on the date of the
first distribution of royalties from the relevant payment by the
service. Rehearing Motion at 10. No other party responded to
SoundExchange's requested amendment. The Judges recognized that the
language of section 380.2(e) may be unclear, and that the amendment
that SoundExchange requested would clarify the regulation in a manner
consistent with the Judges' intent. Therefore, the Judges accepted the
SoundExchange proposal and clarified the regulatory language
accordingly: The three-year escrow period for undistributable royalties
shall be three years from the date of first distribution of relevant
royalty deposits from a Licensee.
3. Designation of the Collective--Sec. 380.4 (d)(1)
The Judges designated SoundExchange as Collective.\224\
SoundExchange participated as the existing and presumed Collective.
SoundExchange indicated its willingness to continue as the Collective.
See Bender WDT at 14-15. No party objected to SoundExchange continuing
in the role of Collective. The Judges acknowledged the administrative
and technological knowledge base developed by SoundExchange over its
years of service as the Collective. Finding no reason to change the
designation, the Judges re-named SoundExchange to serve as the
Collective for purposes of collecting, monitoring, managing, and
distributing sound recording royalties established by this Part 380.
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\224\ In the provision relating to the potential dissolution of
SoundExchange as the Collective, Pandora and SoundExchange agreed
that the phrase ``that have themselves authorized the Collective''
in current CRB Rule 380.4(b)(2)(i) is unnecessary and should be
deleted. See SX Reply PFFCL ] 1231 n.74. Accordingly, the applicable
provision the Judges adopted, Sec. 380.4(d)(2)(i), does not retain
that unnecessary language.
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E. Section 380.5--Handling Confidential Information
1. Disclosure of Confidential Information--Sec. 380.5(c)
Upon review of the supplemental papers, the Judges made an
additional change to the language regarding handling of confidential
information, anticipating a claim of ambiguity. In its discussion of
the new regulatory requirements for, inter alia, written
confidentiality agreements, SoundExchange referred to confidentiality
obligations arising by ``operation of law.'' Supplement at 3. The
Judges acknowledged that a Qualified Accountant and any attorney
admitted to a state's bar is under a professional ethical obligation
\225\ to
[[Page 26401]]
maintain confidentiality of his or her client's confidential
information. The Judges, therefore, eliminated ``attorney'' from the
list of potential viewers of confidential information required to sign
a confidentiality agreement. The Judges added ``outside counsel'' to
``Qualified Auditor'' in subsection (c)(2) of section 380.5, as
eligible to receive confidential information without executing a
separate confidentiality agreement. The Judges specified ``outside
counsel'' as some entities involved in these complex proceedings may
employ in-house counsel, whose duties would not necessitate their
seeing information relating to the Judges' rate proceedings. In-house
counsel are deemed to be included in the term ``employees'' in the list
of persons required to sign the confidentiality agreement.\226\
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\225\ These obligations might or might not arise by ``operation
of law'' depending upon the jurisdiction, but any party aggrieved by
a breach of these professional obligations is likely nonetheless
entitled to a legal or equitable remedy from a court of competent
jurisdiction.
\226\ The Judges understand that in-house counsel admitted to
the bar carry the same professional ethical obligations as outside
counsel. Admission to the bar alone, however, is not sufficient to
grant in-house counsel unnecessary access to confidential
information of a business competitor.
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2. Written Agreements--Sec. 380.5(c)(1)
NAB and NRBNMLC proposed, and the Judges adopted, additional
verbiage for the regulation (section 380.5(c) (1) in the newly-revised
regulations) regarding confidential information shared by participants
in webcasting proceedings that: (1) Required confidentiality agreements
to be in writing; and (2) limited disclosure of confidential
information to those performing activities ``related directly'' to
collection and distribution of royalty payments. SoundExchange did not
indicate that it ever addressed these proposed changes to the
regulations. It was not until SoundExchange sought rehearing that it
raised a specific challenge to this added confidentiality language.
Supplemental Petition for Rehearing . . . at 4 (Supplement).
In their joint opposition to the Supplement, NAB and Pandora
objected to allowing SoundExchange to raise a new issue on rehearing.
See NAB and Pandora's Opposition to . . . Supplement [ ] . . . at 5
(NAB/Pandora Supp. Opp.). iHeart further pointed to record evidence to
support the additional language relating to handling confidential
information during the process of royalty collection and distribution.
See iHeart Opposition to . . . Supplement[ ] at 2-3 (iHeart Supp.
Opp.). iHeart cited direct license agreements that were in evidence in
this proceeding as support for the reasonable addition of requirements
for (1) written confidentiality agreements and (2) restriction of use
of confidential information to purposes ``directly'' related to
collection and distribution of royalties. Id. (citing, e.g., SX Exs 110
at 11 (iHeart-Concord agreement) and 33 at 30 (iHeart-Warner
agreement)). iHeart's citation to the record illustrated the Judges'
ability to look to ``comparable circumstances under voluntary license
agreements'' in setting rates under Sec. 114.
SoundExchange's objection was too little, too late. The Judges
declined to change the confidentiality language.
3. Safeguarding Confidential Information--Sec. 380.5(d)
SoundExchange objected to use of the phrase ``distributees of the
collective'' in section 380.5(d) as creating an uncertain standard,
contending that the provision could be interpreted to require
recipients of confidential information to ``adhere to the unknowable
standards employed by SoundExchange's tens of thousands of
distributees.'' Supplement at 4. SoundExchange proposed to clarify that
recipients of confidential information are bound by the standard of
care that they employ with their own confidential information by
substituting the phrase ``Person authorized to receive confidential
information'' for ``distributees of the collective.'' Id. No other
party raised an issue with the language of the newly-revised
regulation; nor did any party object to SoundExchange's requested
change.
SoundExchange correctly discerned the intended meaning of the
language that the Judges adopted. The Judges did not view the potential
misinterpretation that SoundExchange feared to be a reasonable reading
of the section 380.5(d). The Judges also did not view SoundExchange's
proposed amendment as likely to clarify the Judges' intent.
Nevertheless, to remove all doubt the Judges amended section 380.5(d)
by deleting everything after the second-to-last comma and substituting
the following: ``but no less than the same degree of security that the
recipient uses to protect its own Confidential Information or similarly
sensitive information.''
F. Section 380.6--Auditing Payments and Distributions
1. Frequency of Auditing--Sec. 380.6(b)
SoundExchange argued that the Judges' newly-revised regulatory
language regarding audit frequency included an unintended ambiguity
regarding the frequency with which the Collective may audit Licensees.
Motion at 10. In its Supplement, SoundExchange contended that section
380.6(b) could be interpreted as limiting SoundExchange to a single
audit of a single service each year. Id. SoundExchange asked the Judges
to clarify that it is not restricted to auditing only one licensee per
year; rather that the limit is one audit per year for each licensee. No
party responded in opposition to this clarification request. As
SoundExchange's proposed clarification was consistent with the intent
of the language originally adopted by the Judges, but was not subject
to misinterpretation, the Judges amended the regulatory language
accordingly.
2. The Audit--Sec. 380.6(d)
a. Binding Nature
The NAB proposed the Judges modify the audit regulation by removing
the requirement that the Qualified Auditor's results be binding on the
parties. SoundExchange objected to the Judges' adoption of the NAB
proposal. Supplement at 4. As the NAB noted, SoundExchange \227\
witness, Dr. Thomas Lys, testified that requiring an audit report be
dispositive would be ``unreasonable.'' NAB/Pandora Supp. Opp. at 3,
citing 5/4/15 Tr. at 1507-08 (Lys).
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\227\ In drafting, the Judges inadvertently included language
the NAB proposed to make the choice of a Qualified Auditor binding,
in addition to adopting the NAB proposal to drop the requirement
that the audit results be binding. The Judges found that language
making the choice of a Qualified Auditor binding is unnecessary, and
have removed it.
---------------------------------------------------------------------------
The Judges credited Dr. Lys's testimony and agreed that the subject
of any audit should be permitted to contest audit results.
SoundExchange offered no record support for its proposal that the
regulations return to the current language, albeit made reciprocal in
nature. The ``binding'' language has been excised from the newly-
revised regulations.\228\
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\228\ Accordingly, any attempt to seek a remedy based upon an
auditor's findings, and any attempt to challenge those findings,
must be made in a court of competent jurisdiction, or through any
private alternative dispute resolution procedure to which the
affected parties may have agreed.
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b. Acceptable Verification Process
SoundExchange proposed removing this provision because it allows
audits to be routine financial audits instead of specialized ``royalty
examinations.'' SX PFF ] 1285-86. Although the services did not oppose
this change, SoundExchange offered no evidence of the ineffectiveness
of the audits to date due to the existence of the provision, and
therefore the Judges did not adopt the proposed change. A Service's
recent financial audit need not preclude a business audit that focuses
on the
[[Page 26402]]
Service's royalty policies and procedures.
3. Audit Results; Underpayment or Overpayment of Royalties--Sec.
380.6(g)
a. Terms for Restitution of Underpayment
Pandora suggested that Licensees and SoundExchange be permitted to
agree on acceptable terms \229\ regarding the time for restitution of
underpayments by Licensees.\230\ SoundExchange did not oppose Pandora's
proposal in its Reply PFF/PCL. In its opposition to the SoundExchange
Supplement, iHeart suggested that agreed terms for reconciliation are
consistent with market terms allowing for agreement on the identity of
an auditor and the scope of an audit. iHeart Supp. Opp. at 2, citing,
e.g., SX Ex. 38 at 40 (re timing and scope of audit).
---------------------------------------------------------------------------
\229\ The Judges addressed elsewhere whether those terms shall
include interest.
\230\ SoundExchange complained that Pandora ``sneaked'' in these
changes. The record did not support SoundExchange's allegation.
Pandora included its request for this regulatory change twice--once
with its written rebuttal statement and again with its proposed
findings of fact and conclusions of law. Pandora First Amended Rates
and Terms (Feb. 22, 2015) (submitted concurrently with Pandora
Written Rebuttal Statement); Pandora Second Amended Rates and Terms
at 3, 13 (Jun. 24, 2015) (submitted concurrently with Pandora PFF/
PCL).
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The legislative emphasis in the Act on voluntary, negotiated
settlements, should, without clear, contrary evidence or authority,
extend to permitting agreement regarding the timing for account
reconciliation. SoundExchange failed to show that permission to resolve
a conflict by agreement is without evidentiary support or contrary to
any legal requirements in the Act. The Judges did not err in adding
this provision to the revised regulations. However, the regulatory
language the Judges adopted might be construed as requiring, rather
than permitting SoundExchange and Licensees to agree on acceptable
terms of payment. Accordingly, the Judges clarified section 380.6(g).
b. Recoupment of Overpayment
The parties raised the issue of underpayment collection and
overpayment recoupment (with interest) in the context of monthly
royalty deposits. A periodic audit may also reveal underpayments and
overpayments. SoundExchange objected to new language in section
380.6(g) that gives licensees a credit, with interest, for overpayments
that are revealed in an audit, arguing that the provision is
inconsistent with the Judges' rejection of a similar proposal by the
services in connection with adjustments based on revised Statements of
Account. Rehearing Motion at 10. In the then-extant regulations, the
provisions regarding audits and audit findings did not address the
question of financial adjustment,\231\ either restitution for
underpayment or recoupment of overpayment. In this proceeding, the
Services introduced evidence of the practice of ``truing'' accounts.
See e.g., SX Ex. 33 at 18 (] 4(c) of document) (Licensee to make
immediate restitution of any underpayment discovered by audit), IHM Ex.
3351 at 11 (] 7(b), p. 10 of document) (Licensee may withhold royalties
prospectively in certain circumstances), IHM Ex. 3340 at 3 (] 1(b), p.
2 of document) (same). Reconciliation of accounts should be no less a
practice in the context of statutory licensing. See 17 U.S.C.
114(f)(2)(B)(II) (in establishing terms, Judges may consider
``comparable circumstances under voluntary license agreements'').
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\231\ The only reference to a financial issue in the current
audit regulations relates to restitution of an underpayment and
allocation of the cost of the audit in the event the auditor finds
an underpayment discrepancy of 10% or more. See, e.g. 37 CFR
380.6(g), 380.7(g). No regulation addresses underpayment of less
than 10% or overpayment at any amount.
---------------------------------------------------------------------------
The Licensees participating in this proceeding proposed an open-
ended term that would permit them to amend SOAs and make concomitant
financial adjustments (with interest). The Judges rejected this
proposal because of the open-ended nature of the proposal, which could
result in an excessive administrative burden on SoundExchange. The
Judges concluded, rather, to allocate the burden of accuracy in
reporting to the Licensees.
In allocating that administrative burden, however, the Judges were
not opining on the propriety of or need for a balancing of accounts
after an audit. SoundExchange may audit Licensees annually, but the
period audited may be up to three years. No party offered evidence of
past audit practices or results. The Judges were unaware whether any
audit findings had ever resulted in cost-shifting, for example, let
alone what remedies, if any, the parties had employed to reconcile
under- or over-payments. Further, a sampling of direct license
agreements did not reveal a standard regarding recoupment of
overpayments detected by audit.
Nonetheless, even if directly-contracting parties negotiated
reciprocal reconciliation of payments in any circumstance, the
Collective is in a different business posture than its members making
direct license deals. As SoundExchange pointed out, it is a non-profit
organization that makes distributions directly to a multiplicity of
artists and record companies from each royalty deposit. SoundExchange
is not in the same position that an individual Licensor might be with
regard to management of its funds.
The Judges thus adopted for audit findings the same rationale as
that applicable to Statements of Account: The burden of accurate
reporting and payment is on the Licensee. Accordingly, the Judges'
regulations continue to require immediate restitution in the case of
underpayment, but no right of recoupment for overpayment. As with any
untimely payment, a Licensee that is obligated to remedy an
underpayment is liable to pay reasonable interest thereon.
4. Other Audit Related Proposals
a. Notice and Cure
The NAB proposed adding a notice and cure provision to apply in
case of breach because it is customary in contracts and is included in
some of the agreements in evidence. SoundExchange wanted the option to
use informal methods of dealing with breach, but the NAB argued this
provision would not preclude such efforts; it would only be required in
case of a material breach that SoundExchange planned to assert. Such a
provision is not necessary merely because it is customary, and informal
or formal methods of notice are always available to the parties.
Therefore, the Judges did not adopt this proposed change.
b. Completion of Audit Within Six Months
The NAB and NRBNMLC proposed augmenting the audit notice provision
with what they termed a reasonable deadline for completion of audits,
arguing the potential for abuse and the burden that lengthy audits
place on Broadcasters. They point to comments in a rulemaking
proceeding regarding the burden. SoundExchange argues that the length
of an audit is in the control of the services more than of the auditor
and that the NAB and NRBNMLC point to no such provisions in private
agreements. The comments in the rulemaking procedure are not evidence
in this proceeding. What is reasonable is the ultimate finding of fact.
The parties submitted no evidence on what would be a reasonable time
within which to complete an audit. The Judges do not adopt this
proposal.
[[Page 26403]]
G. Section 380.7--Definitions \232\
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\232\ The Judges included two sections numbered 380.6 in the
initial iteration of the regulatory language, one of which was the
definitions section. The Judges corrected that error and relabeled
the definitions section Sec. 380.7.
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1. Definition of Aggregate Tuning Hours (ATH)
The NAB and NRBNMLC proposed to redefine ATH to allow for a
reduction in reported ATH for broadcast time devoted to talk radio.
SoundExchange countered that NRBNMLC provided no evidence to justify a
reduction different from the one established (and used) by NPR
stations. SoundExchange pointed out that all the rates would have to be
recalculated if the basic assumption regarding ATH is changed at this
point. The Judges agreed. If the definition changed, the threshold
would need to change as well, and there was no basis in the record for
making those changes. The Judges did not adopt this change.
2. Definition of Broadcast Retransmission
The NAB and iHeart proposed a change in the definition of broadcast
retransmission (simulcast) to cover anything that is at least 51%
identical to its antecedent terrestrial broadcast. This proposal was a
companion proposal to the NAB's proposal of separate royalty rates for
simulcasters. The Judges declined to establish separate rates for
simulcasters and therefore did not include a definition of ``broadcast
retransmission'' in the new regulations.
3. Definition of Broadcaster To Include ``Affiliate of''
The NAB and NRBNMLC proposed to change the definition of
Broadcaster, but did not provide a reason for the change. The Judges
determined not to establish separate royalty rates for simulcasts by
over-the-air broadcasters, obviating the need for a definition of
``broadcaster'' in the regulations. The Judges did not, therefore,
adopt this proposed change.
4. Definition of Commercial Webcaster
In the Rehearing context, SoundExchange asked the Judges to change
the definition of ``Commercial Webcaster.'' Motion at 10. As written in
the original ``Exhibit A'' to the Determination, the definition of
Commercial Webcaster excluded ``an Educational Webcaster,\233\ a
Noncommercial Webcaster, or Public Broadcasting Entities . . . .''
SoundExchange sought to change the phrase ``Public Broadcasting
Entities'' to ``Covered Entity under Subpart D'' to conform the
terminology with that adopted in Subpart D of Part 380, pursuant to the
settlement SoundExchange reached with The Corporation for Public
Broadcasting (CPB) and National Public Radio (NPR). By its terms, the
CPB/NPR settlement is by and between SoundExchange on the one hand and,
on the other hand, NPR and CPB, on behalf of themselves and on behalf
of American Public Media, Public Radio International, and certain
public radio stations, together designated the Covered Entities.
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\233\ The Judges noted that the reference to Educational
Webcaster in this definition was misplaced and therefore removed it.
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No participant in the hearing self-identified as a public
broadcasting entity. Presumably, if there were an entity satisfying the
statutory definition of a public broadcaster that was excluded by
agreement from the settlement memorialized in Subpart D of the revamped
regulations, the excluded entity would be treated as a noncommercial
webcaster or a noncommercial educational webcaster, as the case may
be.\234\ As the Judges did not define ``public broadcaster'' in this
iteration of their regulations, however, the request from SoundExchange
to clarify the reference was well taken.
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\234\ Under section 118 of the Act, a ``public broadcasting
entity'' means a noncommercial educational webcaster as defined in
47 U.S.C. 397, viz., ``[CPB], any licensee or permittee of a public
broadcast station, or any nonprofit institution engaged primarily in
the production, acquisition, distribution, or dissemination of
educational and cultural television or radio programs.'' Not all
noncommercial webcasters are public broadcasters. Not all
educational webcasters are public broadcasters. The appellation
``public broadcaster'' appears to be reserved to those stations that
receive funding by or through the CPB.
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The Judges have added a definition of ``public broadcaster'' to
section 380.7, cross-referencing Subpart D.
5. Definition of Performance
In the current regulations, a ``performance'' is defined as ``each
instance in which any portion of a sound recording is publicly
performed to a listener . . . .'' See, e.g., 37 CFR 380.2. The Services
proposed various changes to the definition of performance. Parties can
and do alter the definition of ``performance'' and change other DMCA
provisions in directly negotiated licenses. The Judges cannot, however,
make regulations that are contrary to the requirements of the Act.
Pandora sought to add ``in the United States'' to the definition.
The NAB and NRBNMLC asked for an alternate parenthetical description
and a reference to the section in the Copyright Act regarding
performances that do not require a license. More substantively, the NAB
and NRBNMLC also added two exclusions to the definition, one regarding
performances of very short duration and one very technical one
regarding second connections from the same IP address. SoundExchange
argued that rights owners should be compensated for all uses of their
works, and thus that services should pay for performances even if they
are of brief duration or the service deems them to be ``skips.''
SoundExchange also pointed out that the proposed rates were calculated
based on the current statutory definition of ``performance'' and that
any narrowing of the definition would require adjustments to the
proposals. The second exclusion is not necessary because
SoundExchange's witness, Mr. Bender, agreed that reconnections are not
performances under the current regulations, which specify that a
``performance'' requires a listener.
The definition of performance in the regulations has long been
established. The NAB and NRBNMLC argued that performances of very short
duration are of no value to the listener or the service, and they
pointed out that listeners cannot skip songs on their services. The
Judges agreed that performance as it has been defined should continue
to apply. The Judges did not adopt these changes.
In its Supplement, SoundExchange objected to the Judges'
``linguistic changes'' to the definition of ``performance'' in section
380.7. Supplement at 5. The Judges accepted SoundExchange's concern
that the new language may harbor an ambiguity. No party objected to
SoundExchange's request for modification of the definition. The Judges
made the requested modification.
6. Definition of Qualified Auditor
SoundExchange proposed that the regulations allow non-CPAs to
perform audits if they have the requisite industry-specific expertise,
arguing that it is difficult to find CPAs with the needed expertise and
that other actors in the market allow content owners to audit royalty
payments. The NAB and NRBNMLC countered with the argument that CPAs
inspire confidence in the audit results because of the standards of
their profession and that they can rely on experts in the industry to
assist them if necessary. SoundExchange had argued in past proceedings
for a change to allow in-house auditors to perform audits. The Judges
had rejected that change. Final Rule and Order, Docket No. 2005-1 CRB
DTRA (``Web II''), 72 FR 24084, 24109 (May 1, 2007). For the same
reasons,
[[Page 26404]]
they did not adopt in this proceeding a change to the requirement that
the auditor be a CPA. The Judges further inserted the qualifier
``independent'' into the definition of ``Qualified Auditor'' for the
sake of regulatory efficiency. The Judges did not adopt SoundExchange's
proposed change.
The Judges did, however, adopt language proposed by the NAB and
NRBNMLC concerting the licensing of an auditor. In its Rehearing
Motion, SoundExchange objected to the addition of a requirement that a
Qualified Auditor be licensed in the jurisdiction in which it conducts
the audit. Motion at 8-9. The NAB had requested this additional
requirement to qualify an auditor as part of its proposed terms. NAB
Proposed Rates and Terms at 3 (Tab B to NAB CWDS Vol. 1). SoundExchange
asserted that the additional jurisdictional licensure requirement was
not supported by the record. This requirement provides assurance that
the auditor will be accountable and amenable to local governance in the
jurisdiction in which it operates. Differences in ethical standards and
sanctions for CPAs among jurisdictions might be small, but the
requirement that the auditor submit itself to the jurisdiction of the
local CPA governing bodies and local courts is significant. The NAB's
suggestion is supported by the testimony of Professor Roman Weil and,
therefore, was not without support in the record. See Weil WRT at 11-
13. The Judges rejected SoundExchange's objection.
H. Section 380.10 (Subpart B)--Royalty Fees for the Public Performance
of Sound Recordings and the Making of Ephemeral Recordings
1. Minimum Fee--Sec. 380.10(b)
The NAB proposed a revision to the minimum fee provision that
removed fees for individual channels, leaving only fees for individual
stations. SoundExchange argued that this is not necessary because of
the annual cap on total amount of minimum fees that any licensee must
pay; that fees would no longer be in proportion to SoundExchange's
costs; and that stations would game the system by streaming on multiple
channels in order to reduce fees. The NAB explained that its rate
proposal and terms applied only to stations that simulcast and that
side channels would have different rates and terms. According to the
NAB, this proposed change was a ``conforming change'' that presumably
would bring this term in line with the NAB's proposed rate for
simulcasters. The Judges did not set a separate rate for simulcasters
and therefore did not adopt the proposed revision.
2. Annual Royalty Fee Adjustment--Sec. 380.10(c)
While the Judges rejected SoundExchange's objections to the royalty
fee adjustment adopted in the Determination, the Judges acknowledged
that the regulation should be clarified so that, in rounding to the
nearest fourth decimal place, it is not understood to create a
meaningful deviation from the unrounded real rate. Accordingly the
Judges adopted a change to the regulation providing for annual royalty
fee adjustment in order to clarify the Judges' intent with regard to,
and provide examples of, calculating the indexed increase, if any.
3. Third Party Programming
The NAB proposed a waiver of census reporting on any material that
is transmitted by a simulcaster that is programmed by a third party,
i.e., not the station owner/operator whose broadcasts are
retransmitted. The NAB proposed estimating ATH for third party
programming because the stations are unable to get the necessary data
from the program originators. SoundExchange argued that some
broadcasters use a lot of third party material and that they should be
required to get that data in order to make accurate reporting to
SoundExchange. If broadcasters use third party programming,
SoundExchange should not have to bear the risk of inaccurate reporting.
In addition, the broadcaster is in the best position to incorporate
costs of census reporting into their negotiated payments with the
third-party programmers. The Judges did not adopt this change.
I. Miscellaneous--Proposed Relief From Reporting Requirement
The NAB and NRBNMLC proposed that the regulation regarding
distribution of royalties provide relief from reporting requirements
for small broadcasters and those noncommercial webcasters that are
``exempt from the report of use requirements contained in Sec.
370.4''. NAB Proposed Terms at 6; NRBNMLC Amended Proposed Rates and
Terms at 6. This is an argument the NAB and NRBNMLC make in the pending
rulemaking proceeding and did not make in this proceeding other than to
add the language to their proposed terms. SoundExchange's response is
lodged in the rulemaking proceeding. See Docket No. 14-CRB-0005 (RM).
The forum for that request is the rulemaking, not this proceeding. The
Judges did not adopt these proposals.
IX. Royalty Rates Determined by the Judges
A. Annual Rates and Price Level Adjustments
The Judges will set statutory rates for the year 2016. For the
years 2017 through 2020, the rates shall be adjusted to reflect any
inflation or deflation, as measured by changes in a particular Consumer
Price Index (the CPI-U) announced by the Bureau of Labor Statistics
(BLS), in November of the immediately preceding year, as described in
the new regulations set forth in this determination. In this regard,
the Judges concur with Dr. Shapiro, who testified that a regulatory
provision requiring an annual price level adjustment is preferable to
an implicit or explicit prediction of future inflation (or deflation).
5/19/15 Tr. 4608-10 (Shapiro).
The Judges shall also adjust any effective benchmark rate on which
they rely in this proceeding to reflect inflation (or deflation) as
measured by the CPI-U in the calendar years between the last calendar
year in which the data was collected for the benchmark and 2016, as
reflected in the applicable November announcement by the BLS.
B. Commercial Rates
1. Commercial Subscription Rates
Based on the analysis in this determination, the Judges shall set
two separate rates for commercial noninteractive webcasting. One rate
shall apply to performances on subscription-based commercial
noninteractive services. A separate rate shall apply to performances on
nonsubscription (advertising-supported free-to-the-listener) services.
The Judges have identified two usable benchmark rates for
commercial noninteractive subscription services for 2016.
The first is the steering-adjusted rate derived from the benchmark
developed by Dr. Rubinfeld on behalf of SoundExchange. Dr. Rubinfeld
established a subscription-based benchmark rate of $0.002376. SX Ex. 59
(Rubinfeld CWDT Ex. 16(a); see also SX PFF ]] 344; 393.
As noted in this determination, the Judges apply a steering
adjustment to this benchmark rate to reflect the rate-reducing effect
of steering as indicated in the Pandora/Merlin Agreement.\235\ In the
present case, the steering adjustment
[[Page 26405]]
derived from the evidence is 12%, calculated as follows:
---------------------------------------------------------------------------
\235\ Dr. Shapiro's rate data covered a period through the third
quarter of 2014. Shapiro WDT at 32.
---------------------------------------------------------------------------
(1) The unsteered subscription service rate for 2015 in the
Pandora/Merlin Agreement is $0.[REDACTED]. See Pan Ex. 5014, ]
3(a)(ii).
(2) Pandora's effective rate at the [REDACTED]% (low end) of
steering for 2016, as derived by Dr. Shapiro, is $0.002238. See Shapiro
WDT at 35.
(3) Dr. Shapiro's $0.002238 steered rate for 2016 includes a 2.2%
anticipated inflation factor that the Judges do not apply. See id.
(4) Backing out that 2.2% inflation factor indicates a 2015 steered
rate of $0.002189 (i.e., $0.002238/1.022).
(5) Adjusting for the actual inflation in 2015 of 0.5% (announced
by the BLS on December 15, 2015 \236\) increases the above steered rate
marginally to $0.002194, which the Judges round to $0.0022.
---------------------------------------------------------------------------
\236\ See Bureau of Labor Statistics, Economic News Release
(Dec. 15, 2015) (available at bls.gov).
---------------------------------------------------------------------------
(6) The unsteered 2015 subscription service rate of $0.[REDACTED]
(step 1) minus the steered rate of $0.0022 equals $0.0003.
(7) The percentage change in the subscription service rate for 2015
is 12% (i.e., $0.0003/$0.[REDACTED]).
Accordingly, Dr. Rubinfeld's proposed benchmark rate of $0.002376
must be reduced by 12% to reflect an effectively competitive rate. A
reduction of 12% brings that subscription service rate to $0.0021
(rounded).
However, Dr. Rubinfeld's data covered the period 2011 through 2014.
As noted supra, the Judges reject Dr. Rubinfeld's linear $0.0008 year-
over-year increase. Instead, the Judges apply the CPI-U inflation
adjustment of 0.5% to reflect the inflation announced by the BLS on
December 15, 2015. That adjustment raises the rate derived from Dr.
Rubinfeld's proposed steering-adjusted benchmark marginally, to
$0.0021105, which the Judges round to $0.0021.
The second steering-based subscription rate that the Judges credit
is the rate in the Pandora/Merlin Agreement, which already incorporates
a steering adjustment. That proposed benchmark rate (at 12.5% steering)
is $0.002238, rounded to $0.0022. See Shapiro WDT at 35.
Thus (and perhaps not surprisingly), the steering and inflation-
adjusted subscription rates under both proposed benchmarks establish an
extremely tight zone of reasonableness, separated by only $0.0001.\237\
---------------------------------------------------------------------------
\237\ From an economic perspective, these rates suggest that a
hypothetical willing seller would have a WTA of $0.0021 in this
subscription market, and a hypothetical noninteractive service would
have a WTP of $0.0022. In such a hypothetical market, the parties
could consummate a contract at any price point between $0.0021 and
$0.0022 per play.
---------------------------------------------------------------------------
Based on the foregoing, the Judges determine, in their discretion,
that the appropriate per-play rate for royalties paid by licensees to
licensors in the noninteractive subscription market under Sec. 114 for
the year 2016 is $0.0022. As discussed supra, the rate for the
remainder of the statutory term--2017-2020--shall reflect the foregoing
rate of $0.0022 per performance, as adjusted annually upward or
downward to reflect changes in the CPI-U over the preceding year,
pursuant to the applicable regulations.
2. Commercial Nonsubscription Rates
The Judges have identified two usable benchmark rates for
commercial noninteractive nonsubscription services for 2016. First, the
Judges have identified the adjusted, effective average per-play rate
derived from the iHeart/Warner Agreement. That rate, as developed,
supra, is $0.[REDACTED] per play.
Second, the Judges have identified the effective per-play rate in
the Pandora/Merlin Agreement (with steering at [REDACTED]%) as a usable
benchmark. The effective benchmark rate from that agreement is
$0.[REDACTED].
Thus, the Judges identify a zone of reasonableness in this market
segment as well. That is, the zone embraces a low effective rate of
$0.[REDACTED] and high effective rate of $0.[REDACTED]. As noted
earlier in this determination, it would be improper based on the
present record, to set separate rates for Indies and Majors.
However, as the Judges have also explained, supra, a fundamental
difference between these two benchmarks is that the iHeart/Warner
benchmark reflects an effective rate between a Major and a
noninteractive service, whereas the Pandora/Merlin Agreement reflects
an effective rate between Indies and a noninteractive service. The
evidence at the hearing indicated that the Majors' sound recordings
comprise 65% of noninteractive streams, and the Indies' sound
recordings comprise 35% of noninteractive streams. See, e.g., SX Ex.
269 at 73.
Based on the foregoing factors, the Judges find that the
appropriate statutory rate within this zone of rates, for
nonsubscription, ad-supported (free-to-the-listener) services is
$0.0017 per performance, as adjusted annually upward or downward to
reflect changes in the Consumer Price Index over the preceding year, as
set forth in the regulations.
3. Ephemeral Recording Rate
In accordance with the Judges' analysis supra, section VII, the
royalty rate for ephemeral recordings under 17 U.S.C. 112(e) applicable
to commercial webcasters shall be included within, and constitute 5% of
the royalties such webcasters pay for performances of sound recordings
under Sec. 114 of the Act.
C. The Noncommercial Rates
1. NPR-CPB/SoundExchange Settlement
The Judges have previously adopted the settlement agreement between
SoundExchange, on one hand, and National Public Radio and the
Corporation for Public Broadcasting, on the other, for simulcast
transmissions by public radio stations. See Digital Performance Right
in Sound Recordings and Ephemeral Recordings, Final Rule, 80 FR 59588
(Oct. 2, 2015). The rates and terms governing transmissions and
ephemeral recordings by the entities that are covered by that
settlement agreement for the period 2016-2020 shall be as set forth in
the agreement and codified at 37 CFR 380.30-380.37 (subpart D).
2. CBI/SoundExchange Settlement
The Judges have previously adopted the settlement agreement between
SoundExchange, and College Broadcasters, Inc., for transmissions by
Noncommercial Educational Webcasters (NEWs). See Digital Performance
Right in Sound Recordings and Ephemeral Recordings, Final Rule, 80 FR
558201 (Sep. 28, 2015). The rates and terms governing transmissions and
ephemeral recordings by NEWs for the period 2016-2020 shall be as set
forth in the agreement and codified at 37 CFR 380.20-380.27 (subpart
C).
3. All Other Noncommercial Webcasters
In accordance with the Judges' analysis supra, section V, the
royalty rate for webcast transmissions by all other noncommercial
webcasters during the 2016-2020 rate period shall be $500 annually for
each station or channel for all webcast transmissions totaling not more
than 159,140 Aggregate Tuning Hours (ATH) in a month, for each year in
the rate term. In addition, if, in any month, a noncommercial webcaster
makes total transmissions in excess of 159,140 ATH on any individual
channel or station, the noncommercial webcaster shall pay per-
performance royalty fees for the transmissions it makes on that channel
or station in excess of 159,140 ATH at the rate of $0.0017 per
performance, as adjusted annually
[[Page 26406]]
upward or downward to reflect changes in the Consumer Price Index over
the preceding year.
4. Ephemeral Recording Rate
The royalty rate for ephemeral recordings under 17 U.S.C. 112(e)
applicable to noncommercial webcasters shall be the same as the rate
applicable to commercial webcasters; that is, royalties for ephemeral
recordings shall be included within, and constitute 5% of the royalties
such webcasters pay for performances of sound recordings under Sec.
114 of the Act.
X. Conclusion
On the basis of the foregoing analysis and full consideration of
the record, the Judges propound the rates and terms described in this
Determination. The Register of Copyrights may review the Judges'
Determination for legal error in resolving a material issue of
substantive copyright law. The Librarian shall cause the Judges'
Determination, and any correction thereto by the Register, to be
published in the Federal Register no later than the conclusion of the
60-day review period.
So ordered.
Issue Date: March 4, 2016.
Suzanne M. Barnett,
Chief Copyright Royalty Judge
Jesse M. Feder,
Copyright Royalty Judge
David R. Strickler,
Copyright Royalty Judge
List of Subjects in 37 CFR Part 380
Copyright; sound recordings.
For the reasons set forth in the preamble, amend part 380 of title
37 of the Code of Federal Regulations as follows:
PART 380--RATES AND TERMS FOR TRANSMISSIONS BY ELIGIBLE
NONSUBSCRIPTION SERVICES AND NEW SUBSCRIPTION SERVICES AND FOR THE
MAKING OF EPHEMERAL REPRODUCTIONS TO FACILITATE THOSE TRANSMISSIONS
0
1. The authority citation for part 380 continues to read as follows:
Authority: 17 U.S.C. 112(e), 114(f), 804(b)(3).
0
2. Revise the title of Part 380 to read as set forth above.
0
3. Revise Subpart A to read as follows:
Subpart A--Regulations Of General Application
Sec.
380.1 Scope and compliance.
380.2 Making payment of royalty fees.
380.3 Delivering statements of account.
380.4 Distributing royalty fees.
380.5 Handling Confidential Information.
380.6 Auditing payments and distributions.
380.7 Definitions.
Sec. 380.1 Scope and compliance.
(a) Scope. Subparts A and B of this part codify rates and terms of
royalty payments for the public performance of sound recordings in
certain digital transmissions by certain Licensees in accordance with
the applicable provisions of 17 U.S.C. 114 and for the making of
Ephemeral Recordings by those Licensees in accordance with the
provisions of 17 U.S.C. 112(e), during the period January 1, 2016,
through December 31, 2020.
(b) Limited application of terms and definitions. The terms and
definitions in Subpart A apply only to Subpart B, except as expressly
adopted and applied in subpart C or subpart D of this part.
(c) Legal compliance. Licensees relying upon the statutory licenses
set forth in 17 U.S.C. 112(e) and 114 must comply with the requirements
of this part 380 and any other applicable regulations.
(d) Voluntary agreements. Notwithstanding the royalty rates and
terms established in any subparts of this part 380, the rates and terms
of any license agreements entered into by Copyright Owners and
Licensees may apply in lieu of these rates and terms.
Sec. 380.2 Making payment of royalty fees.
(a) Payment to the Collective. A Licensee must make the royalty
payments due under subpart B to SoundExchange, Inc., which is the
Collective designated by the Copyright Royalty Board to collect and
distribute royalties under this part 380.
(b) Monthly payments. A Licensee must make royalty payments on a
monthly basis. Payments are due on or before the 45th day after the end
of the month in which the Licensee made Eligible Transmissions.
(c) Minimum payments. A Licensee must make any minimum annual
payments due under Subpart B by January 31 of the applicable license
year. A Licensee that as of January 31 of any year has not made any
eligible nonsubscription transmissions, noninteractive digital audio
transmissions as part of a new subscription service, or Ephemeral
Recordings pursuant to the licenses in 17 U.S.C. 114 and/or 17 U.S.C.
112(e), but that begins making such transmissions after that date must
make any payment due by the 45th day after the end of the month in
which the Licensee commences making such transmissions.
(d) Late fees. A Licensee must pay a late fee for each payment and
each Statement of Account that the Collective receives after the due
date. The late fee is 1.5% (or the highest lawful rate, whichever is
lower) of the late payment amount per month. The late fee for a late
Statement of Account is 1.5% of the payment amount associated with the
Statement of Account. Late fees accrue from the due date until the date
that the Collective receives the late payment or late Statement of
Account.
(1) Waiver of late fees. The Collective may waive or lower late
fees for immaterial or inadvertent failures of a Licensee to make a
timely payment or submit a timely Statement of Account.
(2) Notice regarding noncompliant Statements of Account. If it is
reasonably evident to the Collective that a timely-provided Statement
of Account is materially noncompliant, the Collective must notify the
Licensee within 90 days of discovery of the noncompliance.
Sec. 380.3 Delivering statements of account.
(a) Statements of Account. Any payment due under this Part 380 must
be accompanied by a corresponding Statement of Account that must
contain the following information:
(1) Such information as is necessary to calculate the accompanying
royalty payment;
(2) The name, address, business title, telephone number, facsimile
number (if any), electronic mail address (if any) and other contact
information of the person to be contacted for information or questions
concerning the content of the Statement of Account;
(3) The signature of:
(i) The Licensee or a duly authorized agent of Licensee;
(ii) A partner or delegate if the Licensee is a partnership; or
(iii) An officer of the corporation if the Licensee is a
corporation.
(4) The printed or typewritten name of the person signing the
Statement of Account;
(5) If the Licensee is a partnership or corporation, the title or
official position held in the partnership or corporation by the person
signing the Statement of Account;
(6) A certification of the capacity of the person signing;
(7) The date of signature; and
(8) An attestation to the following effect:
I, the undersigned owner/officer/partner/agent of the Licensee
have examined this Statement of Account and hereby state that it is
true, accurate, and complete to my knowledge after reasonable due
diligence and that it fairly presents, in all material respects,
[[Page 26407]]
the liabilities of the Licensee pursuant to 17 U.S.C. 112(e) and 114
and applicable regulations adopted under those sections.
(b) Certification. Licensee's Chief Financial Officer or, if
Licensee does not have a Chief Financial Officer, a person authorized
to sign Statements of Account for the Licensee must submit a signed
certification on an annual basis attesting that Licensee's royalty
statements for the prior year represent a true and accurate
determination of the royalties due and that any method of allocation
employed by Licensee was applied in good faith and in accordance with
U.S. GAAP.
Sec. 380.4 Distributing royalty fees.
(a) Distribution of royalties. (1) The Collective must promptly
distribute royalties received from Licensees to Copyright Owners and
Performers that are entitled thereto, or to their designated agents.
The Collective shall only be responsible for making distributions to
those who provide the Collective with information as is necessary to
identify and pay the correct recipient. The Collective must distribute
royalties on a basis that values all performances by a Licensee equally
based upon the information provided under the Reports of Use
requirements for Licensees pursuant to Sec. 370.4 of this chapter and
this subpart.
(2) The Collective must use its best efforts to identify and locate
copyright owners and featured artists in order to distribute royalties
payable to them under Sec. 112(e) or 114(d)(2) of title 17, United
States Code, or both. Such efforts must include, but not be limited to,
searches in Copyright Office public records and published directories
of sound recording copyright owners.
(b) Unclaimed funds. If the Collective is unable to identify or
locate a Copyright Owner or Performer who is entitled to receive a
royalty distribution under this part 380, the Collective must retain
the required payment in a segregated trust account for a period of
three years from the date of the first distribution of royalties from
the relevant payment by a Licensee. No claim to distribution shall be
valid after the expiration of the three-year period. After expiration
of this period, the Collective must handle unclaimed funds in
accordance with applicable federal, state, or common law.
(c) Retention of records. Licensees and the Collective shall keep
books and records relating to payments and distributions of royalties
for a period of not less than the prior three calendar years.
(d) Designation of the Collective. (1) The Judges designate
SoundExchange, Inc., as the Collective to receive Statements of Account
and royalty payments from Licensees and to distribute royalty payments
to each Copyright Owner and Performer (or their respective designated
agents) entitled to receive royalties under 17 U.S.C. 112(e) or 114(g).
(2) If SoundExchange, Inc. should dissolve or cease to be governed
by a board consisting of equal numbers of representatives of Copyright
Owners and Performers, then it shall be replaced for the applicable
royalty term by a successor Collective according to the following
procedure:
(i) The nine Copyright Owner representatives and the nine Performer
representatives on the SoundExchange board as of the last day preceding
SoundExchange's cessation or dissolution shall vote by a majority to
recommend that the Copyright Royalty Judges designate a successor and
must file a petition with the Copyright Royalty Judges requesting that
the Judges designate the named successor and setting forth the reasons
therefor.
(ii) Within 30 days of receiving the petition, the Copyright
Royalty Judges must issue an order designating the recommended
Collective, unless the Judges find good cause not to make and publish
the designation in the Federal Register.
Sec. 380.5 Handling Confidential Information.
(a) Definition. For purposes of this part 380, ``Confidential
Information'' means the Statements of Account and any information
contained therein, including the amount of royalty payments and the
number of Performances, and any information pertaining to the
Statements of Account reasonably designated as confidential by the
party submitting the statement. Confidential Information does not
include documents or information that at the time of delivery to the
Collective is public knowledge. The party seeking information from the
Collective based on a claim that the information sought is a matter of
public knowledge shall have the burden of proving to the Collective
that the requested information is in the public domain.
(b) Use of Confidential Information. The Collective may not use any
Confidential Information for any purpose other than royalty collection
and distribution and activities related directly thereto.
(c) Disclosure of Confidential Information. The Collective shall
limit access to Confidential Information to:
(1) Those employees, agents, consultants, and independent
contractors of the Collective, subject to an appropriate written
confidentiality agreement, who are engaged in the collection and
distribution of royalty payments hereunder and activities related
directly thereto who require access to the Confidential Information for
the purpose of performing their duties during the ordinary course of
their work;
(2) A Qualified Auditor or outside counsel who is authorized to act
on behalf of:
(i) The Collective with respect to verification of a Licensee's
statement of account pursuant to this part 380; or
(ii) A Copyright Owner or Performer with respect to the
verification of royalty distributions pursuant to this part 380;
(3) Copyright Owners and Performers, including their designated
agents, whose works a Licensee used under the statutory licenses set
forth in 17 U.S.C. 112(e) and 114 by the Licensee whose Confidential
Information is being supplied, subject to an appropriate written
confidentiality agreement, and including those employees, agents,
consultants, and independent contractors of such Copyright Owners and
Performers and their designated agents, subject to an appropriate
written confidentiality agreement, who require access to the
Confidential Information to perform their duties during the ordinary
course of their work;
(4) Attorneys and other authorized agents of parties to proceedings
under 17 U.S.C. 8, 112, 114, acting under an appropriate protective
order.
(d) Safeguarding Confidential Information. The Collective and any
person authorized to receive Confidential Information from the
Collective must implement procedures to safeguard against unauthorized
access to or dissemination of Confidential Information using a
reasonable standard of care, but no less than the same degree of
security that the recipient uses to protect its own Confidential
Information or similarly sensitive information.
Sec. 380.6 Auditing payments and distributions.
(a) General. This section prescribes procedures by which any
entity entitled to receive payment or distribution of royalties may
verify payments or distributions by auditing the payor or distributor.
The Collective may audit a Licensee's payments of royalties to the
Collective, and a Copyright Owner or Performer may audit the
Collective's distributions of royalties to the owner or performer.
Nothing in this section shall preclude a verifying entity and the payor
or distributor from agreeing to verification methods in addition to or
[[Page 26408]]
different from those set forth in this section.
(b) Frequency of auditing. The verifying entity may conduct an
audit of each licensee only once a year for any or all of the prior
three calendar years. A verifying entity may not audit records for any
calendar year more than once.
(c) Notice of intent to audit. The verifying entity must file with
the Copyright Royalty Judges a notice of intent to audit the payor or
distributor, which notice the Judges must publish in the Federal
Register within 30 days of the filing of the notice. Simultaneously
with the filing of the notice, the verifying entity must deliver a copy
to the payor or distributor.
(d) The audit. The audit must be conducted during regular business
hours by a Qualified Auditor who is not retained on a contingency fee
basis and is identified in the notice. The auditor shall determine the
accuracy of royalty payments or distributions, including whether an
underpayment or overpayment of royalties was made. An audit of books
and records, including underlying paperwork, performed in the ordinary
course of business according to generally accepted auditing standards
by a Qualified Auditor, shall serve as an acceptable verification
procedure for all parties with respect to the information that is
within the scope of the audit.
(e) Access to third-party records for audit purposes. The payor or
distributor must use commercially reasonable efforts to obtain or to
provide access to any relevant books and records maintained by third
parties for the purpose of the audit.
(f) Duty of auditor to consult. The auditor must produce a written
report to the verifying entity. Before rendering the report, unless the
auditor has a reasonable basis to suspect fraud on the part of the
payor or distributor, the disclosure of which would, in the reasonable
opinion of the auditor, prejudice any investigation of the suspected
fraud, the auditor must review tentative written findings of the audit
with the appropriate agent or employee of the payor or distributor in
order to remedy any factual errors and clarify any issues relating to
the audit; Provided that an appropriate agent or employee of the payor
or distributor reasonably cooperates with the auditor to remedy
promptly any factual error[s] or clarify any issues raised by the
audit. The auditor must include in the written report information
concerning the cooperation or the lack thereof of the employee or
agent.
(g) Audit results; underpayment or overpayment of royalties. If the
auditor determines the payor or distributor underpaid royalties, the
payor or distributor shall remit the amount of any underpayment
determined by the auditor to the verifying entity, together with
interest at the rate specified in Sec. 380.2(d). In the absence of
mutually-agreed payment terms, which may, but need not, include
installment payments, the payor or distributor shall remit promptly to
the verifying entity the entire amount of the underpayment determined
by the auditor. If the auditor determines the payor or distributor
overpaid royalties, however, the verifying entity shall not be required
to remit the amount of any overpayment to the payor or distributor, and
the payor or distributor shall not seek by any means to recoup, offset,
or take a credit for the overpayment, unless the payor or distributor
and the verifying entity have agreed otherwise.
(h) Paying the costs of the audit. The verifying entity must pay
the cost of the verification procedure, unless the auditor determines
that there was an underpayment of 10% or more, in which case the payor
or distributor must bear the reasonable costs of the verification
procedure, in addition to paying or distributing the amount of any
underpayment.
(i) Retention of audit report. The verifying party must retain the
report of the audit for a period of not less than three years from the
date of issuance.
Sec. 380.7 Definitions.
Aggregate Tuning Hours (ATH) means the total hours of programming
that the Licensee has transmitted during the relevant period to all
listeners within the United States from all channels and stations that
provide audio programming consisting, in whole or in part, of eligible
nonsubscription transmissions or noninteractive digital audio
transmissions as part of a new subscription service, less the actual
running time of any sound recordings for which the Licensee has
obtained direct licenses apart from 17 U.S.C. 114(d)(2) or which do not
require a license under United States copyright law. By way of example,
if a service transmitted one hour of programming containing
Performances to 10 listeners, the service's ATH would equal 10 hours.
If three minutes of that hour consisted of transmission of a directly-
licensed recording, the service's ATH would equal nine hours and 30
minutes (three minutes times 10 listeners creates a deduction of 30
minutes). As an additional example, if one listener listened to a
service for 10 hours (and none of the recordings transmitted during
that time was directly licensed), the service's ATH would equal 10
hours.
Collective means the collection and distribution organization that
is designated by the Copyright Royalty Judges, and which, for the
current rate period, is SoundExchange, Inc.
Commercial Webcaster means a Licensee, other than a Noncommercial
Webcaster or Public Broadcaster, that makes Ephemeral Recordings and
eligible digital audio transmissions of sound recordings pursuant to
the statutory licenses under 17 U.S.C. 112(e) and 114(d)(2).
Copyright owners means sound recording copyright owners who are
entitled to royalty payments made under Part 380 pursuant to the
statutory licenses under 17 U.S.C. 112(e) and 114.
Digital audio transmission has the same meaning as in 17 U.S.C.
114(j).
Eligible nonsubscription transmission has the same meaning as in 17
U.S.C. 114(j).
Eligible Transmission means a subscription or nonsubscription
transmission made by a Licensee that is subject to licensing under 17
U.S.C. 114(d)(2) and the payment of royalties under this part.
Ephemeral recording has the same meaning as in 17 U.S.C. 112.
Licensee means a Commercial Webcaster, a Noncommercial Webcaster,
or any entity operating a noninteractive Internet streaming service
that has obtained a license under Section 112 or 114 to transmit
eligible sound recordings.
New subscription service has the same meaning as in 17 U.S.C.
114(j).
Noncommercial webcaster has the same meaning as in 17 U.S.C.
114(f)(5)(E).
Nonsubscription has the same meaning as in 17 U.S.C. 114(j).
Performance means each instance in which any portion of a sound
recording is publicly performed to a listener by means of a digital
audio transmission (e.g., the delivery of any portion of a single track
from a compact disc to one listener), but excludes the following:
(1) A performance of a sound recording that does not require a
license (e.g., a sound recording that is not copyrighted);
(2) A performance of a sound recording for which the service has
previously obtained a license from the Copyright Owner of such sound
recording; and
(3) An incidental performance that both:
(i) Makes no more than incidental use of sound recordings
including, but not limited to, brief musical transitions in and out of
commercials or program
[[Page 26409]]
segments, brief performances during news, talk and sports programming,
brief background performances during disk jockey announcements, brief
performances during commercials of sixty seconds or less in duration,
or brief performances during sporting or other public events; and
(ii) Does not contain an entire sound recording, other than ambient
music that is background at a public event, and does not feature a
particular sound recording of more than thirty seconds (as in the case
of a sound recording used as a theme song).
Performers means the independent administrators identified in 17
U.S.C. 114(g)(2)(B) and (C) and the parties identified in 17 U.S.C.
114(g)(2)(D).
Public broadcaster means a Covered Entity under subpart D of this
part.
Qualified auditor means an independent Certified Public Accountant
licensed in the jurisdiction where it seeks to conduct a verification.
Transmission has the same meaning as in 17 U.S.C. 114(j).
0
4. Revise subpart B, consisting of Sec. 380.10, to read as follows:
Subpart B--Commercial Webcasters and Noncommercial Webcasters
Sec. 380.10 Royalty fees for the public performance of sound
recordings and the making of ephemeral recordings.
(a) Royalty fees. For the year 2016, Licensees must pay royalty
fees for all Eligible Transmissions of sound recordings at the
following rates:
(1) Commercial Webcasters: $0.0022 per performance for subscription
services and $0.0017 per performance for nonsubscription services.
(2) Noncommercial webcasters. $500 per year for each channel or
station and $0.0017 per performance for all digital audio transmissions
in excess of 159,140 ATH in a month on a channel or station.
(b) Minimum fee. Licensees must pay the Collective a minimum fee of
$500 each year for each channel or station. The Collective must apply
the fee to the Licensee's account as credit towards any additional
royalty fees that Licensees may incur in the same year. The fee is
payable for each individual channel and each individual station
maintained or operated by the Licensee and making Eligible
Transmissions during each calendar year or part of a calendar year
during which it is a Licensee. The maximum aggregate minimum fee in any
calendar year that a Commercial Webcaster must pay is $50,000. The
minimum fee is nonrefundable.
(c) Annual royalty fee adjustment. The Copyright Royalty Judges
shall adjust the royalty fees each year to reflect any changes
occurring in the cost of living as determined by the most recent
Consumer Price Index (for all consumers and for all items) (CPI-U)
published by the Secretary of Labor before December 1 of the preceding
year. The adjusted rate shall be rounded to the nearest fourth decimal
place. To account more accurately for cumulative changes in the CPI-U
over the rate period, the calculation of the rate for each year shall
be cumulative based on a calculation of the percentage increase in the
CPI-U from the CPI-U published in November, 2015 (237.336), according
to the formula (1 + (Cy - 237.336)/237.336) x R2016, where
Cy is the CPI-U published by the Secretary of Labor before
December 1 of the preceding year, and R2016 is the royalty
rate for 2016 (i.e., $0.0022 per subscription performance or $0.0017
per nonsubscription performance). By way of example, if the CPI-U
published in November 2016 is 242.083, the adjusted rate for
nonsubscription services in 2017 will be computed as (1 + (242.083 -
237.336)/237.336) x $0.0017 and will equal $0.00173 ($0.0017 when
rounded to the nearest fourth decimal place). If the CPI-U published in
November 2017 is 249.345, the rate for nonsubscription services for
2018 will be computed as (1 + (249.345 - 237.336)/237.336) x $0.0017
and will equal $0.00179 ($0.0018 when rounded to the nearest fourth
decimal place). The Judges shall publish notice of the adjusted fees in
the Federal Register at least 25 days before January 1. The adjusted
fees shall be effective on January 1.
(d) Ephemeral recordings royalty fees. The fee for all Ephemeral
Recordings is part of the total fee payable under this section and
constitutes 5% of it. All ephemeral recordings that a Licensee makes
which are necessary and commercially reasonable for making
noninteractive digital transmissions are included in the 5%.
0
5. In Sec. 380.22, revise paragraphs (b)(1) through (3) and (c) to
read as follows:
Sec. 380.22 Royalty fees for the public performance of sound
recordings and for ephemeral recordings.
* * * * *
(b) * * *
(1) The Noncommercial Educational Webcaster shall, for such month
and the remainder of the calendar year in which such month occurs, pay
royalties in accordance, and otherwise comply, with the provisions of
Part 380 Subparts A and B applicable to Noncommercial Webcasters;
(2) The Minimum Fee paid by the Noncommercial Educational Webcaster
for such calendar year will be credited to the amounts payable under
the provisions of Part 380 Subparts A and B applicable to Noncommercial
Webcasters; and
(3) The Noncommercial Educational Webcaster shall, within 45 days
after the end of each month, notify the Collective if it has made total
transmissions in excess of 159,140 Aggregate Tuning Hours on a channel
or station during that month; pay the Collective any amounts due under
the provisions of Part 380 Subparts A and B applicable to Noncommercial
Webcasters; and provide the Collective a statement of account pursuant
to part 380, subpart A.
(c) Royalties for other Noncommercial Educational Webcasters. A
Noncommercial Educational Webcaster that is not eligible to pay
royalties under paragraph (a) of this section shall pay royalties in
accordance, and that otherwise comply, with the provisions of subparts
A and B of this part applicable to Noncommercial Webcasters.
* * * * *
0
6. In Sec. 380.23, revise paragraph (b)(1) to read as follows:
Sec. 380.23 Terms for making payment of royalty fees and statements
of account.
* * * * *
(b) Designation of the Collective. (1) The Copyright Royalty Judges
designate SoundExchange, Inc., as the Collective to receive statements
of account and royalty payments from Noncommercial Educational
Webcasters due under Sec. 380.22 and to distribute royalty payments to
each Copyright Owner and Performer, or their designated agents,
entitled to receive royalties under 17 U.S.C. 112(e) or 114(g).
* * * * *
Subpart D--Public Broadcasters
0
7. Revise the heading of Subpart D to read as set forth above.
0
8. In Sec. 380.33, revise paragraph (b)(1) to read as follows:
Sec. 380.33 Terms for making payment of royalty fees and statements
of account.
* * * * *
[[Page 26410]]
(b) Designation of the Collective. (1) The Copyright Royalty Judges
designate SoundExchange, Inc., as the Collective to receive statements
of account and royalty payments for Covered Entities under this subpart
and to distribute royalty payments to each Copyright Owner and
Performer, or their designated agents, entitled to receive royalties
under 17 U.S.C. 112(e) or 114(g).
* * * * *
Dated: April 19, 2016.
Suzanne M. Barnett,
Chief Copyright Royalty Judge.
Jesse M. Feder,
Copyright Royalty Judge.
David R. Strickler,
Copyright Royalty Judge.
Approved By:
David S. Mao,
Librarian of Congress.
[FR Doc. 2016-09707 Filed 4-29-16; 8:45 am]
BILLING CODE 1410-72-P