[House Hearing, 112 Congress] [From the U.S. Government Printing Office] MUSIC LICENSING PART ONE: LEGISLATION IN THE 112TH CONGRESS ======================================================================= HEARING BEFORE THE SUBCOMMITTEE ON INTELLECTUAL PROPERTY, COMPETITION, AND THE INTERNET OF THE COMMITTEE ON THE JUDICIARY HOUSE OF REPRESENTATIVES ONE HUNDRED TWELFTH CONGRESS SECOND SESSION __________ NOVEMBER 28, 2012 __________ Serial No. 112-158 __________ Printed for the use of the Committee on the Judiciary [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT] Available via the World Wide Web: http://judiciary.house.gov _____ U.S. GOVERNMENT PRINTING OFFICE 77-042 PDF WASHINGTON : 2013 ----------------------------------------------------------------------- For sale by the Superintendent of Documents, U.S. Government Printing Office Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800; DC area (202) 512-1800 Fax: (202) 512-2104 Mail: Stop IDCC, Washington, DC 20402-0001 COMMITTEE ON THE JUDICIARY LAMAR SMITH, Texas, Chairman F. JAMES SENSENBRENNER, Jr., JOHN CONYERS, Jr., Michigan Wisconsin HOWARD L. BERMAN, California HOWARD COBLE, North Carolina JERROLD NADLER, New York ELTON GALLEGLY, California ROBERT C. ``BOBBY'' SCOTT, BOB GOODLATTE, Virginia Virginia DANIEL E. LUNGREN, California MELVIN L. WATT, North Carolina STEVE CHABOT, Ohio ZOE LOFGREN, California DARRELL E. ISSA, California SHEILA JACKSON LEE, Texas MIKE PENCE, Indiana MAXINE WATERS, California J. RANDY FORBES, Virginia STEVE COHEN, Tennessee STEVE KING, Iowa HENRY C. ``HANK'' JOHNSON, Jr., TRENT FRANKS, Arizona Georgia LOUIE GOHMERT, Texas PEDRO R. PIERLUISI, Puerto Rico JIM JORDAN, Ohio MIKE QUIGLEY, Illinois TED POE, Texas JUDY CHU, California JASON CHAFFETZ, Utah TED DEUTCH, Florida TIM GRIFFIN, Arkansas LINDA T. SANCHEZ, California TOM MARINO, Pennsylvania JARED POLIS, Colorado TREY GOWDY, South Carolina DENNIS ROSS, Florida SANDY ADAMS, Florida BEN QUAYLE, Arizona MARK AMODEI, Nevada Richard Hertling, Staff Director and Chief Counsel Perry Apelbaum, Minority Staff Director and Chief Counsel ------ Subcommittee on Intellectual Property, Competition, and the Internet BOB GOODLATTE, Virginia, Chairman BEN QUAYLE, Arizona, Vice-Chairman F. JAMES SENSENBRENNER, Jr., MELVIN L. WATT, North Carolina Wisconsin JOHN CONYERS, Jr., Michigan HOWARD COBLE, North Carolina HOWARD L. BERMAN, California STEVE CHABOT, Ohio JUDY CHU, California DARRELL E. ISSA, California TED DEUTCH, Florida MIKE PENCE, Indiana LINDA T. SANCHEZ, California JIM JORDAN, Ohio JERROLD NADLER, New York TED POE, Texas ZOE LOFGREN, California JASON CHAFFETZ, Utah SHEILA JACKSON LEE, Texas TIM GRIFFIN, Arkansas MAXINE WATERS, California TOM MARINO, Pennsylvania HENRY C. ``HANK'' JOHNSON, Jr., SANDY ADAMS, Florida Georgia MARK AMODEI, Nevada Blaine Merritt, Chief Counsel Stephanie Moore, Minority Counsel C O N T E N T S ---------- NOVEMBER 28, 2012 Page OPENING STATEMENTS The Honorable Bob Goodlatte, a Representative in Congress from the State of Virginia, and Chairman, Subcommittee on Intellectual Property, Competition, and the Internet........... 1 The Honorable Melvin L. Watt, a Representative in Congress from the State of North Carolina, and Ranking Member, Subcommittee on Intellectual Property, Competition, and the Internet........ 38 The Honorable Howard Coble, a Representative in Congress from the State of North Carolina, and Member, Subcommittee on Intellectual Property, Competition, and the Internet........... 40 The Honorable Lamar Smith, a Representative in Congress from the State of Texas, and Chairman, Committee on the Judiciary....... 40 The Honorable John Conyers, Jr., a Representative in Congress from the State of Michigan, Ranking Member, Committee on the Judiciary, and Member, Subcommittee on Intellectual Property, Competition, and the Internet.................................. 41 The Honorable Jason Chaffetz, a Representative in Congress from the State of Utah, and Member, Subcommittee on Intellectual Property, Competition, and the Internet........................ 42 The Honorable Howard L. Berman, a Representative in Congress from the State of California, and Member, Subcommittee on Intellectual Property, Competition, and the Internet........... 49 WITNESSES Joseph J. Kennedy, Chairman and Chief Executive Officer, Pandora Media, Inc. Oral Testimony................................................. 52 Prepared Statement............................................. 54 Bruce Reese, President and Chief Executive Officer, Hubbard Radio, LLC, on behalf of the National Association of Broadcasters Oral Testimony................................................. 60 Prepared Statement............................................. 62 David B. Pakman, Partner, Venrock Oral Testimony................................................. 71 Prepared Statement............................................. 73 Jimmy Jam, Chair Emeritus, The Recording Academy, Record Producer, Songwriter, Recording Artist Oral Testimony................................................. 74 Prepared Statement............................................. 77 Jeffrey A. Eisenach, Managing Director and Principal, Navigant Economics Oral Testimony................................................. 79 Prepared Statement............................................. 82 Michael Huppe, President, SoundExchange, Inc. Oral Testimony................................................. 124 Prepared Statement............................................. 126 LETTERS, STATEMENTS, ETC., SUBMITTED FOR THE HEARING The bill, H.R. 6480, the ``Internet Radio Fairness Act of 2012''. 4 Material submitted by the Honorable Jason Chaffetz, a Representative in Congress from the State of Utah, and Member, Subcommittee on Intellectual Property, Competition, and the Internet....................................................... 44 APPENDIX Material Submitted for the Hearing Record Prepared Statement of the Honorable John Conyers, Jr., a Representative in Congress from the State of Michigan, Ranking Member, Committee on the Judiciary, and Member, Subcommittee on Intellectual Property, Competition, and the Internet........... 165 Prepared Statement of the Honorable Jared Polis, a Representative in Congress from the State of Colorado......................... 170 Response to Questions for the Record from Joseph J. Kennedy, Chairman and Chief Executive Officer, Pandora Media, Inc....... 172 Response to Questions for the Record from Bruce Reese, President and Chief Executive Officer Hubbard Radio, LLC................. 181 Response to Questions for the Record from David B. Pakman, Partner, Venrock............................................... 189 Response to Questions for the Record from Jimmy Jam, Chair Emeritus, The Recording Academy, Record Producer, Songwriter, Recording Artist............................................... 192 Response to Questions for the Record from Jeffrey A. Eisenach, Managing Director and Principal Navigant Economics............. 194 Response to Questions for the Record from Michael Huppe, President, SoundExchange, Inc.................................. 196 Prepared Statement of the Information Technology & Innovation Foundation (ITIF).............................................. 202 Letter from the Songwriters Guild of America, Inc. (SGA), the Music Creators North America alliance (MCNA), and the European Composer and Songwriters Alliance (ECSA)....................... 213 Letter from the American Society of Composers, Authors and Publishers (ASCAP); SESAC, Inc; Broadcast Music, Inc. (BMI); and the Nashville Songwriters Associaton International (NSAI).. 217 Letter from The Recording Academy................................ 221 Letter from the Washington Bureau, National Association for the Advancement of Colored People (NAACP).......................... 223 Letter from musicFIRST........................................... 225 Letter from the American Association of Independent Music (A2IM). 227 Letter from the American Federation of Labor and Congress of Industrial Organizations....................................... 229 Letter from Americans for Tax Reform............................. 231 Letter from the Council for Citizens Against Government Waste.... 233 Letter from the Recording Industry Association of America (RIAA). 235 Letter from SAG-AFTRA............................................ 237 Letter from SoundExchange........................................ 239 Prepared Statement of the Taxpayers Protection Alliance.......... 241 Prepared Statement of Public Knowledge........................... 243 Letter from the Future of Music Coalition........................ 265 MUSIC LICENSING PART ONE: LEGISLATION IN THE 112TH CONGRESS ---------- WEDNESDAY, NOVEMBER 28, 2012 House of Representatives, Subcommittee on Intellectual Property, Competition, and the Internet, Committee on the Judiciary, Washington, DC. The Subcommittee met, pursuant to call, at 11:30 a.m., in room 2141, Rayburn House Office Building, the Honorable Bob Goodlatte (Chairman of the Subcommittee) presiding. Present: Representatives Goodlatte, Smith, Sensenbrenner, Coble, Chabot, Issa, Jordan, Chaffetz, Griffin, Amodei, Watt, Conyers, Berman, Chu, Deutch, Sanchez, Nadler, Lofgren, Jackson Lee, and Johnson. Staff Present: (Majority) David Whitney, Counsel; Olivia Lee, Clerk; and (Minority) Stephanie Moore, Subcommittee Chief Counsel. Mr. Goodlatte. Good morning. This hearing of the Subcommittee on Intellectual Property, Competition, and the Internet on the Internet Radio Freedom Act will come to order. The title of today's hearing is ``Music Licensing Part One: Legislation in the 112th Congress.'' The focus of the discussion today will be legislation introduced by Congressman Jason Chaffetz, H.R. 6480, the ``Internet Radio Freedom Act.'' Today's hearing is the first in what I hope will be a series of hearings examining the nuances of music licensing. The Merriam- Webster Dictionary defines the word ``system'' in a number of ways. One of those is a harmonious arrangement or pattern. I'm not sure that definition is the one most suitable to describe the accumulation of laws and customs that govern the music licensing apparatus in the United States today. The complexity of our music licensing system is a result of a number of sometimes independent but often interdependent factors. For instance, there are distinctions that are based on one, the type of work, whether the work is a musical competition or sound recording; two, the type of right someone wishes to license, whether they want to distribute, reproduce or publicly perform the work; and even three, the type of technology they plan to use, whether they want to publicly perform the work by means of an analog radio or Internet radio broadcast. To be sure, there is often a need for fine distinctions in a subject area as complex and far reaching as copyright law. And much of our work in this area is frequently devoted to examining how best to calibrate the law to ensure it achieves the right balance in a particular area. But from time to time, we need to step back from the pieces and look at how they fit into the whole. Music licensing is an area where it would benefit us to take a broader look. To their credit, under the leadership of Chairman Sensenbrenner, Conyers and Smith, this Committee began the process of seeking to modernize and bring some order to aspects of our music licensing system that have been slow to adapt. Indeed, four laws that originated in the Subcommittee that relate principally to or profoundly affect aspects of our music licensing system were enacted during the last decade. And the Committee and the Subcommittee devoted considerable effort to attempt to both resolve the longstanding debate over whether the United States should recognize a full performance right in sound recordings and modernize provisions in the Copyright Act that relate to the collective licensing of musical works. But there are many interconnected issues that have been raised by stakeholders on all sides that the Subcommittee needs to begin to carefully review and consider. These include the following: First, Representative Chaffetz and webcasters have raised the issues of rate standard parity in the sound recording compulsory license, section 114, and reform the adjudicatory and rate-setting processes. Second, sound recording stakeholders have raised the issue of applying the sound recording statutory license to terrestrial radio stations. This Committee reported a bill on that issue in 2009. Third, music publishers and webcasters have raised the issue of the rate standard in the musical work statutory license, section 115, and suggested a need for parity of that standard across licenses. They have also raised the issue of reforming the musical works license, especially as it applies to use by digital services directly. Fourth, performing rights organizations that represent songwriters and publishers, such as ASCAP, have asked the Committee to examine broadly issues of music licensing, including current decisions by the rate court in New York and the continued utility of the consent decree. Fifth, some broadcasters have suggested that performing rights organizations that currently operate in the free market, such as SESAC, should be bound by a consent decree or legislation in a manner similar to that which binds their competitors, ASCAP and BMI. All of these issues need to be carefully examined as they all affect both the incentive to create new works for consumers to enjoy and innovation in the music and Internet industries. However, today we focus our attention on the Internet Radio Freedom Act. This legislation seeks to harmonize the rate- setting standard among Internet radio broadcasters and satellite and cable radio broadcasters by changing the rate- setting standard from the willing buyer/willing seller standard to a modified 801(b) standard, similar to what cable and satellite radio broadcasters currently operate under. It is worth noting that this legislation does not attempt to address the question of whether terrestrial radio should pay performance royalties. In addition to harmonizing the rate standard, H.R. 6480 also contains numerous other provisions amending the procedures governing the music licensing, including changing the method by which copyright royalty judges are chosen. I am open to the idea of harmonizing the rate-setting standard to create more parity across music delivery platforms, but I many also concerned about ensuring that those who create and perform music are fairly compensated for their creative works. I hope today we will have a productive conversation about the issues, including; one, whether we should harmonize the rate standard at all; two, if so, whether the 801(b) standard, the willing buyer/willing seller standard, or something in between is the right balance; and three, how adjusting the standard would affect innovation in the Internet radio market and compensation for artists in the long term. The need to protect intellectual property and the imperative to foster innovation are not mutually exclusive goals. We can and will promote both interests going forward. When we succeed, hopefully more of us will also agree that the copyright law, in general, and the music licensing system in particular, resemble that harmonious arrangement or pattern defined in Merriam-Webster's Dictionary. I look forward to hearing the testimony of all of our expert witnesses today. And before we proceed to swear them in, I want to acknowledge and thank several members of our Committee for their service on this Subcommittee since they are leaving the Congress. And I don't see any of them with me here today, so maybe they've already left. But I still think it is worth noting their contribution to this Subcommittee. And I first want to mention Representative Howard Berman, next Representative Dan Lungren, Representative Mike Pence, Representative Ben Quayle and Representative Sandy Adams. And in their absence, let's give them all a round of applause for their service to this great Subcommittee. [The bill, H.R. 6480, follows:] [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT] __________ Mr. Goodlatte. And now it's my pleasure to recognize the Ranking Member of the Subcommittee, the gentleman from North Carolina, Mr. Watt. Mr. Watt. Thank you, Mr. Chairman. And thank you for a very outstanding opening statement. And I understand Mr. Berman is in the back waiting to make a grand entrance, so we will chide him later. I also want to thank the Chairman on his, what I understand to be his imminent ascension to the chairmanship of the full Judiciary Committee. And he's outlined a robust agenda in this opening statement just in the music area. So I'll be looking forward to working with him. And I want to thank him for scheduling this first in a series of anticipated hearings on music licensing. Music is, of course, ubiquitous. It's everywhere. The proliferation of reality talent shows like American Idol, X Factor, The Voice, America's Got Talent, all evidence of our affection and affinity for music. IPods and iPads and other portable devices further illustrate our near, insatiable appetite for music. It's impossible for me to imagine a day where we don't encounter music. Despite our love of music and our admiration for artists, including the singers, songwriters and musicians whose creative talents provide us a wide diversity of entertainment, the complex licensing scheme for the delivery of music like stability and parity across platforms. Over the past 15 years, Congress has been called upon to intervene following each rate-setting proceeding before the copyright judges. We've created a compulsory license, established new standards for new technologies and retooled the structural framework for the setting of rates all in response to complaints that industry participants could not reach agreements or that the rates set by the authorizing body were too high or too low. This is not a healthy process for artists, delivery platforms or consumers and it's not a healthy process for Congress. Although today's hearing focuses on the Internet Radio Fairness Act, that focus is itself probably very shortsighted. Many of the supporters of H.R. 6480 highlight the longstanding inequity associated with the disparate standards governing the rate-setting process for the delivery of music by digital transmission. Specifically, they argue that while preexisting cable and satellite services pay lower rates determined under the 501(b) standard, newer and increasingly popular Internet music providers pay substantially higher rates determined under the willing buyer/willing seller standard. But an even longer standing inequity exists in the U.S. copyright law in that U.S. copyright law fails to recognize a performance right for vocalists and musicians when their work is played over terrestrial AM and FM radio. Today when you turn on your favorite AM or FM radio station, the artists who perform that music, vocalists and members of the band don't get paid a dime. But when you listen to the same song on Internet, cable or satellite radio, the artists are compensated for their work. The differences don't stop there. The composer or songwriter is paid for the performance of their work across all platforms while sound recording artists are only paid when their work is delivered by digital means. And both the songwriter and the recording artists, when they are paid, are paid at different rates depending upon the method of delivery. The reasons for these disparities in treatment are largely historical, but also rooted in legitimate concerns surrounding the threat that high quality media poses to record sales and other forms of revenue for artists. This concern, however, may no longer justify the exemption enjoyed by broadcast radio, and I think it is incumbent on us to address that disparity if we are to bring any sense of rationality to this area of our economy. That's about 90 percent of the problem. Yet H.R. 6480 fails to address it at all and, at best, nibbles around the edges of the challenge. I believe that we all realize that in some sense digital transmission of music over the Internet has given birth to an even wider degree of exposure and promotional value for musical performers and genres that might otherwise receive little or no airplay. In short, Internet radio has expanded choices for consumers and provided alternate means for independent artists to showcase their talents. But I believe that a fair licensing regime must, first and foremost, adequately compensate the artist who create and perform the musical content upon which all delivery platforms are based. We must get beyond the point where the shelf life of our legislative solutions in this vital industry is only as long as the next rate-setting proceeding. A comprehensive examination of music licensing requires that we examine the existing standards and rationales underlying our copyright system with the goal of establishing a long-term competitive environment with competitive rates for artists under a license which, after all, is a compulsory license. Mr. Chairman, there are several other components of the Internet Radio Fairness Act, including the method of selecting judges, expansion of discovery, modification of evidentiary standards, antitrust provisions and the establishment of a global database that I have not addressed here, but that also cause me varying degrees of concern. We have a distinguished panel of industry experts who no doubt have very passionate views on all those issues in addition to the rate standard. I look forward to their testimony. Before I yield back, Mr. Chairman, I do want to acknowledge a true champion of the rights of creative arts and a pioneer on performance rights, Howard Berman. Mr. Berman has jealously guarded intellectual property rights throughout his distinguished career and has been a valuable resource to me personally and to this Committee. I want to express my gratitude for the work he has done on behalf of the content community, as well as all other players in the IP area and wish him well. I know that he will continue to serve the public interest in some important next endeavor. And with that, Mr. Chairman, I yield back and thank the Chairman. [Applause.] Mr. Goodlatte. The gentleman from North Carolina's timing is better than mine. Mr. Watt. I knew he was waiting on his grand entrance. Mr. Goodlatte. We do thank the gentleman from California for his long and very capable service on this Subcommittee and the full Committee, and we will miss you, Howard. Mr. Coble. Mr. Chairman. Mr. Goodlatte. For what purpose does that the gentleman from North Carolina wish to be recognized? Mr. Coble. May I speak out of order for 1 minute? Mr. Goodlatte. The gentleman is recognized without objection. Mr. Coble. I think I would be remiss if I did not echo what has been said about the distinguished gentleman from California. He served as my Ranking Member, I served as his Ranking Member on this Subcommittee. And Howard, as has been said earlier, you will indeed be sorely missed. Thank you, Mr. Chairman. I appreciate that. Mr. Goodlatte. I thank the gentleman. And now it's my opportunity to recognize the Chairman of the full Committee, who I want to also congratulate for the recommendation of the House Republican Steering Committee that he Chairs, the Science, Space and Technology Committee, in the new Congress, and to thank him for his outstanding work as the Chairman of the Judiciary Committee. Mr. Smith. Thank you for that, Mr. Chairman. I am very delighted that you will be succeeding me. And the Committee will be in good hands, and look forward to continue to work with you there. Also, it was appropriate that we applaud Howard Berman a minute ago for his many contributions to this Committee. And Howard, you should know that's actually the second round of applause you have gotten today because the Chairman, Bob Goodlatte, recognized you before you came into the room. And so even the second round of applause was well deserved as well. Mr. Goodlatte. He doesn't represent the entertainment industry for nothing. He understands how this works. Mr. Smith. Again, thank you, Mr. Chairman, for calling this hearing on issues affecting music licensing. This is a topic that we have debated for many years and deserves this Committee's attention in light of changes that have occurred in the music industry. Twenty years ago when you wanted to listen to a song, you either purchased it on a CD or you tuned your radio to your favorite station and hoped that they would play it. Today, you can simply type Pandora in your browser and select an entire online radio station that plays your favorite artists' sound recordings. The relationship among artists, consumers, composers and publishers is a delicate one. The Constitution affords Congress the exclusive right to make copyright law that protects creators while simultaneously ensuring that artists and composers are compensated. This Committee has continually addressed the issues that surround music licensing and royalty structures. This includes the section 115 Reform Act, the Performance Right Act, the enactment of three webcasting bills, and the passage of the Copyright Royalty and Distribution Reform Act. Today we continue our ongoing examination of this compensation scheme. This hearing will explore the state of the law as it affects music creators, consumers and users of musical works and sound recordings. Government dictated compulsory licenses deprive creators of their ability to negotiate for the use of their works. Rather than increasing our reliance on these compulsory licenses, we should consider moving in the direction of free market discussions and negotiated resolutions. The expansion and strengthening of stringent compulsory licensing terms undermines the ability to develop healthy markets. It leads to below market compensation for creators and invites constant petitions for government to place its thumb on the economic scale, commandeering the force of government to choose winners and losers. I do not believe the copyright law is perfect and should remain unchanged. Any change, however, should reflect a balanced approach with input from creators, presenters and listeners of music. It is my hope that this hearing will begin a process that will carry into the next Congress. And I look forward to more opportunities to examine the laws and policies that underlie our music licensing system and our compulsory licensing regime. Balance, fairness and equality requires to move with deliberation. Justice and prudence require that our process be one that is inclusive of all legitimate interest and perspectives if all results are to achieve lasting and meaningful reforms. Thank you, Mr. Chairman. I yield back. Mr. Goodlatte. I thank the Chairman. And it's now my pleasure to recognize the Ranking Member of the full Committee, the gentleman from Michigan, Mr. Conyers. Mr. Conyers. Thank you, Mr. Chairman. And to all of those who are being celebrated for leaving, for serving and for their continued interest, of course, Mr. Berman. And I want to include the former Chairman, Mr. Smith, who I worked with for more years than I thought was appropriate. But we've had a great time, and this Committee is very important to me. I'm going to just edit my own remarks and put the rest in the record, but might I be the first to suggest the misleading title of this measure, the Internet Radio Fairness Act. A more appropriate title might be the Paycheck Reduction Act, because what we're doing here is lowering the royalties that Internet webcasters would pay to artists by more than 85 percent. This isn't the first time I've persuaded the Committee to redraft the title. I remember the Frederick Douglass and Susan B. Anthony Prenatal Nondiscriminatory Act also. We had to do a little work on that as well. Now, what's the basic issue that brings us here today? Well, it's the fairness issue in terms of people being rewarded for their skill and talent, musicians and singers across all musical genres. I've tried to figure out a way to get Miles Davis and John Coltrane into this discussion without success. But this is their only compensation. They depend on royalties. And their careers aren't always that long either. As a matter of fact, some never have that big hit that separates them. And so here we have the leading supporter of this bill, a publicly traded company valued at $1.4 billion at the end of last month, essentially urging that we consider a measure that would cut royalties and deprive artists of the fair market value of their work. Not surprisingly, this explains why artists who don't often join in expressing public opposition to political matters, some 125 have signed on in opposition to H.R. 6480. As a matter of fact, today, and I'll ask unanimous consent to put in the record the letter that also adds opposition to the measure from the Center for Individual Freedom, the Harbour League, the Hispanic Leadership Fund, the Institute for Liberty, the Institute for Politic Policy Innovation and the Tea Party Nation. All of these quite diverse, as you can detect, are expressing strong reservations about the measure that is being examined here this afternoon. It can't be disputed that now we understand Internet radio to be the future and that the Internet has dramatically changed the way music is produced, marketed and distributed. In particular, Internet radio has become a major source of music for many listeners. Even Apple and Clear Channel, and XM/Sirius have all moved into the Internet radio space. And I know that there are broadcasters, medium-sized and small, that have some resistance to the idea of performance rights. But I want to make a prediction today. This bill may well be the catalyst to advancing and to formulating an AM-FM performance right. That's what people are beginning to think about, because outside of the experts here, most people assume that people listening to a song or a performance on the radio, that they were getting some kind of compensation all the time. And now it's becoming clear that when former Chairman Conyers starts working with Grover Norquist, the American Conservative Union, the Citizens Against Government Waste and the Taxpayer's Protective Alliance, there's something going on. Now, on our side we have the American Federation of Labor, AFL-CIO, we have the NAACP, the Screen Actors Guild, the American Federation of Television and Radio Artists, the American Association of Independent Music. And so I want all of us to remember that it was in 1998 with Henry Hyde that we introduced the Digital Millennium Copyright Act. It was signed into law by President Clinton, and it granted Internet radio services permission to take advantage of the compulsory license, but established that a market oriented by a willing buyer/willing seller rate would be put forth. So that's what this is all about. It's been expanded. We've had the Digital Performance Right in Sound Recordings Act of 1995, and we have moved along in a very fair way. So I just wanted to conclude by thanking and congratulating you, Chairman Goodlatte. We have a very important and increasing role in the Judiciary Committee with reference to intellectual property. And I think this is an excellent way to start that examination. I thank you very much. Mr. Goodlatte. I thank Chairman Conyers. And the Chair would advise Members of the Committee and our panel and our guests here today that because the Republican Conference will convene at 2 p.m. For very important business, we do want to announce that we must conclude this hearing by 2 p.m. So we will proceed expeditiously. But we first want to recognize two more Members, the gentleman from Utah to say a word about his legislation for 1 minute, and then the gentleman from California, Mr. Berman, for 1 minute. And then all other Members' opening statements will be made a part of the record. So the Chair now recognizes the gentleman from Utah, Mr. Chaffetz, for 1 minute. Mr. Chaffetz. Thank you, Chairman Goodlatte. I appreciate your holding this hearing. And today, due to advances in technology, innovation and risk-taking companies consumers are able to listen to the radio on numerous different devices delivered through a wide variety of digital services. Internet radio should be a boon to the entire audio market, from creators to distributors and, of course, to consumers, but instead it's barely hanging on. MTV, Microsoft, Rolling Stone, AOL, Yahoo, all tried to get in the space, all had to exit because it doesn't work financially. All forms of digital radio, whether satellite, cable or Internet should compete against each other on a level playing field. Unfortunately, that's not the case. The Internet Radio Fairness Act legislation levels the playing field for Internet radio services by putting them under the same market base standard used to establish rates for other digital services, including cable and satellite radio. Congress enacted the royalty rate standard for Internet radio 14 years ago when Internet radio was barely a concept and long before today's prominent Internet radio companies even existed. It's well past time to correct the mistakes with the new understanding we have today of how the world works and stop discriminating against Internet radio. Mr. Chairman, I ask unanimous consent to insert in the record three letters, one from the Internet Radio Fairness Coalition, the Digital Media Association and an independent artist, Patrick Laird, into the record. Mr. Goodlatte. Without objection, so ordered. [The information referred to follows:] [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT] __________ Mr. Goodlatte. And the Chair would observe that he doubts that this will be Howard Berman's last words. But today the gentleman from California gets the last word on these opening statements and is recognized. Mr. Berman. Well, thank you very much, Mr. Chairman. And I thank all my colleagues for their very kind words. It's really been a great honor to serve on this Committee for 30 years now. I was reminded of when John Conyers was Chairman of the Criminal Justice Subcommittee trying to reform the RICO laws. That was awhile ago. But just--I don't have an opening statement on the subject, I have some points I'll make later on--but just generally, I think at the end of the day this isn't about content versus technology. Musicians and artists need to get adequately compensated to continue to create and share their art and the services need to thrive in order to ensure that the music continues to be heard. And I think there's really more of a symbiotic relationship here. We have to just find that sweet spot that maximizes the ability of musicians and composers and songwriters to make the music and the songs and the technologies to thrive and to play that music for the benefit in the end of not just the people of this country, but of the world. Thank you very much. Mr. Goodlatte. I thank the gentleman. We have a very distinguished panel of witnesses today. Their written statements will be entered into the record in their entirety. And I ask that the witnesses summarize their testimony in 5 minutes or less. To help you stay within that time, there is a timing light on your table. When the light switches from green to yellow, you will have 1 minute to conclude your testimony. When the light turns red, it signals the witness' 5 minutes have expired. And before I introduce the witnesses, as is the custom of the Committee, I would ask that they rise and be sworn in. Do you and each of you swear that the testimony you are about to give will be the truth, the whole truth and nothing but the truth, so help you God? Thank you. And please be seated. We appreciate the personal efforts that each of you have made to arrange your schedules to accommodate our request that you appear and testify before the Subcommittee on this important subject. Our first witness is Joseph J. Kennedy, the Chief Executive Officer and President of Pandora. Pandora is the Nation's leading Internet radio service. Since launching its app and its mobile service in 2008, Pandora has been recognized by both consumers and industry experts as the premier application on the iPhone and other mobile devices. A public company since 2011, Pandora has a market capitalization in the neighborhood of $1.3 billion, has more than 150 million registered users and serves more than 55 million individual consumers each month. Mr. Kennedy joined Pandora in 2004 immediately following previous positions as a Senior Executive with E-Loan and Saturn Corporation. He earned his MBA from Harvard Business School and possesses a Bachelor of Science in Engineering and Computer Science from Princeton University. Our second witness is Bruce Reese who appears today on behalf of the National Association of Broadcasters. Mr. Reese is President and Chief Executive Officer of Hubbard Radio, LLC. Hubbard operates 21 radio stations in five major media markets in the U.S., all of which stream their broadcasts over the Internet. Mr. Reese has spent nearly three decades in radio. Prior to becoming CEO of Hubbard in 2011, he served as president and CEO, Executive Vice President and General Counsel at various times at Bonneville International Corporation. Mr. Reese began his legal career with the U.S. Department of Justice's antitrust division. He earned his Bachelor of Arts degree and his J.D. from Brigham Young University. Our third witness is David Pakman. Mr. Pakman is a partner in Venrock, a venture capital firm he joined in 2008 that has offices in Palo Alto, New York, Cambridge and Israel. An Internet entrepreneur, Mr. Pakman previously served as the Chief Executive Officer of eMusic, a leading digital retailer of independent music that is second only to iTunes in the number of downloads sold. Mr. Pakman is credited with being a co-creator of Apple Computer's music group. Mr. Pakman earned his degree in Computer Science Engineering from the University of Pennsylvania's School of Engineering and Applied Sciences. Our fourth witness is an accomplished record producer, songwriter, recording artist and the chairman emeritus of the National Academy of Recording Arts and Sciences, Mr. Jimmy Jam. A five-time Grammy award winner, Jimmy and his business and creative partner Terry Lewis have worked together for more than 30 years. They've written and/or produced more than 100 albums and singles that have achieved gold, platinum, multi-platinum or diamond status. Their collaboration has resulted in at least 26 number one R&B hits and 16 number one pop hits which gives the pair more billboard number one hits than any duo in chart history. Raised in Minneapolis, Jimmy and his family now live in Hidden Hills, California. Our fifth witness is Dr. Jeffrey Eisenach. Dr. Eisenach is a professional economist who served in senior positions at the Federal Trade Commission and the Office of Management and Budget during the administration of President Reagan. A visiting scholar at the American Enterprise Institute, Dr. Eisenach focuses on policies that affect the information technology sector, innovation and entrepreneurship. He is a Managing Director and Principal at Navigant Economics and an adjunct professor at the George Mason University School of Law where he teaches regulated industries. Dr. Eisenach has been published on a wide range of issues, including industrial organization, communications policy and the Internet government regulations, labor economics and public finance. He has also taught at Harvard University's Kennedy School of Government and at Virginia Tech. A member of the board of advisors of the Pew Project on the Internet and American Life for more than a decade and the former president of the Progress and Freedom Foundation, Dr. Eisenach received his Ph.D. in Economics from the University of Virginia and his Bachelor of Arts in Economics from Claremont McKenna College. Michael J. Huppe is our final witness. Since 2011 Mr. Huppe has served as the President of SoundExchange, the nonprofit organization that collects digital music royalties paid by Internet radio, satellite radio and other digital media services on behalf of recording artists and record labels. Prior to being appointed to serve as President, Mr. Huppe served as the organization's Executive Vice President and General Counsel. Mr. Huppe earned his J.D. from Harvard Law School and his Bachelor of Arts from the University of Virginia. In addition to his duties at SoundExchange, Mr. Huppe also serves as an adjunct professor at the Georgetown University Law Center. Welcome to you all. And we will begin with Mr. Kennedy. And Mr. Kennedy I will tell you that I am one of those 150 million Pandora users who enjoys your service, and welcome. TESTIMONY OF JOSEPH J. KENNEDY, CHAIRMAN AND CHIEF EXECUTIVE OFFICER, PANDORA MEDIA, INC. Mr. Kennedy. Thank you, sir. Chairman Goodlatte, Ranking Member Watt, Members of the Subcommittee---- Mr. Goodlatte. Mr. Kennedy, you may want to push the button on your microphone so we can all hear you. Mr. Kennedy. Forgive me. Chairman Goodlatte, Ranking Member Watt, Members of the Subcommittee, I am Joe Kennedy, the CEO of Pandora, America's largest Internet radio service, which more than 60 million Americans have listened to in just the last 30 days. America's embrace of Pandora reflects the potential of Internet radio. We play all of the great music created and enjoyed by Americans, not just the most popular genres and hits, but bluegrass, big band, gospel, New Orleans jazz, et cetera, over 400 genres and subgenres. It is the most inclusive form of radio playing the music of over 100,000 different artists every month. I'm here to ask you to support the Internet Radio Fairness Act sponsored by your Judiciary Committee colleagues, Representative Chaffetz, Polis, Issa and Lofgren. This important legislation will address two extraordinary inequities in the Copyright Act. First, the unfair rate-setting standard that applies only to Internet radio, not to cable radio or satellite radio or to record companies when they obtain licenses from musical works and songwriters; and second, an unfair process that deviates in many important ways from how our Federal Court system works, one that actually prevents royalty judges from reviewing all relevant evidence when determining Internet radio rates. The source of these inequities is massed by complex legalese, but the consequence is simple. In 2012 Pandora will account for only 7 percent of U.S. radio listening, yet we will pay SoundExchange almost a quarter of a billion dollars, more than 50 percent of revenue. By contrast, satellite radio will pay 7\1/2\ percent and cable radio 15 percent. Pandora pays more in absolute dollars than any other company, including SiriusXM, a company with eight times our revenue. In fact, Pandora pays more sound recording performance royalties than all of the radio industries in the UK, France, Canada and Australia combined. And although Pandora's payments are extraordinarily high they would have been even higher had Congress not intervened to undo the Copyright Royalty Board's disastrous 2007 decision, so high, in fact, that they would have forced Pandora to shut down. In 14 months, the CRB will begin another rate setting. To avoid yet another congressional intervention, we urge your support of the Internet Radio Fairness Act to ensure an outcome that is fair to all parties. How is it possible that Internet radio rates can be so unfair by any U.S. or global standard? The answer is twofold. First, the so-called willing buyer/willing-seller rate standard which applies only to Internet radio has not proven effective in practice. It forces the judges to set a rate based solely on marketplace benchmarks, yet there is no market for radio rates. Not only is there no market for these rates, but since this is also the Subcommittee on Competition, you may be interested to hear that there is also evidence that the recording industry has actively sought to prevent any such market from developing. This is a highly concentrated industry with an HHI of over 2,500. SoundExchange is today defending itself in Federal Court against charges that it conspired to impede SiriusXM's effort to develop a market for radio rates. In contrast, the rate- setting standard for cable and satellite radio and for record companies when they obtain licenses for musical works from songwriters, utilizes a widely accepted fairness test that directs the judges to assure fairness to all sides. The recording industry simply cannot defend that the standard it has embraced for over 30 years for use when it is the one obtaining rights is not the right standard when the roles are reversed and it is the licensor, not the licensee. The second inequity violates a most basic American principle of fairness. The CRB proceedings as structured under current law actually permit the recording industry to cherry- pick the agreements entered into evidence in order to keep Internet radio rates artificially high. This is just one example of how the CRB process is unfair and what the Internet Radio Fairness Act will fix. In summary, Internet radio is enjoyed by over 100 million Americans, and we embrace that this new form of radio compensates performing artists. Absent the repeated congressional interventions detailed on the screen, today's Internet radio would not exist. The law which produced such disastrous results will be relied upon again in a rate-setting process that begins in just 14 months. The time to fix that law is now. It will benefit artists, innovators and the millions of Americans who cherish Internet radio. Thank you. Mr. Goodlatte. Thank you, Mr. Kennedy. [The prepared statement of Mr. Kennedy follows:] [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT] __________ Mr. Goodlatte. Mr. Reese, we are pleased to have your testimony. TESTIMONY OF BRUCE T. REESE, PRESIDENT AND CHIEF EXECUTIVE OFFICER, HUBBARD RADIO, LLC, ON BEHALF OF THE NATIONAL ASSOCIATION OF BROADCASTERS Mr. Reese. Thank you Chairman Goodlatte, Ranking Member Watt, and Members of the Committee for hearing us today. My name is Bruce Reese. I'm president of Hubbard Radio. We operate 20 radio stations in major markets around the country, including WTOP here in Washington. I've been in the industry for 30 years, and I'm testifying today on behalf of the National Association of Broadcasters and its members. Local broadcast radio is unique among music delivery platforms because it is always on, it is always free and it is accessible to listeners in every local community across the country. There are now more than 14,000 local radio stations in the United States. With a growing audience, over 240 million people listen to radio every week, including those in communities that are underserved by other communications platforms. Local radio is responsible for hundreds of thousands of American jobs and has been shown time and time again to be a lifeline during times of emergency. What makes broadcast radio so successful is the local flavor of our programming, which forges a unique collection with listeners in a way that other media do not. In a constant cycle of new technology, broadcast AM and FM radio has remained part of the fabric of American culture for more than 90 years. The Internet presents an enormous opportunity for broadcasters to expand both the reach and scope of locally- based services, including access to archive station materials, information about artists, and the ability to buy albums or concert tickets. Unfortunately, today many radio stations still do not stream their music over the web which does not help broadcasters or artists. There is one primary reason for the low adoption of Internet streaming by broadcasters: unaffordable royalty rates. For music-based radio stations the advertising revenue simply does not cover the streaming costs. Further, no matter how popular your Internet service becomes, the cost curve never bends in a favorable direction. At Hubbard, we've chosen to pay these high rates to stream our stations over the web because we believe our listeners expect us to be there. But even in our best years, we do no better than break even in our music webcasting business. We're fortunate to operate in large markets and to have the financial ability to make that long-term investment. This is either a luxury that many of my industry peers do not have or a risk they are unwilling to take. Whatever the reason the majority of broadcast radio stations and the local services they provide remain outside the reach of Internet listeners. How did we get here? When initially set in 2007, and then built upon in 2009, the rates set by the Copyright Royalty Board were universally decried as being outrageously high. Four problems at the CRB contribute most significantly to these high royalties. First, the willing buyer/willing seller rate standard provides the judges with no explicit guidance on how to determine a fair market value. Second, the process by which the parties present evidence of a fair market rate to the CRB is insufficient. Third, the CRB appointment and rate-setting processes do not afford adequate congressional oversight allowing these rate decisions to proceed essentially unchecked. And fourth, the CRB process itself is riddled with uncertainty. It's telling that when NAB made our last offer to the musicFIRST Coalition during the last Congress, our members' top priority was to escape the total unpredictability of the CRB proceedings. We're here today to begin a dialogue with this Subcommittee on how best to address these problems. NAB has members who are very supportive of the bill introduced by Congressman Chaffetz and Polis. Other members are still seeking better understanding of how the bill would impact their businesses. So while NAB has not yet endorsed any specific legislative approach, it is fair to say that NAB supports congressional efforts to ensure fair webcasting rates and needed CRB process reforms. This important discussion over how best to encourage the growth of Internet radio must not be bogged down by past fights over the controversial performance rights bills. Recent deals between individual broadcasters and record labels have included fees for AM/FM airplay. This reinforces our belief that this is an issue best addressed through private marketplace agreements. NAB continues to oppose an industry wide government mandate. Regardless of your position however on the performance fee issue, Congress can and should act to resolve the important webcasting rate making problems. The alternative inaction risks stifling the growth of Internet radio to the detriment of broadcasters, listeners and artists. Thank you, and I look forward to answering your questions. Mr. Coble [presiding]. Thank you, Mr. Reese. [The prepared statement of Mr. Reese follows:] [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT] __________ Mr. Coble. Mr. Pakman you're recognized for 5 minutes. TESTIMONY OF DAVID B. PAKMAN, PARTNER, VENROCK Mr. Pakman. Thank you, Chairman Goodlatte, Ranking Member Watt and Members of the Subcommittee. Thank you for inviting me here today to testify regarding the state of Internet music radio licensing. I'm a venture capitalist with the firm Venrock. We invest in early stage Internet health care and energy companies and work to build them into successful standalone high growth businesses. We look to invest in outstanding entrepreneurs intending to bring exciting new products to very large and vibrant markets. Our firm has invested more than $2.6 billion into more than 450 companies over the past 40 years. These investments include Apple, Athenahealth, Check Point Software, Intel and DoubleClick. Although I was previously a multi-time entrepreneur in the digital music business, we are not currently investors in any digital music or Internet radio companies. As venture capitalists we evaluate new companies largely based on three criteria: The abilities of the team, the size and conditions of the market the company aims to enter, and the quality of the product. Although we've met many great entrepreneurs with great product ideas, we have resisted investing in digital music largely for one reason: The complications and conditions of the state of music licensing. The digital music business is one of the most perilous of all Internet businesses. We are skeptical under the current licensing regime that profitable standalone digital music companies can be built. In fact, hundreds of millions of dollars of venture capital have been lost in failed attempts to launch sustainable companies in this market. While our industry is used to failure, the failure rate of digital music companies is among the highest of any industry we have evaluated. This is solely due to the overburdensome royalty requirements imposed upon digital music licensees by record companies under both voluntary and compulsory rate structures. The compulsory royalty rates imposed upon Internet radio companies render them noninvestible businesses from the perspective of many VCs. The Internet has delivered unprecedented innovation to the music community and allowed more and more artists to be heard unfiltered by the incumbent major record labels and terrestrial radio stations. I believe more people listen to a more diverse set of music today than ever before in our time. However, the companies trying to deliver these innovative services are unsustainable under the current rates and frequently shut down once their investors grow tired of subsidizing these high rates and illusive profits fail to arrive at any scale. Pandora is a company that's done an amazing job of trying to make their business work at the incredibly high rates under which it currently operates. But their quarterly earnings reports make abundantly clear why they are virtually alone in this category. Regretfully I cannot point to a single stand-alone business that operates profitably in Internet radio. In fact, in all of digital music, only very large companies who subsidize their digital music efforts with profits from elsewhere in their business currently survive as distributors or retailers of music. There was a time when record companies were part of conglomerate media companies which also distributed the music they controlled. These joint owners and users of music appreciated the need for healthy economics on both sides of a license. Once the Internet emerged, new distributors or users of music grew outside of major label ownership. Perhaps in response to their failure to prosper as Internet distributors of music, the major labels took at short-term approach and refused to license their music on terms that would allow the music users to enjoy healthy businesses. To this day, more than 15 years since I first entered the digital music business, I remain baffled by this practice. In my opinion, it is in the long-term best interests of music rights holders to encourage a healthy, profitable digital music business that attracts investment capital, encourages innovation, and indeed celebrates the successes of the licensees of its music. A healthy future for the recorded music business demands an ecosystem of hundreds or even thousands of successful music licensees, prospering by delivering innovative music services to the global Internet. Yet the actions of the RIAA seem counter to this very goal. They have appeared on the opposite side of every issue facing digital music innovators, opposed to sensible licensing rates meant to achieve a healthy market. Regretfully, and, perhaps most upsetting to all of us, the artists are the ones who suffer most. They depend on the actions of their labels to encourage a healthy market to grow, and have little influence on the decisions of the RIAA. I am a believer in the value of open and unfettered markets and generally prefer market-based solutions. Unfortunately the music industry is controlled by a mere three major labels, two of them controlling about two-thirds of all record sales. That amount of concentrated monopoly power has prevented a free market from operating and letting a healthy group of music licensees thrive. That said, I do believe there has been great value in compulsory licensing regimes such as the one governing Internet radio. This structure has allowed Internet radio companies to license the catalogs of all record labels and tens of thousands of independent artists, not just the dominant majors. The problem is simply that the rates available to Internet radio companies under this compulsory license are too high. They frighten off investment capital, prevent great entrepreneurs from innovating, and they kill off exciting attempts to bring their music services to consumers. I would like nothing more than to invest in the many entrepreneurs we have met with great ideas about the future of music, but without a sensible rate structure in place, our focus on this market won't be able to return. Thank you. Mr. Coble. Thank you, Mr. Pakman. [The prepared statement of Mr. Pakman follows:] [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT] __________ Mr. Coble. Mr. Jam. TESTIMONY OF JIMMY JAM, CHAIR EMERITUS, THE RECORDING ACADEMY, RECORD PRODUCER, SONGWRITER, RECORDING ARTIST Mr. Jam. Thank you, Chairman Goodlatte, Ranking Member Watt and Members of the Subcommittee. My name is Jimmy Jam. I am a record producer, recording artist, songwriter and small business owner. I am also the chair emeritus of the Board of The Recording Academy, known for producing the Grammy Awards. The Recording Academy is the trade association that represents the individual performers, songwriters and studio professionals who create the music enjoyed around the country and around world. I am also a member of the American Federation of Musicians, SAG-AFTRA, and ASCAP. I am honored and grateful for the opportunity to present the music creators' viewpoint at this important hearing. Now, as a record producer I have had the privilege of working with some of the finest recording artists, including Usher, Mariah Carey, the Isley Brothers, Willie Nelson, Yolanda Adams and many others. And while their names are well known, if you came to my studio on any given day, you would see dozens of people who you have never heard of employed as session musicians, background singers, songwriters, engineers and other professionals who all derive their income from creating music. The majority of Recording Academy members are middle-class artists; music is not just their lives, but their livelihood. As a small business owner, I know firsthand that bringing music to the American public takes time, investment, talent, and the passion of many remarkable individuals, but while music is our passion, it is also our job, and, like any job, we hope to be paid fairly for our work. So let us compare two of the ways creators get paid in the digital era. If a consumer downloads a song from Amazon, they pay the rights holders and creators about 70 cents. If a consumer streams that same song on Pandora radio, Pandora pays SoundExchange about one-tenth of 1 penny; or, put another way, the listener would have to hear that song on Pandora every single day for nearly 2 years to equal the payments earned from the one download on Amazon. So when Pandora tells you it is paying too much, think about that tenth of a penny, and then remember that small amount is shared by the copyright owners, featured artists, session musicians, singers and producers. That is why the Recording Academy opposes H.R. 6480, the Internet Radio Fairness Act, which would lower these already small payments by as much as 85 percent. And while Pandora is trying to lower the earnings of artists through legislation, it is also seeking to lower its payments to songwriters in rate court. We oppose both efforts. The Internet Radio Fairness Act is ironically named. First, it is hardly fair to ask the very people who enable Pandora's business to work for below-market payments. But even worse it fails to mention the most unfair aspect of the music royalty debate. Now, if I told you, the congressional leaders responsible for IP policy, that one business in America is allowed to take and use another's intellectual property without permission or compensation, I think you would say, that is crazy. Well, one such business does exist: the radio broadcast industry. Through unbelievable exemption in the law, terrestrial radio is allowed to take and profit from any sound recording without paying a single penny to those that create the track. Now, this is the only industry in America that is allowed to do this, and the United States is the only developed country in the world that provides such an exemption for its broadcasters. We believe that before there can be any discussion of rates or rate standards, Congress should close the corporate radio loophole. Chairman Goodlatte, the Internet Radio Fairness Act is anything but fair, but by all means it is time to have a real conversation about fairness. For example, is it fair for Pandora, which already enjoys the benefit of a compulsory license, to also enjoy a government-imposed, below-market rate? Is it fair for songwriters who provide the very DNA of the music industry to have to fight Pandora in court just to keep their already small payments? And finally, is it fair for terrestrial broadcasters to pay nothing for using the sound recordings because they, not we, have decided that it is good for us? The answer to all these questions is clearly no. Members of the Subcommittee, if you agree that music creators should be paid fairly for their work, then I ask that you oppose H.R. 6480, and that we all work together to support fair-market royalties paid by all who use music as the foundation of their business. Thank you. Mr. Coble. Thank you, Mr. Jam. [The prepared statement of Mr. Jam follows:] [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT] __________ Mr. Coble. Dr. Eisenach. TESTIMONY OF JEFFREY A. EISENACH, MANAGING DIRECTOR AND PRINCIPAL, NAVIGANT ECONOMICS Mr. Eisenach. Mr. Chairman and Mr. Ranking Member, Members of the Subcommittee, thank you for the opportunity to testify before you today. I thank Mr. Goodlatte for his kind introduction and note that while the research upon which my testimony is based was partially supported by the musicFIRST Coalition, I am appearing solely on my own behalf, and the views I will express are exclusively my own. I have submitted written testimony, and I would like to briefly summarize it. Beginning with the Digital Performance Right in Sound Recordings Act of 1995, and continuing with the Digital Millennium Copyright Act in 1998, Congress has adopted an increasingly market-oriented approach to sound performance recording rights. Under DMCA, license terms and royalty rates for nearly all parties are either negotiated directly between the parties or, in the case of rights subject to a compulsory license, are set so as to, quote, ``represent the rates and terms that would have been negotiated in the marketplace between a willing buyer and a willing seller.'' Twice in recent years this Subcommittee has passed legislation that would have extended this market- based approach to over-the-air broadcasting. My central point today is that Congress is on the right track and should not turn back by passing legislation designed to subsidize a particular class of copyright users. I am referring, of course, to the proposed Internet Radio Fairness Act, or IRFA, and especially to the proposal to replace the market-oriented willing buyer/willing seller standard with the uneconomic four-part standard under section 801(b) of the Copyright Act of 1976. Doing so would distort the marketplace and harm consumers for four primary reasons. First, market-based rates maximize consumer welfare by ensuring that society's resources are directed to their highest-valued uses. In a market-based economy like ours, prices serve as the key signaling mechanism telling economic actors how capital and labor should be directed to produce products and services valued most highly by consumers at the lowest possible cost. Replacing the market-based willing buyer/ willing seller standard with the downward-biased 801(b) standard would result in the misallocation of economic resources and ultimately make consumers worse off. Second, there is no valid economic or public policy basis for forcing content providers to subsidize webcasters by charging them the below-market rates that would almost surely result from IRFA. The market for online music is intensely vibrant and growing rapidly. Online advertising revenues are growing 30 percent per year. New firms are entering the market, existing firms are garnering billion-dollar valuations, and the mobile marketplace, as Pandora notes prominently in its most recent financial reports, is getting ready to take off and explode. Pandora makes much of the fact that content acquisition accounts for half or more of its revenues, but in reality its content costs as a proportion of revenues are comparable to other similar firms. Moreover, the ratio of Pandora's content costs to its revenues is within Pandora's control. As The New York Times put it recently, throughout the music industry there is a wide belief that Pandora could solve its financial problems by simply selling more ads. Third, the fourth prong of section 801(b), the nondisruption standard, would grant copyright users a de facto right to perpetual profitability based on their current business models. In fact, copyright users are arguing in the current SDARS II proceeding that the nondisruption standard guarantees them a profit not only on their past investments, but on future investments as well. In the dynamic world of online content delivery, the creation of what amounts to a right of eternal life for market incumbents is a recipe for technological and marketplace stagnation. Fourth and finally, passage of IRFA would risk politicizing the rate-setting process for sound recording performance rights. The changes it would make to the appointment process and qualifications of the copyright royalty judges would reduce the objectivity and independence of the CRB. More broadly, as you all know, all firms would prefer to pay lower prices for their inputs. Car manufacturers would like to pay less for steel, filling stations less for gasoline, aluminum plants less for electricity. In general, markets ensure that the prices paid for such inputs are, to paraphrase Goldilocks, neither too high nor too low, but just right. The politicization of pricing decisions, on the other hand, favors those with the greatest capacities for political influence. In this case Congress should not allow the fact that webcasters have the demonstrated capacity to generate a large volume of emails from their listeners to lead to a result that would in the end harm those very same consumers by retarding innovation and destroying incentives for content creation. Mr. Chairman and Members of the Subcommittee, that completes my testimony. I look forward to your questions. Mr. Coble. Thank you, Doctor. [The prepared statement of Mr. Eisenach follows:] [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT] __________ Mr. Coble. Mr. Huppe. TESTIMONY OF MICHAEL HUPPE, PRESIDENT, SOUNDEXCHANGE, INC. Mr. Huppe. Mr. Chairman, Ranking Member, Members of the Subcommittee. Thank you for giving me the opportunity to set out the reasons why the music community stands united in its opposition to the so-called Internet Radio Fairness Act. The entire music industry, and many groups beyond this industry, all reject this attempt to subsidize companies at the expense of artists. Worse yet, a bill that claims to seek fairness and parity blatantly ignores the fact that traditional over-the-air radio, representing a huge aspect of the radio market, pays nothing to artists when it is their music that makes radio possible. Contrary to what you may have heard, Mr. Chairman, digital radio is flourishing under the current royalty structure. As this slide demonstrates, the number of such services has grown from 850 in 2007 to more than 2,000 services today. SoundExchange wants to foster that type of growth; it is, after all, good for everybody. But we must always remember that the statutory license which enables this growth is a tremendous commercial benefit, a gift really, to these online services. It allows them to use every sound recording ever released to build their own business. The very least Congress can do is ensure that artists are paid fairly for this forced transfer of rights. Now, Mr. Chairman, there has been a lot of talk about what these payments really mean, so let us try to put it in everyday perspective. As you heard Jimmy Jam say, Pandora currently pays about one-tenth of a penny to stream a single song. So when the average Pandora listener listens for 20 hours per month throughout the entire year, Pandora pays to SoundExchange less than $4, less than $4, in royalties for 250 hours of music. Mr. Chairman, that is less than some people in this room spent on their coffee this morning for an entire year's worth of listening. And remember, that $4 is divided among hundreds of featured artists, background musicians, record labels and others who created the music that drives the industry. And this legislation before you today seeks to lower those payments even further. That is why over 130 artists listed in this ad recently signed a letter in support of fair payment and against this bill. So how are most artists paid now? Current law sets a fair- market standard for compensating artists. Specifically it considers what a willing buyer would negotiate with a willing seller in the marketplace; in other words, what is the fair market value? That rule applies to more than 2,000 digital services. As this slide demonstrates, only 3 digital services out of the 2,000 do not operate under this fair-market standard. Why only three, you ask? Because they happened to be in business back when the standard was established in 1998. In other words, Mr. Chairman, they are getting this break merely because they have been around a while. This bill is really about trying to lower those 2,000 modern services down to a subsidized rate, rather than raise the three outliers up to the modern fair- market standard. As you have heard, terrestrial radio must also pay for the music that drives its success. To paraphrase Mr. Watt, we shouldn't nibble around at the edges and avoid the biggest problem out there. We cannot have a meaningful discussion about fairness if we allow the $14 billion radio industry to continue to pay nothing to artists. We are thankful that this Committee has recognized that inequity by favorably reporting out the Performance Rights Act of 2009. And we also want to commend Mr. Nadler's draft interim first act, which seeks an interim solution to this decades-long injustice. Lastly, Mr. Chairman, the bill has a litany of unfair and unwise provisions that are too long to list here, but reveal it for the one-sided, unfettered wish list that it is. So we agree that the current situation is unfair, but it is unfair to artists and labels. It is unfair that traditional radio gets to use sound recordings for free. It is unfair that SiriusXM, a multibillion-dollar company, pays less than the market rate. And it is unfair that thriving Internet radio companies like Pandora want Congress to make artists subsidize their business. In closing, Mr. Chairman, it is no secret that the music community, like any healthy family, has any complicated relationships over complicated issues. It is not often that you see agreement on a given topic from artists, musicians, managers, producers, songwriters, publishers and labels, so it is noteworthy when we all come together as one voice opposing something like this bill. But it is not just us, Mr. Chairman. We stand shoulder to shoulder with groups as diverse as the AFL-CIO and the Americans for Tax Reform, the NAACP and the American Conservative Union, SAG-AFTRA and AFM, and Citizens Against Government Waste. That type of outcry is a clear indication to Congress that this bill is bad policy and would make bad law. Mr. Chairman, we want Pandora and other digital services to succeed, but the law must ensure that artists are treated fairly in the process. I appreciate the opportunity to testify today. We look forward to working with Congress to develop a comprehensive approach that treats creators of music fairly and all music platforms equally. Thank you, Mr. Chairman. [The prepared statement of Mr. Huppe follows:] [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT] __________ Mr. Coble. The gentleman's time has expired. I want to thank all of the panelists for your time and your presence here today. In 1998, there was some question as to how the DMCA was going to affect Internet radio. A series of stakeholders meetings were convened, and the net result of those meetings, you will recall, was willing seller/willing buyer. Now, Internet radio has enormous potential for music lovers, the music industry and high-tech industry, but in my opinion it does not replace the rights of creators and performers. All three, it seems to me, should flourish. Mr. Kennedy, let me put a two-part question to you. Is Pandora profitable and successful without changes in the law, A; and B, how does Pandora generate revenue, and does that include capital generated from the stock market? Mr. Kennedy. Forgive me. I hesitate to frame this as a Pandora-specific issue. As you heard from Mr. Hubbard, the rates that exist today in Internet radio prevent every broadcaster from entering the market or, for those that are there, from making any profit in the market. So we don't really view this as a Pandora issue. The amount of money we pay, almost a quarter billion dollars a year, is more than the performance rights paid by the entire radio industries of the U.K.--which includes AM/FM payments--France, Germany, every country on the planet. So I don't think this issue is really about the profitability of Pandora. And to the extent the profitability of Pandora is relevant, then 801(b) is really the appropriate standard, because it is the standard that directs the judges to take into consideration the financial conditions of the companies involved. Willing buyer/willing seller makes no reference to that. And so if you believe that it is a relevant consideration in rate setting, then we certainly would say 801(b) is appropriate, and let the judges completely examine the financial performance of Pandora and every other licensee under section 114 in making their determination of appropriate rates. We generate revenue by a mix of advertising and subscription, really the way radio has generated revenue for many years. As Mr. Reese talked about, ad-supported radio is the foundation of the radio experience in America, has been that way for roughly 100 years. SiriusXM is a subscription model. We offer both of those business models to consumers. Part of the benefit of the Internet is the ability to give consumers that choice. Mr. Coble. I thank you, sir. Mr. Jimmy Jam or Dr. Eisenach, many established artists, I am told, have signed a letter to Congress opposing this legislation. How about up-and-coming artists; does it affect them as well? Mr. Jam. Sir, I would say that it probably affects them even more so. Mr. Coble. Mr. Jam. Mr. Jam. The green light is on. Maybe come a little closer? How is that? Mr. Coble. That is better. Mr. Jam. That is why I am a producer and not a singer. I know how to set it up, but---- Mr. Coble. I bet you do both pretty well, Mr. Jam. Mr. Jam [continuing]. I leave it to the talented people to do it. The ad actually includes a lot of people who I think would be thought of as up-and-coming artists certainly, but, yeah, it affects everybody across the board. And I think that, you know, part of the reason that I am passionate about it, and I have been fortunate to have a lot of success in the industry, but to me it is important that it continues on. And it is really simple to me. When we talk about the music business, the word ``music'' comes first. There has to be music. We have to support the music before anything else, before the business gets done. And I just feel that the idea of lowering rates that are already in place and were already acknowledged by Pandora as they could function under those rates, it seems a little bit interesting to me that 3 years later we are here in front of you arguing that for some reason they can't make the business model work. Mr. Coble. I want to try to beat the illumination of that red light. Thank you, Mr. Jam. Mr. Reese, if you would distinguish--strike that. Regarding terrestrial radio, how would you distinguish terrestrial from satellite, cable radio and Internet radio? Mr. Reese. I think two principle distinctions, Mr. Chairman. First is that AM/FM radio is local and free, and that is a distinguishing characteristic from the others, which are at least subscription driven and in many cases subscription and advertiser supported. And we have been there for 90 years. We have been providing relationships with communities. We played with an important promotional role, a multibillion-dollar promotional role, in promoting the music industry. It was said by one of the witnesses that music makes radio possible. Radio makes music possible. There has been a terrific relationship there for nearly 100 years now, and we believe the free local nature of our business is very important in continuing to make music possible. Mr. Coble. I thank you, sir. I see my red light has appeared, so I will yield back the time I don't have. Mr. Watt. Mr. Chairman, I am going to defer to the other Members and go last in case we run out of time, so I will go to Mr. Conyers. Mr. Coble. The distinguished gentleman from Michigan is recognized. Mr. Conyers. Thank you, Mr. Chairman, and I thank all the witnesses. I am still trying to determine why artists and performers, whose music is played 24 hours a day on terrestrial radio, don't get a dime. And I notice that, with all due respect, the first three witnesses said little or nothing about it, and, to me, this is the--I mean, we are not only leaving things at a situation that is unacceptable, but we are making it worse; don't you think, Mr. Huppe? Mr. Huppe. Thank you, Congressman. I absolutely believe we are making it worse. As I mentioned earlier, to attempt to solve the problem piecemeal and avoid the biggest elephant in the room, which is the $14 billion over-the-air industry, is really a huge mistake. You know, it was stated just a minute ago that without radio there would be no music, and I believe it was asserted that without--without music there would be no radio. Mr. Reese asserted without radio there would be no music. I respectfully beg to differ. Music is what drives radio. Music is one of our greatest cultural assets. The American music industry, American artists, American unions, American record companies are the most popular musical asset around the world. It is American music that is played overseas. It is American music that is played in Europe. And the fact that we stand alone in not rewarding the artists who feed that music to the radio station so they can make their profit from advertising is unacceptable. And I would note---- Mr. Conyers. So our country is the only country that doesn't compensate. Mr. Huppe. It is the only industrialized country that does not do it. Mr. Conyers. And pay royalties to those who are performing. Mr. Huppe. It harms performers twice, because not only do they not share in any of that $14 billion profit made every year by the radio industry off their hard work, but because we do not have that right in this country, there are hundreds of millions of dollars overseas collected on behalf of American artists that don't ever work their way to American artists because we lack the reciprocity. So they are harmed not once, Mr. Conyers, but twice. Mr. Conyers. Dr. Eisenach, could you put in some order the importance of the four principles that you articulated in connection with this subject matter? What is at the bottom of all of this, if we were putting it simply? Mr. Eisenach. Two concepts. First, the notion of applying a nondisruption standard to the Internet, I hope everyone would recognize how nonsensical and perverse that is. The Internet is the world's greatest example of the process of creative destruction. The Internet works because people come to the table with new ideas; they invest their sweat and their energy and their money. Sometimes they succeed; sometimes they fail. They don't have a right to succeed. And section 801(b)(4)-- (b)(1)(D) would, in effect, seek to give them that right. So it is a recipe for technological and marketplace stagnation. Secondly, and this responds to something Mr. Kennedy said, the advantage of the willing buyer/willing seller standard is precisely that it does not guarantee the profitability of individual companies, precisely that, right? This is the stuff of public utility regulations. We have rate commissions which are designed to preserve the profitability of our electricity companies. But that is not the kind of innovative marketplace that we are dealing with here. We don't want to guarantee these companies the right to eternal life. Mr. Conyers. Thank you very much. I wasn't going to ask the former head of The Recording Academy any questions, but, you know, Jimmy Jam, you come off as a very able witness. You are in the industry. Don't you think that just a sense of fairness would require that somewhere along the line--we tried it once; I think we passed the bill of mine at least once here already--in terms of giving performers some share of all of the enjoyment they are giving to hundreds of millions of people, and everybody is doing it in almost every country on the planet but us. Mr. Jam. Right. Yeah. This is an area where it doesn't really make a whole lot of sense that artists do not get paid royalties on AM/FM radio. I am sorry, I don't remember which gentleman it was of the experts on this side that basically alluded to the fact that there were some private deals that had taken place. We like the idea that that has happened because basically it is an acknowledgment that it is the fair thing to do. And those companies that have chosen to go into a private agreement, that is wonderful. The thing that I would say, though, is that we need an industrywide solution to that problem. And really only Congress can make that happen and make it so that--this is actually a letter that was written by Scott Borchetta, who is the CEO and President of Big Machine Records. So this is one the private deals that was done. But in his letter, even though that they have struck the private deal, which we think is a good thing moving forward, he does call that the idea that the government needs to get involved at this point to make it an industrywide solution, even he, as part of this private deal, feels that that needs to happen. So we would obviously like to see that happen on that side, and we want to just create the right that the rest of the developed world has. We are the only Nation that doesn't have that for the artists. Mr. Conyers. I am so glad that all of you are here, and I thank the Chairman and return any unused time. Mr. Sensenbrenner. [Presiding.] The time of the gentleman has expired. The new Acting Chair will recognize himself for 5 minutes. Mr. Kennedy, as you know, I have been pretty sympathetic to the concerns that webcasters have brought up. And during the 6 years when I was the Chairman of the full Committee, the Committee reported out and was enacted into law two changes in royalties. And after my retirement as Chairman of the full Committee, the Webcaster Settlement Act was passed. Digital Millennium Copyright Act established a compulsory license, which I think was necessary to allow this industry to get off the ground, but it also said that the license fee should be based on a willing buyer/willing seller principle, which I basically interpret as saying that it should be based on market principles. That was in 1998. In 2002, there was political pressure to reduce the royalty payment, and Congress, during my chairmanship, passed the Small Webcaster Settlement Act. Then 2 years later we passed the Copyright Royalty and Distribution Reform Act, and the trade association that led the lobbying campaign for the webcasters issued a press release boasting that they were thrilled that Congress had a passed the legislation, and that the redesigned royalty arbitration process will be more efficient and the rates would be more fair to participants as a result of the revision in the law. Then during Mr. Conyers' chairmanship, there was another bill passed, which was called the Webcaster Settlement Act of 2008, and Pandora praised the deal as, quote, ``the agreement we have been waiting for,'' unquote, and, ``Pandora is finally on safe grounds with a long-term agreement for survivable royalty rates.'' Now here we are back again, and this is the 1, 2, 3, 4, fifth attempt of the Congress and specifically this Committee to deal with this issue. Mr. Kennedy, when is a deal a deal, and you have to accept a bad deal as well as cash in from a good one? Mr. Kennedy. Mr. Sensenbrenner, several comments in that regard. The webcasters who were there in 1998 when this law was first passed were two fledgling webcasters who are now no longer in business. The webcasters who are present in the 2002 and 2004 time frames that you reference are no longer in business. We have not been part of any of those legislative changes. The webcaster settlement agreement that we reached with SoundExchange extends through 2015, and we fully sign up to live within the provisions of that webcaster settlement agreement. The issue before us is that that settlement agreement expires in 2015, and we enter a new rate setting for the period 2016 through 2020 with the system in place that, as you allude to, has failed to develop outcomes that are considered by all parties--fair by all parties in any of its applications. We seek now to address that fundamental flaw in the legislation precisely to get Congress out of the business of having to intervene into these proceedings. Mr. Huppe would have the exact numbers, but the overwhelming majority of the payments to SoundExchange today from Internet radio do not come by rates that were set by the CRB. They come as a consequence of settlement agreements entered into only after congressional intervention. That is not the way the system should work. The system should be able to generate rates that all of the parties consider fair, and we seek to achieve what Mr. Berman alluded to in the context of a symbiotic system, an approach that can truly generate outcomes that are considered fair by all parties. Mr. Sensenbrenner. Well, Mr. Kennedy, my time is about ready to expire, but let me say that the Members of this Committee have, you know, spent probably more time dealing with this issue than with any other single issue in the last decade or decade and a half, and we have got lots of other stuff on our plate that we have got to deal with, as everybody in the room knows. So what would happen if we just said, well, your time is up, we can't spend any more time on this, let 2015 come, and let the current agreement expire? Mr. Kennedy. I think the issue for you to consider is that under the rates that are established by the CRB, again rates under which very few, if any, services operate, to give you a perspective, if those rates were applied to all of radio in this country, based on a study by a very well-respected music business professor at Washington and Lee University, this study, unfunded by any participant, completely independent, estimated that the total payments due from the radio industry under the current rate structure set by the CRB would be $4 billion a year. That is illustrative of what the willing buyer/ willing seller and current CRB process establishes as the appropriate rate. I am not aware of anyone who studied this issue who believes that the appropriate answer is to charge AM/FM radio $4 billion a year, that that would truly represent a fair market rate that broadcast radio would be a willing buyer at those rates. Yet those are the rates last set by the Copyright Royalty Board. They are completely out of line by any standard in the U.S., in the world, and in order to establish a system that generates fair outcomes to all parties, this system fundamentally needs change. The attempts to develop new and different rate standards, new and different processes, while undoubtedly well meaning over the last 15 years, have generated a rate standard and a rate system that, as you allude to, simply have not delivered results that have been considered fair by all parties and, as you say, have taken far too much time of Congress. It is time to fix that fundamental system. Mr. Sensenbrenner. Well, my time has long since expired. The gentleman from California Mr. Berman. Mr. Berman. Well, thank you, Mr. Chairman. It is quite clear that a rate that all parties agree on is easier said than done. There are obviously a few people at that table who think willing buyer/willing seller is not a fair market rate. My guess is there are a few people at that table who think the 801(b) standard is not a rate that reflects a fair market value. And part of the problem here, as Mr. Sensenbrenner has said, there is great value in the compulsory license in terms of getting music out there, but it is sort of hard to figure out what a fair market rate is in a compulsory license. No one wants to appeal that. What is the glaring incongruity in this legislation is to call it the Internet Fairness Act when the issue should be sort of the Music Fairness Act for the people who create the music and the people who deliver the music. And it is disingenuous, I have to say, Mr. Reese, for you to talk about finding the rate that will incentivize more webcasting by radio stations without acknowledging any obligation to be subject to a performance right for over-the- air broadcasting. You want to talk about parity without discussing the ultimate inequity, the fact that over-the-air broadcasters do not pay for the music they play. If radio stations want to be all talk radio, they shouldn't have to pay a penny of music performance rights, but when they live and thrive and sell lots of advertising--Mr. Kennedy talked about $4 billion, why that would be unfair to charge to webcasting. Is zero fair to charge to broadcasters? There is a potential bargain here, even though it is a fair market rate bargain, but it is in the context of dealing with all the inequities in the platforms, and without that you are not going to find this fair rate for all parties. So I think the broadcasters have to come to terms with maybe some of your guys don't want to go into webcasting, and they like it free, but at the end of the day, if webcasting is a major part of the future, I think we are at a point in time where you are going to have to come to terms with free doesn't work anymore in terms of incentivizing creators and fairness. And so in a Music Fairness Act, it is a huge albatross around this legislation's neck to ignore that issue. I understand the Pandora problem. They are not an over-the- air terrestrial broadcaster, and they are part of a coalition to try and change a standard. But I am predicting that, and I won't be here to determine it, but I am predicting that standard will not change in the desire to find that fair market rate. By the way, as Mr. Kennedy acknowledged, no one is paying the willing buyer, or hardly anyone is paying the willing buyer/willing seller rate, it has only been discounted by agreements. I was very involved in the most recent agreement back in 2008 and early 2009. But the absence of a performance right for terrestrial broadcasting is what is going to make this a very interesting academic exercise that isn't going to produce a piece of legislation, and we have to come to terms with that on all sides, and including most specifically the broadcasters. You may able to stop that from happening, but you are not going to be able to get what you think is the rectification of an injustice on the digital side without coming to terms with that. And with that I yield back. Mr. Chaffetz. [presiding.] I thank the gentleman. I now recognize the gentleman from California Mr. Issa. Mr. Issa. Thank you, Mr. Chairman. I am going to follow up on my distinguished colleague and friend. And when I say that, Howard, you got kind of a standing ovation before you came out because of your good work on this Committee, and you are going to be missed until you pop up somewhere else, and then we are going to be glad to have you back in whatever roll you choose to have. So I want to personally take a few moments to thank you for the work you have done with me on both this Committee and others. Mr. Berman. If the gentleman would yield, I do not want to be on the copyright royalty tribunal. Mr. Issa. You know, Howard, one the beauties of not being in elected office is that your obligation is only what you want in the future. Mr. Reese, I am going to follow up on what Mr. Berman started on. Do you think that if you webcast from a terrestrial-based location, you promoted the artist the way you do on a regular terrestrial radio station, your price should be the same as it is on terrestrial radio station? It is not a trick question; we all know the price is free. Mr. Reese. Well, the price over there in terms of a cash price has been free. In terms of the promotional value that has been provided---- Mr. Issa. Well, then the question is if Pandora, sitting next to you, or yourself in a Web broadcast, if do the same promotion, should the price be the same? Because I tell you, Mr. Kennedy is perfectly happy, I suspect, to add an equal amount of promotion to Pandora on behalf of the artist if it gets him a price of free. Mr. Reese. Well, Mr. Kennedy recently, or just moments ago, volunteered for our industry to pay $4 billion in as well. So I agree with you, he would be happy for us---- Mr. Issa. No, actually he wants your price. I have no doubt, and I am not going to ask him to state it, because it is just too obvious---- Mr. Reese. No. I---- Mr. Issa. Just hear me out for a second. I have been working with Mr. Conyers and Mr. Berman and others for years on this trying to figure out how do we get to something that Mr. Jam and others can have their business model work, and, of course, all those people who want to create, and yet be fair to the competition between the two of you. And I think it is wonderful that you are seated next to each other, because one of you has not made a profit because, in fact, you are paying a tremendous amount of royalties on the music and trying to have a business model--as good a model as it is in gross revenues-- have a business model that has some net revenues. But they are paying the equivalent of your $4 billion, if you will. You are paying zero. And every time we talk about paying anything, you know, National Association of Broadcasters push back and say, we are all going out of business, we can't afford it. So am I to presume that I have to discount Mr. Kennedy to some new numbers so he can break even, but even at free you are going to go out of business. So my question to you is isn't harmonization, an amount greater than free, that allows specifically Congress to unwind its past participation that created multiple standards where like competitors pay vastly different amounts of royalties--and I say so because I am a cosponsor of the bill not because I think it is the final bill, but because there had to be a discussion and starting point, and it was a new approach to it. So I would love to hear your answer, sir. Mr. Reese. We are here because we think it is important that we discuss these issues. Several of the Members have alluded to the desirability of a free market business. Mr. Sensenbrenner suggested this Committee is sick and tired of dealing with this issue, and that we ought to address this. We have seen free market solutions begin to happen here, and we believe that is the right way to approach this, rather than having a mandate of some variety come in here. We will, for economic reasons, continue to do our best as an industry to maintain our viability as a business to be able to continue to serve our communities, to be there in times of emergency, but we don't believe that a mandate is the way to address that. We believe that a free market approach is the way to work, and it is beginning to work. We would encourage this Committee to allow that process to continue to thrive. Mr. Issa. Mr. Jam, you obviously are in a different position. You receive nothing in some cases, some money in others, and no particular difference in what you are delivering to those industries; isn't that true? Mr. Jam. No, I mean, the music is the music. I get paid as an artist on one side, and on the terrestrial radio side I don't. But Mr. Reese brought something up that is kind of interesting. If you allow me just 20 seconds here, I can read, because he is talking about let the private industries come to an agreement. This is just a piece of a letter that I alluded to earlier from Scott Borchetta, who is the president and CEO of Big Machine Records, who had come to a private deal with Clear Channel and, I believe, a couple of other of the terrestrial broadcasters. He states, while the debates on this subject are many, the absolute need for legislation cannot be emphasized enough. Only then will American artists properly participate in performance monies earned around the world. The United States of America stands inauspiciously in line with North Korea, Iran, Afghanistan and China---- Mr. Issa. I thought Cuba was in there. Mr. Jam. They might be. He doesn't mention them there, but they could be--in not paying artists for terrestrial sound recording performances. And he goes on to say, respectfully, this is despicable and unacceptable. Mr. Issa. Mr. Chairman, I want to thank you for your participation in creating this hearing and your willingness to continue with this issue. Mr. Nadler. Can't hear you. Mr. Issa. Maybe somebody finally decided I should cut my mic. But thank you again, Mr. Chairman. I yield back. Mr. Goodlatte. [presiding.] I thank the gentleman for his comments and his questions. And the Chair recognizes the gentlewoman from California, Ms. Chu, for 5 minutes. Ms. Chu. Thank you, Mr. Chair. I would like to address questions to Mr. Eisenach on the composition of the Copyright Royalty Board. There is a change that is proposed by this bill, and, in fact, this bill would eliminate the requirement that one of the copyright royalty judges have significant knowledge of economics, and that one of the other judges be an expert in copyright law. Given that economics and copyright are certainly central to deliberations of this Board, what are your thoughts on this change? Mr. Eisenach. Well, first of all, I find the provision eliminating the requirement for someone with economic knowledge to be especially personally offensive and hope the Committee would take that under consideration. But, you know, the rate-setting process, the notion of establishing independent commissions to set prices in circumstances where either as a matter of first instance in the case of public utilities or as a matter of a backstop in the instance of the compulsory licenses here, the independence of those bodies and the ability of those bodies to operate as expert bodies and apolitical bodies is at the core of the whole notion of how we approach these issues. We seek to set politics aside and to have an expert group dispassionately look at the evidence and arrive at the best possible conclusion. Now, I have reviewed the major proceedings that have taken place under the Digital Millennium Copyright Act, and I believe that is what has taken place. And that is different from saying that they have hit the right price on the mark to the penny each time. That is not going to happen in this kind of rate- setting proceeding. But have they established a rate which reasonably approximates the market-based rate? I believe they have. And the changes that are proposed, the ones that you mention and others, in IRFA are changes--for example, I think requiring that the Copyright Royalty Board judges be confirmed, but also that the Board not be able to function without a full capacity really guarantees that each time there is a vacancy on the Board, all of these issues, which are contentious economic issues properly decided outside the realm of politics, but properly decided in an expert realm, all of these issues will be forced to be represented in a political framework. So that is what I think we are trying to get away from when we establish an entity like the Copyright Royalty Board, and the changes that IRFA would make, you know, would throw us back into the fire that we were trying to escape from in the first place. Ms. Chu. In fact, I would like to follow up on that issue, the political appointments of the Copyright Royalty Judges. Mr. Huppe, I could direct this toward you, which is this curious change that the Senate confirm the Copyright Royalty Judges, and given the politics and stagnation that is mired around any nomination appointment to the Senate, is this advisable? There are many political appointees that have yet to be confirmed right now, and wouldn't adding the CRB judges to this list of positions requiring confirmation lead to a lot of inefficiencies in the system? Both of you. Mr. Eisenach. Well---- Mr. Huppe. Congresswoman, absolutely that is true. The Copyright Royalty Judges perform a very important function, and it has been set up in a certain way by Congress, and the system is working. To echo the words of Mr. Eisenach, the judges have developed a very particular expertise, and there are very complicated cases that they review. There has been the impression left, I think, by some of our witnesses that these are willy-nilly rates that are set by these judges. Nothing could be further from the truth. These are very complex hearings with many witnesses, many days of trial testimony, unbelievable amounts of discovery, complex economic theory, looking at markets, looking at actual deals that have happened in the marketplace. These decisions are based on real deals out in the real marketplace involving free sellers and free buyers. They are the absolute thing that the judges should look to. So they have developed this expertise, and politicizing the process by making them subject to Presidential appointment would be a problem firstly because it politicizes the process, and it is exactly this type of process that we do not want to politicize. And it would also lead the system to encounter serious problems. There is almost always something going on before the judges. With all the different classes of service both in 114 and other sections of the Copyright Act, there is an ongoing and very high-volume business that judges have to deal with. To have that interrupted with gaps and political disagreements over who should sit and who should not would work great harm to the system. Ms. Chu. And, Dr. Eisenach, I don't know if he wanted to continue his thought. Mr. Eisenach. I just repeat what Mr. Huppe said and say that if you go back over the course of about 100-plus years of, both through State Public Utility Commissions and through independent regulatory commissions at the Federal level, this notion of taking, what are essentially direct economic fights, what is before you today is two constituencies, each of which wants to get paid more, or multiple constituencies all of whom want to get paid more. Now, the question is are we going to do that on the basis of who can get the most postcards mailed to their Members of Congress, or are we going to do it on the basis of some kind of objective standard, and what is that standard going to be? And I think you want an objective process to decide those things, first of all. And second of all, I think what you want is an objective standard that aims to hit at something approximating the market-based rate, which is willing buyer/ willing seller. Ms. Chu. Thank you. I yield back. Mr. Goodlatte. The gentleman from Utah Mr. Chaffetz is recognized for 5 minutes. Mr. Chaffetz. Thank you. Mr. Huppe, at the very beginning of your presentation, you put up a chart that showed the royalties paid. What percentage is Pandora paying of those dollars going in? Mr. Huppe. I am not actually permitted to disclose those numbers. I will tell you this---- Mr. Chaffetz. No. I want to know what percentage. Mr. Huppe. What percentage of the overall revenues? Mr. Chaffetz. Yes. Yeah. Mr. Huppe. Pandora, they pay a substantial portion of our revenues. Mr. Chaffetz. I want to know a percentage. You are here testifying before Congress. Don't tell me you don't have permission from your mom. Tell me what the number is. Mr. Huppe. Well, with all due respect, Mr. Chaffetz, my mom is not here today. Mr. Chaffetz. And I am, and I want to know what percentage---- Mr. Huppe. Of the current, based on numbers that I have most recently seen, Pandora, of Internet revenues or overall revenues to SoundExchange? Mr. Chaffetz. What? Mr. Huppe. Are you asking overall revenues or Internet revenues, Mr. Chaffetz? Mr. Chaffetz. Based on that chart that you put up there. You used a chart earlier. Mr. Huppe. I used a chart that showed the growth of services. Mr. Chaffetz. Let us get both numbers. Mr. Huppe. Roughly a third. Somewhere between a third and a half of our revenue is from Pandora. Mr. Chaffetz. Overall. What about from just the Internet portion? Mr. Huppe. Just the Internet? They are in the neighborhood of 60 to 70 percent. Mr. Chaffetz. Thank you. Do you feel the 801(b) standard is working when you determine what record labels base songwriters; is that the right standard, is that working? Mr. Huppe. You are referring to the 115 standard, Congressman? Mr. Chaffetz. Yes. On how record labels pay songwriters, does the 801(b) standard work? Mr. Huppe. I think the best standard that everyone should follow--and it is my understanding that the record labels, if it is part of a broader solution involving comprehensive reform like has been discussed here multiple times today, I believe the record labels are willing to play by the same rules as everybody else. Mr. Chaffetz. Well, we will have to further explore that. Mr. Jam, as you know, currently the amount SoundExchange receives for any given recording played by an Internet radio station, generally 50 percent goes to the copyright holder, which is usually the record label; 45 percent goes to the artist; and 5 percent is set aside for background and session musicians. Do you think that the majority of that should go to the copyright holder, essentially the record label, or should the artist get more? Mr. Jam. Well, let me hit my button here. Sorry about that. I guess I feel that, first of all, 50 percent for the compulsory rate is fair because it---- Mr. Chaffetz. So you are not suggesting that artists should get the majority of the revenue. Mr. Jam. I don't think I am suggesting anything yet because I had only started talking. I believe that the 50 percent is the correct--as the rate the court has set, that is the correct way to go. Mr. Chaffetz. I am sorry, I only have got 5 minutes. I have to keep going. If you like the way the rates are set, I accept that, and let me move on. Mr. Kennedy, it is obvious from the part of the argument you just need to pay more. You are not paying enough. I would like to you address that. Maybe I should actually start with Mr. Pakman here. Why aren't more companies going into this? One of the things that is disturbing is MTV, Rolling Stone, Microsoft, Yahoo, AOL, they all tried to get into this business and couldn't make it work. And the argument is, well, these guys need to pay more; they just need to pay more. Why don't they just go out and charge? I mean, obviously there is a marketplace, according to the argument on this side of table. The argument is that they are just not charging enough. Their ad sales team isn't good enough. How do you view that? Mr. Pakman. Congressman, we don't have a market here. We have very few willing sellers, huge amount of concentrated power, and we have almost no buyers. We have only one large stand-alone company in Internet radio, and we have plenty of other players who are in digital music, but they subsidize digital music with profits from elsewhere in their business. In a sense they use music as loss leaders. We want an ecosystem where we have hundreds or thousands of participants, licensees offering music services, Internet radio and others. Mr. Chaffetz. I'm sorry, my yellow light is already on. I got to keep going. Mr. Kennedy, can you address that please. Mr. Kennedy. I think the evidence is that Pandora monetizes Internet radio better than any other entity based on all of the public information that I've seen. This is not a Pandora- specific issue. The issue is that at 7 percent of all radio listening in the U.S., we're paying a quarter of a billion dollars. That if the CRB rates were applied to all music radio listening in this country, the rates due would be over $4 billion. Mr. Chaffetz. Sorry to interrupt you right there, but based on what happened in your last experience, what percentage of your revenue would have had to be paid out in royalties? Mr. Kennedy. If the CRB ruling in 2007 were let to stand, we would have to pay more than 100 percent of our revenue in royalties and would have run out of business. Mr. Chaffetz. Mr. Chairman, as I yield back, I believe that the 801(b) standard, what this bill is suggesting that we would move toward, would be the more fair opportunity for those to have this discussion and take into account all of the factors that are out there, not just cherry-picking, some selected deals in order to convince some judges out there, I really do believe it can actually get to that standard. So this is the beginning of this, Mr. Chairman. I appreciate the discussion here, but I hope that this will continue to bear fruit because Internet radio should be thriving far and above and beyond just Pandora. Mr. Huppe. Mr. Chairman, may I respond to that? Mr. Goodlatte. Yes. The gentleman's time is expired but we'll allow you to respond. Mr. Huppe. Thank you, Mr. Chairman. There's been much said about Pandora and the percentage of revenue that they pay. And what I think it's important for everyone to understand is that percentage of revenue can be a very misleading quote. The only person that has control over Mr. Kennedy's revenue in this room is Mr. Kennedy. Pandora has focused over the past several years and they've made a conscious business decision, and we don't fault them for it, but it's a business decision that was made to focus on growing their user base, growing their audience, growing their brand, growing the hype. They've done a very good job of it and we congratulate them. They had an IPO last year. But the fact that they have done things other than focus on revenue is a very important part of this discussion. A few years ago, they would charge heavy users who went---- Mr. Chaffetz. Can you point to anybody else that is successful? Point to one. Just name one. Mr. Huppe. It depends what you mean by success, Mr. Chaffetz. Mr. Chaffetz. Revenue, money, dollars, stock. Mr. Huppe. There are many companies who do not---- Mr. Chaffetz. Name one. Mr. Huppe. There are many companies who do not start off in a revenue positive situation. Mr. Chaffetz. I know, because there's none. Name one. Mr. Huppe. We are---- Mr. Chaffetz. It's been out there for awhile. The Internet is thriving. I think it's going to be around for awhile. Name one that is successful under this model. Mr. Huppe. If you look to success as a measure of investment, $1.5 billion market cap of Pandora, commercial---- Mr. Chaffetz. Outside of Pandora, name one other company that's successful. Mr. Nadler. Mr. Chairman. Mr. Goodlatte. The time of the gentleman has expired. For what purpose does the gentleman from New York take recognition? Mr. Nadler. I just ask that Mr. Huppe was answering a question and then Mr. Chaffetz came in with some other question. I would like to hear the end of the answer he was giving. It was very fascinating as far as he got. Mr. Goodlatte. We're going to let him very briefly answer that, and then we are going to move on to the gentleman from Florida who has been waiting patiently to ask his questions. Mr. Huppe. Thank you, Mr. Chairman. As an example of Pandora's focus on users over revenue, a few years ago for heavy users who went over 40 hours a month they would charge $0.99 if a heavy user went over 40 hours a month. There came a point where they stopped doing that. Mr. Chaffetz. Mr. Chairman, he's not answering the question. Mr. Goodlatte. I know, but we all exceeded the amount of time, so we're going to discontinue and we'll allow the gentleman from Florida to follow up on that if he wishes to. But the Chair recognizes Mr. Deutch for 5 minutes. Mr. Deutch. Thank you, Mr. Chairman. I choose not to follow up on that. Here's what I would like to do. Mr. Kennedy, you and I have spoken before about your service. I've suggested to you that there may be no one in Congress who spends as much time enjoying your service as I do. I'm a huge fan. What I've learned in preparation of this hearing that was the most troubling to me though, quite frankly, is that for all of the discussion about percentage of revenue, the number, and I would like to give you the chance to talk about this, but the number that there seems to be general agreement on, that listeners like me wind up contributing to the artists is $4 per listener, $4 per listener goes to the artist. And that according to some of the estimates that we've seen, the recording industry has some and there are some others out there, that number under this legislation would be reduced to less than $0.70. So I guess I'm troubled by that. And I would actually get back to Mr. Chaffetz's line of questions here, and the exchange that was taking place. I understand that there's this discussion about revenue, but the fact is that there is some control that you have over revenue. And why is it that instead of--why is it that this entire discussion is about a percentage of your current revenue compared to others' percentage of current revenue instead of a discussion of how you monetize, and the fact that the results of the way you monetize while successful generate $4 per listener for all the time I listen to be reduced under this bill to less than $0.70. Mr. Kennedy. Mr. Deutch, part of what has, I think, complicated this debate is to talk about the royalties paid by fractional pieces; how much per song, how much per user. The fact of the matter is that we'll pay SoundExchange this year almost a quarter of a billion dollars. Mr. Deutch. We don't dispute that you're paying a lot of money. I'm just looking at how that actually translates to what artists are paid. And as a per listener, on a per listener basis. Mr. Kennedy. And I think for perspective we pay that quarter billion dollars for approximately 7 percent of radio usage in this country. A study by a well-respected music business professor at Washington Lee University said what if we took the CRB rates and applied them to every song played on the radio across the U.S. The results in payments due under the CRB willing buyer/willing seller are estimated by this professor to be over $4 billion. And for perspective it's important to know the entire revenue of the recording industry in this country is that same zone. Mr. Deutch. I understand that. I'm just asking whether there are other ways to monetize what you do. Well, let me just turn to Mr. Reese who has figured this out with the benefit of not having to pay the performers at all. But Mr. Reese, you said that--you spoke earlier in your testimony about the fact that there would be a--I want to make sure that I get this right. I mean, you talked about broadcast radio being always free and available all the time, and you worried about--you warned against this performance tax that may be coming. And I just wanted to clear one thing up there. On your stations that are talk radio stations, you pay the hosts, right? And on the stations that are talk radio stations that don't have local hosts but have syndicated hosts who aren't in the studio but your producers there are producing the show, they still, those hosts still get paid as well. So I guess what I'm trying to figure out is, as Mr. Kennedy and Pandora grapples with how to make it work on that side, here--why is it that you would characterize as a performance tax a payment that you make regularly in very large amounts of money to talk show hosts all throughout the country? Mr. Reese. We are more than a music service. We are not Pandora, we are not any other webcaster with AM/FM radio. We are local, we are produced. We're more than just someone who pushes a button randomly and music comes out. Music comes out, with all due respect to the brilliant algorithms that Mr. Kennedy's people have developed. There's a lot more involved in this. There has been a lot of support here for a negotiated resolution of this problem. We need a solution where everybody thrives. On the webcast side only, which is what this legislation addresses, there's a system in which one side doesn't have a way to make a profit. We haven't demonstrated it yet, and a number of people have tried. We haven't been able to sustain a profitable business on the webcasting piece. And this piece of it needs a different solution. Ideally, a negotiated solution. Mr. Deutch. I understand. I hope this is the start, as Mr. Conyers said, I hope this is the start of our discussion. But the one question I'm just trying to figure out is, and Mr. Chairman, this will be my last question, if you could just explain to me, and I'm not trying to be flip, I want to understand, the difference between your station that pays an awful lot of money for Rush Limbaugh's broadcast to Rush Limbaugh, and the station that plays Rihanna many, many times an hour, but doesn't pay her anything, can you just explain that to me? Mr. Reese. We are paying the disk jockey who is introducing Rihanna and is helping her label sell lots and lots of music over the year. So again, it's not just the musician who's involved here. I understand your question. It is an issue that has been addressed and continues to be addressed. It's a very complicated issue. It lends itself best to private negotiation. And we're beginning to see that. We believe that's a better solution than a mandated solution on a one-size-fits-all basis. Mr. Goodlatte. Thank you, Mr. Reese. The time of the gentleman has expired. And the Chair recognizes the gentleman from New York for 5 minutes, Mr. Nadler. Mr. Nadler. Thank you, Mr. Chairman. Let me say first of all, just following up on the gentleman from Florida, I don't think it's a complicated question, I think it's a very simple question. People ought to be paid for their service. As far as I can tell performing artists and over-the-air-radio are the only people in the United States or the world for that--well, slave labor in some other parts of the world, but only people in the United States who are not paid for their labor, period. And to me, that's very simple. I believe basically in the free market, though some people may not think I do, but I do. I also believe in government intervention when strictly necessary, but when strictly necessary. And that brings the question of when it's strictly necessary. I don't understand why--I do think that the bill we're talking about here should not be enacted except perhaps as part of a larger global solution to the problems we're talking about because any of the specifics just increase the distortion of something that we keep distorting all the time. With that in the background, let me ask a couple of specific questions. Mr. Kennedy, two questions. First of all, you've referenced several times a well-respected professor. Can you tell us who that is? Mr. Kennedy. Forgive me for not pronouncing his last prior. His name is David Touves, T-O-U-V-E-S. Mr. Nadler. And where is he? Mr. Kennedy. A longstanding business professor at Washington and Lee University. Mr. Nadler. Washington and Lee. Thank you. Secondly, as Mr. Huppe points out in his testimony, the founder of Pandora, who I think is your predecessor, said only 3 years ago in July of 2009 after the private negotiations on rates concluded that ``Pandora is finally on safe ground with a long-term agreement for survivability royalty rate--for survivable royalty rates. This ensures that Pandora will continue streaming music for many years to come.'' Now you're saying the rates are too high. Are we going to have to change the law every time the CRB decides a rate under the law that is not to your liking or to the Internet community radio's liking? Three years ago you said this would be fine for a long time, and now you're back and saying we got to change the law. Mr. Kennedy. Yes. And I would encourage you to read that entire---- Mr. Nadler. Yes what? Yes, we have to change the law every time you don't like the ruling from the CRB? Mr. Kennedy. We truly want to get Congress out of this business. And I think all of us who run businesses would like to spend our time running businesses. But there's unfinished business here. And I would encourage you to read that full blog post by Tim Westergren following the settlement in 2009. Mr. Nadler. But my real question is, without going into another long discussion here, 3 years ago, the head of Pandora said after the rate setting, we're finally on clear ground, it's going to take us for a long time, this ensures Pandora will continue streaming music for many years to come. The implication was Congress can relax, forget about it, it solved the problem for a long time. Now it's 3 years. Mr. Kennedy. In the very same posting, first of all, that agreement expires in 2015. We are fully prepared and are living with that---- Mr. Nadler. So in other words when you--excuse me. So when your predecessor 3 years ago said Pandora continues streaming music for many years to come, he was talking about for 6 years? Mr. Kennedy. Yes. Mr. Nadler. Okay. Mr. Kennedy. In one sense he was talking about the prospect of going out of business. It's also very important, in a subsequent paragraph, Tim said, the system remains fundamentally unfair. Mr. Nadler. Okay. Fair enough. Secondly, let me ask Mr. Huppe. At $4 a year to a recording artist, which seems a ridiculous figure, but if it's only $4 a year why are royalty payments 50 percent of their revenues? Mr. Huppe. And yes, actually, Congressman, it's $4 to everybody. Only half of that goes to the artist side. The other half goes to copyright owners. Two dollars goes to the artist side. Mr. Nadler. So even more so, why is it---- Mr. Huppe. And the reason that it is such a big percentage of the revenue is, as I mentioned, Pandora has made a very conscious business decision. They could do lots of things to monetize more than they do. Mr. Nadler. Okay. So the answer is they should be looking more at the revenue side? Mr. Huppe. The revenue side would definitely change that ratio, yes. Mr. Nadler. Thank you. I don't want to rush, but I have more questions. Finally to Mr. Eisenach. Professor Eisenach, the Internet community says it would like Congress to change the rate standard it faces from willing buyer/willing seller to the factors found in section 801(b). In fact, the Chaffetz bill would use the factors in 801(b) but then they add additional factors to the current 801(b) law. First of all, what is our evidence of the kind of rate the CRB has set in the past using the 801(b) standard? Mr. Eisenach. Well, in SDARS I proceeding, for example, the Copyright Royalty Board established that its best estimates of the appropriate rate, and they were setting it on the basis of percentage of revenues, was 13 percent. And then they came back, they considered the 801(b), the fourth standard in particular, the disruption standard, and decided that, in fact, the correct standard was 7 percent, so they cut it about in half. Mr. Nadler. I have two quick questions. Well, I'll make it one last one. If the CRB interprets 801(b) as compelling a below market rate, what will likely happen to the royalties received by artists under H.R. 6480 which uses a version of this standard? Mr. Eisenach. As referred today, half of the royalties paid under the compulsory license go to the artist, so I think that's a good estimate. They would lose half of what their-- half of whatever the impact was. Now, on the question of what would that be, if you just--a lot of things happen when you change prices. Let me just say it's very important, you're hearing two numbers here. You're hearing cost as a percentage of revenues. That's not a number that economists look at when they think about how competitive is a market or what are people paying, right? The only thing you've heard today that approximates a price is $4 per year. That's a price. The price per play which that is based on, that's a price. Now, when you start changing prices, which is what would happen, you would end up with a lower price, a lot of things can move around. But if you simply take the status quo, other things equal, and do the math, rates would go down by--revenues would go down by 85 percent. Mr. Kennedy. Can I answer just briefly? Mr. Goodlatte. Actually, we are running very low on time and neither the Ranking Member or the Chairman have asked any questions yet, so the gentleman's time has expired. Mr. Nadler. Thank you. I yield back. Mr. Goodlatte. And the Chair recognizes the gentleman from North Carolina, Mr. Watt, for his questions. Mr. Watt. Thank you, Mr. Chairman. And it's been an interesting hearing, a lot of different concepts discussed. The one I'm kind of fascinated with is the one that Mr. Reese seems to support, which is this free market solution. And I want to kind of go at that, what that really means. Under free market solution, I take it we would do away with a compulsory license, and you would have to go and negotiate with every artist for the playing of their music. And if you played their music, you would be subjected to litigation for playing it. And so I'm trying to figure out what this free market system is that you are talking about. If you wanted to play Mr. Jam's music, you had no compulsory license, you got to go find Mr. Jam because you'd like his music to play on your station like you go and find your talk artist. Maybe you like Beyonce for awhile so you will contract with her for a whole year. You got to pay her. If you like her and you don't go and track her down and negotiate with her whatever the rates are, she sues you when you play her music and you're in litigation forever. That's the free market we're talking about? Or that is assuming we just passed a law that recognizes a performance right. We don't do anything else. We don't do anything other than say performers have a right to be paid for their music just like everybody else has the right to be paid for whatever they produce. Is that the free market that you're talking about, Mr. Reese? Mr. Reese. Well, there are a lot of nuances to your question. Mr. Watt. A lot of nuances to my question, but that's the free market, I take it. Let me just ask the bottom line question. Would you accept that free market concept in that way? Would that be a successful deal for all of the stations? Mr. Reese. What seems to be beginning to work, Mr. Watt, is in the current context of a compulsory license record labels and---- Mr. Watt. So you've done away with the free market because you've created a compulsory license? Mr. Reese. You've also created a right that doesn't exist as well. Mr. Watt. Okay. We don't do anything. We don't even recognize a performer's right. So when you use somebody's music, you get sued. Is that a world that you think would be successful for the broadcast industry? Mr. Reese. What seems to be working, beginning to work here is in the context, in the current world in which we exist, record labels and broadcasters seem to be beginning to find a solution here that works for both sides. Mr. Watt. I understand that, I do recognize that. Mr. Reese. We are not supportive of a creation of a new right, we're also not supportive of undoing much of what we've got so far. Mr. Watt. That was really the question I was asking. Mr. Pakman, you've been, since you've testified, left out of most of the questions and answers. How would you go about monetizing the rights that Mr. Kennedy has, other than paying for them through the musicians taking a hit? Mr. Pakman. I think Pandora is doing a fine job of exploiting the two business models available to it. Mr. Watt. My question is are there some revenue sources that Pandora could access to monetize their business to make it more viable? That's the question I'm asking. If everything else was great are there some other revenue sources they could access? Mr. Pakman. I believe the only two available to it are to ask its users to pay and to ask brands to pay, and that they ask both of them to pay. So I believe they're pursuing the two business models available to them. Mr. Watt. Mr. Eisenach, you seem to disagree with that. Mr. Eisenach. And very briefly, two points. First of all, there's a lot of entry going on in this marketplace. Pandora just raised 50--excuse me, Spotify just raised $50 million for Goldman Sachs who are no dummies and would not be doing that if they didn't think there were profits to be made. And veterans of Skype have just entered this market. Apple is considering entering this market. They all think they're going to make money. Mr. Watt. I understand that. I'm trying to find out how you monetize this other than on the backs of musicians. Mr. Eisenach. Pandora is the fifth largest wireless on-line ad network in the world behind companies like Google and Facebook, just behind them, and fast and growing, faster than any of them. That's another source of revenue, which is all of the information that they are accumulating about their listeners and the ability to sell advertising not only--to sell that information to other users. Mr. Watt. Okay. All right. Well, I'm out of time. I'm just theorizing here. I mean, this is something I proposed the last time we had this discussion about performance rights. Let's just do a performance right. If you don't like the rate, let the market take care of it. I believe in the free market. Lawyers believe in litigation. I mean, you know. There's some benefits that we're providing here to all parties, and it just seems to me that everybody needs to get a grip here and sit down and try to work this out rather than trying to nibble around the edges of it. I don't think we can solve this problem by dealing with 7 to 10 percent of the industry. We got to be dealing with the entire package here, otherwise I personally don't have much interest in it. Mr. Kennedy. Mr. Chairman, may I have a minute to respond? Mr. Goodlatte. Actually, we are very low on time, so I'm going to recognize the gentleman from Georgia, Mr. Johnson, for 5 minutes. Mr. Johnson. Thank you. Mr. Eisenach, in your written testimony, you argue that market-based rates result in an efficient system that maximizes consumer welfare, and yet there is testimony that the market is anticompetitive due to a small number of competitors that have disproportionate influence over music licensing. If you would give us a short explanation of that and also, or an example of that, and also tell us whether or not the marketplace is freely functioning or is it too complex, calculated or closely controlled? Mr. Eisenach. Well, first of all, I would note that the Federal Trade Commission just as recently as September approved a major merger between two of the largest, two of the four largest record labels, and did so saying that there was no market power issues to be concerned about in approving that merger. So the current Federal Trade Commission, I think, if they thought there were market power issues on that side they would have said so. On the other side of the market, Pandora brags, or states, ``brags'' isn't fair, we should be proud of the fact that it has 69 percent of the market for online radio. So who is the dominant firm if we're going to simply look at market shares? It is not obvious which is which. Now in all markets like this, you have firms with large market shares. That's how they work, and the way they're likely to work in the future. The battles between these firms over sharing the value that's created among them are always heated battles, and that's what you're seeing here. The question is should that battle take place in a hearing room or should they take place in a negotiation room someplace probably in Silicon Valley. Mr. Johnson. Let me ask this question of you, sir, since we are on the subject of competitiveness. The bill contains certain activities by copyright owners. It targets those activities as per se violations, but would permit webcasters to engage in the same types of communications. Can you elaborate on that for us? Mr. Eisenach. Just very briefly. When you establish a system like the one we have of compulsory licenses, you have bargaining agents by the nature of the institutional arrangements involved. And so the paper that I submitted I go through a long list of things that are in IRFA, the proposed legislation, which attempt to tilt the playing field. And it's, I think, a very kind of bold face attempt to simply gain the upper hand. Mr. Johnson. Let me ask Mr. Huppe also on that issue. Mr. Huppe. Thank you, Congressman. It's important to be able--what SoundExchange does, for instance. When we administer this license, this is the job we've been selected to do. And part of what we have to do when we administer that license is educate our side of the table and let people know what's going on with the statute. It's very important to remember that when the CRB sets a rate it is binding on all record companies. It forces them to surrender their property at the rate the CRB sets. And I would note there's no such similar obligation on the other side. It doesn't bind the webcasters to do anything. It binds the record companies. So it's not only the right thing to do. We believe it's our duty to work with them, talk to them, educate them about what's going on and when we go to the CRB, represent them on their behalf. And some of the language in the bill, which is one- sided directed our way, is troubling in its restrictions. Mr. Johnson. Thank you. Let me ask Mr. Reese. Mr. Reese, in 1998, we responded to the rise of satellite and digital technologies by amending the Copyright Act to create a performance right, but exempted terrestrial broadcasters from paying royalties for this right. The rationale for this exemption was that broadcasters and sound recording owners enjoy a mutually beneficial relationship where broadcasters promotion and increased exposure of music benefit sound recording owners through increased sales, tours and other sources of income. Has that relationship between the broadcasters and the sound recording owners changed? Mr. Reese. I don't believe that mutually beneficial relationship that was talked about in 1998 has changed. And that is indicated by the efforts the recording industry goes to with the radio industry to continue to encourage us to play their music, even though they're not getting paid for that performance directly. Mr. Johnson. Do you believe that it's fair to both artists and owners of sound recordings, and it's fair to all providers of music or publishers of those sound recordings, do you think it's fair for there to be some discrimination between any of those platforms or artists? So in other words, what I'm saying is I believe that we should treat artists fairly across the spectrum regardless of what medium or what platform we're on, and we should also treat all particular phases of a platform equally as well. Do you believe that that is true? Mr. Goodlatte. I hate to interrupt the gentleman from Georgia to say that's a great question. The answer is going to have to be in writing. And because the time has expired all of my questions will be submitted to the members of the panel in writing as well. Both the Republican Conference and Democratic Conference have business that started at 2 p.m. And I regret that we have to cut the hearing short, but I thank you all for your contribution. This has been a very good start to discussing a very important issue. Without objection, all Members will have 5 legislative days to submit to the Chair additional written questions for the witnesses which we will forward and ask the witnesses to respond as promptly as they can, so their answers may be made a part of the record. Without objection, all Members will have 5 legislative days to submit any additional materials for inclusion in the record. And with that I want to again thank our witnesses for their contribution today, and the hearing is adjourned. [Whereupon, at 2:09 p.m., the Subcommittee was adjourned.] A P P E N D I X ---------- Material Submitted for the Hearing Record Prepared Statement of the Honorable John Conyers, Jr., a Representative in Congress from the State of Michigan, Ranking Member, Committee on the Judiciary, and Member, Subcommittee on Intellectual Property, Competition, and the Internet Today we examine various music licensing issues and will explore ways to improve the current music licensing system. It is my understanding that this process will continue into the next Congress, which I strongly support. The Internet has dramatically changed the way music is produced, marketed, and distributed. In particular, Internet radio has become a major source of music for many listeners. In addition, technological developments have changed the ways by which artists are discovered. In past years, new artists and their songs were typically introduced via the radio. Today, artists are discovered through a vast array of platforms, including blogs, YouTube videos, webcasts, satellite radio broadcasts, and even the artists' own websites. In today's world, music is accessible to the public in whatever format is desired, at any time, and on demand. As we discuss the various issues presented by these technological developments, it is essential that we also consider the potential impact that our decisions will have on songwriters and whether their entitlement to proper compensation is adversely affected by these decisions. Among the issues we should address during today's hearing and the hearings we anticipate holding in the next Congress are the following. To begin with, I am concerned that H.R. 6480, the ``Internet Radio Fairness Act,'' may not actually improve the current system and that it could result in artists receiving less compensation. The bill seeks to facilitate a process by which all digital music services would be judged by the same rate-setting standard. The bill does this by changing the existing ``willing buyer, willing seller'' standard that Internet webcasters currently use to the 801(b) standard used for determining rates for satellite and cable television music channels. As a result, H.R. 6480 would lower the royalty rate for Internet webcasters as well as lower the royalties that Internet webcasters would pay to artists by more than 85 percent. Let me point out one obvious fact: musicians and singers across all musical genres depend on these royalties, which are often their only compensation for their work. Not surprisingly, this explains why more than 125 artists have signed on to a letter expressing strong opposition to H.R. 6480. It also explains why the bill is opposed by the AFL-CIO, NAACP, musicFirst Coalition, SAG-AFTRA and the American Association of Independent Music. It is clear that we cannot ignore these serious concerns. Another issue that must be examined is whether our efforts to improve the music licensing scheme will be, in fact, truly fair if it does not include performance rights for sound recordings. As everyone here knows I am a strong supporter of artists and believe that the current compensation system on terrestrial radio--by which I mean AM and FM radio--is not fair to artists, musicians or the recording labels. When we hear a song on the radio, the individual singing the lyrics receives absolutely no compensation. To address this inequity, I introduced the ``Performance Rights Act of 2009,'' that would have created both an AM/FM performance right and set a new standard for digital services. Every other platform for broadcast music--including satellite radio, cable radio, and Internet webcasters--pay a performance royalty. Terrestrial radio is the only platform that does not pay this royalty. This exemption from paying a performance royalty to artists no longer makes any sense and unfairly deprives artists of the compensation they deserve for their work. And, finally, the process for setting rates for music royalties should be inherently fair. Some, however, claim that the current rates are too high. The compulsory license for digital music radio services dates back to 1995 with the passage of the Digital Performance Right in Sound Recordings Act. This Act allowed digital musical broadcasters--like cable and satellite services--to transmit sound recordings without asking permission or negotiating rates with rights holders. Instead, the rates would be set by statute. In 1998, Congress granted Internet radio services permission to take advantage of this compulsory license, but established that a market-oriented ``willing buyer, willing seller'' would be put in place moving forward. Some, however, allege that this standard is not fair. Thus, our goal should be to examine the bona fides of these claims to ensure that our royalty system is, in fact, fair and competitive. I look forward to working together with my colleagues to ensure that the music licensing process is fair and does not have unintended consequences that will harm artists. ATTACHMENT [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT] Prepared Statement of the Honorable Jared Polis, a Representative in Congress from the State of Colorado I am pleased that the House Judiciary Subcommittee on Intellectual Property, Competition and the Internet is holding a hearing today on music licensing, and specifically discussing the Internet Radio Fairness Act, a bill sponsored by Representative Chaffetz and myself. I am thankful to Subcommittee Chairman Goodlatte and Ranking Member Watt for holding this hearing on this very important and timely issue. The Internet Radio Fairness Act (IRFA) is a common-sense proposal to address the discriminatory and unfair royalty rates currently imposed on Internet radio. The premise of the bill is simple: put Internet radio under the same standard which is used to establish rates for their competitors in the satellite and cable radio industries. In 1998, the Digital Millennium Copyright Act established the ``willing buyer-willing seller standard now used by the Copyright Royalty Board (CRB) to set performance royalties for Internet radio. As time has shown, the ``willing buyer-willing seller'' approach is unworkable and has required Congressional intervention every time it has been applied. It assumes there is a competitive market for sound recording performance royalties when a true market has never existed. Under this broken royalty system, Internet radio providers pay exorbitant royalty rates: approximately half of their total revenues go to royalties. Without Congressional intervention, internet radio companies would be paying more than 100% of revenue and most would have shuttered their doors. In comparison, satellite radio will pay 7.5%, and cable radio will pay 15% in revenues in 2012. Before coming to Congress, I launched several online companies, so I know the Internet's power to launch new businesses and to create jobs. The existing standard has not only harmed the ability of Internet radio providers' ability to grow and compete, it has prevented new entrants from entering the marketplace. Several large companies have attempted to enter the marketplace, but have failed because they can't make a profit under the current royalty system. Under this legislation, Internet radio would be judged under the more equitable 801(b) rate-setting standard, which sets forth four balanced objectives to maximize the availability of creative works to the public, provide copyright owners a fair return, and support the development of innovative technologies that offer copyrighted works to the public. This standard has been used for 30 years to determine copyright license fees, and is the same standard that satellite and cable radio currently enjoy. Applying this same standard would promote innovation, increase consumer choice, and generate economic growth. The rate structure problems Internet radio faces are compounded by the fact that the laws governing the CRB provide few procedural protections for the parties. Current CRB proceeding rules do not allow copyright users to present all relevant evidence, such as marketplace agreements, which harms the judges' ability to accurately determine the royalty rates. Moreover, the existing process to select CRB judges prevents adequate Congressional oversight, and has resulted in discriminatory rate decisions. This bill attempts to address these problems by interjecting due process and fairness into the royalty rate structure. It adds procedural protections consistent with the Federal Rules of Civil Procedure and Federal Rules of Evidence, as appropriate, to further information-sharing between the parties, promote voluntary settlements, reduce discovery and litigation costs, and subject the CRB decisions to judicial review. It also calls for the appointment of judges by the president, with the advice and consent of the Senate, instead of by the Library of Congress. Unfortunately, we have seen a pattern of misinformation from the other side about the underlying bill. For example, claims that the bill will cut rates by 85% are misleading. The bill does not set an actual rate, it sets a standard. The rate set by CRB if this bill passes is unknown, but the intent is to allow the CRB to set a sustainable rate to allow Internet radio to grow and flourish. Simply put, claims about an actual number at this point are purely hyperbole. Also contrary to opponents' claims, the premise of the IRFA is not about paying artists less, it's about allowing Internet radio providers to thrive--resulting in more exposure and more revenue for singers, songwriters, and record labels of all kinds. Further, allowing the industry to expand will spur further innovation and improve artists' ability to build a base of support and find new audiences. As a co-sponsor of the Performance Rights Act, I share the concerns raised by many witnesses at this hearing that we need to address the broadcast radio problem. However, it is my belief that the Internet radio royalty structure is an entirely separate and distinct issue and the time for consideration of Internet radio rates is now. The CRB is set to begin the next rate-setting proceeding in 2015. Internet radio's potential must be unleashed now--not sometime in the future. It is time for America's outdated laws to catch up with today's technology so we can foster even greater innovation and job creation-- generating more opportunities for artists and radio competition--for the benefit of us all.
Response to Questions for the Record from Joseph J. Kennedy, Chairman and Chief Executive Officer, Pandora Media, Inc. [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT] Response to Questions for the Record from Bruce Reese, President and Chief Executive Officer, Hubbard Radio, LLC [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT] Response to Questions for the Record from David B. Pakman, Partner, Venrock [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT] Response to Questions for the Record from Jimmy Jam, Chair Emeritus, The Recording Academy, Record Producer, Songwriter, Recording Artist [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT] Response to Questions for the Record from Jeffrey A. Eisenach, Managing Director and Principal, Navigant Economics [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT] Response to Questions for the Record from Michael Huppe, President, SoundExchange, Inc. [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]