[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]