Determination of Rates and Terms for Digital Performance of Sound Recordings and Making of Ephemeral Copies To Facilitate Those Performances (Web V)
| Published date | 27 October 2021 |
| Record Number | 2021-20621 |
| Section | Rules and Regulations |
| Court | Copyright Royalty Board |
Federal Register, Volume 86 Issue 205 (Wednesday, October 27, 2021)
[Federal Register Volume 86, Number 205 (Wednesday, October 27, 2021)]
[Rules and Regulations]
[Pages 59452-59593]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-20621]
[[Page 59451]]
Vol. 86
Wednesday,
No. 205
October 27, 2021
Part IILibrary of Congress-----------------------------------------------------------------------Copyright Royalty Board-----------------------------------------------------------------------37 CFR Part 380Determination of Rates and Terms for Digital Performance of Sound
Recordings and Making of Ephemeral Copies To Facilitate Those
Performances (Web V); Final Rule
Federal Register / Vol. 86, No. 205 / Wednesday, October 27, 2021 /
Rules and Regulations
[[Page 59452]]
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LIBRARY OF CONGRESS
Copyright Royalty Board
37 CFR Part 380
[Docket No. 19-CRB-0005-WR (2021-2025)]
Determination of Rates and Terms for Digital Performance of Sound
Recordings and Making of Ephemeral Copies To Facilitate Those
Performances (Web V)
AGENCY: Copyright Royalty Board, Library of Congress.
ACTION: Final rule and order.
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SUMMARY: The Copyright Royalty Judges announce their final
determination of the rates and terms for two statutory licenses
(permitting certain digital performances of sound recordings and the
making of ephemeral recordings) for the period beginning January 1,
2021, and ending on December 31, 2025.
DATES:
Effective date: October 27, 2021.
Applicability date: The regulations apply to the license period
beginning January 1, 2021, and ending December 31, 2025.
ADDRESSES: The final determination is posted in eCRB at https://app.crb.gov/. For access to the docket to read the final determination
and submitted background documents, go to eCRB and search for docket
number 19-CRB-0005-WR (2021-2025).
FOR FURTHER INFORMATION CONTACT: Anita Blaine, CRB Program Assistant,
(202) 707-7658, [email protected].
SUPPLEMENTARY INFORMATION:
Final Determination
The Copyright Royalty Judges (Judges) hereby issue their written
determination of royalty rates and terms to apply from January 1, 2021,
through December 31, 2025, to digital performance of sound recordings
over the internet by nonexempt, noninteractive transmission services
and to the making of ephemeral recordings to facilitate those
performances.
The rate for commercial subscription services in 2021 is $0.0026
per performance. The rate for commercial nonsubscription services in
2021 is $0.0021 per performance. The rates for the period 2022 through
2025 for both subscription and nonsubscription services shall be
adjusted to reflect the increases or decreases, if any, in the general
price level, as measured by the change in the Consumer Price Index for
All Urban Consumers (U.S. City Average, all items) (CPI-U) from that
published by the Bureau of Labor Statistics (BLS) in November 2020, as
set forth in the regulations adopted by this determination.
The rates for noncommercial webcasters are: $1,000 annually for
each station or channel for all webcast transmissions totaling not more
than 159,140 Aggregate Tuning Hours (ATH) in a month, for each year in
the rate term. In addition, if, in any month, a noncommercial webcaster
makes total transmissions in excess of 159,140 ATH on any individual
channel or station, the noncommercial webcaster shall pay per-
performance royalty fees for the transmissions it makes on that channel
or station in excess of 159,140 ATH at the rate of $0.0021 per
performance in 2021. The rates for transmissions over 159,140 ATH per
month for the period 2022 through 2025 shall be adjusted to reflect the
increases or decreases, if any, in the general price level, as measured
by the changes in the CPI-U from that published by BLS in November
2020, as set forth in the regulations adopted by this determination.
The Judges also determine herein details relating to the rates for
each category of webcasting service, such as minimum fee and
administrative terms, in the following analysis. ``Exhibit A'' to this
determination contains the regulatory language codifying the terms of
the Judges' determination.
I. Background
A. Purpose of the Proceeding
The licenses at issue in the captioned proceeding, viz., licenses
for commercial and noncommercial noninteractive webcasting, are
compulsory. Title 17, United States Code (Copyright Act or Act),
establishes exclusive rights reserved to copyright owners, including
the right to ``perform the copyrighted work publicly by means of a
digital audio transmission.'' See 17 U.S.C. 106(6). The digital
performance right is limited, however, by section 114 of the Act, which
grants a statutory license for nonexempt noninteractive internet
transmissions of protected works. 17 U.S.C. 114(d). Eligible webcasters
are entitled to perform sound recordings without an individual license
from the copyright owner, provided they pay the statutory royalty rates
for the performance of the sound recordings and for the ephemeral copy
of the sound recording necessary to transmit it. 17 U.S.C. 114(f),
112(e). Licensee webcasters pay the royalties to a Collective, which
distributes the funds to performing artists and copyright owners. The
statutory rates and terms apply for a period of five years. The Act
requires that the Judges ``establish rates and terms that most clearly
represent the rates and terms that would have been negotiated in the
marketplace between a willing buyer and a willing seller.'' 17 U.S.C.
114(f)(2)(B). The marketplace the Judges look to is a hypothetical
marketplace, free of the influence of compulsory, statutory licenses.
Web II, 72 FR 24084, 24087 (May 1, 2007). The Judges ``shall base their
decision on economic, competitive[,] and programming information
presented by the parties . . . .'' 17 U.S.C. 114(f)(2)(B), 112(e)(4)
(emphasis added). Within these categories, the Judges' determination
shall account for (1) whether the internet service substitutes for or
promotes the copyright owner's other streams of revenue from the sound
recording and (2) the relative roles and contributions of the copyright
owner and the service, including creative, technological, and financial
contributions, and risk assumption. Id. The Judges may consider rates
and terms of comparable services and comparable circumstances under
voluntary, negotiated license agreements. Id. The rates and terms
established by the Judges ``shall distinguish'' among the types of
services and ``shall include'' a minimum fee for each type of service.
Id. (emphasis added).
B. Procedural Posture
Following the timeline prescribed by the Act, the Judges published
notice of commencement of this proceeding in the Federal Register. 84
FR 359 (Jan. 24, 2019). Twenty parties in interest filed petitions to
participate in the proceeding. Nine of those petitioners subsequently
withdrew from the proceeding, and the Judges dismissed one of the
petitioners because the Judges determined that he lacked the requisite
substantial interest in the proceeding.\1\
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\1\ The following parties filed petitions to participate: Accu
Radio LLC (withdrew), College Broadcasters Inc. (settled), David
Powell (dismissed), Educational Media Foundation (joined case of
NRBNMLC), Live365 Broadcaster LLC (withdrew), LA RAZA MEDIA GROUP
LLC (withdrew), Pandora Media LLC (Pandora), Radio Coalition LLC
(withdrew), Sirius XM Radio, National Religious Broadcasters
Noncommercial Music License Committee (NRBNMLC), National
Association of Broadcasters (NAB), Feed Media, Inc. (withdrew), Dash
Radio, Inc. (withdrew), Tunein Inc. (withdrew), National Public
Radio (settled), Radio Paradise Inc. (withdrew), SoundExchange, Inc.
(SoundExchange) (filing jointly on behalf of The American Federation
of Musicians and the United States and Canada, Screen Actors Guild/
American Federation of Television and Radio Artists, The American
Association of Independent Music, Sony Music Entertainment, UMG
Recordings, Inc., Warner Music Group Corp., and Jagjaguwar Inc.),
iHeart Media Inc., ICON Health & Fitness Inc. (withdrew), and Google
Inc.
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[[Page 59453]]
1. Negotiated Settlements
The Judges received two settlements, one between SoundExchange and
certain public broadcasters and the other between SoundExchange and
certain educational webcasters.
a. Public Broadcasters
One of the settlements, among SoundExchange, National Public Radio
(NPR), and the Corporation for Public Broadcasting (CPB), addressed
rates and terms for certain internet transmissions by public
broadcasters, NPR, American Public Media, Public Radio International,
Public Radio Exchange, and certain other unnamed public radio stations
for the period from January 1, 2021, through December 31, 2025. The
Judges published the terms of the settlement in the Federal Register on
October 29, 2019. The Judges received no comments on the proposal and
approved the settlement on February 28, 2020.\2\
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\2\ 85 FR 11857 (Feb. 28, 2020).
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b. Educational Webcasters
The other settlement, between SoundExchange and College
Broadcasters, Inc. (CBI), addressed rates and terms for certain
internet transmissions of sound recordings by college radio stations
and other noncommercial educational webcasters for the period from
January 1, 2021, through December 31, 2025. The Judges published the
terms of the settlement in the Federal Register on October 30, 2019.
The Judges received no comments on the proposal and approved the
settlement on March 4, 2020.\3\
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\3\ 85 FR 12745 (Mar. 4, 2020).
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2. The Current Proceeding To Adjudicate Rates and Terms
The Act provides that the Judges shall make their determinations
``on the basis of a written record, prior determinations and
interpretations of the Copyright Royalty Tribunal, Librarian of
Congress . . .'' and their own prior determinations to the extent those
determinations are ``not inconsistent with a decision of the Register
of Copyrights . . . .'' 17 U.S.C. 803(a). Pursuant to 17 U.S.C. 803(b),
the Judges conduct a hearing to create that ``written record.'' To that
end, non-settling parties appeared before the Judges virtually for an
evidentiary hearing. At the hearing, SoundExchange represented the
interests of licensors. Several non-settling licensees also
participated in the hearing.\4\
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\4\ The non-settling licensees were Google, iHeart Media, NAB,
NRBNMLC, Pandora, and Sirius XM.
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The hearing commenced on August 4, 2020, and concluded on September
9, 2020.\5\ The parties submitted proposed findings and conclusions
(and responses thereto) in writing, prior to their closing arguments on
November 19, 2020. During the hearing, the Judges heard oral testimony
from 33 witnesses (some of them for both direct case and rebuttal
testimony) and considered the testimony of eight witnesses on the
papers. The witnesses included 13 qualified experts. The Judges
admitted 748 exhibits into evidence, consisting of over 900,000 pages
of documents (9227 MB of electronic files in eCRB), and considered
numerous illustrative and demonstrative materials that focused on
aspects of the admitted evidence and the permitted oral testimony.
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\5\ The hearing was originally scheduled to commence on March
16, 2020, but was delayed due to the coronavirus pandemic. See Order
Granting Joint Motion for Continuance of Hearing (Mar. 12, 2020)
(delaying commencement of hearing until April 28, 2020. In
consultation with the participants, the Judges granted several
additional continuances, until ultimately scheduling a virtual
hearing employing videoconferencing technology to commence on August
4, 2020. See Order Granting Joint Motion for Second Continuance of
Hearing (Apr. 1, 2020); Order Granting Joint Motion for Third
Continuance of Hearing (May 1, 2020); Order on Hearing Schedule and
Related Pre-Hearing Matters (Jun. 10, 2020); Order Setting Virtual
Hearing and Addressing other Hearing-Related Matters (Jun. 25,
2020); Order Postponing Virtual Hearing (Jul. 14, 2020); Order
Rescheduling Virtual Hearing (Aug. 3, 2020).
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Pursuant to section 803(c)(1), the initial Determination in this
matter was due no later than December 16, 2020 (i.e., 15 days before
the expiration of the current statutory rates and terms). See 17 U.S.C.
803(c)(1). On July 6, 2020, the Acting Register of Copyrights, at the
request of the Judges, exercised her authority under 17 U.S.C. 710 to
``toll, waive, adjust, or modify'' the timing provision in section
803(c)(1) to account for the disruption and delay caused by the COVID-
19 pandemic. The Acting Register extended the Judges' deadline for
issuing an initial Determination by up to 120 days, effectively making
the deadline April 15, 2021. See Public Notice Regarding Timing
Provisions for Persons Affected by COVID-19, U.S. Copyright Office,
https://www.copyright.gov/coronavirus/ (last visited Jan. 11, 2021).
The Register of Copyrights announced an additional 60-day extension on
March 29, 2021, in the Copyright Office's NewsNet, Issue No. 889.
II. Context of the Current Proceeding: Prior Rate Determinations
Congress created the exclusive sound recordings digital performance
copyright in 1995. See Digital Performance Right in Sound Recordings
Act of 1995, Public Law 104-39, 109 Stat. 336 (1995). At the same time,
Congress limited that performance right by granting noninteractive
subscription services a statutory license to perform sound recordings
by digital audio transmission. In 1998, Congress created the ephemeral
recording license and further defined and limited the statutory license
for digital performance of sound recordings. See Digital Millennium
Copyright Act, Public Law 105-304, 112 Stat. 2860 (1998) (DMCA).
A. Web I-Web III
The Judges summarized the history of webcasting determinations from
Web I through Web III in detail in their Web IV determination. See
Determination of Royalty Rates and Terms for Ephemeral Recording and
Webcasting Digital Performance of Sound Recordings, Final rule and
order, 81 FR 26316, 26317-19 (May 2, 2016) (Web IV). The Judges hereby
incorporate that discussion by reference into this Determination.
B. Web IV Determination and Appeals
The Judges commenced the Web IV proceeding in January 2014.
SoundExchange and a pro se petitioner, George Johnson d/b/a GEO Music,
represented the interests of licensors. Seven licensees also
participated in the hearing.\6\ The Judges approved two negotiated
agreements, one for public broadcasters between SoundExchange and NPR
and CPB, and the other for educational webcasters between SoundExchange
and CBI.
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\6\ The licensees were Harvard Radio Broadcasting, Inc., IBS,
iHeartMedia, NAB, NRBNMLC, Pandora, and Sirius XM.
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The Judges concluded that ``there is continued support in the
marketplace for a different rate structure for commercial and
noncommercial webcasters.'' 81 FR 26316, 26320 (May 2016). The Judges
therefore adopted separate rate structures for noncommercial and
commercial webcasters. With respect to noncommercial webcasters, the
Judges adopted a $500 per station or channel fee for all transmissions
by noncommercial webcasters up to a threshold of 159,140 aggregate
tuning hours (ATH) for 2016 through 2020. For transmissions in excess
of 159,140 ATH, the Judges set a rate of $0.0017 per performance for
2016, which would be adjusted annually for changes to the CPI-U for the
years 2017-2020. Id. at 26396.
The Judges also identified a distinction between two different
types of copyright owners. Based on the
[[Page 59454]]
record, the Judges observed that ``in the marketplace, Services have
agreed to pay higher rates to'' major record labels (Majors) than to
so-called independent labels (Indies). Id. at 26319. To gain clarity on
whether the Judges could establish different rates based on differences
among copyright owners, the Judges referred to the Register of
Copyrights (Register) the novel question of whether the Act permits the
Judges to differentiate based on types of licensors. The Register
concluded that the Judges' question did not meet the statutory criteria
for referral and declined to answer it. Id. In the absence of an
adequate record to support such differentiation, the Judges declined to
adopt separate rates for Majors and Indies. Id.
The Judges also addressed potential distinctions between groups of
licensees. In particular, NAB argued that simulcasting is different
from other forms of commercial webcasting and therefore simulcasters
(i.e., terrestrial radio stations that simulcast over-the-air
broadcasts on the internet) should pay a lower rate than other
commercial webcasters. Id. at 26320. Based on the record in Web IV,
however, the Judges concluded that NAB did not satisfy its burden to
demonstrate that simulcasting differs in ways that would cause willing
buyers and willing sellers to agree to a lower royalty rate in the
hypothetical market. Therefore, the Judges did not adopt a different
rate structure for simulcasters than that which applied to other
commercial webcasters. Id.
SoundExchange and Pandora each proposed different greater-of rate
structures employing a per-play rate and a percentage-of-revenue rate.
All of the Services, other than Pandora, opposed such a two-pronged
approach. The Judges concluded that the record did not support a
greater-of rate structure in the rate period at issue in Web IV. Id. at
26323. Rather, the Judges found that the statutory rate should continue
to be set on a per-play basis for commercial webcasters. Id. at 26325.
The Judges set two separate rates for commercial noninteractive
webcasting. One applied to performances on subscription-based
commercial noninteractive services. A separate rate applied to
performances on nonsubscription services (i.e., advertising supported
services that are free to the listener). Id. at 26404. The Judges set
each of the rates for 2016 (the first year of the five-year statutory
license term) and then applied an inflation-based adjustment to the
rates for the remaining years of the license. The Judges looked to
separate benchmarks to establish the rates. For commercial
noninteractive subscription services, the Judges used a benchmark
developed by SoundExchange's expert, Dr. Rubinfeld, to which the Judges
applied a 12% ``steering'' reduction to reflect a lack of competition
in that particular segment of the market among the providers of the
copyright works. The Judges also credited a rate established in an
agreement between Pandora and Merlin. Those two rates formed a zone of
reasonableness, within which the Judges chose a per-performance rate of
$0.0022 for 2016. Id. at 26405.
With respect to the rate for commercial nonsubscription services,
the Judges identified two usable benchmarks. One was based on a rate in
an agreement between iHeart and Warner. The other was based on a rate
from an agreement between Pandora and Merlin. Id. at 26405. The first
represented an agreement between a service and a Major and the second
between a service and Indies. The Judges used these rates to form a
zone of reasonableness. The Judges selected a rate for 2016 of $0.0017,
which took into account a greater number of streams from Major sound
recordings as opposed to the percentage of streams from Indie sound
recordings. The rates for 2017 through 2020 would be adjusted to
account for changes in the CPI. The rate for the Section 112 license
would constitute 5% of the royalty services would pay for performances
under the Section 114 license. Id. at 26406.
SoundExchange and George Johnson appealed the Judges' determination
to the U.S. Court of Appeals for the D.C. Circuit. The court affirmed.
SoundExchange, Inc. v. Copyright Royalty Bd., 904 F.3d 41 (Sep. 18,
2018).
III. The Role of Effective Competition in Setting Webcasting Rates
A. The Concept of ``Effectively Competitive'' Rates
In Web IV, the Judges held that the Copyright Act either required
them, or permitted them, in their discretion, ``to set a rate that
reflects a market that is effectively competitive.'' Web IV, 81 FR at
2633 (emphasis added). The D.C. Circuit affirmed the Judges' conclusion
that they had the discretionary authority ``to determine rates through
the lens of an effective-competition standard'' (but held that the
Judges were not required to do so). SoundExchange, 904 F.3d at 57.
More particularly, the D.C. Circuit found reasonable the Judges'
construction of the statutory ``willing seller/willing buyer-
marketplace'' standard as calling for the establishment of rates that
would have been set in an effectively competitive market. In that
regard, the D.C. Circuit pointed to testimony and record evidence--
referenced approvingly by the Judges--stating that ``neither sellers
nor buyers can be said to be `willing' partners to an agreement if they
are coerced to agree to a price through the exercise of overwhelming
market power.'' SoundExchange, 904 F.2d at 56 (quoting Web IV, 81 FR at
26331).
Additionally, the D.C. Circuit grounded its affirmance on its
finding that the statutory willing buyer/willing seller-marketplace
standard was inherently ambiguous. Because of this ambiguity, the D.C.
Circuit held that the Judges had properly exercised their statutory
duty by considering ``the clear statutory purpose, applicable prior
decisions, and the relevant legislative history.'' SoundExchange, 904
F.3d at 55 (quoting Web IV at 26332). In particular, the D.C. Circuit
took note of the Judges' reliance on their own webcaster rate
determination that had immediately preceded Web IV:
The [Judges] relied on one of [their] prior determinations in
reasoning that, ``[b]etween the extremes of a market with
`metaphysically perfect competition' and a monopoly (or collusive
oligopoly) market devoid of competition there exists in the real
world . . . a mind-boggling array of different markets, all of which
possess varying characteristics of a `competitive marketplace.' ''
[Web IV, 81 FR at 26333 (quoting Web III Remand, 79 FR at 23114
n.37)].
SoundExchange, 904 F.3d at 57.
In fact, the D.C. Circuit not only found that the Judges acted
reasonably in this regard, but also that--when exercising their
discretion--the Judges ``must consider `competitive information'''
contained in the hearing record, in order ``to identify the relevant
characteristics of competitiveness on which to base [their]
determination of the statutory rates.'' SoundExchange, 904 F.3d at 56-
57 (emphasis added).
Consistent with the D.C. Circuit's decision affirming Web IV, the
Judges in this Web V proceeding again apply the standard that royalty
rates for noninteractive services should be set at levels that reflect
those that would be set in an effectively competitive market. Further,
the Judges note that no party in this proceeding challenges the
application of this effective competition standard, although
SoundExchange and the Services offer vastly different understandings of
how the Judges should apply the standard in this case.
In Web IV, the Judges applied the concept of ``effective
competition'' as a
[[Page 59455]]
counterweight to the ``complementary oligopoly'' power of the Majors.
Web IV, 81 FR at 26368 (identifying the ``complementary oligopoly that
exists among the Majors,'' allowing them to ``utilize their combined
market power to prevent price competition among them . . . .''). Simply
put, the Judges found that each Major is a ``Must Have'' licensor for
noninteractive services (in the hypothetical unregulated market),
meaning that each noninteractive service ``must have'' a license for
the entire repertoires of Sony, Universal and Warner, in order to
remain in business. Also, because the interactive market was proffered
as a benchmark market in Web IV (as in the present proceeding), the
Judges performed the same inquiry for that market, concluding that
interactive licensees likewise ``must have'' access to the repertoires
of each Major in order to survive commercially. Web IV, 81 FR at 26340,
26342. From a more technical economic viewpoint, the ``Must Have''
status of the three Majors rendered each a ``complementary
oligopolist.'' \7\ As explained in Web IV, this status allows each
Major to wield the individual economic power of a monopolist, but the
exercise of that power leads to royalty rates that are even greater
than those that would be set by a single monopolist. Specifically, the
Judges held:
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\7\ ``Complementary oligopolists'' supply products or, as here,
offer licenses, for access to products, that are ``perfect
complements,'' meaning that the products or licenses they offer are
essential, i.e., ``Must Haves,'' for a buyer/licensee in order to
operate its business. Such products/licenses are known in economics
as ``Cournot Complements.'' See Web IV, 81 FR at 26342-43.
`[I]f the repertoires of all [Majors] were each required by
webcasters (i.e., if the repertoires were necessary complements) . .
. each [Major] would have an incentive to charge a monopoly price to
maximize its profits . . . constitut[ing] higher monopoly costs . .
. paid by webcasters to each of the [Majors].' . . . The Judges in
this determination adopt this economic reasoning and will not allow
such complementary oligopoly power to be incorporated into the
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statutory rate.
Web IV, 81 FR at 26368 & n.142 (quoting Web III Remand, 79 FR at
23114); see also Web IV, 81 FR at 26342-43 (summarizing corroborating
economic expert testimony as (i) stating that the complementary
oligopoly structure is ``even worse than a market controlled by a
single monopoly supplier . . . [as] first identified by Antoine Cournot
in 1838''; and (ii) explaining that Universal had argued to the
Department of Justice that its merger with EMI ``would lead to lower
prices because it would remove the Cournot Complements pricing effect''
between the merging entities.).
In Web IV, the dispute regarding the ``effective competition''
standard focused essentially on the absence of horizontal price
competition between and among the Majors--and whether such horizontal
competition could be generated by noninteractive services in the
hypothetical (i.e., unregulated) market.\8\ Based on the record in that
proceeding, the Judges determined that the Services had successfully
demonstrated how effectively competitive rates had been set, (i.e., via
steering, discussed infra) even in the face of a complementary
oligopoly.\9\
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\8\ The section 114 statutory rate supplants an unregulated
market rate, so the Judges must ascertain the rates that would have
been set in such a hypothetical market. See Web IV, 81 FR at 26316,
26333. In Web IV, though, in addition to receiving evidence
regarding the hypothetical market, the Judges were presented with
actual market evidence of effectively competitive rates from the
noninteractive market. Id. at 26343 (``[T]he Judges are not left
with mere hypotheticals . . . . Rather, the Judges were presented
with hard and persuasive evidence that . . . reduced royalty rates
in the noninteractive market and would do so in the hypothetical
market as well.'').
\9\ The more particular issue was whether noninteractive
services could foment such horizontal price competition among record
companies through the services' expressed intent to ``steer'' their
algorithmically or humanly curated plays toward those licensed by
Majors who agree to royalty rates lower than those of their
competitors. Web IV, 81 FR at 26348 (``[T]he ability of
noninteractive services to steer away from higher priced recordings
and toward lower priced recordings (or threaten to do so) serves as
a buffer against the supranormal pricing that arises from the impact
of complementary oligopoly pricing . . . .'').
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The foregoing findings regarding the ``Must Have'' status of the
Majors in the interactive benchmark market are not challenged in this
proceeding. However, SoundExchange argues that, unlike in the Web IV
period, the benchmark interactive market now generates effectively
competitive rates, because the present record demonstrates that Spotify
has gained licensee-side power sufficient to offset, in whole or in
part, the Majors' ``Must Have'' status. SoundExchange's Second
Corrected Proposed Findings of Fact and Conclusions of Law ] 89 et seq.
(and record citations therein) (SX PFFCL). The Services dispute the
assertion that the record shows Spotify to have acquired such power or
that the interactive market has otherwise become effectively
competitive. Services' Joint Proposed Findings of Fact and Conclusions
of Law ] 62 et seq. (Services PFFCL). (This issue is discussed in
detail infra, section III.B.).\10\
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\10\ However, the Services dispute the assertion that all three
Majors would be ``Must Have'' licensors in the hypothetical
noninteractive market. Services PFFCL ] 195 et seq. That issue is
discussed infra, section IV.C.2.b in the Judges' consideration of
Pandora's ``Label Suppression Experiments.''
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Thus, the present record raises a new question: Have there have
been changes in bargaining power between the Majors and Spotify in the
interactive benchmark market such that the royalty rates in their
agreements are consonant with the ``effectively competitive'' standard?
In order to address this new question, the Judges find it first
necessary to consider the concept of ``effective competition'' in a
context dictated by the present record, one that did not arise in Web
IV. To put this analysis in proper economic context, it is helpful and,
indeed, necessary, to begin by identifying the aspects of the
``effective competition'' standard that were addressed and determined
in Web IV. In summary, those points are the following:
1. The Majors possess ``complementary oligopoly power'' in the
actual (unregulated) interactive market and in the hypothetical
(unregulated) noninteractive market that ``thwart[s] price competition
and [is] inconsistent with an `effectively competitive market' . . .
.'' Web IV, 81 FR at 26335.
2. Because there are a ``mind-boggling'' number of markets with
various competitive characteristics, there exists a range of rates that
may satisfy the ``effectively competitive'' standard--between the
statutorily-created de facto zero rate for terrestrial sound recordings
and the complementary oligopoly rate generated by the Majors' power as
complementary oligopolists--each of which can be seen as a ``bookend''
for the range of potential rates. Web IV, 81 FR at 26334.\11\
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\11\ To borrow from Tolstoy, perfectly competitive and perfectly
monopolist markets all gravitate toward well-understood equilibria
in the same way, but oligopolistic markets move in different ways.
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3. The ``essence of a competitive standard is that it suggests a
continuum and differences in degree rather than in kind,'' which
dovetails with the Judges' statutory charge to ``weigh competitive
information'' in order to ``decide whether the rates proposed
adequately provide for an effective level of competition.'' Web IV, 81
FR at 26334.\12\
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\12\ Economists have acknowledged the pragmatic nature of
applying the ``effective competition'' standard. See, e.g., Alfred
E. Kahn, Antitrust Policy, 67 Harv. L. Rev., 28, 35, (1953)
(``[T]here exists no generally accepted economic yardstick
appropriate to . . . determine what degree [of monopoly power] is
compatible with [effective] competition.''); J. Markham, An
Alternative Approach to the Concept of Workable Competition 349, 361
(1950) (The concepts of ``market competition are essentially
pragmatic'').
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4. When the hearing record provides actual evidence allowing the
Judges to
[[Page 59456]]
determine whether a rate is effectively competitive, that evidence and
the adjudicatory process vitiate the theoretical absence of an a priori
``bright line'' to distinguish effectively competitive and
noncompetitive rates. Web IV. 81 FR at 26343.
In Web IV, the evidence demonstrated only one potential method for
the amelioration of the ability of the Majors, as complementary
oligopolists, to set noncompetitive rates. Specifically, Pandora and
iHeart introduced evidence of agreements with Merlin and Warner,
respectively, that incorporated ``steering'' into those agreements.
``Steering'' in this context means the presence of contract provisions
by which a licensee will increase the number of plays of the
counterparty record company above its historic market share, in
exchange for the record company's agreement to accept a lower royalty
rate than other record companies. Web IV, 81 FR at 2366 (``The Judges
find that steering in the hypothetical noninteractive market would
serve to mitigate the effect of complementary oligopoly . . . and
therefore move the market toward effective, or workable, competition''
together with ``the ever-present `threat' that competing [licensors]
will undercut each other in order to [license] more . . . .'').
But Web IV does not consider in detail whether evidence of any
other economic factors could also serve to offset or ameliorate the
complementary oligopoly power present on the licensor/record company
supply-side of the market. And further, the Judges never intimated--let
alone determined--that steering was the sole method by which the
complementary oligopoly power on the licensor side could be
ameliorated.\13\ Indeed, the Web IV Determination clearly explains that
the steering adjustment is not a sui generis device for adapting a
benchmark rate, but rather ``is of a class with any other adjustments
necessary to harmonize the benchmark rate with the statutory
requisites.'' Web IV, 81 FR at 26368.\14\
---------------------------------------------------------------------------
\13\ In fact, Web IV makes clear that the Judges found the
injection of steering into the market (actual or hypothetical) could
be ``sufficient'' to ameliorate the anticompetitive impact of
complementary oligopoly power--not that an injection of steering was
necessary to do so. See Web IV, 81 FR at 26367-68; see also id. at
26369 (Professor Shapiro noting that steering is only ``an example
of price competition at work.'').
\14\ In Web IV, the Judges did touch upon the potential for
countervailing licensee power as a potential mitigating or
offsetting factor. SoundExchange asserted that Pandora had
significant (monopsony) market power in its own right in the
noninteractive market that generated rates below effectively
competitive rates in its benchmark agreement with Merlin. But the
Judges rejected SoundExchange's argument, finding--in reliance on an
analysis presented by Pandora's economic expert witness, Professor
Shapiro--that ``Pandora's share of the Merlin Labels' [overall]
revenues is far short of the level that would be necessary for
Pandora to have undue market power in its negotiations with
Merlin.'' Web IV, 81 FR at 26371. Implicitly, the Judges there
indicated that, had Pandora possessed sufficient market power, that
fact may have weighed in the Judges' calculus in reducing the
effective competition adjustment, thereby increasing the effectively
competitive statutory rate.
---------------------------------------------------------------------------
Web IV also must be understood as limited by the fact that the
parties implicitly agreed (given the facts of that case) to apply a
particular conception of ``competition''--``price competition.'' In
fact, although the parties and the Judges discussed extensively the
meaning of ``effective competition,'' they intentionally did not
provide a rigid definition for the concept of ``competition.'' This
absence is unsurprising because the only form of competition at issue
in Web IV was price competition--a standard neoclassical variant. Web
IV, 81 FR at 26366 (``The Judges find that steering in the hypothetical
noninteractive market would serve to mitigate the effect of
complementary oligopoly on the prices paid by the noninteractive
services and therefore move the market toward effective, or workable,
competition. Steering is synonymous with price competition in this
market . . . .'') (emphasis added). But the Judges did not have cause
to examine in any detail whether, beyond price competition, it was
appropriate to consider other dimensions of competition, of which there
are several. See generally Donald J. Harris, On the Classical Theory of
Competition, 12 Cambridge J. of Econ., 139, 141, 146 (1988)
(contrasting the ``relative tranquility [of] the neoclassical
conception of competition . . . formalized in a vast array of modern
textbooks'' with ``a structure of oligopolistic firms in which price
competition is simply one component . . . of a broader process of
strategic rivalry among leading firms [and] other possible behavioural
rules on price formation.'') (emphasis added).
So, although the importance of effective price competition cannot
be disputed, the Judges must consider whether, if such competition is
lacking, other forms of market behavior either substitute for price
competition or otherwise generate prices consonant with those that
would be established through price competition in an effectively
competitive market. In fact, as discussed below, the Judges have
engaged in such analyses in prior cases.
The first case in which the Judges considered other economic
dimensions beyond price competition was the SDARS III proceeding. In
that case, the Judges again addressed the complementary oligopoly power
of the Majors, albeit in connection with a different and now superseded
statutory rate-setting standard. SDARS III, 83 FR at 65320 n.82.\15\
There, the Judges noted that the licensor-side complementary oligopoly
power could be ameliorated by the ``countervailing power'' of a
licensee (Sirius XM in that case) that possessed a large share of the
downstream market at issue (a monopoly share of the satellite radio
market in that case). SDARS III, 83 FR at 65238.\16\
---------------------------------------------------------------------------
\15\ The superseded statutory standard was set forth in 17
U.S.C. 801(b)(1). Despite the different standard, the Judges applied
the same hypothetical market approach in SDARS III, before
considering whether that hypothetical market rate should be adjusted
to account for factors set forth in the now superseded statute.
SDARS III, 83 FR. at 65237, 65253.
\16\ That countervailing power, the Judges noted, existed if the
market in which the licensee operated is not subject to meaningful
potential substitution from listening via another form of music
delivery. Id.
---------------------------------------------------------------------------
And, in the next rate-setting case, Phonorecords III, the Judges
(in the majority and in the dissent) found that the licensors--owners
of the copyrights for musical works--possessed complementary oligopoly
power. The majority Determination found that this noncompetitive effect
could be ameliorated--not only by steering or another form of price
competition--but by the application of economic game theoretic modeling
(specifically, the Shapley Value approach) that economic experts
testified would have such an effect. Phonorecords III, 84 FR at 1947,
1950 (``The Judges look to the Shapley Analyses . . . as one means of
deriving a reasonable royalty rate (or range of reasonable royalty
rates) . . . . The Judges . . . find that the Shapley Analysis . . .
eliminates the `holdout' problem that would otherwise cause a rate to
be unreasonable, in that it would fail to reflect effective (or
workable) competition.'').\17\
---------------------------------------------------------------------------
\17\ Although the D.C. Circuit vacated and remanded the
Phonorecord III Determination, the general point stands: The Judges
consider factors and methods other than price competition (via
steering or otherwise) to determine whether a rate is ``effectively
competitive'' and, more specifically, whether such other factors or
methods counterbalance the rate inflation caused by the
complementary oligopoly effect.
---------------------------------------------------------------------------
The Phonorecords III Dissent, although certainly not discounting
the value of the Shapley Value approach, asserted instead that the
complementary oligopoly power could be better ameliorated by adopting
the benchmark proposed by the interactive streaming service-licensees,
which was essentially
[[Page 59457]]
the Phonorecords II rate structure, i.e., a benchmark based on the
rates in effect in the prior rate period that had been adopted in a
settlement between industrywide trade associations, the NMPA and DiMA,
representing licensors and licensees, respectively. Phonorecords III,
84 FR at 1993 (dissent) (``settlement agreements tend to eliminate
complementary oligopoly inefficiencies, and provide guidance as to an
effectively competitive rate.''). Thus, once again, a Copyright Royalty
Judge applied a factor--countervailing power--other than the presence
of price competition, to determine an effectively competitive rate.
In this regard, it is important to note that the concepts of
``effective competition'' and ``countervailing power'' are not mutually
exclusive, but are better understood as complementary. Professor John
Kenneth Galbraith, who developed the concept of ``countervailing
power,'' defined it as follows:
[W]ith the widespread disappearance of competition in its
classic form . . . it was easy to suppose that since competition had
disappeared, all effective restraint on private power had
disappeared . . . . [However,] [i]n fact, new restraints on private
power did appear to replace competition . . . . [T]hey appeared not
on the same side of the market but on the opposite side, not with
competitors but with customers or suppliers . . . countervailing
power.
John Kenneth Galbraith, American Capitalism: The Concept of
Countervailing Power 111 (1952).
In Web IV, the Judges recognized the economist J.M. Clark as the
individual who introduced into microeconomics analysis the concept of
effective competition, which he originally described as ``workable
competition.'' Web IV, 81 FR at 26341 n.96 (citing J. M. Clark, Toward
a Concept of Workable Competition, 30 Am. Econ. Rev. 241 (1940)). Two
decades hence, Professor Clark wrote a book that served, in his words,
as an ``elaboration of [the] line of inquiry'' dating from his seminal
1940 article. John Maurice Clark, Competition as a Dynamic Process at
ix (1961). In that volume, Professor Clark took note of the
compatibility between the concept of ``countervailing power'' and his
own concept of workable/effective competition. Clark, supra at 5
(noting approvingly Professor Galbraith's view that, if competition is
found wanting, ``countervailing power'' serves as a ``rough
substitute'' that can ``deprive monopoly of its arbitrary power . . .
.'').\18\
---------------------------------------------------------------------------
\18\ In his 1961 treatise, Professor Clark expressly ``shift[s]
. . . from `workable' to `effective competition''', because ``[t]he
theory of effective competition is dynamic theory,'' going beyond
``the analysis of static equilibrium'' to ``bring[] in the . . .
interplay between aggressive and defensive forms of competition . .
. .'' Id. at ix. (emphasis added).
---------------------------------------------------------------------------
Likewise, in American Capitalism, Professor Galbraith expressly
acknowledges the interplay between Professor Clark's conception of
effective/workable competition and the principle of ``countervailing
power'':
There remains the possibility that within the structure of the
market shared by a few firms there are practical restraints on
economic power--that there is an attenuated but still workable
competition which minimizes the scope for exercise of private market
power . . . . This line of argument has emphasized results . . . .
The notion of workable competition takes cognizance of the . . .
point that over-all consequences, while in theory are deplorable,
are often in real life quite agreeable . . . . [W]hat is unworkable
in principle becomes workable in practice . . . because the active
restraint [on the exercise of market power] is provided not by
competitors but from the other side of the market by strong buyers.
Galbraith, supra at 57-58, 112 (emphasis added); see also id.158 n.912
(noting the ``originality of Professor J.M. Clark'' and crediting his
1940 article for the development of the concept of workable
competition).\19\
---------------------------------------------------------------------------
\19\ Despite Professor Galbraith's well-known progressive
leanings, his concept of ``countervailing power'' as a means for
more competitively dividing profits between input oligopolists and
oligopsonists has been well-received by ardent free market
economists as well, including a Nobel Prize winner. See, e.g.,
George J. Stigler, The Economist Plays with Blocs, 44 Am. Econ.
Rev., no.2, 7, 9, 13-14 (1954) (papers and proceedings) (agreeing
that Galbraith's concept of ``countervailing power'' describes a
context in which ``a monopsonist or a set of oligopsonists arises
and shares the gains of a previously unhampered monopolist or set of
oligopolists,'' because ``[i]t is true that as countervailers they
might share monopoly profits . . . .''). However, Professor Stigler
disagreed vehemently with the notion that the bilateral oligopolies
formed through the exercise of countervailing power ``reduce prices
to consumers'' or ``should in general eliminate, and not merely
redistribute, monopoly gains.'' Id. at 9, 13. But such downstream
effects are irrelevant to the Judges' statutory task of setting an
effectively competitive royalty rate in the upstream market.
Moreover, Professor Stigler cautioned that the presence of
``countervailing power'' in a market will not necessarily ``place
groups on a basis of equality with respect to one another . . . .''
Id. at 14 (emphasis added). Accordingly, even if Spotify has
acquired some additional bargaining power, that does not mean that
its bargaining power is equal to the complementary oligopoly of the
Majors. That is, any new bargaining power enjoyed by Spotify could
mitigate the Majors' complementary oligopoly power but not
necessarily offset it in full.
---------------------------------------------------------------------------
In sum, the inclusion of the concepts of price competition and
countervailing power into microeconomic analysis--as already applied by
the Judges in several determinations--makes it clear that the Judges
must consider record evidence regarding both of these economic concepts
in order to fulfill their statutory mandate to establish rates that
would be set between willing sellers and willing buyers in the
marketplace. The Judges discuss and apply both of these economic
concepts below.
B. Evaluation of Arguments Concerning Effective Competition
1. SoundExchange's Claim That Spotify has Downstream Pricing Power That
Mitigates or Offsets the Majors' Complementary Oligopoly Power
SoundExchange asserts several bases for its claim that the
complementary oligopoly power of the Majors has been mitigated in part,
or offset in full, by the increase in Spotify's market power, which has
manifested in the latter's ability to [REDACTED]. More particularly, in
the agreements between Spotify and the Majors that immediately preceded
their 2017 agreements,\20\ the contract rate for [REDACTED]. In all
three subsequent 2017 agreements between Spotify and the Majors,
[REDACTED]. Trial Ex. 5609 ] 24 (WDT of Aaron Harrison) (Harrison WDT);
Trial Ex. 5611 ] 10 (WDT of Reni Adadevoh) (Adadevoh WDT); Trial Ex.
5613 ] 31 (WDT of Mark Piibe) (Piibe WDT) ([REDACTED]).
---------------------------------------------------------------------------
\20\ The 2017 agreements were the most recent agreements
available for inclusion in the record in this Web V proceeding.
---------------------------------------------------------------------------
SoundExchange identifies the following three interrelated sources
for Spotify's alleged increase in pricing power in 2017 that generated
this [REDACTED]:
1. Spotify now generates [REDACTED]. SX PFFCL ] 306 et seq.
2. Spotify can now [REDACTED]. SX PFFCL ] 311 et seq.
3. Spotify now has the ability to steer a significant number of
plays on Spotify-curated playlists. SX PFFCL ] 346 et seq.
The Judges examine each of these assertions seriatim below.
a. Has Spotify's Increased Share of each Major's Revenue provided
Spotify with Leverage to Obtain [REDACTED]?
SoundExchange asserts that--between 2014 and 2017--there has been
explosive growth in the subscription on-demand format. More
specifically, SoundExchange notes that, whereas in 2013, U.S. retail
revenue from on-demand services was approximately $0.9 billion, by
2016, this revenue total had increased to approximately $2.8 billion
and, by 2017, to approximately
[[Page 59458]]
$4.2 billion. This growth has continued, with 2018 retail revenue from
on-demand services greater than $5.4 billion, and, by 2019, reaching
$6.8 billion. See Trial Ex. 5604 app. 2 (WDT of Catherine Tucker)
(Tucker WDT); Trial Ex. 4115 at 3.\21\
---------------------------------------------------------------------------
\21\ The Services do not dispute the fact of significant growth
in the subscription on-demand market over this period, but they
assert that Professor Tucker's data appear to include ad-supported
on-demand revenue as well as subscription on-demand revenue. Compare
SX PFFCL ] 306, with Tucker WDT app. 2. This specific potential
discrepancy does not alter the substance of the parties' dispute nor
the Judges' analysis of this issue.
---------------------------------------------------------------------------
Accordingly, SoundExchange maintains that the Majors have now
become increasingly reliant on income generated by all the interactive
services. Because of this changed circumstance, SoundExchange avers
that the balance of pricing power as between the Majors and Spotify has
changed, with the latter now in a position to bargain more aggressively
for favorable rates and terms. See Trial Ex. 5602 ]] 119-131 (WDT of
Jon Orszag) (Orszag WDT).
The Services assert that this is merely a re-tread of the
SoundExchange argument the Judges rejected in SDARS III. Although the
Services dispute neither the growth in music industry revenue nor the
growth of interactive streaming industry revenue from 2014 through
2017,\22\ they assert that the revenue data does not support Sound
Exchange's argument that a single service's growth--here, Spotify's
revenue growth--supports the assertion that the Majors' complementary
oligopoly power has been compromised. More specifically, the Services
maintain that the important metric is the percentage of the music
industry's total revenue generated by Spotify. In this regard, the
Services take note that Spotify accounted for [REDACTED] [REDACTED] of
the Majors' total U.S. revenue in 2017, and only [REDACTED] in 2018.
Trial Ex. 1105 ] 64 (AWRT of Steven Peterson) (Peterson WRT); Trial Ex.
4107 at 10 & n.17 (WRT of Carl Shapiro) (Shapiro WRT). Additionally,
the Services' economic expert witnesses reject the idea that the
Majors' complementary oligopoly power vis-[agrave]-vis Spotify has been
compromised because of the latter's contribution to the Majors' revenue
stream. These witnesses further aver that, because Spotify and its on-
demand service competitors offer essentially the same service at the
same downstream subscription price, if one Major's repertoire was
unavailable on Spotify, subscribers would turn to its competitors, thus
abandoning Spotify in the process. 8/25/20 Tr. 3713-14 (Peterson); 8/
19/20 Tr. 2859 (Shapiro).
---------------------------------------------------------------------------
\22\ ``The Services agree that streaming accounts for a larger
percentage of the overall revenue for recorded music, however the
industry's total revenue has increased substantially since 2013.''
Services RPFFCL ] 308.
---------------------------------------------------------------------------
The Judges agree with the Services reasoning and conclusion,
finding that the increase in revenues from the entire interactive
services sector cannot support SoundExchange's argument that Spotify's
pricing power vis-[agrave]-vis the Majors has strengthened.\23\ The
Judges find that Spotify's relative pricing power must be evaluated in
the context of Spotify's particular economic position. The Judges find
nothing in the record to demonstrate that Spotify provides an on-demand
service that is so unique to listeners as to imbue it with greater
bargaining leverage.\24\ More particularly, even acknowledging that,
ceteris paribus, a Major would prefer to avoid the loss of Spotify's
[REDACTED] to overall music revenues, the substitutability of the on-
demand subscription services indicates to the Judges that the potential
loss of Spotify's royalty payments to a Major would be quickly offset
in the form of increased royalties from Spotify's competitors, as
subscribers substituted alternative on-demand subscription services
that offered the music licensed by all the record companies. Thus,
there is no basis for the Judges to conclude that a Major would be
willing to capitulate to Spotify by [REDACTED].
---------------------------------------------------------------------------
\23\ The Services are correct in noting that the Judges rejected
the same argument when asserted by SoundExchange in a prior
proceeding. See SDARS III, 83 FR at 65238, 65245. However, each
proceeding considers the facts as presented in the record of that
pending proceeding, so the Judges are not constrained here by the
factual record as presented in SDARS III.
\24\ In the language of economics, Spotify and the other on-
demand services--such as Apple Music, Google, Amazon, and others
with a smaller market footprint--may provide somewhat differentiated
on-demand experiences inter se, but nothing in the record suggests
that whatever differences exist make them anything other than mere
``monopolistic competitors,'' rather than buyers/licensees with
enhanced pricing power. See generally Robert S. Pindyck & Daniel L.
Rubinfeld, Microeconomics 451 (8th ed. 2012) (In a
``monopolistically competitive market . . . [f]irms compete by
selling differentiated products that are highly substitutable for
one another. . . . [T]he cross-price elasticities of demand are
large but not infinite . . . [t]here is free entry and exit . . .
[and] [i]n long-run equilibrium . . . the firm earns zero profit
even though it has monopoly power [over its own brand].''). Further,
the essential products offered by interactive services, as
SoundExchange's industry witnesses all tout, are their sound
recording repertoires, which makes a listener's selection of any
particular streaming service of secondary concern compared to the
ability to access all the music. See Harrison WDT ] 5 (identifying,
as examples, 23 Universal artists who are ``some of the best known
and most popular recording artists in the world''); Piibe WDT ]] 6-7
(listing, as examples, Sony's own 23 artists who are ``superstars''
and ``legendary recording artists''); Adadevoh WDT ] 3 (listing, as
examples, 10 Warner artists who are among ``today's most popular
artists, within a roster of ``some of the most celebrated artists in
recorded music history''). These artists and their recordings are
not available only on Spotify.
The chronic lack of profits and essentially identical downstream
subscription prices persuade the Judges that the Services are
correct that the on-demand streaming services lack of market power
downstream and an absence of pricing power upstream. Further, the
meteoric growth of Apple Music in the streaming market and the
recent strong growth of Amazon and Google in the on-demand sector,
show that the on-demand streaming market has characteristics of a
competitive market. See Orszag WDT tbl.4.
---------------------------------------------------------------------------
To make this argument from a different perspective, SoundExchange
also looks at Spotify's U.S. revenue through the narrower prism of
total U.S. subscription interactive revenues--noting that Spotify was
responsible in 2016 and 2017 for a more considerable portion--almost
[REDACTED]% of such domestic royalties. Orszag WDT ] 124, tbl.11.
However, the Services aver that this [REDACTED]% figure needs to be
placed in an appropriate temporal context. Specifically, they note that
Spotify's share of U.S. gross subscription interactive revenues has
actually fallen from 2015, when it was [REDACTED]% of the total, to
2018, when it accounted for [REDACTED]% of the total. See Orszag WDT ]
124, tbl.10.
Because the specific issue under consideration is the alleged
change in Spotify's pricing power since the execution of the parties'
2013 agreements, the Judges find that the dynamic changes in
subscription revenue shares during the relevant period is a more
meaningful metric than the static [REDACTED]%-[REDACTED]% market share
measure. Because Spotify's share of domestic revenues has diminished
[REDACTED] since 2015--according to Mr. Orszag's own written
testimony--there is no basis to support SoundExchange's claim that the
Majors had become more dependent upon Spotify's revenue stream over
this period. Moreover, because the decrease in Spotify's share of
domestic on-demand subscription revenue coincided with the rapid growth
of Apple Music's entry into the market, these data further confirm the
substitutability of interactive services among the listening public,
further diminishing the Majors' dependence on any single interactive
service.
Placing Spotify's royalty revenues in the context of two Majors'
internal contract renewal discussions, SoundExchange relies on the
testimony of two witnesses, for Sony and Warner
[[Page 59459]]
respectively.\25\ First, according to the Sony witness, the [REDACTED]
9/2/20 Tr. 5228 (Piibe); Trial Ex. 5467 at 1. Moreover, Sony believed
that Spotify was [REDACTED]. 9/2/20 Tr. 5368 (Piibe).
---------------------------------------------------------------------------
\25\ The Judges discuss the separate negotiations between
Spotify and the three Majors in detail infra.
---------------------------------------------------------------------------
Second, Warner also emphasized the impact of [REDACTED]. In its
internal documents discussing negotiations with Spotify, Warner
executives expressed the importance of [REDACTED], with one executive
stating: ``[REDACTED]'' Trial Ex. 4025 at 1. However, the Services
point out that, in the very same document, Warner executives were also
emphasizing that [REDACTED] and that Warner [REDACTED] Trial Ex. 4025
at 1.\26\
---------------------------------------------------------------------------
\26\ As the Judges discuss in greater detail infra, the interest
Warner (or either of the other Majors) had in [REDACTED] is the only
economically credible rationale for [REDACTED].
---------------------------------------------------------------------------
Moreover, although the internal [REDACTED] deliberations summarized
in Trial Ex. 4025 reference the [REDACTED], the recitation of that
latter point is not economically relevant, let alone dispositive.
Internal business documents that reflect information such as historical
revenue or other accounting data but ignore crucial economic
information regarding, for example, the fluidity of market shares, the
elasticity of market demand, and the absence of barriers to entry, are
not only lacking in economic relevancy, they obscure the identification
of relevant economic evidence. See Geoffrey A. Manne & E. Marcellus
Williamson, Hot Docs vs. Cold Economics: The Use and Misuse of Business
Documents in Antitrust Enforcement and Adjudication, 47 Ariz. L. Rev.
654 (2005) (noting in the analogous area of antitrust law, ``[r]eliance
on accounting data, market characterizations, and statements of intent
by economic actors threatens to undermine the economic foundations of
antitrust jurisprudence, and thus the purpose of the antitrust
laws.''). This caution extends from comments made by negotiators in the
trenches up to discussions in corporate boardrooms. See William Inglis
& Sons Baking Co. v. ITT Cont'l Baking Co., 668 F.2d 1014, 1028 (9th
Cir. 1982) (discounting the probative value of ``boardroom
ruminations'' in antitrust cases). In fact, Mr. Orszag is in agreement
with regard to the primacy of economic testimonial analysis over such
other evidence. 8/11/20 Tr. 1338 (Orszag) (``It's well understood in
competition economics . . . that . . . economic analysis should play a
dominant role'' relative to the role of statements of the commercial
actors and internal company documents.) (emphasis added).\27\
---------------------------------------------------------------------------
\27\ In Web IV, the Judges found that the existence of
negotiations between Must Have record companies and interactive
services did not prove that the latter had pricing power, because
expert economic testimony explained that even monopolists will
negotiate in order to estimate their counterparties' willingness-to-
pay. Thus, the Judges held: ``[T]he mere existence of . . .
negotiations is uninformative as to whether the rates negotiated
between the interactive services and the Majors are competitive.''
Web IV, 81 FR at 26343. Thus, evidence of negotiations must be
examined contextually--on a case-by-case basis--to ascertain whether
that evidence in fact reflects an effectively competitive
environment.
---------------------------------------------------------------------------
In sum, the Judges find that Spotify's share of the Majors'
downstream revenue does not explain why [REDACTED].
b. Can Spotify [REDACTED]?
SoundExchange asserts that the Majors could not reasonably
[REDACTED], because [REDACTED]. SX PFFCL p. 105 et seq. First, Sony's
testifying witness, Mr. Piibe, explained that the [REDACTED]. 9/2/20
Tr. 5229-30 (Piibe). Further, according to a Warner analysis,
[REDACTED]. Trial Ex. 5077. See also Harrison WDT ] 35 (``It would take
time to [REDACTED] . . . .''). From this testimony and evidence,
SoundExchange concludes that ``[REDACTED] . . . .'' SX PFFCL ] 317 (and
record citation therein).
The Services emphasize in response that this argument again ignores
the fundamental bargaining point: That because [REDACTED]. Services'
Corrected Reply to SoundExchange's Proposed Findings of Fact and
Conclusions of Law ] 311 (and record citations therein) (Services
RPFFCL). To that end, the Services point to the testimony of a
[REDACTED] witness, who said that [REDACTED]. 9/9/20 Tr. 5932
([REDACTED]). See also 9/2/20 Tr. 5424-25 ([REDACTED]) (noting that if
[REDACTED]).
With regard to the distinction between short-run and long-run
effects, Professor Shapiro contextualizes the issue in an economic
manner. Shapiro WRT at 7 n.16 (``the economics of bargaining teaches
that bargaining power depends on the long-run impact on both parties of
failing to reach an agreement, with future impacts suitably discounted
as are all cash flows.''). That is, he considers the problem as a
weighing of present discounted values to Spotify, on the one hand, and
to a Major, on the other, over a one-year period,\28\ of a license
negotiation impasse that leaves Spotify without the Must Have Major
and, reciprocally, leaves the Major without the Spotify platform. The
Judges find his analysis highly persuasive, and thus quote it at some
length below:
---------------------------------------------------------------------------
\28\ It was agreed that [REDACTED]. Peterson WRT ] 66; 9/3/20
Tr. 5928-30 ([REDACTED]); see also 8/11/20 Tr. 1293-94 (Orszag)
(``obviously there's a longer-term effect that would occur that
would be adverse to Spotify''); Leonard WRT ] 77 (``[A] label would
have a greater ability to wait out the impasse, given that it would
continue to receive royalties from other sources, whereas the
service's entire subscription revenues would potentially be at risk
. . . .'').
[C]onsider as an example the negotiations between Spotify and
Sony. Sony is ``must-have'' for Spotify (as Mr. Orszag concedes), so
if Spotify fails to sign a license with Sony, Spotify's interactive
service will decline, fail to be commercially viable, and be forced
to close down. Unquestionably, that makes an impasse very costly for
Spotify, so Sony has a great deal of bargaining power in its
negotiations with Spotify.
Mr. Orszag['s] claim[ ] that Spotify has comparable pricing
power comparable to that of a ``must-have'' service for Sony . . .
does not withstand scrutiny. If Sony does not sign a license with
Spotify, so Spotify is forced to stop offering Sony tracks, Sony
will immediately suffer a loss of royalty income from Spotify . . .
. According to Table 13 in the Orszag WDT, Sony received [REDACTED]%
of its total revenue from Spotify in 2017.
Mr. Orszag provides no explanation of why Sony losing up to
[REDACTED]% of its revenue from recorded music is comparable, in
terms of impact and thus bargaining power, to Spotify having to shut
down its service altogether. Moreover, the [REDACTED]% figure for
Spotify's share of Sony's revenue in 2017 is far too high as a
measure of the revenue that Sony would have lost, had Sony music no
longer been available on Spotify. Crucially, the [REDACTED]% figure
represents the immediate impact on Sony, before any Spotify
subscribers respond to the absence of Sony music.
Quite soon, Sony's loss of income would be much smaller. As
emphasized repeatedly by SoundExchange--indeed as a foundational
pillar of its entire case here--a ``must-have'' record company bears
a substantial opportunity cost of licensing to a music service
because without its music listeners to that service will shift their
listening time to other forms of music listening. By definition,
that implies that when Sony does not license to Spotify, Sony will
gain substantial revenue from other licensees and other forms of
listening. As a matter of arithmetic, that means that Sony would
lose less than [REDACTED]% of its revenue.
As an illustrative example, suppose that Spotify would shut down
after one year, due to its lack of Sony's ``must-have'' repertoire,
and suppose that all of the former Spotify subscribers would replace
their Spotify subscriptions with subscriptions to other interactive
services that pay royalties comparable to those paid by Spotify. In
that case, Sony would be made entirely whole after the first year.
In that situation, Spotify would have very little pricing power in
its negotiations with Sony, far less than Sony's power as a ``must-
have'' record company.
[[Page 59460]]
Mr. Orszag and the label witnesses on which he relies emphasize
the short-term cost to a record company of not licensing to Spotify.
However, economic theory tells us that the correct measure of the
cost to Sony of not licensing to Spotify in a bargaining context is
the present discounted value of the revenue that Sony would lose in
total. The present discounted value includes short-term and long-
term effects, weighting them appropriately given the time value of
money.
This is a critical point in understanding relative bargaining
power in the upstream interactive services market. The underlying
idea is relatively simple and hopefully intuitive: When two parties
are bargaining, their bargaining power does not just depend upon how
costly an impasse would be for each of them over the first day or
week, but rather upon how costly an impasse would be over time. Mr.
Orszag's analysis is unreliable because he focuses excessively on
the short-term cost to a major record company of not licensing to
Spotify and fails to account for the long-term effects.
Shapiro WRT at 7-8 (emphasis added; footnotes omitted).
Applying an 8% annual discount factor--that Professor Shapiro found
to be a reasonable cost of capital to use for generating present
value--as well as other assumptions not challenged as unreasonable by
SoundExchange--Professor Shapiro found that not licensing to Spotify
would: (i) Cause Sony to lose only [REDACTED]% of the present
discounted value of its royalty income; and (ii) by [REDACTED]
contrast, cause Spotify to lose approximately 95% of the present
discounted value of its revenue and profits. Shapiro WRT at 9.
Accordingly, Professor Shapiro concludes that ``[c]learly, in this
situation Sony would be in the driver's seat in negotiating with
Spotify.'' Shapiro WRT at 9.
The only rejoinder by SoundExchange, through Mr. Orszag, is that
the record reflects a [REDACTED] than the weighting reflected in a
present value approach that did not incorporate this [REDACTED].
However, the record is barren of any analysis [REDACTED] The Judges
find this alternative not credible. Moreover, even if the Majors did
[REDACTED], they would surely recognize (and, indeed, do not dispute)
that [REDACTED].
Indeed, the Services emphasize that the testimony of Majors'
witnesses regarding the impact of [REDACTED] was speculative and lacked
support--particularly as it related to [REDACTED]. See 9/2/20 Tr. 5388
(Piibe) ([REDACTED]); 9/3/20 Tr. 5731-32 (Harrison) (admitting that
[REDACTED]).
Given the dearth of analysis in the record of the relative harms to
Spotify and the Majors from a prolonged blackout, and the fact that
such a consequence would spell Spotify's commercial demise, the Judges
find that SoundExchange's assertion that [REDACTED], beggars belief.
The Services also seek to diminish the evidentiary value of Trial
Ex. 5077, on which [REDACTED] relies. That document, the Services note,
is a [REDACTED]. Moreover, the Services point out that this document
[REDACTED]. Services RPFFCL ] 315 (and record citations therein).\29\
---------------------------------------------------------------------------
\29\ The Services also note that the reference to a [REDACTED]
reflects a situation that arose in Mexico and that there is no
evidence or testimony to support [REDACTED] implication that this
foreign event is representative of what would occur in the United
States. See Trial Ex. 5077; Services RPFFCL ] 317.
---------------------------------------------------------------------------
In sum, the Judges find that SoundExchange's claim that the effect
on a Major of its loss of the Spotify platform (i.e., going dark on
Spotify) has altered the power dynamic between Spotify and the Must
Have Majors to be incomplete at best, and almost certainly incorrect.
In order to demonstrate that the power complementary oligopolists bring
to the market and thus to the bargaining table had been neutralized to
any degree, [REDACTED] needed to do more than [REDACTED]. Because the
context of this analysis is to ascertain relative negotiating power,
SoundExchange needed to demonstrate that the economic impact to the
Majors of going dark on Spotify would at least approximate the impact
of such an event on Spotify. This SoundExchange decidedly did not do.
Rather, the evidence is clear--and the economic logic of maximizing the
present value of profits and minimizing the present value of losses is
compelling--that a Major going dark on Spotify would work expeditiously
to contain losses and entice Spotify subscribers to maximize their own
self-interest by moving to an interactive service that continued to
play that Major's music.
SoundExchange alternatively seeks to show that the Majors'
bargaining power has been compromised vis-[agrave]-vis Spotify because
Spotify [REDACTED]. SX PFFCL ]] 318-327 (and record citations therein).
In response, the Services note the absence of testimony from artists
themselves regarding whether they might depart from a Major who failed
to secure a license deal with Spotify. In fact, the Services point out
that testimony upon which SoundExchange does rely--[REDACTED]--
indicates [REDACTED] [REDACTED].'' 9/2/20 Tr. 5426-27 (Jennifer
Fowler). And, in terms of the legal and practicable ability of
[REDACTED]. 9/9/20 Tr. 5952-54 (Sherwood); 9/3/20 Tr. 5738 (Harrison).
The Judges find compelling the absence of the testimony from any
artists as to how they would react if the Major with which they had
contracted lost the Spotify platform because of an impasse in licensing
negotiations. In the absence of such testimony, the Judges put
particular weight on the testimony, cited above, from [REDACTED]
indicating that [REDACTED].
SoundExchange also suggests that a Major would suffer several
miscellaneous injuries if it reached an impasse with Spotify that
resulted in that Major going dark on the Spotify platform. First, the
Major would [REDACTED]. See generally Trial Ex. 5017; SX PFFCL ] 328
(and record citations therein). However, the Judges agree with the
Services that a Major's ongoing ability to obtain data from other
interactive services would reduce the impact of such a data loss,
especially as erstwhile Spotify subscribers--unhappy with the loss of a
Major's repertoire--migrated to other on-demand services. Moreover,
even the prospect of a short-term data loss is quite low, given the
futility of a Spotify strategy of actually forcing a Must Have to go
dark.
Another damage which SoundExchange posits derives from the
testimony of a Universal executive who was concerned that a [REDACTED]
could [REDACTED] Harrison WDT ] 35; 9/3/20 Tr. 5724 (Harrison). The
Judges find this testimony to constitute mere speculation, and
meritless speculation at that. The Judges find it bordering on the
absurd to contemplate that a licensing impasse between a single service
and a single Major [REDACTED]. Other interactive services that are
already competing vigorously in the market stand at the ready to
acquire Spotify's subscribers and, given the low barriers to entry for
streaming services, the concept of contestable competition means that a
new competitor could also enter and compete for a share of the market.
See Shapiro WRT at 9.\30\
---------------------------------------------------------------------------
\30\ Further, Spotify's competitors (as well as aggrieved
artists and social and mass media) would likely spread the word
publicly regarding the music missing from Spotify in the event of a
blackout of a Major, hastening the transition of Spotify customers
to other interactive services. Ironically, as discussed infra, this
is the very sort of accelerating demise that, according to
SoundExchange (in convincingly criticizing Pandora's Label
Suppression Experiments), would befall a noninteractive service that
attempted to black-out a Major. If noninteractive ad-supported
listeners--who pay nothing out-of-pocket to listen to music curated
by the service--would switch away from the service if they became
aware of the blackout of a Major, then, a fortioiri, Spotify's
interactive subscribers--who do pay out-of-pocket to listen to music
they demand--would certainly switch away from Spotify if it likewise
blacked-out a Major's entire repertoire.
---------------------------------------------------------------------------
[[Page 59461]]
Continuing with its speculation regarding miscellaneous harm,
SoundExchange argues that, upon a licensing impasse with a Major,
Spotify's subscribers would not abandon it because (i) subscribers pay
monthly or yearly for their subscriptions, (ii) Spotify delivers well-
customized recommendations, (iii) subscribers have invested time in
building their music collection, (iv) subscribers who purchased Spotify
as a part of a bundle may be less likely to cancel their subscription,
and (v) subscribers might anticipate a quick resolution to the
licensing dispute. SX PFFCL ]] 339-343 (and record citations therein).
The Judges agree though with the Services that these assertions are
little more than rank speculations. As the Services point out, because
on-demand plays account for [REDACTED]% of Spotify listening hours, the
idea that subscribers would tolerate the loss of any Majors' repertoire
because of behavioral impediments is not only unexplored, it assumes a
remarkable irrationality among subscribers with regard to their own
tastes and preferences. Further, SoundExchange's assertion of this
speculative status quo outcome is 180 degrees from its immediately
preceding speculative assertion that the entire subscription concept
and market would collapse if a single Major went dark on Spotify. While
there may be a rational argument why either outcome could occur,
neither extreme is reasonable or based on record evidence. Moreover, it
is not rational to posit that such a licensing disagreement would cause
the industry both to remain in stasis and to disappear. Indeed, by
making both arguments simultaneously without evidentiary support,
SoundExchange seems willing to engage in the evidentiary equivalent of
throwing spaghetti against the wall to see if any of it sticks.\31\
---------------------------------------------------------------------------
\31\ SoundExchange also posits that whatever injury would befall
the domestic industry would also injure the global music market. SX
PFFCL]] 337-338. However, this assertion is likewise devoid of
evidentiary support, as there is no adequate record support that
foreign agreements are affected by the existence, vel non, of
licensing agreements in U.S. interactive markets. See Services
RPFFCL ] 338. As a general rule, the Judges have eschewed reliance
on developments in foreign markets when the proofs are insufficient
to demonstrate a posited connection between foreign and U.S. market
that is relevant to these proceedings. SDARS II, 78 FR at 23058 (and
precedent cited therein).
---------------------------------------------------------------------------
In sum, the Judges find insufficient evidence to support
SoundExchange's argument that a Major going dark on Spotify would lead
to a ``parade of horribles'' befalling that Major so substantial as to
imbue in Spotify a market power sufficient to [REDACTED].
c. Does Spotify's technological ability to steer plays on spotify-
curated playlists provide it with pricing power sufficient to mitigate
or offset the Majors' complementary oligopoly power?
The bulk of Spotify's argument in support of its claim that Spotify
has a pricing power commensurate with the overall bargaining power of
the Majors is based on Spotify's technological ability to steer plays
of sound recordings toward or against a record company. This emphasis
on steering is unsurprising, because in Web IV the Judges relied on
evidence of the noninteractive services' ability to steer, and their
credible threats to do so, as ameliorating the anticompetitive effect
of the Majors' complementary oligopoly.
More particularly, SoundExchange asserts that Spotify developed a
substantial ability to influence listening on its platform subsequent
to the execution of its 2013 Agreements with the Majors. See, e.g.,
Orszag WDT ]] 138-151; 9/2/20 Tr. 5414 (Fowler); 9/2/20 Tr. 5197-98
(Piibe). Spotify's purported power to influence market share, according
to SoundExchange, flowed mainly from its alleged ability to influence
market share through economically strategic placement of sound
recordings within Spotify-controlled playlists. Orszag WDT ]] 141-
146.\32\ By way of background, in July 2015, Spotify launched playlists
personalized for its subscribers, including Discovery Weekly, to assist
subscribers in identifying new music tailored to their listening
preferences. Orszag WDT ] 62. Contemporaneously, Spotify began to
prioritize those playlists and additional Spotify-curated playlists,
for various genres, by giving them prominent and superior locations in
its search and display features. Trial Ex. 5619 ]] 15, 17 (CWDT of
Jennifer Fowler). See also SX PFFCL ]] 359-360 (and record citations
therein). From 2015 to 2017, these Spotify-curated playlists increased
as a share of listening on Spotify from less than 20% to approximately
31% of Spotify platform listening. Orszag WDT ] 142.
---------------------------------------------------------------------------
\32\ SoundExchange further notes that [REDACTED] has [REDACTED].
SX PFFCL ]] 370-71 (and record citations therein); Orszag WDT ] 148.
Less significantly, SoundExchange avers that Spotify can also
leverage its [REDACTED]. Orszag WDT ] 147.
---------------------------------------------------------------------------
According to SoundExchange, the economic value of these Spotify-
curated playlists extends beyond a subscriber's initial accessing of
songs on the playlist. Listeners also can add songs from those
playlists onto their own playlists and into their own music
collections, and, having positively experienced music curated by
Spotify, they are more likely to search for music from the same
artists, and thus from the same record company. SX PFFCL ]] 363-364,
366 (and record citations therein).
Consequently, SoundExchange avers that record companies consider
playlists to be [REDACTED], and thus they devote considerable effort
and resources to the development and implementation of playlist
strategies. SX PFFCL]] 365, 367 (and record citations therein).
Further, the [REDACTED]. See Trial Exs. 5070-5072; Harrison WDT ]] 49,
52. SoundExchange further relies on the testimony of Michael Sherwood,
a Warner Senior Vice President responsible for overseeing its Spotify
and other streaming service accounts, Trial Ex. 5620 ]] 1-2 (WDT of
Mike Sherwood), who testifies that [REDACTED]. 9/9/20 Tr. 5921-22
(Sherwood).
Moreover, SoundExchange emphasizes that Pandora's own economic
expert witness, Professor Shapiro, acknowledges that, by the time
Spotify and the Majors were negotiating their 2017 Agreements, Spotify
already possessed the ability to influence listening and record company
market share through its selection and placement of songs on Spotify-
curated playlists. 8/19/20 Tr. 2868 (Shapiro) (``Spotify has some
ability to influence listening through a service-generated playlist.
[Mr. Orszag] emphasizes that. I agree that they definitely have that
ability.'').
SoundExchange relies yet again on Professor Shapiro's testimony to
argue that, when a streaming service such as Spotify has the technical
ability to steer, its credible threat to steer against a Major during
contract negotiations can constitute sufficient leverage by which
Spotify can negotiate better terms for itself. See 8/20/20 Tr. 3067-68
(Shapiro). SoundExchange's expert is in full agreement, testifying that
in negotiations related to steering, as in negotiations generally, ``it
is often the threat that can influence outcomes . . . as long as the
threat is credible.'' 8/11/20 Tr. 1255 (Orszag) (emphasis added); see
also id. at 1211-13, 1347-48.
Continuing its attempt to build its steering argument on the back
of Professor Shapiro's own testimony, SoundExchange points out that he
admitted that a steering threat could be implicit as well as explicit.
8/20/20 Tr. 3066-67 (Shapiro). Moreover, the evidence of [REDACTED],
might be seen, Professor Shapiro recognizes, [REDACTED]. 8/20/20 Tr.
3052 (Shapiro). For these reasons,
[[Page 59462]]
SoundExchange emphasizes, in Web IV Professor Shapiro testified that
``if the services have substantial ability to steer'' then the market
can be ``workably competitive'' notwithstanding that each Major remains
a Must Have. See 8/20/20 Tr. 3036 (Shapiro).
SoundExchange does recognize that, for Spotify to be able to
transform its technological ability to engage in editorial steering
into [REDACTED], its threats must be credible to a Major, so that
actual steering is neither needed nor implemented. SX PFFCL ] 354
(citing Orszag WDT ] 149). On this score, Professor Shapiro likewise is
in full agreement. He testifies that steering threats are ``depend[ent]
on the credibility of these threats'' as well as the ``fallback''
positions of the parties in the event the threat of steering leads to a
failure of the parties to enter into a licensing agreement. 8/20/20 Tr.
3053 (emphasis added).
The Services strongly disagree with SoundExchange's steering
argument. First, they minimize the economic importance of playlist
listening--where steering might take place--notwithstanding its recent
growth. In particular, they criticize Mr. Orszag for trumpeting that
31% of all Spotify listening is to Spotify-curated playlists, when this
figure obviously means that approximately 69% of all listening remains
on-demand in nature and thus outside of Spotify's curatorial
gatekeeping capacity. Thus, the Services argue, the defining feature of
Spotify (and other interactive services) remains the offering to a
subscriber of access to a virtually complete repertoire of songs for
on-demand listening. Services RPFFCL ] 358 (and record citations
therein). Google's economic expert, Dr. Leonard, takes note of a
behavioral study of Spotify users [REDACTED] See Trial Ex. 2122 at 8.
Dr. Leonard takes from the 69%:31% split referenced above and the
[REDACTED] that ``[a] user's ability to play any song on demand remains
a defining characteristic of interactive services and a driver of user
demand for these services.'' Trial Ex. 2160 ] 73 (CWRT of Gregory
Leonard) (Leonard WRT).
Further, on a fundamental level, the Services assert that
SoundExchange misapprehends the concept of steering, untethering the
concept from its economic significance. The relevant form of
``steering'' for purposes of this proceeding, the Services maintain, is
one that generates price competition among the Majors. Services PFFCL ]
64 (citing Web IV, 81 FR at 26343 (``[s]teering is synonymous with
price competition in this market'') and SoundExchange, 904 F.3d at 52
(affirming the Judges' decision that ``the likely effect of steering in
the music industry would be to promote price competition'')).
The Services distinguish Web IV in this regard by emphasizing that
the Judges in that case had relied on two agreements that contained
explicit steering provisions designed to generate lower royalty rates
in exchange for additional plays--what the Services characterize as the
essence of steering. First, the Services point to the agreement between
Pandora and Merlin for Pandora's noninteractive service, which provided
that ``the [REDACTED]'' as set out in the agreement. Web IV, 81 FR at
26356. Second, the Services refer to the Web IV Judges' description in
that determination of an ``iHeart/Warner Agreement [that] incorporates
the same economic steering logic as the Pandora/Merlin Agreement.'' Id.
at 26375.
But, in the present case, the Services aver that the Majors had
[REDACTED]. In fact, the Services maintain, Mr. Orszag concedes this
point, testifying in response to a question from the Judges that
[REDACTED].'' 8/12/20 Tr. 1536 (Orszag); see also id. at 1711 (Orszag)
(``[REDACTED].''); Shapiro WRT at 16 (summarizing lack of evidence in
Orszag WDT and noting ``when Mr. Orszag discusses how the major record
companies have responded to the growing role of service-generated
playlists, he does not claim they have reduced their royalty rates to
encourage increased plays of their material''). In this regard,
Google's economic expert witness, Dr. Peterson, noted that [REDACTED].
Peterson WRT ] 74.
The Services also point to the hearing testimony of [REDACTED], who
acknowledged that [REDACTED]. Specifically, they note that: (1)
[REDACTED] 9/2/20 Tr. 5371-72 ([REDACTED]) (emphasis added); (2)
[REDACTED].'' 9/3/20 Tr. 5698 ([REDACTED]) (emphasis added); and (3)
[REDACTED] 9/3/20 Tr. 5531-32, 5480-81 ([REDACTED]) (emphasis added);
see also Trial Ex. 4014 at 3 (``[REDACTED].'').
Accordingly, the Services maintain that [REDACTED] present no
evidence or testimony that [REDACTED]. See 9/02/20 Tr. 5435 (Fowler);
9/09/20 Tr. 5949-50 (Sherwood). Accordingly, the Services note that,
[REDACTED], Mr. Orszag was compelled to concede that competition for
playlist slotting is not based on royalty rate discounts (or side
payments). 8/11/20 Tr. 1313 (Orszag). The Services maintain that this
testimony is powerful evidence ``undermining [the] theory that playlist
competition is an outgrowth of steering-based price competition.''
Services RPFFCL ] 359. In fact, the Services note, [REDACTED]. See
Services PFFCL ] 66 ([REDACTED]) (and record citations therein).
The Services also take issue with Spotify's claim that the 31% of
listening that occurs on Spotify-curated playlists is entirely subject
to Spotify's steering capabilities. Specifically, the Services note
that 17 percentage points of that listening (more than half of the 31%)
occurs on algorithmically-curated playlists that are personalized for
each user based on his or her listening behavior and thus outside
Spotify's control.'' See Orszag WDT ] 61. Moreover, no SoundExchange
witness provided any evidence that Spotify exerts any price-based
influence over this algorithm (or over the autoplay algorithm), such as
in the Pandora/Merlin agreement relied upon by the Judges in Web IV.
See 9/2/20 Tr. 5406 (J. Fowler); 8/11/20 Tr. 1316 (Orszag).
The Services also assert that SoundExchange is exaggerating the
importance of playlists within Spotify's entire streaming platform. It
notes [REDACTED] indicating that ``[REDACTED]'' Trial Ex. 2074. In the
same vein, the Services take note of the testimony of a [REDACTED], who
acknowledged that, for [REDACTED] 9/2/20 Tr. 5432-33, 5443
([REDACTED]). Furthermore, the Services emphasize that SoundExchange
relies essentially on supposition that playlist listening drives
listeners' subsequent on-demand streaming decisions, noting the absence
of any detailed studies that would confirm this hypothesis. Services
RPFFCL ]] 365-366 (and record citations therein).
The Services further note that, in the [REDACTED]. 9/2/20 5370-71
(Piibe); 9/3/20 Tr. 5537-39 (Adadevoh).
According to the Services, [REDACTED]. Essentially, according to
the Services, [REDACTED]t. See Services PFFCL ]] 151-156 (and record
citations therein).
To make clear the scope of the relevant [REDACTED], the Services
rely on the exact language of the 2017 agreements between the Majors
and Spotify. The Services assert that this contract language, set forth
below, [REDACTED], thus disposing of the very notion that [REDACTED]:
The Sony-Spotify Agreement
[REDACTED]
Trial Ex. 5011 at 36 (Sony-Spotify 2017 Agreement); see also Trial
Ex. 5074 at 22 ([REDACTED] in Sony-Spotify immediately prior 2013
Agreement) (emphasis added).
[[Page 59463]]
The Universal-Spotify Agreement
[REDACTED]
Trial Ex. 5037 at 45, 96 (Universal-Spotify 2017 Agreement); see
also Trial Ex. 2062 at 38 ([REDACTED] in Universal-Spotify 2013
Agreement).
The Warner-Spotify Agreement
[REDACTED]
Trial Ex. 5020 at 20, 36 (Warner-Spotify 2013 Agreement).\33\
---------------------------------------------------------------------------
\33\ [REDACTED]. See Trial Ex. 5038 at 24 (``[REDACTED]''). See
also 9/3/20 Tr. 5549-51, 5557-61 (Adadevoh) (acknowledging these
provisions were intended to [REDACTED]).
---------------------------------------------------------------------------
The Services note a consensus between SoundExchange and Services'
expert witnesses that [REDACTED]. See, e.g., 8/12/20 Tr. 1709 (Orszag);
Leonard WRT ] 66. More particularly, they point to Dr. Leonard's
testimony that [REDACTED]. Leonard WRT ]] 60-63 (reviewing [REDACTED]
provisions in the Spotify agreements); see also 8/25/20 Tr. 3716-17
(Peterson); see also Peterson WRT ]] 69-70 (noting the [REDACTED]); 8/
12/20 Tr. 1699-1701, 1704 (Orszag) (acknowledging that [REDACTED]).
SoundExchange maintains, though, that these [REDACTED] have not
been sufficient to [REDACTED], as discussed supra). Specifically,
SoundExchange argues:
1. [REDACTED]. See, e.g., 9/3/20 Tr. 5702 (Harrison). SoundExchange
notes that [REDACTED] construed the [REDACTED]. See Trial Exs. 4031 at
37 ([REDACTED]) & 5020 at 20 ([REDACTED]).
2. A service that curates its own playlist, such as Spotify, could
[REDACTED]. See 9/3/2020 Tr. 5700-01 (Harrison) (discussing the
Spotify-Universal agreement).
3. There are significant [REDACTED], including the Majors'
[REDACTED]. Orszag WDT ] 150 (``[REDACTED].''). And, even if a record
company [REDACTED]. See id. [REDACTED]). Moreover, the [REDACTED]. See
9/2/20 Tr. 5404-06, 5446-47 (J. Fowler).
4. Even [REDACTED]. 8/11/20 Tr. 1317-18 (Orszag); accord Trial Ex.
4017 at 4 (noting that [REDACTED]); Trial Ex. 2124 at 1 (``[REDACTED]);
9/2/2020 Tr. 5204 (Piibe) (``[REDACTED]).
5. Even if the [REDACTED], SoundExchange claims they would
nonetheless be left with [REDACTED]. It asserts that [REDACTED]--but
that would [REDACTED]. See, e.g., Harrison WDT ] 56; Adadevoh WDT ] 34,
38 & n.27; Piibe WDT ]] 29-30; 9/3/20 Tr. 5482 (Adadevoh).
Consequently, SoundExchange maintains, it is unsurprising that the
record contains no evidence that [REDACTED]. See, e.g., 9/3/20 Tr. 5481
(Adadevoh); accord id. at 5565 (Adadevoh) (noting that [REDACTED]).
And, when Universal asserted to Spotify that the latter was [REDACTED].
9/3/20 Tr. 5702 (Harrison).
Additionally, SoundExchange avers that, even assuming arguendo the
[REDACTED] and effectively competitive. Specifically, SoundExchange
explains that [REDACTED]. Accordingly, although Majors may want or need
to [REDACTED] such as those quoted above, [REDACTED]. Rather, according
to SoundExchange, Spotify is [REDACTED] or, importantly here, to
[REDACTED]. See 8/11/20 Tr. 1254 (Orszag).
That is, as Mr. Orszag explains, once a streaming service has
successfully used a [REDACTED], the Major may in turn seek [REDACTED].
See 8/11/20 Tr. 1331-32 (Orszag). By similar economic logic, a Major
that had entered a negotiation [REDACTED] may decide [REDACTED]. See 9/
2/20 Tr. 5203-05 (Piibe).
Thus, SoundExchange maintains, the mere presence of [REDACTED], on
which the Services rely, is hardly conclusive evidence that the market
lacks effective competition. Rather, as Professor Shapiro himself
acknowledges, in an effectively competitive market, a service might
agree to accept an [REDACTED]. 8/19/20 Tr. 3089-92 (Shapiro).
The Services respond, though, that the notion that the [REDACTED]
was contradicted by SoundExchange's own witnesses. Specifically, as the
Majors and Spotify negotiated over terms in 2016 and 2017, they
[REDACTED]. See, e.g. 9/3/20 Tr. 5551 (Adadevoh) (agreeing that
[REDACTED]''); see also 9/3/20 Tr. 5704-05 (Harrison).
Moreover, the Services aver, the terms of [REDACTED] with the
[REDACTED]. See, e.g., Peterson WRT ] 69. That is, while Spotify
negotiated [REDACTED], Spotify remained [REDACTED]. Trial Ex. 5074 at
22; Trial Ex. 5020 at 20, 36. Indeed, SoundExchange's own witness, Mr.
Orszag, concedes that throughout Spotify's presence in the United
States streaming market, [REDACTED] 8/12/20 Tr. 1703-04 (Orszag); see
also Services PFFCL ] 100 (summarizing additional evidence).
The Services also assert that there is no evidence that, as
SoundExchange maintains, the Majors negotiated for [REDACTED]. Instead,
the Services point to the Majors' imposition of [REDACTED]. See Shapiro
WRT at 22 (noting the Majors' recognition that [REDACTED]).
More particularly, the Services explain that the Majors' [REDACTED]
ensured that a [REDACTED]. That is, unless other labels [REDACTED]. 8/
20/20 Tr. 3058 (Shapiro); see also 8/13/20 Tr. 1905-06 (Orszag)
([REDACTED]''). The Services also rely on the testimony by Mr.
Harrison, the Universal executive appearing at trial, who agreed that
[REDACTED],'' and that ``[[REDACTED]'' 9/3/20 Tr. 5705-06
(Harrison).\34\
---------------------------------------------------------------------------
\34\ Because Mr. Harrison testified, without dispute, that
Universal ([REDACTED]) could only use the [REDACTED], Universal
apparently could not, for example, [REDACTED].
---------------------------------------------------------------------------
Importantly, SoundExchange's position--that the [REDACTED] in the
2017 agreements reflect a [REDACTED]--is inconsistent with
SoundExchange's argument, itemized supra, that, for ``[REDACTED]'' SX
PFFCL ] 388.
In addition to their rejoinders to SoundExchange's [REDACTED]
assertions, set forth supra, the Services take issue with each of
SoundExchange's additional arguments regarding the [REDACTED]. First,
they note that the only example SoundExchange could muster regarding
potentially [REDACTED] was related to [REDACTED] entered into between
[REDACTED]. However, there is no evidence in the record regarding how
[REDACTED] interpreted the [REDACTED] and, further, that the context
for any possible disagreement [REDACTED]. Further, there is no record
evidence indicating that Pandora had the intent to influence, or did
influence, [REDACTED]'s streams. Moreover, the Services note that there
is no sufficient proof that the [REDACTED] in the [REDACTED] agreement
are the same in all respects as those in the [REDACTED] agreement.
Services RPFFCL ]] 389-390.
The Judges find that SoundExchange's reliance on [REDACTED] is
unavailing because [REDACTED]. Moreover, although [REDACTED] is a
participant in these proceedings (represented by SoundExchange and its
counsel), no [REDACTED] witness testified that [REDACTED] sound
recordings was--to its understanding--a [REDACTED]. More broadly, the
Judges find wholly undeveloped SoundExchange's speculative assertion
that a service and a label may have [REDACTED]. Of course, they might
have (or claim to have) [REDACTED], but that possibility hardly
indicates that [REDACTED]. Moreover, the parties (services and labels)
spend substantial sums on attorneys to draft contract language
[REDACTED], the Judge are unwilling to
[[Page 59464]]
find that industrywide [REDACTED], as a class, are [REDACTED].
Second, the Services' assert as meritless SoundExchange's argument
that, even under [REDACTED], Spotify could [REDACTED]. The Services
point out that [REDACTED]--the only label SoundExchange cites for this
argument--prohibits ``any form of preferential or otherwise enhanced
positioning, placement or status'' and provides that [REDACTED] Trial
Ex. 5037 at 45, 96.
Moreover, the Services aver that the Majors do not [REDACTED]. In
fact, the Services note, in 2017, [REDACTED]. See Trial Ex. 4014; 9/3/
20 Tr. 5537-39 (Adadevoh) (reviewing Trial Ex. 4014, an internal Warner
analysis of [REDACTED] and agreeing that Warner had found
[REDACTED]'').\35\
---------------------------------------------------------------------------
\35\ The Services also note that SoundExchange separately claims
that the Majors [REDACTED]. This claim [REDACTED], belies
SoundExchange's claim that it [REDACTED] The Judges agree with the
Services.
---------------------------------------------------------------------------
The Judges find that there is insufficient evidence to support
SoundExchange's claim that it is hamstrung in attempting to [REDACTED].
Given the ostensible greater importance the Majors place in this
proceeding on [REDACTED]--see Trial Ex. 2124 at 1 (``[REDACTED]--the
Judges find that a Major would [REDACTED]. Moreover, [REDACTED].
Further in this regard, the Services disagree with SoundExchange's
claim that record companies would have ``[REDACTED].'' Rather, the
Services point to, inter alia, Trial Ex. 2108, in which [REDACTED].
Trial Ex. 2108 at 2-3. The Services assert that this [REDACTED] shows
the Majors have an available [REDACTED]. Further, the Services maintain
that the mere fact that [REDACTED] is consistent with [REDACTED] rather
than with speculation that [REDACTED]. See Services RPFFCL ] 395 (and
record citations therein).
The Judges find there is inadequate evidence to demonstrate that
the Majors [REDACTED], for the reasons given by the Services. Further,
consistent with the Judges comment regarding legal representation
supra, the Majors have at their disposal highly talented commercial,
corporate and litigation attorneys, who receive handsome fees for
[REDACTED]. Although [REDACTED], a sufficient record of [REDACTED] must
be demonstrated by a more persuasive record than exists in this
proceeding. Finally, in this regard, if the Majors [REDACTED], why does
SoundExchange argue that the [REDACTED]? If [REDACTED]? Indeed, the
fact that there is [REDACTED] in the record, as discussed supra, does
not mean that [REDACTED]; it points to the value of such [REDACTED].
The Majors' claims (1) that [REDACTED] and (2) that [REDACTED], are
blatantly inconsistent.
Accordingly, on balance the Judges find that there is insufficient
evidence to demonstrate that [REDACTED] in their stated intent. The
Judges take particular note of SoundExchange's acknowledgement,
discussed supra, that the Majors (1) had [REDACTED], (2) did not
[REDACTED], (3) found it difficult to [REDACTED], (4) asserted
[REDACTED], (5) failed to [REDACTED], and (6) agreed to [REDACTED].
Shifting from the issue of [REDACTED], the Services disagree with
SoundExchange regarding the economic importance of this issue. They
note that, pursuant to an internal Sony document, [REDACTED]
comprise[REDACTED] and that, [REDACTED], replacing those [REDACTED]
with [REDACTED] would only [REDACTED]. Trial Ex. 4017 at 4. See also 9/
03/20 Tr. 5544-45 (Adadevoh) ([REDACTED]); Trial Ex. 4014 at 3.
The Judges agree with the Services that Spotify's [REDACTED] to
suggest a sea change in Spotify's pricing power. And, there is no
evidence that Spotify could alter its business model by engaging in a
wholesale [REDACTED] with subscribers remaining indifferent to such a
fundamental change in the service. This is critical because the Judges
do not lose sight of the purpose of this particularized analysis of the
benchmark interactive service, which is to determine if Spotify has
changed in a manner that lessens or eliminates the complementary
oligopoly power of the Majors, such that an effective competition
adjustment in the target noninteractive statutory market is either
unnecessary or should be reduced. A [REDACTED] (themselves generating
but a minority of Spotify's listening) is wholly uninformative as to
this issue.\36\
---------------------------------------------------------------------------
\36\ The Judges discuss the negotiation of ``[REDACTED]'' with
Spotify later in this Determination. But, the Judges note here that
they find unavailing Mr. Orszag's attempt to de-contextualize the
impact of [REDACTED] by his noting that a [REDACTED]% loss in Sony's
market share would equate to a $[REDACTED] annual revenue loss. Mr.
Orszag reports that in 2018 Sony's digital music U.S. revenue
totaled $[REDACTED]. Orszag WDT tbl.13. Thus, the $[REDACTED] short-
term revenue loss posited by Mr. Orszag equals [REDACTED] about
[REDACTED] one percent of Sony's total annual U.S. digital music
revenue. Although $[REDACTED] is a large sum in many contexts, it is
small in the present context, especially because the purpose of the
exercise is to determine Spotify's pricing power relative to the
complementary oligopoly market power of the Majors. Clearly the
$[REDACTED] figure fails to reflect the appropriate magnitude of the
impact of Spotify's [REDACTED]. Such distorted use of monetary sums
is inappropriate. Cf. Pablo J. Barrio et al., Improving the
Comprehension of Numbers in the News, Proc. 2016 Conf. Hum. Factors
Computing 1 (Ass'n for Computing Mach. 2016) (``Unfamiliar
measurements make up much of what we read, but unfortunately carry
little or no meaning . . . as they can be difficult to interpret
without the appropriate context.'') (available on Google Scholar at
www.cs.columbia.edu (accessed June 9, 2021).
---------------------------------------------------------------------------
d. The (Partial) Evidence and Testimony Regarding the Majors'
Negotiations With Spotify Leading to Their 2017 Agreements
In addition to its foregoing arguments, SoundExchange relies on
evidence and testimony regarding the negotiations between Spotify and
the three Majors. Sound Exchange avers that this evidence and testimony
show that in the run-up to the execution of the 2017 Agreements
[REDACTED]. Accordingly, the Judges next consider that evidence and
testimony.
Before they weigh the record in that regard, the Judges take note
of the nature and sequencing of that evidence and testimony. First,
SoundExchange proffered this information in a disjointed manner.
Multiple documents from the archives of the three Majors were
introduced--primarily email correspondence between and among various
executives within each Major--discussing the Spotify negotiations.
However, none of the individuals who actually negotiated with Spotify--
and virtually none of the authors or recipients of these internal
emails--provided oral or written testimony at the hearing. Rather,
SoundExchange proffered witnesses from the Majors who had some
knowledge of these documents and second-hand knowledge of the oral
negotiations between their employers and Spotify.\37\ The Judges would
have much preferred to hear from first-hand witnesses from the Majors'
negotiating teams, who actually bargained with Spotify, in order to
appreciate how the usual bargaining dominance of the Majors might (or
might not) have been usurped by Spotify. Further, the documents to
which the Majors' second-hand
[[Page 59465]]
witnesses testified are not always models of clarity, and these second-
hand witnesses could not go beyond the four corners of the documents to
explain, identify or provide a sufficient economic context for these
documents. See Manne & Williamson, supra at 645; see also Web IV, 81 FR
at 26352 (When ``the Judges' task is to determine . . . economic
significance . . . the contracts are but one . . . piece of evidence .
. . [and] [w]here . . . a transaction is part of a complex . . .
business relationship it is appropriate--even necessary--for the Judges
to consider other evidence and analysis to determine the true economic
value of the transaction.'') (emphasis added). And, to the extent oral
negotiations between Spotify and the Majors, or between the Majors'
negotiating teams and their superiors, were never summarized or were
summarized in writings not in evidence, the record is incomplete in the
absence of testimony from the Majors' negotiators and other direct
decision-makers.
---------------------------------------------------------------------------
\37\ The Judges admitted these documents into the record,
finding them sufficiently authenticated, and, exercising their
discretion to admit hearsay evidence, the Judges did not exclude
these documents on that basis. But the issue of admissibility does
not raise the same concerns regarding the weight to be given to
documents written or received by relevant actors who were not called
to testify to explain the context, completeness and ambiguities, if
any, relating to those documents. Further, the actual negotiators
could have been called to testify regarding oral negotiations (the
Majors are all parties in this proceeding) and to explain and
contextualize statements contained in internal emails. Thus, to the
extent the record evidence of the Spotify-Majors negotiations is
incomplete or uncertain, the Judges find that SoundExchange must
bear the consequences of such deficiencies.
---------------------------------------------------------------------------
Second, SoundExchange proffered only correspondence from the
licensor side, that is, from the Majors. The record does not contain
any documentary evidence (or testimony, for that matter) from Spotify
regarding its negotiations with the Majors. Accordingly, there is an
incomplete and one-sided record of the negotiations upon which
SoundExchange relies.\38\ SoundExchange asserts that this
incompleteness is inconsequential because what is relevant are the
Majors' understandings and perceptions of [REDACTED].
---------------------------------------------------------------------------
\38\ In previous proceedings, the Judges have considered
negotiation documents when the record contained such material from
both counterparties. That is not the case with the record here.
---------------------------------------------------------------------------
The Judges agree that the Majors' understanding of Spotify's
position [REDACTED] is the ultimate relevant factor in explaining how
and why the Majors responded as they did in negotiations. However, to
determine whether the Majors' claimed understanding is credible, and to
weigh the value of each factor, the Judges would need to know much more
about how Spotify bargained and the representations it made. The actual
negotiators would have been the best witnesses to provide that level of
detail to assist the Judges in determining whether the Majors'
[REDACTED] is factually persuasive.
This is crucial for two reasons. First, the Services offer up a
quite different explanation. They argue that the Majors were simply
utilizing their complementary oligopoly power to [REDACTED]. See
Services PFFCL ]] 138-150 (and record citations therein). SoundExchange
is making an argument that relies on facts that, if relied upon by the
Judges, would lead to a radical departure from the bargaining analysis
they identified and adopted in Web IV--one which is consistent with the
economic framework of complementary oligopoly that has an unchallenged
lineage dating back to the 19th century work of the economist A.A.
Cournot. See Web IV, 81 FR at 26342. Such a departure from the prior
bargaining framework is certainly conceivable, but the hearing record
necessary to support the task should be substantial; instead,
SoundExchange's presentation appears to the Judges to have been
stitched together and, for the reasons discussed supra, lacking a sound
basis in economics, as well as in the very principles and dynamics of
bargaining that it applies to the hypothetical noninteractive
market.\39\
---------------------------------------------------------------------------
\39\ By contrast with the problematic record relating to the
effects of Spotify's supposed new-found pricing power, and as
discussed in detail infra, the Majors' internal documents and
hearing testimony reveal [REDACTED]. As also discussed infra, the
Majors' [REDACTED].
---------------------------------------------------------------------------
The Judges keep these considerations in mind as they analyze below
the parties' arguments regarding the import of the relevant strands of
evidence and testimony regarding Spotify's negotiations with the
Majors.
i. The Universal-Spotify Negotiations
Universal and Spotify began their negotiations to replace their
2013 agreement in [REDACTED], see Trial Ex. 4027 at 1, and completed
the negotiations at [REDACTED]. See Trial Ex. 5037 at 1. Early in the
negotiations, according to an internal company document, Universal
identified [REDACTED] as an issue to be addressed. Trial Ex. 5410 at 1.
SoundExchange notes that Universal's subsequent internal communications
reflect its [REDACTED]. Trial Ex. 4016 at 1 (``[REDACTED]''); see also
Trial Exs. 4019, 5429 at 1. Further, some Universal negotiators--again,
who did not testify--expressed in internal documents their belief that
[REDACTED], Trial Ex. 5422 at 1, with the author of an internal
Universal email, adding [REDACTED]. Trial Ex. 5221 at 5.\40\
---------------------------------------------------------------------------
\40\ Because the author of the email did not testify, the
unusual placement and styling of this alleged quote (itself hearsay)
was not the subject of examination at the hearing.
---------------------------------------------------------------------------
When apprised of [REDACTED], according to an internal Universal
email, Spotify acknowledged to Universal that it [REDACTED]. Trial Ex.
5413 at 1. Consistent with [REDACTED], Universal's testifying witness,
Aaron Harrison, acknowledged that [REDACTED]. 9/3/20 Tr. 5701
(Harrison).
In an attempt to [REDACTED], Universal ultimately proposed that
[REDACTED]. Trial Ex. 5410 at 1. However, Universal's internal emails
indicated that Spotify had [REDACTED] Trial Ex. 5421 at 1. Rather,
Spotify took the position that it would be ``[REDACTED].'' Trial Ex.
5414 at 1. Ultimately, the final 2017 Agreement included [REDACTED].
See generally Trial Ex. 5037. (However, as noted above, the 2017
Agreement included [REDACTED].
In response, the Services point out, as an initial matter, that the
statements in Trial Ex. 5414 constitute double hearsay, in that they
repeat [REDACTED] (the first hearsay) to a [REDACTED], which were then
repeated in the exhibit (the second hearsay). The Services also argue
that the Judges should give no weight to Trial Ex. 5521, which also
contains double hearsay, viz., [REDACTED] [REDACTED] (the first
hearsay), repeated in an internal email (the second hearsay). In any
event, the Services maintain, no part of the [REDACTED] that would
generate price competition.
Moreover, the Services aver that these statements are flatly
inconsistent with the acknowledgement by Universal's testifying
witness, Mr. Harrison, that Universal [REDACTED], but rather Universal
sought to [REDACTED] Trial Ex. 4016 at 1. Thus, Universal's negotiating
stance, according to the Services, was to [REDACTED]. To that extent,
the Services do acknowledge that Universal [REDACTED]--see Harrison WDT
] 56; 9/3/2020 Tr. 5743-5744 (Harrison)--but Universal was [REDACTED].
Id. at 5744 (Harrison). Accordingly, Universal had to rely on the
[REDACTED]. Harrison WDT ] 56. Additionally, the Services note that the
2017 Agreement [REDACTED].
The Services also contest SoundExchange's characterization of
[REDACTED]. Specifically, the Services point to the [REDACTED], which
requires that Spotify [REDACTED] and that Spotify would ``[REDACTED]''
Trial Ex. 2062 at 53-54 (2013 Spotify-Universal Agreement).
In fact, Trial Ex. 5429 (a 2016 negotiation email cited by
SoundExchange) acknowledged that the [REDACTED] Trial Ex. 5429 at 4.
Moreover, according to the Services, Spotify's [REDACTED] rendered
dubious, unsubstantiated, and unwarranted Universal's [REDACTED].
Further, as an economic matter, the Services assert that
Universal's [REDACTED] gives away the game--
[[Page 59466]]
Universal was seeking to [REDACTED] that the Services characterize as a
``perverse conception of `price competition' to say the least.''
Services RPFFCL ]] 419-421 (and record citations therein). Moreover,
the Services aver, in any event, the presence of [REDACTED] Spotify's
agreements with the [REDACTED]. See Services RPFFCL ] 425
The Judges find that the evidence and testimony relating to these
negotiations, relied upon by SoundExchange, are insufficient to
demonstrate that Spotify had acquired any greater pricing power in
connection with the negotiation of the 2017 Agreement. The [REDACTED]
in the 2013 Agreement [REDACTED] in the 2017 Agreement, as confirmed in
Universal's own internal email. Further, as the Services point out,
Universal's testifying witness, Mr. Harrison, contradicted the key
point that SoundExchange is attempting to make with regard to these
negotiations: [REDACTED] 9/3/20 Tr. 5701 (Harrison). This broad
statement clearly undermines SoundExchange's assertion that
[REDACTED].\41\ Further, because Universal's agreement to [REDACTED],
the Judges agree with the Services that Universal's pointed attempt to
have Spotify agree to [REDACTED] demonstrates that Universal was
[REDACTED].
---------------------------------------------------------------------------
\41\ The Judges find startling, though, the Services'
dismissal--as a ``perverse conception of `price competition' ''--of
SoundExchange's more nuanced claim that [REDACTED]. This is
precisely the phenomenon that Professor Shapiro enthusiastically
endorsed in Web IV and which the Judges adopted. Web IV, 81 FR at
26366 (Professor Shapiro testifying that it was ``absolutely''
correct that ``the threat of steering . . . pushes [the record
companies] . . . towards their original [market share] percentages
to avoid being that odd man out who was the holdout for the higher
price . . . .''). In any event, Mr. Harrison's testimony that
[REDACTED] renders moot the Services' jarring attempt to repudiate
the notion of a Major agreeing to lower rates in exchange for
protection from steering. Moreover, if, hypothetically, the facts
had demonstrated [REDACTED], then [REDACTED] might have made sense
as a way for a Major to avoid the situation where it [REDACTED].
However, under SoundExchange's own theory of the case, as discussed
elsewhere in this Determination, the idea that the Majors thought
[REDACTED], would be a chimera, given that the Majors aver that
[REDACTED].
---------------------------------------------------------------------------
On a more general basis, the Judges find SoundExchange's portrayal
of Universal as essentially a ``pitiful helpless giant'' in
negotiations to be at odds with the reality of its status as a
complementary oligopolist wielding a Must Have repertoire. It did not
have to [REDACTED], but rather, ceteris paribus, could have [REDACTED].
Additionally, SoundExchange's assertion that Universal [REDACTED]
in the 2017 Agreement is problematic for two reasons. First, Universal
claimed to be [REDACTED], so why did Universal [REDACTED]? Again,
SoundExchange's characterization of this largest Must Have Major as
some sort of pitiful helpless giant (like Gulliver restrained by the
Lilliputians) is simply not credible, because, as discussed elsewhere
in this Determination, Spotify would be out of business [REDACTED]
without a Major's repertoire, whereas Universal and the other Majors
would continue in business, as Spotify's listeners would migrate to a
substitute streaming service. And, if the [REDACTED] as SoundExchange
claimed (because, as discussed supra, a Major could not [REDACTED] then
why was Universal (or any Major) [REDACTED]--especially given that
SoundExchange proffered evidence that the Majors claimed [REDACTED].
Moreover, in Web IV, SoundExchange provided substantial detail
regarding how the Majors would respond to thwart an attempt by a
service to engage in steering as a means of price competition. A Major
would threaten to black out its repertoire on that service or actually
do so (a threat that remains viable, as discussed in this
Determination). Second, a Major could demand that all royalties be paid
up front on a non-refundable basis, according to historic market
shares, making subsequent market share deviations costly (i.e., the
marginal cost of deviating toward a Major beyond its historic share
would be a positive royalty, compared to the zero marginal cost of
playing a marginal sound recording as part of a Major's historic share,
because the royalties based on historic market share had been prepaid).
Finally, in Web IV, SoundExchange noted that each Major could insist on
an MFN or similar anti-steering/anti-discrimination clause, making
deviations from historic share play a breach of contract. Web IV, 81 FR
at 26364-65.\42\
---------------------------------------------------------------------------
\42\ The very concept of licensors requiring historic shares to
be maintained appears inconsistent with effective competition. In
Web IV, the Judges noted that ``demands by the Majors to prevent
steering by insisting that a noninteractive service not deviate from
an historical (``natural'') division of market shares would be a
classic example of anticompetitive conduct.'' Web IV, 81 FR at 26373
(citing Blue Cross & Blue Shield United of Wisconsin v. Marshfield
Clinic, 65 F.3d 1406, 1415 (7th Cir. 1995) (Posner, J.).
---------------------------------------------------------------------------
In Web IV, the Judges acknowledged the capacity of the Majors to
engage in such conduct, and the Judges characterized such conduct as
simply alternate expressions of their complementary oligopoly power
that, under the statute, the Judges were intending to mitigate, in
order to identify rates that would be set in an effectively competitive
market. Web IV, 81 FR at 26373-74. In the present proceeding,
SoundExchange has not provided a sufficient evidentiary basis to show
that Spotify would be immune from such tactics. Moreover, it would be
in each Major's long-run interest, acting alone, yet consciously aware
of the parallel incentives of the other Majors, to threaten and, if
necessary, follow through on such actions, because of each Major's
individual Must Have status (and each Major's knowledge of the other
Majors' Must Have status).\43\ Simply put, the Majors' power provides
them with multiple tactics, which, if triggered, would confront Spotify
with certain and prompt economic ruin, as its subscribers expeditiously
defected to Apple, Amazon, Google, or one of Spotify's smaller
competitors.
---------------------------------------------------------------------------
\43\ Indeed, an important point made by Professor Willig,
SoundExchange's Shapley Value and bargaining expert, regarding the
noninteractive market is fully applicable here. Each Major, as a
Must Have, would recognize its power to withhold (or threaten to
withhold) a license in order to maximize the benefit of the bargain.
See also Richard A. Posner, Oligopoly and the Antitrust Law: A
Suggested Approach, 21 Stan. L. Rev. 1067, 1081a n.39 (1969) (A
``meeting of the minds'' among oligopolists is ``illuminated by game
theorists [who note that] mutual dependence . . . demands . . .
collaboration [that is] . . . tacit if not explicit . . . .'').
There is no reason to believe that this phenomenon does not exist in
the unregulated interactive music licensing market. Kristelia A.
Garcia, Facilitating Competition by Remedial Regulation, 31 Berkeley
Tech. L.J. 183, 188 (2016) (``In an industry like music licensing .
. . parallel pricing and tacit collusion can . . . remov[e] the
threat of meaningful competition from the marketplace.'').
---------------------------------------------------------------------------
Accordingly, the Judges reject the argument that Spotify's economic
position generated a change in bargaining and market power [REDACTED].
Rather, it is apparent to the Judges that Universal must have had
[REDACTED].\44\
---------------------------------------------------------------------------
\44\ That [REDACTED] is discussed infra, section III.B.2, after
the Judges consider the evidence regarding the negotiations between
Spotify and Sony and between Spotify and Warner.
---------------------------------------------------------------------------
ii. The Warner-Spotify Negotiations
At the outset of negotiations regarding the 2017 Agreement, Spotify
represented to Warner that it had [REDACTED]. 9/3/20 Tr. 5479; 5526-27
(Adadevoh).
In response to a Spotify proposal for [REDACTED], Warner explored
with Spotify a [REDACTED]. See Trial Exs. 5264 at 4; 5265 at 2; 9/3/
2020 Tr. 5495-96 (Adadevoh). According to Warner's testifying witness,
Ms. Adadevoh--who did not participate in the negotiation sessions with
Spotify--Spotify rejected this [REDACTED] proposal, and [REDACTED]. See
Trial Exs. 5264 at 4; 5265 at 2; 9/3/2020 5495-97 (Adadevoh). According
to Warner,
[[Page 59467]]
Spotify also rejected its subsequent proposal for [REDACTED]. Trial Ex.
4020 at 1.
In February 2017, Warner alternately proposed that, in
consideration of a [REDACTED], Spotify [REDACTED]. However, Spotify
refused. Trial Exs. 5520 at 2; 5038; 9/3/20 Tr. 5505 (Adadevoh).
Ultimately, Warner agreed to [REDACTED]. According to Ms. Adadevoh,
Warner agreed to [REDACTED], motivated in part by [REDACTED].
SoundExchange avers that Warner's [REDACTED] was reasonable because
Spotify had [REDACTED]. Trial Ex. 5401 at 3. In this regard, Ms.
Adadevoh testified at the hearing that Warner's perception of Spotify's
[REDACTED] 9/3/20 Tr. 5490-91 (Adadevoh). Accordingly, she testified
that Warner [REDACTED]. 9/3/20 Tr. 5531 (Adadevoh).
During these negotiations, Warner attempted to determine whether
its speculation was justified that Spotify might have [REDACTED].
Through this analysis, Warner was [REDACTED]. Nonetheless, according to
SoundExchange, Warner's [REDACTED], but rather reflected the
[REDACTED]. SX PFFCL ] 435 (citing Trial Ex. 4014 at 1; 9/3/20 Tr.
5601-02 (Adadevoh)).
Ms. Adadevoh testified that--notwithstanding the [REDACTED] that
Spotify had [REDACTED]--Warner [REDACTED]. Trial Ex. 5612 ] 12 (WRT of
Reni Adadevoh); 9/3/20 Tr. 5530-31 (Adadevoh). The importance of
[REDACTED] was noted in an email written by Warner's lead negotiator
with Spotify, who wrote that ``[REDACTED]'' the effect on WMG's
[REDACTED] would be [REDACTED]. Trial Ex. 2124 at 1. The same email
also stated that the [REDACTED] in Warner's 2013 agreement with Spotify
did not [REDACTED]. Trial Ex. 2124 at 1; Adadevoh WDT ] 12.
To underscore Warner's purported concern that Spotify might
[REDACTED], SoundExchange also notes discussions on a Warner [REDACTED]
regarding [REDACTED]. Trial Ex. 4025 at 1.
Ultimately, Warner agreed to [REDACTED], which was included in its
2017 Agreement with Spotify. Trial Ex. 5038; Adadevoh WDT ]] 11-12.
According to Ms. Adadevoh, Warner [REDACTED] because ``[REDACTED]'' 9/
3/20 Tr. 5480.
The Services respond first by noting that SoundExchange has ignored
the import of Warner's complementary oligopoly power in connection with
the bargaining dynamics. Absent consideration of this fact, they argue
that Ms. Adadevoh's assertion that [REDACTED] is simply conclusory and
hardly credible. Additionally, the Services maintain that there is no
evidence linking [REDACTED] to either (1) a [REDACTED] or (2) a
[REDACTED].
The Services also assert that a key document on which SoundExchange
relies, Trial Ex. 4022, actually identifies [REDACTED] in its 2017
Agreement with Spotify.\45\ Among these drivers, according to the
Services' understanding of this Warner document, was [REDACTED]. See
Trial Ex. 4011 at 1 (``[REDACTED]'').
---------------------------------------------------------------------------
\45\ The Services also identify several other ``drivers'' that
led Warner to agree to the terms of the 2017 Agreement,
predominantly relating to Warner's [REDACTED]. These other points
are discussed infra.
---------------------------------------------------------------------------
The Services also note that another document on which SoundExchange
relies regarding the Warner-Spotify negotiations, Trial Ex. 5264,
consists of double hearsay--providing a second-hand report of Spotify
statements. Moreover, the Services claim the statements contained
therein cannot even unambiguously be attributed to specific sources--
making it difficult to tell whether certain text reflects a Spotify
statement, Ms. Gardner's reaction thereto, or something else entirely.
Moreover, the Services point out that the testifying Warner witness,
Ms. Adadevoh, did not claim to have personal knowledge sufficient to
provide the requisite clarity.
The Services also characterize as misleading SoundExchange's
attempt to portray [REDACTED] as an example of Spotify's market power.
Rather, they claim that an examination of Trial Ex. 5265 reveals that
Spotify was [REDACTED] in the 2017 Agreement; rather, Spotify was
making the practical observation that if a [REDACTED]. Trial Ex. 5265
at 4-5. And, the Services add, allowing a [REDACTED] noted supra in
Trial Ex. 4011.
The Services also dispute SoundExchange's assertion that Spotify's
refusal to provide Warner with [REDACTED] demonstrates Spotify's
increased bargaining or market power. They note that it was Spotify's
[REDACTED]. Moreover, the Services note that Warner made its proposal
[REDACTED] (see Trial Ex. 5520) [REDACTED], belying Ms. Adadevoh's
suggestion that [REDACTED]. Additionally, the Services point out that
Trial Ex. 5520 also reveals that Warner sought to [REDACTED]--
underscoring the degree to which Warner recognized that it, too,
[REDACTED]--and that Warner was willing to agree to [REDACTED] because
of [REDACTED]. See Trial Ex. 5520 at 3.
More broadly, the Services argue that, if it was true that Spotify
had been [REDACTED], the negotiation files would have been [REDACTED],
and yet, by contrast, the quantum of evidence on which Warner relies is
remarkably slender. Services RPFFCL ] 434 (and record citations
therein). And, with regard to the extant record evidence, the Services
characterize as insufficient and unconvincing SoundExchange's attempt
to recharacterize Warner's internal [REDACTED]. See Trial Ex. 4014.
Continuing its attack on what it describes as SoundExchange's purported
misstatement of the evidentiary record, the Services point to another
SoundExchange document, Trial Ex. 2124, which includes, [REDACTED]--
contradicting SoundExchange's argument that the [REDACTED] (as
discussed supra).
Continuing its attack on the usefulness of the evidence relied upon
by SoundExchange relating to Warner's negotiations with Spotify, the
Services note that Trial Ex. 4025, apparently describing [REDACTED] is
replete with double hearsay, in the form of a declarant's summary of
third-party statements by other declarants. The Services state that
there is no indication that any particular comment in this exhibit
reflects Warner's final or official position, or that they are not
merely the opinions of each individual. On the substance of this
exhibit, the Services point out that this document contains [REDACTED],
ignored by SoundExchange, which [REDACTED]. Services RPFFCL ] 438 (and
record citations therein).
The Judges find the Services' arguments convincing. Warner's
internal correspondence indicates it was [REDACTED]. But, when it
[REDACTED] Warner's contract with Spotify. On these facts, the Judges
cannot find support for Spotify's supposed new-found power [REDACTED].
Further, there is no persuasive evidence [REDACTED] included in
that contract. The Judges will not presume such a [REDACTED] when the
record does not reflect that this [REDACTED] occurred. Alternatively
stated, SoundExchange is asserting that the Judges should find
causation--that the [REDACTED] and vice versa--when the evidence
[REDACTED]. Here, the absence of testimony from the actual negotiators
looms large; if there had been evidence of such [REDACTED] (which is
not in the present record) in first-hand testimony from the
negotiators, the Judges could have weighed their direct and cross-
examination testimony to assist in
[[Page 59468]]
making a finding as to this issue. But, no such record exists.
Accordingly, the possibility that [REDACTED] were the consequence of
Spotify's new market power [REDACTED] is not more plausible than the
Services' position that the [REDACTED] were included, [REDACTED], to
[REDACTED], and that Warner's agreement to the [REDACTED] was
[REDACTED].
Additionally, the fact that Spotify refused to [REDACTED] Warner
does not reflect any pricing power possessed by Spotify. Rather, it
reflects the power of[REDACTED] to [REDACTED], thus undermining price
competition.
Finally, the Warner [REDACTED] document on which SoundExchange
relies is unpersuasive. Not only does it consist of double-hearsay--as
the Services note, it also fails to identify the speakers and their
business affiliations [REDACTED] (which also are not provided in
hearing testimony)--but rather, the email reflects [REDACTED] regarding
the pending Spotify-Warner 2017 Agreement. In that regard, it contains
[REDACTED], allegedly voiced by the unidentified participants. As the
Judges noted supra, corporate documents, including [REDACTED] are often
likely to fail to shed light on the economic factors relevant to a
proceeding. See William Inglis & Sons Baking, 688 F.2d at 1028.
Here, the Warner [REDACTED] document is even more problematic, as
it merely recites [REDACTED]. The problem with this document--
emblematic of the problem with all of these hearsay documents--was
highlighted in a fruitless attempt by SoundExchange's counsel to cross-
examine Professor Shapiro regarding the meaning of a double hearsay
declaration in this Warner [REDACTED] document, Trial Ex. 4025.
Presented with language in this exhibit stating: ``[REDACTED]''
Professor Shapiro responded by stating: ``I'm not sure what this
[REDACTED] means,'' and adding: ``I don't know what it means
[REDACTED].'' 8/20/20 Tr. 3076-77 (Shapiro). The witness then asks
SoundExchange's counsel: ``Could you help me out on that?,'' to which
SoundExchange's counsel then had no choice but figuratively to throw up
his hands and lament: ``Well, . . . let's just leave it since we don't
have the fact witness here.'' 8/20/20 Tr. 3077 (Shapiro) (emphasis
added). The Judges share that frustration.
iii. The Sony-Spotify Negotiations
According to Sony, at the outset of negotiations, Spotify sought
[REDACTED]. 9/2/20 Tr. 5218 (Piibe). However, Sony was [REDACTED]
particularly because Sony believed the proposed [REDACTED]. Piibe WDT ]
20; 9/2/20 Tr. 5195-96 (Piibe); Trial Ex. 4018 at 1. The Services find
this opening salvo--made about a year before the parties ultimately
executed their 2017 Agreement--to be wholly unremarkable. Professor
Shapiro characterizes this start to negotiations as merely
``[REDACTED]'' 8/20/20 Tr. 3082 (Shapiro).
When [REDACTED] appeared [REDACTED] Sony decided that,
``[REDACTED],'' \46\ it would offer to [REDACTED]. Trial Ex. 5461 at 7,
35 (offering increasing [REDACTED]); \47\ see also Trial Ex. 4026 at 1,
4 (offering a more general framework for [REDACTED]); Piibe WDT ] 22
(the thinking behind the [REDACTED] was simply that, [REDACTED]).
---------------------------------------------------------------------------
\46\ The relevancy of Spotify's ``importance'' to Sony and the
other Majors, in terms of the subscription royalty rate [REDACTED],
is discussed infra.
\47\ To put this proposal in context, Sony's market share for
interactive subscription plays in 2018 was [REDACTED]%. Orszag WDT,
tbl.2.
---------------------------------------------------------------------------
The Services' rejoinder to this assertion is consistent with their
explanation of the problem regarding the [REDACTED]: As long as Spotify
remained [REDACTED], Spotify was [REDACTED] Services RPFFCL ] 442 (and
record citations therein).
Because Sony understood that Spotify had the [REDACTED], Piibe WDT
] 25, Sony recognized that a consequence of [REDACTED]. As Mr. Piibe
explained, in [REDACTED]. Piibe WDT ] 26. Moreover, Sony asserted that
it [REDACTED]--because it believed that Spotify could [REDACTED] Piibe
WDT ] 26 (emphasis added).
More particularly, Sony asserts that it was concerned about
Spotify's [REDACTED]. See Trial Ex. 5451 at 1 (noting that Spotify
[REDACTED]); Trial Ex. 5461 at 40 (noting that [REDACTED]); Trial Ex.
5514 at 3 (noting that [REDACTED] and identifying [REDACTED]); Trial
Ex. 4017 at 4 (noting that [REDACTED]). Sony was concerned because it
believed its [REDACTED] Trial Ex. 5461 at 40; accord Trial Ex. 5514 at
3 (asserting that Sony's [REDACTED]). Trial Ex. 5468 at 2.
The Services aver that these purported [REDACTED] reflect mere
possibilities, which Sony [REDACTED] in contract negotiations. First,
regarding [REDACTED], the 2017 Agreement included a [REDACTED] More
particularly, the Services note the dynamics of the negotiations that
led to [REDACTED]. In Spotify's initial contract proposal, Trial Ex.
5461, it sought a [REDACTED] However, in the final 2017 Agreement,
Trial Ex. 5011, the [REDACTED] was [REDACTED] to Sony.
Moreover, the Services point to what they consider to be a blatant
inconsistency between Mr. Piibe's WDT regarding this [REDACTED] and Mr.
Piibe's deposition testimony in this proceeding, with which he was
confronted at the hearing, as set forth below:
[Hearing Question]: [L]et me ask you to take a look at . . . your
deposition. . . .
[Deposition Question]:
[REDACTED]?
* * * * *
[Deposition Answer]
[REDACTED].
[Hearing Question]
[W]as that answer correct at the time?
[Hearing Answer]
Yes.
9/2/20 Tr. 5339-40 (Piibe) (emphasis and bolding added).
Further, the Services note (as discussed supra) that the [REDACTED]
in the Sony-Spotify 2017 Agreement contained a [REDACTED] Trial Ex.
5011 at 36. There is no basis in the record, the Services maintain, to
conclude that this [REDACTED] would [REDACTED], two areas regarding
which Sony claimed to be concerned.
SoundExchange also finds a [REDACTED] in a statement supposedly
made by Spotify (contained in an internal Sony email), [REDACTED]
There, Mr. Piibe recounted what he heard from a Sony employee regarding
a statement allegedly made by a Spotify negotiator, to the effect that,
[REDACTED]. Trial Ex. 5469 at 1. Mr. Piibe asserts that, in response to
that and [REDACTED], Sony ``determined that [REDACTED]'' Piibe WDT ]]
24, 26.
The Services respond by noting that this [REDACTED]--of
questionable veracity given the double-hearsay nature of its
representations--[REDACTED]. Further, the Services contrast what they
characterize as [REDACTED] with what they indicate to be Mr. Orszag's
[REDACTED] characterization of the statement in his oral testimony as a
``[REDACTED]'' in which Spotify said, ``[REDACTED].'' 8/12/20 Tr. 1743
(Orszag). Ultimately, Sony determined that it was [REDACTED] that,
according to its testifying witness Mr. Piibe, caused a ``[REDACTED].''
Piibe WDT ] 23. According to Mr. Piibe, Sony, in fact, [REDACTED].
Piibe WDT ] 36. And, during the hearing, he elaborated, testifying:
[REDACTED].
9/2/20 Tr. 5228 (Piibe) (emphasis added). Moreover, on behalf of Sony,
[[Page 59469]]
Mr. Piibe speculated that Spotify was [REDACTED]. 9/2/20 Tr. 5228, 5368
(Piibe). Consequently, Sony negotiators, according to an internal Sony
email, concluded that [REDACTED]. Trial Ex. 5467 at 1.
The Judges find, for several reasons, that the evidence proffered
by SoundExchange regarding the Sony-Spotify negotiations does not
support the assertion that Spotify's supposed new pricing power was
[REDACTED]. First, Spotify's [REDACTED] was simply consistent with the
[REDACTED]. Thus, such [REDACTED] was not [REDACTED].
Next, SoundExchange's assertion that Sony alternatively sought
[REDACTED] in order to [REDACTED] was unambiguously refuted by Mr.
Piibe's deposition testimony. As noted above, in that testimony, he
admitted that [REDACTED]. His testimony in this regard also neutralizes
the claim by SoundExchange that [REDACTED].
Finally, the Judges take note of Mr. Piibe's exaggerated hearing
testimony regarding Sony's decision [REDACTED]. In that testimony, Mr.
Piibe indicated that the very [REDACTED] was ``[REDACTED]'' to the
point that he was ``stuttering'' in an attempt to ``process'' the idea.
The Judges find this over-the-top testimony not only lacking in
credibility, but also a fine example of the adage ``the lady doth
protest too much.'' \48\ Mr. Piibe was a polished witness who spoke
carefully and with fluidity. The question that he was asked that led to
his ``stuttering'' response was the following: ``[REDACTED]?'' 9/2/20
Tr. 5228 (Piibe).
---------------------------------------------------------------------------
\48\ William Shakespeare, Hamlet act III, sc. 2.
---------------------------------------------------------------------------
This question was straightforward, simple, and posed to him on
direct examination, thus unlikely to have caught him by surprise.
Moreover, the [REDACTED] is the [REDACTED]. The Judges cannot fathom
that a Major, a sophisticated corporation, would not [REDACTED] when it
is undisputed in the present record, and supported by the economic
analysis discussed in this Determination, that [REDACTED]. Indeed, a
substantial component of SoundExchange's case-in-chief (presented in
the testimony of Professor Willig) turns on the contributions each
party makes to the value of a music service and their fallback
values.\49\ What the Judges find inconceivable is Mr. Piibe's claim
that [REDACTED]. Thus, the Judges find this exaggerated testimony to
lack credibility, indicating that there must have been another reason
for [REDACTED].
---------------------------------------------------------------------------
\49\ Professor Willig refers to the opportunity cost of a Major
that is a complementary oligopolist when negotiating with a
potential licensee as the [REDACTED] opportunity cost. [REDACTED]
---------------------------------------------------------------------------
e. Other Record Evidence and Testimony Contradict SoundExchange's Claim
That Spotify's Pricing Power Had Neutralized the Majors' Complementary
Oligopoly Power
If Spotify, in fact, had become so powerful by virtue of its market
size, ability to [REDACTED] and ability to [REDACTED], as a Sony
executive wrote, to [REDACTED]. Trial Ex. 2137. However, the evidence
indicates that the Majors were [REDACTED]. The Judges find telling the
following colloquy between the bench and Michael Sherwood, a senior
Warner executive:
[THE JUDGES]
[REDACTED]?
[MR. SHERWOOD]
[REDACTED]. . . .
[THE JUDGES]
Why [REDACTED]?
[THE WITNESS]
[REDACTED].
[THE JUDGES]
Okay. Did you have an understanding as to why [REDACTED]?
[MR. SHERWOOD]
I [REDACTED].
[THE JUDGES]
When you say [REDACTED], you mean [REDACTED], so to speak?
[MR. SHERWOOD]
Correct. That was my impression of it.
[THE JUDGES]
Okay. And how did you come to that impression?
[MR. SHERWOOD]
Through conversations with our business development team at Warner
Music Group.
[THE JUDGES]
Okay. Who, in particular, do you recall, by name?
[MR. SHERWOOD]
I don't, unfortunately. That team has had some turnover since that
time.
[THE JUDGES]
I see. Who was the head of the team at the time you came to that
conclusion?
[MR. SHERWOOD]
[REDACTED].
* * * * *
[THE JUDGES]
Okay. And at a more general level, separate and apart from this
particular negotiation and [REDACTED], how would you [REDACTED]?
[MR. SHERWOOD]
Well, if that circumstance were to come to light, [REDACTED].
9/9/20 Tr. 5930-32 (Sherwood) (emphasis added).
The Judges find Mr. Sherwood's testimony, quoted at length above,
to be highly informative, and the Judges found him to be a highly
credible witness. He has been a Warner employee for 21 years, and he is
currently the Senior Vice President of Streaming and Revenue,
responsible for overseeing all of the revenue-generating commercial
accounts, which include digital service providers, including Spotify.
9/9/20 Tr. 5912-13 (Sherwood). Moreover, he was one of the few Major
employees that SoundExchange chose to testify in this proceeding, out
of the numerous individuals who had duties related to the streaming
services or who wrote or received emails regarding the issues raised in
the present proceeding.
His testimony indicates that [REDACTED] what the Services have
argued repeatedly--that Spotify [REDACTED] when it [REDACTED]. Not only
did Mr. Sherwood agree with that [REDACTED], but he also identified the
negotiating team within Warner itself as having informed him that
[REDACTED] This testimony supports the Services' characterization of
Spotify's weak pricing power and overall bargaining position, further
confirming the dubiousness of SoundExchange's claim that the Majors did
not [REDACTED] that [REDACTED] continued into the negotiations over the
2017 Agreements.
Perhaps even more importantly, Mr. Sherwood's testimony regarding
[REDACTED] speaks even more persuasively than his words. Warner was
[REDACTED], as he testified he would do if a [REDACTED].
Mr. Sherwood's testimony also underscores the problem created by
SoundExchange's decision not to call witnesses with first-hand
experience negotiating with Spotify, such as [REDACTED], who could have
shed direct light on the Majors' analysis of Spotify's [REDACTED] in
the 2016-2017 period.\50\
---------------------------------------------------------------------------
\50\ This portion of Mr. Sherwood's testimony does not contain
inadmissible hearsay, as it is in the nature of testimony regarding
an admission and/or declaration against interest by Warner.
Moreover, no objection was lodged by SoundExchange (which would have
been awkward, given that he was its own witness and the testimony
had been elicited by the Judges) and, even if the testimony
constitutes hearsay, the Judges invoke their discretion to allow
hearsay testimony pursuant to 37 CFR 351.10(a).
---------------------------------------------------------------------------
Finally, Mr. Sherwood's testimony [REDACTED] gives real-world
evidence of the substitutability and cross-elasticity of these various
downstream services addressed by the Services' economic expert
witnesses. Likewise, this testimony shows [REDACTED], consistent with
SoundExchange's direct case criticisms of Pandora's Label Suppression
Experiments for their failure to address how the industry
[[Page 59470]]
would respond to such a going-dark scenario.
One of SoundExchange's internal Major documents from an executive
who actually negotiated with Spotify took a [REDACTED] than
SoundExchange regarding Spotify's pricing power--[REDACTED] consistent
with the Judges' findings herein that Spotify had not acquired pricing
power sufficient to [REDACTED]. The document was an email written by
[REDACTED] 9/2/20 Tr. 5247 (Piibe). Mr. [REDACTED] wrote the following
in a December 13, 2016 email--REDACTED] in a response to [REDACTED]:
[REDACTED]
[REDACTED]
[REDACTED]
[REDACTED].
Trial Ex. 5467 (emphasis and bolding added).
In the succinct, colloquial, and mildly vulgar statement emphasized
above, Mr. [REDACTED] concisely summed up [REDACTED] The Judges find
Mr. [REDACTED] observation consistent with the economic analysis on
which the Judges have relied in this Determination, supporting the
finding that Spotify lacked the pricing power to mitigate or offset the
complementary oligopoly power of the Majors.
But, as the quoted document--indeed, the quoted sentence--also
reveals, Mr. [REDACTED] took note of [REDACTED], stating that he
``[REDACTED]'' Trial Ex. 5467. Thus, Mr. [REDACTED], in one sentence,
also summed up a conundrum that is at the heart of the question: Why
did three complementary oligopolists decline to exercise their market
power [REDACTED]?
The Judges consider that conundrum below.\51\
---------------------------------------------------------------------------
\51\ SoundExchange notes that Apple has [REDACTED]. Moreover, it
notes that Apple [REDACTED] [REDACTED]. 9/3/20 Tr. 5681-82
(Harrison); Harrison WDT ] 31. Subsequently, Apple also [REDACTED].
Piibe WDT ] 46. See generally 8/13/20 Tr. 1899-1900 (Orszag); 8/11/
20 Tr. 1367 (Orszag). According to SoundExchange, these facts
indicate that Apple, [REDACTED] was able to [REDACTED]. See SX PFFCL
] 468 (and record citations therein).
However, the Judges are struck by the fact that the record
regarding Apple's relationship with the Majors is barren, even in
comparison to the meager and disjointed proofs SoundExchange
proffered regarding Spotify's negotiations with the Majors. There
are no internal documents from the Majors describing their
relationship with Apple, including [REDACTED], nor is there any
evidence that Apple [REDACTED]. Accord, Services' Response to SX
PFFCL ] 466 (noting the [REDACTED] the setting and level of its
rates). Moreover, as the Services note, Mr. Orszag did not use the
Apple rate as a benchmark in this proceeding. Id. ] 465. In fact,
Mr. Orszag did not identify in the materials upon which he relied in
preparing his WDT any documents memorializing any aspect of Apple's
negotiations with any of the Majors, and he could not recall with
any certainty having reviewed such documents prior to preparing that
written testimony. 8/12/20 Tr. 1646-48 (Orszag).
The Judges also note that the fact that Apple [REDACTED] is
consistent with the Judges' understanding of the Majors' [REDACTED].
That is, the Majors negotiated [REDACTED], so to speak.
For these reasons, the Judges find that there is insufficient
evidence that Apple's [REDACTED] is supportive of SoundExchange's
argument that an interactive service's mere market share [REDACTED].
(The Judges note that this is not the first time the Judges have
declined to give weight to SoundExchange's underdeveloped record as
it related to an Apple agreement. See Web IV, 81 FR at 26352
(declining to rely on ``SoundExchange's analysis and use of [an]
Apple agreement'' because ``there is insufficient evidence in the
record'')).
---------------------------------------------------------------------------
2. The Majors' Action to [REDACTED]
a. Introduction
The record discussed supra reflects an apparent disconnect between
the facts discussed above and the relevant economic principles. The
Majors agreed to [REDACTED]. Why did that occur? The upstream benchmark
agreements at issue were consummated in a market where the licensors,
the Majors, are complementary oligopolists with ``Must Have''
repertoires, and the licensee, Spotify--despite being arguably the
largest interactive service--lacked long-term bargaining power and
pricing power sufficient to affect, let alone dictate, the terms of
trade.\52\
---------------------------------------------------------------------------
\52\ To better appreciate the Judges' discussion of this
conundrum, they note here a distinction among different types of
economic power as used in this analysis.
The Judges use the phrase ``pricing power'' to reflect the
ability of a seller or buyer (or licensor or licensee) to influence
price (royalty rates) because of its own ``market power,'' arising
from strengths, such as monopoly, monopsony, oligopoly, or
oligopsony positions, as derived from whatever source. Here, the
Majors have ``pricing power'' derived from their status as
complementary oligopolists; Spotify lacked ``pricing power,'' for
the reasons discussed supra.
The Judges use the phrase ``countervailing power,'' as discussed
supra, to reflect a contracting party's power, again from whatever
source, that offsets, in whole or in part, the pricing power of a
counterparty. (Thus, it is a power defined in relative terms
compared to the opposing commercial power.).
These two types of power collide in the negotiation process,
allowing each party to exert a measure of ``bargaining power.'' See
Orszag WDT ] 110 (and citations therein) (``Bargaining power can be
defined as the advantage one player has over another in establishing
desired terms [and] can arise from a number of sources, including
market power, better information (e.g., knowledge of the true value
of what is being negotiated), and credible threats to retaliate or
steer business away from the other player. A player with enhanced
bargaining power tends to extract greater surplus through better
terms.'').
---------------------------------------------------------------------------
The further factual record though, when analyzed through the lens
of economics, provides the answer to this facial conundrum; the Majors
were intent on surviving as powerful licensors vis-[agrave]-vis their
licensees.\53\ As discussed below, the Majors were [REDACTED], enabling
them to [REDACTED].\54\ One way the Majors could attempt to avoid this
development and survive as economically powerful licensors was to
[REDACTED] that were rapidly expanding in the interactive market.
---------------------------------------------------------------------------
\53\ See Manne & Williamson, supra at 620 (``In the end,
whatever business people think they are maximizing, whatever they do
or wish to do, survival is ultimately an economic matter.'')
(emphasis added).
\54\ Despite their complementary oligopoly power, the [REDACTED]
is a contemporary example of the literary adage: ``Uneasy lies the
head that wears a crown.'' William Shakespeare, King Henry IV, act
III, sc. 1. From the drier economic perspective, the [REDACTED].
---------------------------------------------------------------------------
Accordingly, as the record (discussed below) reveals, [REDACTED],
the Majors [REDACTED] in order to [REDACTED].\55\
---------------------------------------------------------------------------
\55\ An IPO is a process offering shares of a private
corporation to the public in a new stock issuance that allows the
corporation to raise capital from public investors. See
Investopedia.com (search term ``Initial Public Offering'') (last
accessed May 12, 2021). Ultimately, Spotify decided to forego an IPO
and instead engaged in a ``Direct Placement'' (a/k/a ``Direct Public
Offering'' or ``Direct Listing'') by which the corporation does not
raise new capital, but rather enables its existing shareholders to
sell their stock to the public. See Spotify's Wall Street Debut is a
Success, New York Times (Apr. 3, 2018); See generally
Corporatefinanceinstitute.com (search term ``Direct Placement'')
(last accessed May 14, 2021).
---------------------------------------------------------------------------
The Judges' evidence-based analysis in this section is not the
story that SoundExchange chooses to emphasize. SoundExchange prefers
the story in which the Majors are the [REDACTED]. It is not immediately
obvious why SoundExchange prefers that story to the facts that actually
match economic theory to reality--that the Majors perceived themselves
as [REDACTED].\56\
---------------------------------------------------------------------------
\56\ It may be that SoundExchange was reluctant to emphasize a
countervailing power argument that was not based on a licensee's
pricing power because pricing power (through steering) was the
rationale applied in Web IV.
---------------------------------------------------------------------------
The forgoing analysis is also not the story told by the Services.
Although they discuss the same record facts as relied upon by the
Judges (discussed infra), they aver that these facts demonstrate merely
that the Majors were behaving as complementary oligopolists always
behave--[REDACTED], without regard for the bargaining power of their
counterparties. As explained in more detail infra, the Services'
understanding of the facts is neither supported by the record nor
relevant to the Judges' task of identifying an effectively competitive
rate.
b. The Majors' [REDACTED]
Nested within its assertions of Spotify's pricing power, discussed
supra, SoundExchange presented witness testimony and advanced
[[Page 59471]]
arguments that the [REDACTED]--in the interactive service market.\57\
Some of the most compelling testimony in this regard was provided by
Aaron Harrison, Universal's Senior Vice President, Business & Legal
Affairs, responsible for overseeing the teams that negotiate licensing
agreements with digital music services. Harrison WDT ] 1.
---------------------------------------------------------------------------
\57\ The rapid rise of the tech firms in the interactive market
is undisputed. The record reveals that [REDACTED], account for
[REDACTED] of U.S. interactive subscribers respectively, and
[REDACTED] has already [REDACTED]. Orszag WDT, tbl.4.
In his written direct testimony, Mr. Harrison emphasized the
[REDACTED]:
[S]ome on-demand services are part of companies that dwarf
[Universal] and dominate digital markets. Amazon, Apple and Google,
for example, can rely on their size to absorb any losses from their
streaming services and [REDACTED].
Id. ] 41 (emphasis added); see also Orszag WDT ] 39 n.56 (relying on a
2019 trade publication article stating that Amazon Music is reportedly
growing faster than Spotify and Apple Music).\58\ At the hearing, Mr.
Harrison elaborated on this [REDACTED]. 9/3/20 Tr. 5752 (Harrison)
(acknowledging that Universal's [REDACTED]).
---------------------------------------------------------------------------
\58\ As noted above, SoundExchange does not emphasize this
argument. In this regard, Mr. Harrison buries this [REDACTED] in a
section of his WDT entitled, ``[REDACTED],'' Harrison WDT at 12,
where he notes there are ``several reasons'' why [REDACTED]. But the
fourth (and final) reason he provides, the one addressed in the
accompanying text, see id. ] 41, pertains only [REDACTED]. Thus,
this final reason resides as something of a non sequitur within a
section explaining why Mr. Harrison believed [REDACTED].
---------------------------------------------------------------------------
The relevance of the size of the tech firms must be distinguished
from the market power of a Must Have Major. The latter has what
Professor Willig aptly describes as ``walk away'' market power, see
Trial Ex. 5600 ] 14 (CWDT of Robert Willig) (Willig WDT), in that a
service cannot operate when it lacks a license for the sound recordings
from each of the three Majors. Therein lies the power of ownership and
control over essential inputs possessed by complementary oligopolists.
The tech firms, however, possess a different type of power. Their
advantage is based on sheer size, affording them the potential to
dominate a market they decide to enter.\59\ Thus, if they were to
control the downstream interactive streaming market [REDACTED], they
would be well-positioned to threaten blacking out one (or more) Majors
and to follow through on that threat by, as Mr. Harrison testified,
[REDACTED]. See SX PFFCL ] 336 (``the music business is a rounding
error for these big-tech services.'').\60\
---------------------------------------------------------------------------
\59\ This distinction between market power and power derived
from sheer corporate size is a specific example of a broader
contemporary issue in competition law, especially with regard to
these tech firms. Compare Tim Wu, The Curse of Bigness 15, 21 (2018)
(asserting that the power of ``just a handful of giants . . .
Amazon, Google and Apple . . . transcend[s] the narrowly economic'')
with J. Wright et al., Requiem for a Paradox: The Dubious Rise and
Inevitable Fall of Hipster Antitrust, 51 Az. St. L.J. 293, 362
(2019) (criticizing the new emphasis on sheer corporate size as
``call[ing] for nothing less than the complete dismantling of the
consumer welfare standard and the consensus . . . among antitrust
practitioners, enforcers and academics . . . about how to promote
competition.'').
\60\ The ability of tech firms to dominate markets, including
music markets, and the implications of that power has been noted by
economists who have studied the issue. See Alan B. Krueger,
Rockonomics at 103, 200-201 (2019) (``Superstar firms, including
Google, Apple and Amazon, have probably benefited from . . .
deploying the technological innovations that enable them to take
advantage of enormous economies of scale [b]ut there is also a
concern that such firms use their dominant position to stifle
competition. . . . Spotify's long-run existential challenge is
exacerbated by the fact that [tech firms] can sustain losses . . .
rais[ing] the question of whether Spotify can be sustainable as a
stand-alone company.'') (emphasis added).
---------------------------------------------------------------------------
Accordingly, [REDACTED]. As Mr. Harrison further acknowledged on
cross-examination, it was his view that ``[REDACTED]'' 9/3/20 Tr. 5721
(Harrison). Moreover, Mr. Harrison agreed that the economic [REDACTED]
would not only [REDACTED], but also would ``[REDACTED].'' 9/3/20 Tr.
5721 (Harrison).
The Services do not dispute that the Majors [REDACTED]. In fact,
relying on Mr. Harrison's testimony, the Services argue that the Majors
[REDACTED]
[to] [REDACTED] . . . .
Services PFFCL ] 147.\61\ The Services argue that this testimony
reveals that ``[t]he unmistakable implication of Mr. Harrison's
testimony [is that Universal] [REDACTED] Services PFFCL ] 147.
---------------------------------------------------------------------------
\61\ The idea that [REDACTED]. In Web II, 72 FR 24084 (2007),
the Judges set rates for all noninteractive services at $0.0008 for
2006, rising annually to $0.0019 in 2010, after a hearing that
included the large tech services of that era--Yahoo, Microsoft, and
AOL. After the passage of the Webcaster Settlement Acts of 2008 and
2009, SoundExchange negotiated a substantially lower per-play
royalty rate regime for the pureplay noninteractive services--
beginning at the same $0.0008 for 2006, but then lower in every
subsequent year until reaching a 2010 rate of $0.00097, only 51% of
the Web II rate. (The pureplay rate was part of a greater-of
structure including a 25%- of-revenue prong, but that prong was not
triggered.). In addition, the pureplay settlement rates continued
through 2015 and were substantially lower than the Web III rates.
For example, in the final year of the Web III rate period (2015),
the pureplay rate was $0.0014, only 61% of the Web III rate of
$0.0023 (with similar disparities in the prior years of the Web III
rate period). The Webcaster Settlement Acts prohibited a party from
using the settlement rates as precedent or evidence in subsequent
proceedings. See generally Jeffrey A. Eisenach, The Sound Recording
Performance Right at a Crossroads: Will Market Rates Prevail?, 22
CommLaw Conspectus 1 (2014).
---------------------------------------------------------------------------
The Judges find that the Services misconstrue the import of this
aspect of Mr. Harrison's testimony. His point is [REDACTED]. (In fact,
[REDACTED] make that apparent. See Orszag WDT tbls.15 & 16.). Rather,
the point is that the [REDACTED] would [REDACTED] would [REDACTED]. For
example, [REDACTED]. See generally J. Baker & J. Farrell, Oligopoly
Coordination, Economic Analysis, and the Prophylactic Role of
Horizontal Merger Enforcement, 168 U. Pa. L. Rev. 1985 (1986). Thus,
[REDACTED].\62\
---------------------------------------------------------------------------
\62\ The Services also construe Mr. Harrison's testimony as
[REDACTED] at ``market segmentation.'' Services PFFCL ] 147.
However, market segmentation in the music streaming markets is
typically undertaken to effectuate price discrimination. There is no
sufficient evidence that is occurring here. The record does not
indicate that Apple, Amazon, Google, and Spotify compete among
themselves by each appealing principally to different segments of
the listening public based on the varying willingness-to-pay among
listeners (although each has tiers and products intended to appeal
to categories of listeners varying based on willingness-to-pay).
---------------------------------------------------------------------------
Whether [REDACTED] generates an effectively competitive rate in the
interactive benchmark market is of no consequence in this proceeding
regarding the noninteractive market.\63\ Rather, the important issue
for the present benchmarking purposes is whether the royalty rate the
Majors agree to accept from Spotify is less influenced, on balance, by
the complementary oligopoly power of the Majors [REDACTED].
---------------------------------------------------------------------------
\63\ [REDACTED]). See generally David T. Scheffman & Richard S.
Higgins, Twenty Years of Raising Rivals' Costs: History Assessment,
and Future, 12 Geo. Mason L. Rev. 371, 375 (2003). An economist who
specializes in the analysis of music markets has noted that
licensees and licensors have the power to strategically manipulate
relative streaming royalty rates. Kristelia A. Garcia, Facilitating
Competition by Remedial Regulation, 31 Berkeley Tech. L.J. 183, 221
(2016) (``the owners of popular songs . . . acting alone or in tacit
collusion with similarly situated entities [can] act
anticompetitively by . . . offering favorable rates to one service
over another.'').
---------------------------------------------------------------------------
Mr. Harrison's testimony clearly shows that [REDACTED]. This is the
economic reality that spawned Spotify's bargaining power--a reality
created by Spotify's successful 2011 entry into the U.S. market. That
is, it is a power that Spotify created, not merely a marketplace factor
that the Majors, as complementary oligopolists, chose to exploit.
Further, this particular bargaining power cannot be characterized and
explained away like SoundExchange's other attempts to explain Spotify's
bargaining power--
[[Page 59472]]
[REDACTED]. Quite the contrary: [REDACTED] \64\ [REDACTED]
---------------------------------------------------------------------------
\64\ Tech firm dominance would not necessarily be limited to the
exertion of their power in vertical negotiations with the Majors.
The tech firms could integrate upstream and develop their own record
companies and poach artists from the Majors, Such an event is not
unlikely, given that (1) Amazon has already integrated upstream to
create or purchase television and film content through Amazon
Studios, (2) Apple has already integrated upstream with original
content television shows, movies and documentaries available via
Apple TV, and 3) Google has made a similar foray, through YouTube
Originals. See generally https://www.fastcompany.com/3058507/apple-facebook-google-and-alibaba-take-hollywood (accessed June 2, 2021).
Further, there is historical precedent for downstream distributors
integrating upstream to compete with licensors, such as in 1939,
when the NAB, representing radio station licensees, created
Broadcast Music, Inc. (BMI) in the mid-20th century to compete with
ASCAP, the dominant musical works licensor, after the latter sought
a substantial increase in royalty payments. See, https://www.bmi.com/about/history (accessed June 2, 2021).
---------------------------------------------------------------------------
Mr. Harrison's testimony as considered above was echoed by Mr.
Piibe, Sony's principal witness. Relying on Mr. Piibe's written
testimony, SoundExchange argues as follows:
If Spotify was out of the market, record companies would have
faced a material reduction in their relative bargaining power with
other services. . . . [REDACTED].
SX PFFCL ] 333 (quoting Piibe WDT ] 48) (emphasis added).\65\
---------------------------------------------------------------------------
\65\ [REDACTED] Mr. Piibe's testimony, repeated by
SoundExchange, [REDACTED], the Judges do not credit other portions
of that testimony. Specifically, the Judges do not agree that, in
the context of vertical negotiations involving complementary
oligopolists, [REDACTED], complementary oligopolists prefer multiple
downstream licensees whose competition, inter se, allows the
complementary oligopolists to avoid ``double marginalization''
(oligopolistic profits shared by upstream licensors and downstream
sellers) and thus to capture for themselves the entirety of the
supranormal profits generated by their market structure. See Web IV,
81 FR at 26342 & n.98 (Professor Katz testifying that ``actually,
the more intense the competition downstream, the greater the
incentive to charge a high price upstream because you don't have to
worry about so-called double marginalization) (emphasis added).
Also, Mr. Piibe oddly omits from his list of benefits arising from a
better Sony bargaining position its ability to increase its own
profits--listing only artist income and investment recoupment as the
benefits of a more advantageous bargaining environment. It is
curious when a businessman fails to identify his company's own
ability to increase profits as a worthy goal, as if acknowledging a
desire to maximize profits is somehow inappropriate, so it is better
to be disingenuous than disreputable. And, in that vein, Mr. Piibe
joins in the Orwellian language of several of the Majors' other fact
witnesses--identifying their streaming service counterparties as
their ``partners.'' Parties seeking to promote their own interests
at the expense of their counterparties is a fundament of negotiation
to be anticipated and welcomed, but the counterparties are hardly
``partners.'' (Although in the context of [REDACTED] the Judges find
it appropriate to note that the [REDACTED]).
---------------------------------------------------------------------------
SoundExchange also makes this bargaining point, in the form of a
response to Professor Shapiro's argument that the Majors should have
instead gone on offense, using their complementary oligopoly power
``[REDACTED].'' 8/20/20 Tr. 3102-04 (Shapiro). In response to this
argument, SoundExchange convincingly stated:
Had record companies leveraged their must-have status to walk
away from Spotify, as Professor Shapiro suggests they were willing
to do, Spotify's exit would have strengthen[ed] Apple Music
significantly, and also strengthen[ed] Amazon and Google.
[REDACTED].
SX PFFCL ] 335 (citing 8/11/20 Tr. 1273-75 (Orszag); Orszag WDT ] 33,
tbl.4; 9/3/20 Tr. 5733 (Harrison) (emphasis added)).
To illuminate further how Spotify's role as a bulwark against the
tech firms influenced the Majors' bargaining position with Spotify,
SoundExchange states:
Put simply, leveraging must-have status to put Spotify out of
business would risk making Apple Music dominant in the market.
[REDACTED], the result would be a material increase in their
relative bargaining power. The outcome would put the record
companies in a precarious position, given that the music business is
a rounding error for these big-tech services.
SX PFFCL ] 336 (citing 8/11/20 Tr. 1273-75 (Orszag); 9/3/20 5733
(Harrison) (emphasis added)). See also 8/11/20 Tr. 1274-75 (Orszag)
(noting that the absence of Spotify would increase the market shares of
the tech firms).\66\ SoundExchange's point is reasonable. Indeed, given
that the record makes it clear [REDACTED].
---------------------------------------------------------------------------
\66\ More precisely, using Mr. Orszag's subscriber data, if
Spotify left the market and its subscriber share was distributed
proportionately among its existing competitors, [REDACTED] See
Orszag WDT, tbl 4. Alternatively, if Spotify were to be acquired by
another large tech firm (e.g., Facebook) and no longer be
``independent,'' then adding Spotify's share to the existing tech
firm shares would place [REDACTED]% of the interactive subscription
in the hands of the large tech firms.
---------------------------------------------------------------------------
c. The Majors Demonstrated [REDACTED]
Early in the negotiations, the [REDACTED]. Mr. Harrison's further
testimony on behalf of SoundExchange and Universal, in colloquy with
the Judges, made that clear:
The Judges: [W]as it your understanding that [REDACTED]?
Mr. Harrison: [REDACTED]
9/3/20 Tr. 5748 (Harrison) (emphasis added).
The documentary evidence regarding the negotiations between Spotify
and the Majors, relied on by SoundExchange, is consistent with the
testimony considered above. More particularly, this evidence also
reveals that [REDACTED].\67\
---------------------------------------------------------------------------
\67\ [REDACTED] Spotify with a countervailing power that
generated a more level bargaining table, in contrast to the one-
sided bargaining where a ``Must Have'' Major could threaten--in
Professor Willig's terminology--to ``walk away'' from the
negotiations. This change explains why the [REDACTED] other terms
resulted in [REDACTED], as discussed infra.
---------------------------------------------------------------------------
In an email to Stefan Blom, Spotify's then Chief Strategy Officer,
dated December 7, 2016--approximately one-half year prior to the
execution of the Spotify-Sony 2017 Agreement--Sony's President, Global
Digital Business & U.S. Sales, Dennis Kooker, wrote:
[REDACTED].
Trial Ex. 4026 (emphasis added).\68\ See also SX PFFCL ] 441
(acknowledging that Trial Ex. 4026 [REDACTED].\69\ And, as testified to
by Mr. Piibe (who reported to Mr. Kooker), Spotify requested
[REDACTED]s. 9/3/20 Tr. 5323 (Piibe). Thus, from the [REDACTED] that
the former [REDACTED] through, inter alia, [REDACTED].
---------------------------------------------------------------------------
\68\ Mr. Kooker testified in Web IV. SoundExchange did not call
him as a witness in this Web V proceeding.
\69\ The Judges understand the Majors' expressed interest in a
[REDACTED] to be a specific example of how the Majors' could
[REDACTED]. It is also true, as the Services point out, the record
reflects that the [REDACTED] (and the ultimate Direct Placement
[REDACTED]. See https://seekingalpha.com/article/4408328-direct-listing-explained (accessed June 2, 2021). However, there is no
record evidence regarding the cost (including opportunity cost)
incurred by the Majors to [REDACTED], so the Judges cannot find
sufficient evidence that the Majors' [REDACTED] was an independent
or material motive for [REDACTED]. See also Services PFFCL ] 144
(the Services acknowledging that Spotify's [REDACTED] (emphasis
added).
---------------------------------------------------------------------------
As generally acknowledged by Mr. Harrison's testimony, discussed
supra, Universal's internal documents [REDACTED]. Eight months before
the parties concluded negotiations and entered into the April 2017
Agreement, Johnathan Dworkin, Universal's Senior Vice President of
Digital Strategy and Business Development, wrote the following in an
internal email to other Universal executives dated August 27, 2016:
[REDACTED]Trial Ex. 4023. See also SX PFFCL ] 473 (SoundExchange
conceding that in Trial Ex. 4023 [REDACTED].'').
In a subsequent internal email to other Universal executives dated
September 4, 2016, Jeffrey Harleston, Esq., Universal's General Counsel
and Executive Vice President of Business & Legal Affairs, wrote the
following--still seven month prior to the execution of Universal's 2017
Agreement with Spotify:
[REDACTED].
[[Page 59473]]
Trial Ex. 5421 (emphasis added).\70\ In this exhibit, Mr. Harleston
added that the [REDACTED] Trial Ex. 5421. As discussed further infra,
the Judges find Spotify's [REDACTED] to be consistent with [REDACTED].
---------------------------------------------------------------------------
\70\ Mr. Harleston, also, testified in Web IV, but SoundExchange
did not proffer him as a witness in this proceeding.
---------------------------------------------------------------------------
Rounding out the early documentary evidence, the third Major,
Warner, in internal notes written by its chief Spotify negotiator,
Tracey Gardner, dated October 12, 2016--eight months out from the
eventual Warner-Spotify 2017 Agreement--recorded Spotify's [REDACTED] .
. . .'' Trial Ex. 4022 (emphasis added). According to these notes,
Warner conveyed [REDACTED] Trial Ex. 4022 (emphasis added). Thus,
Warner, [REDACTED], had indicated to Spotify early in the negotiations
that [REDACTED].\71\
---------------------------------------------------------------------------
\71\ As the quoted language provides, Warner indicated that
there was [REDACTED]. Although that point is self-evident and
economically rational, stating so in negotiations is obviously
strategically prudent. But the salient point here is that
[REDACTED]--thus allowing Spotify to negotiate on a more level
playing field than would otherwise exist when it lacked such
countervailing power in negotiations with a Must Have Major.
---------------------------------------------------------------------------
As negotiations proceeded, [REDACTED] remained an important element
[REDACTED]. Specifically, in a December 13, 2016 internal Universal
email, Trial Ex. 4052, written [REDACTED] of the Universal-Spotify 2017
Agreement, Universal's Michael Nash, Executive Vice President of
Digital Strategy, included a draft \72\ letter to Spotify that stated
the following:
---------------------------------------------------------------------------
\72\ Although the letter is identified in the email as a draft,
SoundExchange does not claim that correspondence containing this or
substantively similar language was not in fact transmitted to
Spotify. See SX RPFFCL (to Services) at 83 n.35 (noting the
correspondence within Trial Ex. 4052 is identified as a draft but
not denying it was sent to Spotify). Clearly, SoundExchange and
Universal could have provided documentary evidence and/or testimony
in an attempt to demonstrate the draft correspondence (or its sum
and substance) had not been transmitted to Spotify. Because
SoundExchange did not present such evidence or testimony, the Judges
find that this correspondence, or a substantively similar version,
was transmitted by Universal to Spotify.) In any event, this draft
email demonstrates Mr. Nash's state of mind regarding the importance
to Universal of [REDACTED].
---------------------------------------------------------------------------
[REDACTED].
Trial Ex. 4052 (emphasis added). This language not only re-affirms
Universal's [REDACTED], it also strongly emphasizes the importance to
Universal of [REDACTED].
In sum, the Judges find that the negotiation-related documents and
testimony \73\ show [REDACTED].\74\
---------------------------------------------------------------------------
\73\ These business documents are probative because they provide
facts relating to the parties' state of mind during negotiations
that are [REDACTED]. See Manne & Williamson, supra at 626-627
(``business documents can be useful in demonstrating `economic
realities' [that are] relevant . . . [and] it is ``permissible to .
. . consider evidence of intent, belief, or motivation to
demonstrate that the act intended did, in fact, happen.).
\74\ In an attempt to explain away the statements made by the
Major's executives contained in the documents discussed above--
[REDACTED]--SoundExchange asserts that these statements are
[REDACTED] For example, [REDACTED] testified that [REDACTED].''
[REDACTED] instead [REDACTED] 9/2/20 Tr. 5265 (Piibe);
SoundExchange's Corrected Replies to the Services' Joint Proposed
Findings of Fact and Conclusions of Law ] 145 (SX RPFFCL (to
Services)). See also SX RPFFCL (to Services) at 81 nn.30, 33, 35; SX
PFFCL at 147 n.17, ] 441 (multiple assertions by hearing witnesses
that [REDACTED]). This argument highlights the serious defect in
SoundExchange's failure to call as witnesses the negotiators and
executives identified in the Majors' documents, who are the
individuals who could testify as to their own state of mind when
making those statements. Moreover, if these declarants [REDACTED]
For these reasons, the Judges afford no weight to any testimony by
SoundExchange witnesses who offer hearsay or opinion testimony
regarding the so-called ``true meaning'' of statements made by
declarants contained in the documentary record.
---------------------------------------------------------------------------
d. The Services' Contrary Explanation of the [REDACTED] as Based Solely
on the Majors' Complementary Oligopoly Is Unavailing
The Services do not acknowledge this countervailing power argument.
Rather, they attempt to explain away Spotify's value and power--
[REDACTED]--by treating that phenomenon as purely the consequence of
the Majors' complementary oligopoly power.
In this regard, the Services assert that the [REDACTED] was merely
the [REDACTED]--telltale behavior of a complementary oligopolist rather
than a price competitor. They rely on testimony by Messrs. Harrison and
Orszag that Universal [REDACTED] not to [REDACTED], but rather
[REDACTED]. Services PFFCL ] 148 (and record citations therein). The
Services also cite testimony by Professor Shapiro in which he opines
that when licensors are [REDACTED] 8/19/20 Tr. 2881 (Shapiro) (emphasis
added). This basic principle, according to the Services, explains why
``[REDACTED]'' Services PFFCL ] 149 (citing 8/19/20 Tr. 2864, 2870,
2880 (Shapiro)) (emphasis added).
SoundExchange asserts there is a serious flaw in this reasoning,
which undermines the Services' assertion that the Majors' complementary
oligopoly status explains the sum and substance of the relative
bargaining power of the Majors and Spotify. Specifically, SoundExchange
avers that if the Majors were [REDACTED] they would have [REDACTED].
However, the record indicates that the Majors only negotiated
[REDACTED].\75\ In support of this point, SoundExchange refers to
particular testimony by Professor Shapiro in a colloquy with the
Judges. When asked by the Judges why the Majors [REDACTED]--given that
[REDACTED]--Professor Shapiro responded, [REDACTED] 8/19/20 Tr. 2880
(Shapiro) (emphasis added).
---------------------------------------------------------------------------
\75\ Apparently, [REDACTED], 9/3/2020 Tr. 5681-82 (Harrison),
but that is not the same as a Major [REDACTED] as complementary
oligopolists, in accordance with the Services' theory of the case.
The Judges address the paucity of the record relating to this
[REDACTED], supra note 51.
---------------------------------------------------------------------------
The Judges agree with SoundExchange and find Professor Shapiro's
response unpersuasive. His theory of complementary oligopoly as the
single cause of the [REDACTED] is premised on the idea that it was
[REDACTED]--at monopoly rates rather than complementary oligopoly
rates. 8/19/20 Tr. 2880-81 (Shapiro). But, if it was [REDACTED], there
would have been no need [REDACTED]; rather, in their own interest the
Majors would have [REDACTED]. Moreover, SoundExchange is persuasive in
its argument that because the Majors [REDACTED], a fact acknowledged by
Professor Shapiro, see Shapiro WRT at 23, fig. 1; 8/20/20 Tr. 3108-09
(Shapiro), the [REDACTED].
Alternatively, Professor Shapiro noted that Spotify may have
[REDACTED] because it was the ``leader'' among interactive services.
But the Judges find the record to demonstrate, as discussed above, that
Spotify's ``leader'' status was important because it was the leader
among [REDACTED]. Google's economic expert witness, Dr. Peterson,
though, did acknowledge the importance of [REDACTED], testifying that
[REDACTED] 8/25/20 Tr. 3723 (Peterson).\76\
---------------------------------------------------------------------------
\76\ By contrast, it is not clear that Professor Shapiro had
recognized, acknowledged or recalled the importance of Spotify's
[REDACTED], until the Judges brought the issue to his attention.
Compare 8/19/20 Tr. 2882 (Shapiro) (stating in response to the
Judges' inquiry that he did not recall reviewing correspondence
indicating that [REDACTED]) with 8/20/20 Tr. 3080 (Shapiro)
(Professor Shapiro testifying the next hearing day that it was his
``sense'' that because Spotify was [REDACTED]the Majors
``[REDACTED].'') and Shapiro WRT at 18 n.58 (Professor Shapiro
quoting from Sony's December 7, 2016 internal document (later marked
in evidence as Trial Ex. 4026 and discussed supra) stating that
[REDACTED] (emphasis added). Additionally, it is noteworthy that
Professor Shapiro did not specifically address the point in Harrison
WDT ] 41 where Mr. Harrison identified [REDACTED] because he
identified the Harrison WDT as a document upon which he relied in
preparing his rebuttal testimony. Shapiro WRT app. A.
---------------------------------------------------------------------------
[[Page 59474]]
Indeed, were it not for [REDACTED], its position [REDACTED] would
make it [REDACTED], because [REDACTED]. That is, the Majors, as
complementary oligopolists, would prefer to keep downstream competition
roiling to avoid a downstream extraction of monopoly profits (double
marginalization) that would reduce the Majors' revenues, as discussed
in Web IV and noted earlier in this Determination.
The Judges note that, ultimately, in their post-hearing briefing,
the Services do appear to acknowledge that the Majors [REDACTED]
Services RPFFCL ] 477 (emphasis added). The Services assert, though,
that this reflects only that Spotify has ``[REDACTED], which, they
contend, would explain why the Majors [REDACTED]. Services RPFFCL ] 477
(emphasis added). But, the Judges find this assertion to be fully
consistent with their finding that Spotify's much different
circumstances explain why it had countervailing power--generated by the
confluence of (1) [REDACTED] and (2) its own status as the
[REDACTED].\77\
---------------------------------------------------------------------------
\77\ As the Judges have explained in other circumstances,
licensors will also charge different licensees different royalties
to promote price discrimination and in recognition of a licensee's
lower willingness-to-pay (often as a function of its lower ability-
to-pay). But, a licensor will not offer a licensee a lower rate if
that licensee's presence serves to cannibalize the business of
services paying higher royalties (as Professor Willig explains well
in this proceeding). Here, after the [REDACTED] [REDACTED]. Thus,
providing [REDACTED]. There was; and that particular attribute--as
the record demonstrates--was [REDACTED].
---------------------------------------------------------------------------
Finally, according to the Services, the Majors' [REDACTED] ``does
not inform the demonstrated reasons why they [REDACTED] Services RPFFCL
] 477. The Judges partially agree: the Majors' decision [REDACTED] is
not informative--standing alone--to explain why they did [REDACTED].
However, the Services are simply in error when they say the Majors'
[REDACTED] was disconnected from [REDACTED]. As the record discussed
above reveals, the connection is clear: SoundExchange provided ample
evidence that the Majors [REDACTED]. And, to reiterate, Spotify came to
possess that power because it had developed a market-leading business
while [REDACTED].\78\
---------------------------------------------------------------------------
\78\ Additionally, the Judges reject the Services' argument as
reductive. That is, the Services treat the complementary oligopoly
structure of the licensor side of the market as wholly explanatory
of the [REDACTED]. In other words, they essentially assert that
because the licensors are complementary oligopolists any [REDACTED]
must be a matter of pure self-interest. But, that structural
explanation ignores the dynamic and strategic competitive effects
revealed by the present record: [REDACTED]; [REDACTED]; and the
interplay of those two forces that provides Spotify with a
countervailing power [REDACTED]. The Services' argument also is
inconsistent with the fundamental economic concept of ``Pareto
Optimality,'' which posits that any consensual transaction between
private actors is efficient, in the sense that it benefits each
party (or else it would not enter into the transaction). To be sure,
if a party is not a willing buyer or seller, whether because of a
counterparty's excessive market power or otherwise, this optimality
is not realized, but here the Majors and Spotify found it in their
interest, through the exercise of their countervailing power, to
enter into agreements containing [REDACTED]. Accordingly, it is
incorrect to state, as the Services do, that the negotiated
[REDACTED] cannot be in the mutual interest of Spotify and the
Majors.
---------------------------------------------------------------------------
e. There Is Agreement That Spotify's Subscription Royalty Rate Is
[REDACTED] Set Through the Exercise of Complementary Oligopoly Power
Alone
Notwithstanding the foregoing analytical disputes, Professor
Shapiro acknowledges that Spotify's subscription royalty rate equates
with a rate he identifies as set without the anticompetitive effect of
complementary oligopoly power. As SoundExchange explains--relying on
Professor Shapiro's own testimony--in the course of developing his
proposed competition adjustment, he calculates [REDACTED]'s effective
per-play interactive royalty rate at $[REDACTED]. Ex. 4094 at 40 &
tbl.10 (SCWDT of Carl Shapiro) (Shapiro WDT). Then, he characterizes
this $[REDACTED] rate as an effectively competitive rate (as a base for
comparison with other rates he identifies as not effectively
competitive). Id. at 40; 8/19/20 Tr. 2850 (Shapiro).\79\
---------------------------------------------------------------------------
\79\ Professor Shapiro reaches this opinion based on the limited
repertoire available on [REDACTED], which he understands to
demonstrate that customers ``do not expect to find all their
favorite artists and recordings on the service.'' Shapiro WDT at 40.
Thus, he opines that, for [REDACTED], no record company is a Must
Have, making the rate effectively competitive. 8/20/20 Tr. 3110-11,
3117-19 (Shapiro).
---------------------------------------------------------------------------
SoundExchange notes that, according to Professor Shapiro's own
calculations, Spotify's effective subscription per-play rate is
$[REDACTED], Shapiro WDT at 40, tbl.10, [REDACTED] to the [REDACTED]
rate he characterizes as free of the complementary oligopoly effect. 8/
20/20 Tr. 3112-13 (Shapiro); see also 8/10/20 Tr. 1170 (Orszag).
SoundExchange further notes that Professor Shapiro acknowledges, as he
must, that these two rates are [REDACTED] 8/20/20 Tr. 3113 (Shapiro).
Given this [REDACTED], Mr. Orszag opines that, at most, a competition
adjustment should measure the difference between the Spotify effective
rate ($[REDACTED]) and the [REDACTED] effective rate ($[REDACTED]).
Orszag WDT ] 114. This difference would lead to a [REDACTED]% effective
competition adjustment.\80\
---------------------------------------------------------------------------
\80\ [REDACTED]/[REDACTED] = [REDACTED]
[REDACTED]-[REDACTED] = [REDACTED]%.
---------------------------------------------------------------------------
After first conceding [REDACTED] the Services attempt to dismiss
the importance of this equivalency--in a reply, quoted below--that is
off-point and unconvincing:
In an attempted ``gotcha,'' Mr. Orszag argues that if
[REDACTED]'s per-play rate of $[REDACTED] reflects the lack of must-
have power, and if [REDACTED] pay $[REDACTED] per performances (see
Shapiro WRT at 30 fig. 3), then the record companies must not be
must-have for those services either--in which case there is no need
to adjust the Spotify rates any further for effective competition
(or to make an adjustment of only [REDACTED] \81\ ([REDACTED])).
Orszag WRT ] 114. . . . Mr. Orszag is resorting to sleight-of-hand.
Because he artificially excludes all the discounted plans from his
calculations, the effective per-play rate of Spotify plans on which
he actually relies for his benchmark is $[REDACTED], not
$[REDACTED]. Moreover, as explained at length above, he does not use
the per-play rate at all, but rather alters the Web IV methodology
by starting from Spotify's percent-of-revenue royalty. . . .
---------------------------------------------------------------------------
\81\ This [REDACTED]% calculation appears to be a computational
error, as indicated by the math in the immediately preceding
footnote.
---------------------------------------------------------------------------
Were Mr. Orszag actually working from a $[REDACTED] per
performance benchmark and following the Web IV methodology [by] . .
. drop[ping] his industry-wide interactive per-play benchmark . . .
he might have a point--but he does not.
Services PFFCL ] 160.
This criticism is off-the-mark because it explains why the Services
believe that Mr. Orszag improperly ignored Spotify's $[REDACTED]
effective per-play subscription rate. But the point here is not what
Mr. Orszag did or did not do with this data point, but rather that
Professor Shapiro identified two [REDACTED] royalty rates as
simultaneously satisfying and not satisfying the effective competition
requirement (inconsistent with the principle of transitivity). The
Services' response fails to address that point.
The Judges find that the [REDACTED] is generally confirmatory of
the fact that Spotify's [REDACTED] is not--as the Services maintain--a
product solely of the Majors' complementary oligopoly power.\82\
---------------------------------------------------------------------------
\82\ However, the Judges do not find that the [REDACTED] of
Spotify's effective per play rate with [REDACTED]'s per play rate
limits the effective competition adjustment to the [REDACTED] in
those rates. Rather, as discussed elsewhere in this Determination,
the Judges agree with Dr. Peterson (Google's expert economic
witness) that the 12% steering adjustment from Web IV remains
applicable here. But, as also described elsewhere herein, that 12%
downward adjustment must be offset by use of the [REDACTED]), as
applied to the segments of the Spotify market for which the
[REDACTED] applied. See Peterson WDT fig. 5 ([REDACTED]). Further,
by limiting the application of the [REDACTED]'' adjustment only to
Spotify market segments to which that rate actually applied, the
Judges have allayed a final argument by the Services, viz., that the
evidentiary value of the Spotify and [REDACTED] should not apply
beyond the subscription tier. See Services PFFCL ] 161.
---------------------------------------------------------------------------
[[Page 59475]]
f. The Majors' [REDACTED] Explains the [REDACTED] of the Ongoing
Negotiations
The Majors' [REDACTED] explains the flow of the ongoing
negotiations between the Majors and Spotify. Unlike a negotiation in
which the complementary oligopolists' ``Must Have'' status allows them
to dictate terms, they [REDACTED].
In this regard the Services describe these negotiations as follows:
[W]hat is apparent from the evidentiary record is [REDACTED] . .
. par for the course in a deal negotiation . . . .
Services RPFFCL ]] 426-427 (and record citations therein).
But, the point of complementary oligopoly power is that a ``Must
Have'' supplier/licensor [REDACTED] to its buyers/licensees. And yet,
here the Services acknowledge that the Spotify-Major negotiations were
marked by a [REDACTED], as happens in any negotiation. Clearly, given
that the Majors remained ``Must Have'' licensors, something else
[REDACTED], and, as discussed above, that ``something else'' is
Spotify's countervailing power flowing from its status as the
[REDACTED].\83\
---------------------------------------------------------------------------
\83\ The Services maintain that, as a general rule,
complementary oligopolists, like monopolists, negotiate with their
counterparties, but that does not demonstrate the existence of
effective competition. Shapiro WRT at 1; see also Web IV, 81 FR at
26344 (monopolists and complementary oligopolists bargain with their
customers to establish discriminatory prices that increase the
sellers' profits). That is certainly true, but it is insufficient
for the Services simply to maintain, ipse dixit, that any ``give-
up'' by a Major in negotiations represents the foregoing elements of
negotiation rather than a ``give-up'' generated by identifiable
countervailing power.
---------------------------------------------------------------------------
The [REDACTED] is clear in the record. Among the provisions that
the Majors prevailed on (and, thus reciprocally, as to which [REDACTED]
were four important items: (1) [REDACTED], (2) [REDACTED], (3)
[REDACTED], and (4) [REDACTED]. Services PFFCL ] ] 146, 157-158 (and
record citations therein).
And, on the other side of the ledger, among the provisions as to
which [REDACTED] in negotiations (and, thus reciprocally, as to which
[REDACTED]) were the following important items: (1) [REDACTED], (2)
[REDACTED], (3) [REDACTED] [REDACTED], and (4) [REDACTED] [REDACTED].
SX PFFCL ] ] 293, 413, 431-432, 444; SoundExchange's Corrected Replies
to the Services' Joint Proposed Findings of Fact and Conclusions of Law
] 158 (and record citations therein) (SX RPFFCL (to Services)). This
[REDACTED]led the Services to describe that process as typical of an
ordinary bargaining process when each counterparty has bargaining
leverage. See Services RPFFCL ]] 413; 424, 426-427 (and record
citations therein) (it is ``unsurprising'' that ``each party to the
negotiation [REDACTED]; it is ``inevitable [that] not all [REDACTED]
will form part of the . . . agreement''; and ``what the [Warner-Spotify
negotiation] record shows is [REDACTED] (emphasis added). These
descriptions are not consistent with the one-sided negotiations between
complementary oligopolists and their relatively powerless
counterparties, belying the Services' assertion that these negotiations
reflected the one-sided power of the Majors' complementary oligopoly
status.\84\
---------------------------------------------------------------------------
\84\ By contrast, SoundExchange, in its zeal to portray Spotify
as [REDACTED] in these negotiations, studiously ignores the fact
that Spotify [REDACTED]. The Judges see this as ``hyperbole-by-
omission.'' The Judges reject any notion that Spotify had acquired
unilateral power to dictate terms; rather, its [REDACTED] provided
it with a power to countervail the Majors' Must Have power.
---------------------------------------------------------------------------
Finally, consistent with the idea that the Majors would continue to
bargain ([REDACTED]--is the following succinct colloquy (referred to
supra) between Spotify and Warner negotiators in October 2016, as
recounted in one of Warner's internal documents:
[REDACTED]
[REDACTED]
Trial Ex. 4022 (emphasis added). As noted supra, Warner was making a
basic economic point: It understood that Spotify, as a [REDACTED]. The
[REDACTED] realized by the Majors reflect [REDACTED] to incur for this
benefit, and the Majors' [REDACTED] reflect [REDACTED] to incur.
In sum, the Judges find that the negotiation documents on which
SoundExchange relies reflect bargaining that is consistent with: (1)
The testimony of the Majors' witnesses regarding [REDACTED] and (2) the
economic principle of countervailing power that, as discussed supra,
could and did blunt some of the Majors' complementary oligopoly power,
[REDACTED] toward an effectively competitive rate, even in the absence
of horizontal price competition.\85\
---------------------------------------------------------------------------
\85\ The Majors' [REDACTED]. As noted supra, in an internal Sony
email from a Sony line negotiator, Andre Stapleton, to Mr. Piibe,
Trial Ex. 5467, discussed supra, the [REDACTED]. By contrast, Mr.
Sherwood, a Warner witness, [REDACTED], testifying, as noted supra,
that [REDACTED]. 9/9/20 Tr. 5931 (Sherwood).
---------------------------------------------------------------------------
C. The Price Competition Adjustment Necessary To Set an Effectively
Competitive Rate
In the exercise of their statutory duty to ``to decide whether the
rates proposed adequately provide for an effective level of
competition,'' SoundExchange, Inc. v. Copyright Royalty. Bd., 401 F.2d
41, 57 (D.C. Cir. 2018), the Judges find that the 12% effective
competition adjustment that they set in Web IV remains an appropriate
measure for an effective competition adjustment (before any necessary
adjustment to reflect Spotify's countervailing power). To recap, the
12% effective competition adjustment was based on a factual record that
included Pandora Steering Experiments, a steering-based agreement
between Pandora and Merlin,\86\ and a steering-based agreement between
iHeart and Warner. The Web IV Judges defined steering in the same
manner as defined by the parties in this proceeding, i.e., as a
licensee's ``ability to control the mix of music that's played on the
service in response to differences in royalty rates charged by
different record companies.'' Web IV, 81 FR at 26356.
---------------------------------------------------------------------------
\86\ Merlin is referred to in the music industry as ``the fourth
major.'' See, e.g., https://theindustryobserver.thebrag.com/heres-to-ten-years-of-merlin/ (accessed June 7, 2021).
---------------------------------------------------------------------------
The Judges in Web IV construed the economics of steering in the
following manner:
[S]teering in the hypothetical noninteractive market would serve to
mitigate the effect of complementary oligopoly on the prices paid by
the noninteractive services and therefore move the market toward
effective, or workable, competition. Steering is synonymous with
price competition in this market, and the nature of price
competition is to cause prices to be lower than in the absence of
competition, through the ever-present ``threat'' that competing
sellers will undercut each other in order to sell more goods or
services.
Web IV, 81 FR at 26366 (emphasis added). Moreover, the Web IV Judges
noted that the steering evidence was especially probative because it
consisted of ``a combination of benchmarks, experiments and expert
economic theorizing using fundamental principles of profit maximization
and opportunity cost . . . [a] combination of proofs and arguments
[that] is actually more
[[Page 59476]]
persuasive to the Judges than a mere benchmark standing alone.'' Web
IV, 81 FR at 26367 n.141. Relying on all the steering evidence
presented, the Web IV Judges determined that benchmark rates that were
inflated by the complementary oligopoly effect needed to be adjusted
downward by 12%, in order to establish an effectively competitive rate.
Web IV, 81 FR at 26404-05.
Additionally, crucial evidence that supported the Judges' Web IV
finding of a 12% adjustment is part of the present record, having been
designated as such by Pandora. Specifically, Pandora designated as part
of the Web V record the Web IV Written Direct Testimony and hearing
testimony of Stephan McBride, Pandora' Senior Scientist responsible for
the Pandora Steering Experiments on which the Judges relied. See Trial
Exs. 4104 & 4105; see generally 37 CFR 351.4(b)(2) (permitting a party
to designate ``past records and testimony'' for inclusion in its
Written Direct Statement).
The Judges in Web IV described the Pandora Steering Experiments as
follows:
Pandora's . . . steering experiments . . . consist of
comparisons between randomly selected groups of listeners, one group
receiving a manipulated experience (the ``treated'' group) and the
other group receiving the standard Pandora experience (the
``control'' group). . . . These experiments are randomized,
controlled, and blind . . . .
Pandora initiated the steering experiments because . . . it
recognized that, as a noninteractive service it has the economic
incentive to ``steer'' its performances toward music owned by a
particular record company if that music is available at a lower
royalty rate. . . . Therefore, Pandora decided to determine through
its steering experiments whether and to what extent it could use
this technological ability to steer performances without negatively
affecting listenership.
. . .
The Steering Experiments consisted of a group of 12 experiments.
Each experiment involved a combination of one of three target
ownership groups (UMG, Sony or WMG) and a target ``deflection'' in
share of spins (treatment group) as compared to spins that would
occur according to the standard Pandora music recommendation results
(control group
The experiments demonstrated that Pandora was able to steer +15%
or -15% for all three Majors without causing a statistically
significant change in listening behavior. McBride WDT 21.
However, Pandora was unable to steer +30% or -30% for Universal or
Sony without creating a statistically significant change in
listening behavior.
Web IV, 81 FR at 26357-58 (emphasis added).
As noted above, the Judges also relied on provisions in two
agreements. First, Web IV noted that ``the central piece'' of the
agreement between Pandora and Merlin was a ``reduced per-play rate in
exchange for increased plays''--the very essence of steering. Web IV,
81 FR at 26357. The second agreement the Judges relied on in Web IV was
the iHeart/Warner agreement which the Web IV Judges described as
``incorporat[ing] the same economic steering logic as the Pandora/
Merlin Agreement [by] [c]reat[ing] an incentive for iHeart to increase
Warner's share of performances substantially.'' Web IV, 81 FR at 26375.
As with the Pandora/Merlin Agreement, the Web IV Judges described this
``steering aspect'' of the contract as reflective of ``price
competition--an increase in quantity (more performances) in exchange
for a lower price (a lower rate).'' Web IV, 81 FR at 26383.
SoundExchange argues that this evidence of steering is now
``stale,'' because the experiments are outdated, as are the two cited
agreements, SX PFFCL ]] 490-91.\87\ But the dates of the experiment and
those agreements are insufficient to wash away the importance of
steering as a price competition mechanism applicable to the
noninteractive market. The Judges note that SoundExchange could have
called a witness from Merlin in Web V (as it did in Web IV) to present
testimony that may have shed light on why its [REDACTED] but elected
not to.\88\ By contrast, Pandora presented testimony from Professor
Shapiro explaining that Merlin (and the Majors) had refused to agree to
continue steering. Specifically, Professor Shapiro testified:
---------------------------------------------------------------------------
\87\ The Pandora/Merlin agreement was executed on June 16, 2014,
the iHeart/Warner agreement was entered into on October 1, 2013, and
the Pandora Steering Experiments were conducted between June 4 and
September 3, 2014. Web IV, 81 FR at 26355, 26357, 26375.
\88\ The [REDACTED]. See SX PFFCL ] 1168 (and record citations
therein).
Following the Web IV Determination, as a condition for obtaining
the additional rights necessary to offer its non-statutory services,
[REDACTED]. These provisions appear to be the result of the
complementary oligopoly power held by certain record companies in
the market for licensing recorded music to interactive services.
Given these provisions, Pandora has been unable to offer to steer
toward other labels in exchange for a discounted royalty rate from
them, lest it jeopardize the share of other labels in violation of
their anti-steering provisions. As a result, competition for
incremental performances on Pandora in the form of steering has been
---------------------------------------------------------------------------
snuffed out.
Shapiro WDT at 9-10 (emphasis added); see also Trial Ex. 4090 ] 24 (WDT
of Christopher Phillips) (Phillips WDT) (noting the existence of the
[REDACTED]).
In response, SoundExchange asserted that: (1) Pandora had not
offered any further evidence or testimony beyond the testimony cited
above; (2) it was not clear that [REDACTED]; (3) Pandora had
``considerable leverage in negotiations'' because it could default to
the statutory rate. SoundExchange's Corrected Replies to Pandora and
Sirius XM's Corrected Proposed Findings of Fact and Conclusions of Law
] 21 (SX RPFFCL (to Pandora/Sirius XM)).
The Judges find SoundExchange's arguments unavailing. As already
noted, SoundExchange could have attempted to rebut Pandora's testimony
by calling a Merlin representative, as it had in Web IV, yet it
declined to do so. When a party is in a position to proffer testimony
or evidence that would elucidate a point, or rebut an adverse point,
but declines to do so, a finder of fact may determine that the
testimony would not have been supportive of that party's position. See
Huthnance v. District of Columbia, 722 F.3d 371, (D.C. Cir. 2013)
(Under the ``missing evidence rule, when a party has relevant evidence
[which includes testimonial evidence] within his control which he fails
to produce, that failure gives rise to an inference that the evidence
is unfavorable to him . . . .''). The Judges infer that the absence of
a Merlin witness indicates that the testimony of a Merlin witness would
not have been favorable to SoundExchange's argument on this steering
issue. Moreover, there is simply no evidence to contradict the
testimony of Professor Shapiro in this regard.
In the present case, the absence of a Merlin witness is
particularly noteworthy. As Dr. Peterson recounted in his testimony,
SoundExchange had in the recent past--after Web IV--cautioned Indies
that entering into direct agreements with services, even though they
appear advantageous to the Indies, may ultimately be used in rate
proceeding as evidence to support a lowering of statutory royalty
rates. 8/25/20 Tr. 3673 (Peterson); Trial Ex. 2113 (SoundExchange's
2015 notice informing labels they ``should . . . keep in mind that any
direct deals might be used against artists and record companies as
evidence,'' and that because ``[d]igital radio services are intensely
focused on how market evidence will be used in their case, . . . you
should be as well.''). Although there is no evidence that SoundExchange
repeated that cautionary communication in the run-up to Web V, there is
also no evidence that it has ever retracted this warning. Thus, in this
context, the
[[Page 59477]]
absence of a Merlin witness to explain the [REDACTED] is of even
greater importance.
Further, SoundExchange's assertion that steering beneficial to
Pandora may have remained possible under its agreement with Merlin--and
yet Pandora nonetheless acted against its self-interest and
[REDACTED]--is simply bewildering; the Judges do not assume that
sophisticated commercial entities engage in economically irrational
conduct. Also, SoundExchange's assertion that Pandora enjoyed
``considerable leverage in the negotiations'' with Merlin is purely
speculative (given the absence of record evidence demonstrating such
leverage) and also runs counter to an essential premise of
SoundExchange's case-in-chief, presented through Professor Willig, that
as a matter of bargaining strategy and modeling, the record companies
would not engage in steering because it would thwart the maximization
of their ``Must Have'' value. See 8/10/20 Tr. 1077-78 (Willig).
Additionally, [REDACTED] was one of the very devices SoundExchange
claimed in Web IV that record companies would use to defeat steering-
based price competition. Web IV, 81 FR at 26364. In response, the
Judges found such a contract term would constitute an exertion of the
licensors' complementary oligopoly power, frustrating the setting of an
effectively competitive rate. Web IV, 81 FR at 26373-74 (``the
hypothetical use by the majors of anti-steering clauses in response to
the threat of price competition-via-steering would thwart `effective
competition.' ''). Here too, it would be anomalous (in the nature of a
Catch-22) for the Judges to disregard the capacity of price-competitive
steering to offset a complementary oligopoly effect because a record
company had used such power to thwart the continuation of such
steering.
Further, the Judges' task is to set a rate that equates with an
effectively competitive rate that would have been agreed to by willing
buyers and sellers in a hypothetical market. The Pandora/Merlin and
iHeart/Warner agreements demonstrate that actual steering has occurred
in the market. A fortiori, steering is clearly an element of the
hypothetical market (as shown by the Pandora Steering Experiments) that
the Judges must construct.
The Judges also note that in the present case, Dr. Leonard, the
economic expert for the NAB, adopts the 12% steering adjustment applied
by the Judges in Web IV in order to establish an effectively
competitive rate. Trial Ex. 2150 ] 115 (CWDT of Gregory Leonard)
(Leonard WDT). In his oral testimony, Dr. Leonard testified that any
initial reluctance he may have had to ``reuse'' this 12% adjustment was
outweighed by the fact that this adjustment: (1) Is based contractual
agreements; (2) is the product of agreements entered into ``not that
long ago''; and (3) is ``conservative'' and ``small'' relative to the
complementary oligopoly effect in the present circumstances. 8/24/10
Tr. 3410 (Leonard).
In addition, Google's economic expert, Dr. Peterson, testified in
favor of utilizing this same economic evidence to support the steering
adjustment in the present case. Dr. Peterson's testimony in this regard
is well worth quoting:
In a hypothetical effectively competitive market, statutory
streaming services, such as custom radio services, have the
potential to steer the music they use toward or away from particular
labels [because] [m]usical recordings are differentiated but
substitutable products. . . . [T]he service can reduce the number or
share of plays for a given label's recordings if the license rate is
too high. This response to rate differences is called steering. . .
. [I]it is appropriate that the hypothetical negotiation between
statutory streaming services and licensors reflect some degree of
competition from steering or the ability of the streaming services
to substitute one label's recordings for another's relative to the
rates that the labels charge acting as Cournot oligopolists.
The evidence available to me in this proceeding does not include
recent licenses with steering adjustments built into them as was the
case in the Web IV proceeding. However, I am aware of no evidence
that a stand-alone statutory webcaster would not be able to steer
toward or away from labels, which would lead to their competing at
the margin for additional plays on the service.
In the absence of new benchmarks, it can be appropriate to use
previous benchmarks. In the Web IV proceedings, there was ample
evidence of the ability of statutory streaming services to steer
toward or away from record labels. Thus, the evidence indicates that
listener behavior permits statutory webcasters to engage in
substantial steering without negatively affecting their user base.
In the hypothetical effectively competitive marketplace for
licensing statutory webcasters, licensors would not be in the
position of Cournot oligopolists because their high license fees
would affect the spins of their works directly.
Trial Ex. 1103 ]] 37, 58-61, 64 (emphasis added) (CWDT of Steven
Peterson) (Peterson WDT). Relying on this analysis, and also
considering other evidence, Dr. Peterson opined that a reasonable range
for the steering-based effective competition adjustment was between 11%
and 23% (which includes the Judges' 12% adjustment). Peterson WDT ] 65.
The Judges agree with Dr. Peterson. They emphasize that basic
economic principles do not change with the mere passage of a few years.
Although new probative factual evidence or advances in economic theory
or modeling presented by an expert witness could show either that the
principle is factually inapplicable or needs to be revisited, no such
record has been presented in this proceeding. Accordingly, the Judges
find that the economic experts cited above \89\ have properly relied on
the evidence supporting the Web IV steering adjustment to establish the
appropriate steering adjustment in this proceeding.\90\
---------------------------------------------------------------------------
\89\ Pandora's economic expert, Professor Shapiro, although
presenting in this proceeding a ``carriage competition'' model
relying on the Label Suppression Experiments, rather than a
steering-based adjustment, nonetheless has acknowledged previously
that ``a streaming service that possesses an ability to ``steer''
towards certain recordings, and away from others, will have `much
more bargaining power and be able to negotiate a lower royalty
rate,'' reflecting ``price competition at work,'' and the workings
of an ``effectively competitive market.'' Web IV, 81 FR at 26356-57.
Thus, experts for all the commercial services are on record as
supporting the use of a steering adjustment to generate an
effectively competitive rate.
\90\ The Judges have also not hesitated to apply evidence from a
prior proceeding when they have found the prior evidence to be
superior to the evidence presented in the new proceeding. SDARS II,
78 FR at 23063 (``The Judges rely [inter alia] . . . on . . . the
unadjusted upper bound in SDARS-I to guide the determination of what
the upper bound should be in this proceeding.'').
---------------------------------------------------------------------------
A final aspect of the Web IV and Web V proceedings adds to the
ample evidence supporting the use of a steering adjustment to establish
an effectively competitive rate. In this Web V proceeding, Professor
Willig, a SoundExchange economic witness, while testifying in support
of his Shapley Value Model, emphasized repeatedly that Majors were
``Must Haves'' in the noninteractive market because their repertoires
included the bulk of sound recording ``hits'' that listeners wanted to
hear. See, e.g., 8/5/20 Tr. 400 (Willig) (``Must Have'' status is
``really about the hits''); 8/5/20 Tr. 440 (Willig) (the hits are
``terribly important'' to the overall value of listening); 8/5/20 Tr.
448 (Willig) (the Majors' collection of hits is what makes them ``Must
Haves''); 8/6/20 Tr. 807 (Willig) (the level of spin rates on
noninteractive services is a function of the plays of current hits);
Trial Ex. 5601 ] 28 & n.46 (WRT of Robert Willig) (Willig WRT)
(Universal has a [REDACTED]% share of the streams but accounts for
[REDACTED]% of the top 100 hits according to 2019 Billboard data relied
on by Professor Willig).
Similarly, in Web IV, the Judges took note of the importance of
hits (``top spins'') to a noninteractive service. Web
[[Page 59478]]
IV, 81 FR at 26373 n.155 (`` `top spin' figures are indicative of the
`must have' aspect of the Majors' repertoire . . . suggest[ing] to the
Judges that the popularity of the Majors' spins is the reason why
steering away from their repertoires cannot be pursued beyond a certain
level, and why [Professor] Shapiro candidly declined to reject the idea
that the Majors' repertoires were `must haves' . . . .'').
Professor Willig's emphasis in this proceeding on the Majors'
possession of many of the ``hits'' puts a fine point on the steering
issue. The noninteractive services need to play the ``hits'' (at
intervals consistent with the sound recording performance complement)
in order to remain attractive to their listeners and subscribers. That
necessity renders the Majors ``Must Have'' licensors. However, the
flip-side of this appropriate emphasis on the ``hits'' is a de-emphasis
on less popular sound recordings, and therein lies the ability of the
noninteractive services to engage in price competition by embedding
steering into their algorithmic or human curation system.
That is, noninteractive services can (and, in the case of
[REDACTED], did) steer curated songs that were not necessarily the
hits/top spins, in a manner that [REDACTED]. See Web IV, 81 FR at
26368-69 (explaining why substituting a curated song with a [REDACTED]
did not impact listeners but improved the bottom lines of the services
and labels that engaged in steering). When the Judges consider this
point together with Professor Willig's testimony regarding the need of
noninteractive services to obtain licenses necessary to play all the
hits, the economic coexistence of the noninteractives' steering ability
and the Majors' ``Must Have'' status remains clear.
Finally, the Judges note that none of SoundExchange's arguments
indicates that the fundamental economics of noninteractive services
have changed in any manner that would make steering by such services a
less useful tool for applying an appropriate steering adjustment.
Rather, as Dr. Peterson testified, ``the ability to steer for a non-
interactive statutory service is pretty much bred right into the nature
of the service where it's choosing the songs.'' 8/25/20 Tr. 3668
(Peterson).
In sum, the Judges find it appropriate --for the reasons discussed
above--to apply a 12% steering adjustment (prior to the offsets
discussed below) in order to generate a competitive rate.
D. The Countervailing Power Offset to the Price Competition Adjustment
As discussed more fully elsewhere in this Determination, the Judges
find that Spotify, through its success as a market leader among
interactive services and as the dominant independent pureplay
interactive service, has acquired a significant measure of bargaining
power in its licensing negotiations with the Majors. To summarize very
briefly, the evidence demonstrates that Spotify's [REDACTED]--in the
interactive market. See supra, section III.B.2.
Spotify's bargaining power allowed it to bargain for
[REDACTED].\91\ This reduction is a function of the countervailing
power discussed supra, which can serve as a means for reducing prices
(and rates) toward a level indicated by the processes of price
competition that are the hallmark of traditional neoclassical
microeconomics.
---------------------------------------------------------------------------
\91\ [REDACTED]%-[REDACTED]% = [REDACTED]%. [REDACTED]%/
[REDACTED]% = [REDACTED]%.
---------------------------------------------------------------------------
In this regard, it is noteworthy that one of SoundExchange's
economic expert witnesses, Mr. Orszag, acknowledges that the 12%
effective competition adjustment can be applied, if [REDACTED]. 8/25/20
3837 (Orszag) (``[REDACTED]'').\92\
---------------------------------------------------------------------------
\92\ The Judges do not agree with Mr. Orszag's levels of
adjustment to reduce the 12% factor, but his concept is the one the
Judges are applying in this proceeding.
---------------------------------------------------------------------------
Here, [REDACTED]. A 12% price competition adjustment is warranted.
But [REDACTED]. Thus, an appropriate adjustment for rates using this
benchmark is 12%--[REDACTED], or [REDACTED]%.
However, as explained infra, that [REDACTED]% adjustment applies
only to a headline rate that serves as a benchmark in this proceeding
and that is consistent with [REDACTED] in the effective per-play rate.
To the extent the [REDACTED]% adjustment does not apply to discounted
subscriptions, such as student plan subscriptions, or to ad-supported
plans, then the [REDACTED]% reduction is not applicable. Rather, in
such instances, the full 12% competition adjustment applies.\93\
---------------------------------------------------------------------------
\93\ The Judges recognize, as they did in Web IV, that
estimating a rate that reflects effective competition is not an
exact science. See Web IV, 81 FR at 26334 (``The very essence of a
competitive standard is that it suggests a continuum and differences
in degree rather than in kind.''). However, the quality of the
steering evidence in Web IV allowed the Judges to identify with some
precision the ``range of potential steering adjustments,
notwithstanding the otherwise inherently `fuzzy' nature of the
`bright line' . . . between effectively competitive and
noncompetitive rates.'' Web IV, 81 FR at 26344. Here, applying that
steering evidence together with the offset indicated by the Web V
record represents another application of specific evidence to put
into focus the necessary size of the effective competition
adjustment. Mr. Orszag likewise acknowledges that identifying the
impact of market developments on the ascertainment of an effective
competition adjustment cannot be determined with absolute precision.
8/11/20 Tr.1276 (Orszag) (``[T]hese are areas of gray. . . .
[M]arkets can be less workably competitive or less effectively
competitive and more effectively competitive.''). And, to compare
markets over time to identify the change to the level of an
effective competition adjustment, Mr. Orszag opines that ``[f]rom an
economic perspective, what one can do is utilize calibration or
empirical evidence to understand how markets have changed. 8/12/20
Tr. 1653 (Orszag). The Judges quite agree, and that is what they
have undertaken in this Determination--to use the empirical data and
related evidence to calibrate the extent to which an effective
competition adjustment is required in the noninteractive
subscription and ad-supported markets.
---------------------------------------------------------------------------
IV. Commercial Webcasting Rates
A. Evaluation of Survey Evidence
1. Zauberman Music-Listening Behavior Survey
a. Description of the Zauberman Survey
Professor Willig's opportunity cost approach is dependent upon the
results of the consumer behavior surveys.\94\ The Judges, therefore,
test the underlying survey data on which he relied to assess their
reliability or their strength in supporting Professor Willig's
conclusions.
---------------------------------------------------------------------------
\94\ One input in calculating a record company's opportunity
cost of licensing its repertoire to a statutory webcaster is a
diversion ratio, which measures how listening is spread across a
range of alternative listening sources in the event that listeners
stop listening to a statutory webcaster because a label's repertoire
is no longer available.
The Judges discuss Professor Willig's economic modeling infra,
section IV.C.1.
---------------------------------------------------------------------------
SoundExchange engaged Professor Gal Zauberman to measure the music-
listening behavior of listeners to streaming radio services.\95\ Trial
Ex. 5606 ]] 1, 4(WDT of Gal Zauberman) (Zauberman WDT). Professor
Zauberman conducted an internet-based survey with the assistance of the
Brattle Group, an economic consulting firm, and Dynata, a marketing
research company with extensive experience in conducting surveys.
Zauberman WDT ] 28. Specifically, the survey explored how consumers of
streaming radio services that are eligible for the webcasting statutory
license would listen to music if those streaming radio services were
not available. Zauberman WDT ] 12. The survey respondents were asked
about their listening behavior in a hypothetical world in which either
[[Page 59479]]
free or paid streaming radio services were no longer available.
Zauberman WDT ] 13.
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\95\ Professor Gal Zauberman, is the Joseph F. Cullman 3rd
Professor of Marketing at the Yale School of Management, who
specializes in consumer judgment and decision-making, financial
decision-making, and survey methodology. Zauberman WDT ]] 1, 4.
---------------------------------------------------------------------------
The Zauberman Survey consisted of three key types of questions:
Respondents were asked about which music-listening options they have
used in the past 30 days, either a free or paid streaming radio service
(Q1), which replacement music-listening options they would choose
instead of the free or paid streaming radio service set forth in their
assigned hypothetical scenario (Q2), and (in some cases) how they would
allocate their replacement time music-listening options (Q3, 3A) among
replacement options. Zauberman WDT ] 51.\96\
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\96\ A total of 21,335 respondents entered the survey: 6,146
respondents answered Q1 and 2,151 respondents answered Q2. Of these,
1,552 qualified respondents completed the survey without being
excluded for selecting ``Unsure'' for any of the options in Q1 or
Q2. These 1,552 respondents did not include 88 respondents who were
excluded for completing the survey in what was judged to be too
little time or too much time. Zauberman WDT ] 53.
---------------------------------------------------------------------------
Among the 6,146 respondents who were asked which type of music-
listening options they had used in the prior 30 days (Q1), 66 percent
(4,029 respondents) responded that they had used a free streaming radio
service in the past 30 days, and 21 percent (1,278 respondents)
responded that they had used a paid streaming radio service in the past
30 days. Altogether, 71 percent (4,369 respondents) said they had used
either free or paid streaming radio (or both), and 15 percent (938
respondents) said they had used both free and paid streaming radio
services in the past 30 days. Zauberman WDT ] 68.
Out of the 1,552 respondents who were not excluded and completed
the survey, a total of 989 respondents were assigned to the scenario in
which free streaming radio services are no longer available (Q2). The
survey assigned 563 respondents to the scenario in which paid streaming
radio services are no longer available. Zauberman WDT ] 56. After being
provided with the respective scenario in which free or paid streaming
radio services were no longer available, respondents were asked a
series of questions about how they would replace the time they
currently spent listening to music on their free or paid streaming
radio services. Respondents were then presented a variety of music-
listening options with the exception of the streaming radio option that
was no longer available in their given scenario. Zauberman WDT ] 57.
Out of 989 respondents who completed the survey and were told that
free streaming radio services were no longer available, the (Q2)
responses indicated that 33 percent of current listeners of free
streaming radio services would instead listen to paid streaming radio
services, 80 percent would instead listen to free On-Demand streaming
services, 39 percent would instead listen to paid On-Demand streaming
services, 31 percent would instead listen to Sirius XM satellite radio
services on a satellite receiver, 85 percent would instead listen to
AM/FM radio on a traditional radio receiver, 69 percent would instead
listen to CDs, vinyl records, or MP3 files they currently own or would
purchase, and 48 percent would instead do something other than listen
to music.\97\ Zauberman WDT ] 24, 72, fig. 8.
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\97\ The percentages add up to more than 100% because
respondents were permitted to select multiple replacement options.
See Zauberman WDT app. D.
---------------------------------------------------------------------------
Out of 563 respondents who completed the survey and were told that
paid streaming radio services were no longer available, the (Q2)
responses indicated that 84 percent of current listeners of paid
streaming radio services would instead listen to free streaming radio
services, 83 percent would instead listen to free On-Demand streaming
services, 71 percent would instead listen to paid On-Demand streaming
services, 52 percent would instead listen to Sirius XM satellite radio
services on a satellite receiver, 79 percent would instead listen to
AM/FM radio on a traditional radio receiver, 67 percent would instead
listen to CDs, vinyl records, or MP3 files they currently own or would
purchase, and 50 percent would instead do something other than listen
to music. Zauberman WDT ] 25, 74, fig. 9.
The respondents who answered the (Q2), saying that they would
replace their streaming radio service that is no longer available with
either (a) a free On-Demand service or (b) a free streaming radio
service (if their paid streaming radio service were no longer
available), and who chose at least one other music-listening option (or
``[d]o something other than listen to music'') as a replacement for
their streaming radio service that is no longer available, were asked
(in Q3) if they would expect to listen to their streaming radio service
one week from the day on which the respondent was taking the survey, if
it were available.\98\ Zauberman WDT ] 75.
---------------------------------------------------------------------------
\98\ For example, respondents who took the survey on a Wednesday
would be asked if they would expect to listen to their streaming
radio service on the following Wednesday.
---------------------------------------------------------------------------
This form of questioning was designed to account for the
possibility that time spent listening to music may vary from day to day
for different people and across the respondents' allowed measurement of
listening time across all days of the week. The day of week question
format was also designed to be as specific as possible about the
occasion that they are estimating and to have the estimation day not
too far into the future. Zauberman WDT ] 61-62.
The respondents who answered ``Yes'' to Q3 were then asked to
allocate their time among replacement options they chose in the
replacement question, Q2. They were asked (in Q3A) to allocate any
number from 0 through 100 to reflect the percentage of time they would
listen to each particular option. Respondents were shown all of the
services they said they would use to replace free or paid streaming
radio in response to Q2. Zauberman WDT ] 64, 76.\99\
---------------------------------------------------------------------------
\99\ The ``day of week'' variable was designed to function in
the same manner as in Q3.
---------------------------------------------------------------------------
The responses to Q3A indicated that current listeners of free
streaming radio services who were asked to allocate their time
indicated that they would replace 16 percent of the time they would
have spent listening to their free streaming radio services by
listening to paid streaming radio services, 32 percent of that time by
listening to free On-Demand streaming services, 25 percent of that time
by listening to paid On-Demand streaming services, 19 percent of that
time by listening to Sirius XM satellite radio services on a satellite
receiver, 27 percent of that time by listening to AM/FM radio on a
traditional radio receiver, 18 percent of that time by listening to
CDs, vinyl records, or MP3 files they currently own or would purchase,
and 16 percent of that time by doing something other than listen to
music. Zauberman WDT ] 26, 77, fig. 10.
The responses to Q3A also indicated that current listeners of paid
streaming radio services who were asked to allocate their time
indicated that they would replace 24 percent of the time they would
have spent listening to their paid streaming radio services by
listening to free streaming radio services, 20 percent by listening to
free On-Demand streaming services, 24 percent by listening to paid On-
Demand streaming services, 21 percent by listening to Sirius XM
satellite radio services on a satellite receiver, 18 percent by
listening to AM/FM radio on a traditional radio receiver, 14 percent by
listening to CDs, vinyl records, or MP3 files they currently own or
would purchase, and 10 percent by doing something other than listen to
music. Zauberman WDT ] 27, 78, fig. 11.
[[Page 59480]]
b. Services' Criticisms of the Zauberman Survey
The Services offer a number of critiques of Professor Zauberman's
surveys, including those noted below. Services PFFCL ]] 288-302.
The Services assert that the survey erroneously toggles between an
initial definition of ``free streaming radio service'' and an incorrect
definition that described ``on-line streams of AM/FM radio stations''
as services that ``allow you to listen to customized radio stations
with advertisements,'' like Pandora. Services PFFCL]] 288-290, Proposed
Findings of Fact and Conclusions of Law of the National Association of
Broadcasters ]] 190-191 (NAB PFFCL), 8/27/20 Tr. 4245-51
(Zauberman).\100\ The Services point out that in his hearing testimony,
Professor Zauberman conceded that, contrary to the language of his
erroneous definition, simulcasts are not customizable, and that
including different definitions for the exact same term in a survey is
not a best practice in his field. Services PFFCL]] 288-290; 8/27/20 Tr.
4246-47, 4253.
---------------------------------------------------------------------------
\100\ Q1: ``A free streaming radio service, such as personalized
radio services like free Pandora and free iHeart Radio, and on-line
streams of AM/FM radio stations, where you cannot choose a specific
song, and must listen to advertisements.''
Q2: ``Free streaming radio services--services, such as
personalized radio services like free Pandora and free iHeart Radio,
and on-line streams of AM/FM radio stations, allow you to listen to
customized radio stations with advertisements, but you cannot choose
a specific song.''
---------------------------------------------------------------------------
The Services also suggest Professor Zauberman's survey suffers from
``cheap-talk'' or hypothetical-bias problems. Services PFFCL ]] 291-
294. These concepts are described by Professor Hauser and Dr. Leonard
as problems arising where respondents are allowed to choose multiple
options, in which case they are more likely to select paid options that
they would not in fact pay for in the real world, or otherwise do not
really consider how much things cost or their budget constraint.
Services PFFCL ] 291; 8/27/20 Tr. 4346-48 (Hauser); 8/24/20 Tr. 3421-23
(Leonard). Dr. Leonard also referenced academic literature addressing
issues with the hypothetical nature of the ``payment'' in surveys,
which can lead respondents to overstate their true willingness to pay.
See Leonard WRT ]] 19-21 & n.37 (citing Franziska Voelckner, An
Empirical Comparison of Methods for Measuring Consumers' Willingness to
Pay, 17 Marketing Letters 137 (2006); James J. Murphy et al., A Meta-
analysis of Hypothetical Bias in Stated Preference Valuation, 30 Envtl.
Resource Econ. 313 (2005).). Dr. Leonard's testimony suggests that
aspects of responses to Q3, the time allocation question, indicate that
respondents would not actually pay for their survey selections in the
real world. Services PFFCL ] 291; Leonard WRT ] 21; 8/24/20 Tr. 3447-48
(Leonard) (addressing instances in which a service option was selected
but no listening time was allocated to the option, a concept known in
the economics literature as ``hypothetical bias'').
The Services, through their expert witness Professor Hauser,
suggest that the Zauberman Survey's instruction to focus on music-
listening options is biased and could suggest to respondents that the
researcher was interested only in respondents switching to music-
listening options, which could prompt respondents to favor the music-
listening options rather than the stated option to do something other
than listen to music. Professor Hauser points out the absence of
specificity about what ``do something other than listen to music''
might entail and offers that respondents may not have immediately
known, recalled, or considered alternatives that were available to them
if they were not listening to music, leading them to select music-
listening options instead. Services PFFCL ] 295; 8/27/20 Tr. 4364-65;
Trial Ex. 2161 ]] 7, 28-30 (WRT of John Hauser) (Hauser WRT).
The Services point to the Zauberman Survey's inability to
distinguish between a respondent who did not have an existing paid
subscription and a respondent who had an existing paid subscription but
did not use it in the past thirty days. This concern was highlighted by
the testimony of Dr. Leonard and Mr. Harrison who both address the
occurrence of consumers having inactive paid subscriptions. Services
PFFCL ]] 297-298; Leonard WRT ] 18; 9/3/20 Tr. 5732 (Harrison)
(explaining how users who bill subscriptions through a credit card
might have a service for months without realizing they were still a
subscriber). Professor Hauser also criticizes the survey's inability to
distinguish between a respondent who did not have an existing paid
subscription and a respondent who had an existing paid subscription but
did not remember using it in the past thirty days. Services PFFCL ]
299. Professor Hauser stated that both academic research and his own
survey pretest indicate that thirty days is too long for respondents to
remember their own listening behavior accurately. The inability to
distinguish between respondents who did not have an existing paid
subscription, or who had one but did not use it or remember using it in
the past thirty days, likely resulted in an upward bias in estimated
switching to new, paid subscriptions. Hauser WRT ]] 24-27; see also 8/
27/20 Tr. 4360.
The Services find fault with the Zauberman Survey's failure to
allow respondents to distinguish between their listening to CDs, vinyl,
or digital music files they owned already, and listening to CDs, vinyl,
or digital files they would purchase. They point to Professor Zauberman
conceding that a respondent who had a large existing collection of
downloads or CDs would have no way of indicating that she would listen
to her existing collection, rather than purchasing new CDs. Services
PFFCL ] 300; 8/27/20 Tr. 4240. The Services point out that Professor
Willig described the effect of this on the Zauberman Survey results as
an ``inaccuracy.'' Services PFFCL ] 300; 8/6/20 Tr. 843-47. The
Services also note that both the Hauser and Hanssens surveys and
industry data suggest that far more people would listen to existing
collections than purchase new CDs or digital music files, suggesting
that Professor Zauberman's survey likely would have demonstrated the
same if he had given respondents the opportunity to make this
distinction. See Hauser WRT ]] 47-48; Trial Ex. 4095 tbls.4, 8 (CWDT of
Dominique Hanssens) (Hanssens WDT); Leonard WRT ] 19; 8/24/20 Tr. 3448
(Leonard); Trial Exs. 2037, 2038, 2041 at 6 (showing declining sales
and use of CDs and digital downloads).
The Services contend that the Zauberman Survey contained a
fundamental error of failing to include attention checks to confirm
respondents were sufficiently engaged in the survey and were providing
reliable responses. See Hauser WRT ]] 31-34. Professor Hauser explained
that attention checks represent best practices in survey research, and
not including them could have exacerbated the asserted flaws in the
Zauberman Survey. See id. ]] 8, 31-32; 8/27/20 Tr. 4334-35.
The Services suggest that some respondents in the Zauberman Survey
who indicated they would listen to physical or digital recordings of
music may in fact obtain pirated copies of recordings, thus calling
into question the results. See 8/6/20 Tr. 799 (Willig); 8/10/20 Tr.
1089-92 (Willig). And, NAB takes issue with the Zauberman Surveys for
not taking into account properly respondents who listened to zero hours
of simulcasts. See NAB PFFCL ] 126.
c. Responses to Criticisms of the Zauberman Survey
In response to criticism of the Zauberman Survey, SoundExchange
[[Page 59481]]
characterizes the altered definitional language as a ``slight
discrepancy,'' noting that the word ``customized'' appeared only in
introductory language, and not in any survey response option.
SoundExchange offers that the Services provide no basis to conclude
that the difference in definitions had any effect on Professor
Zauberman's data or that respondents were ever confused or noticed the
discrepancy. SoundExchange suggests that the word ``customized'' in Q2
would not signal to respondents that AM/FM streaming was not a free
streaming radio service because every time the survey describes free
streaming radio services, it provides examples of services that fall
into this category, including the example ``on-line streams of AM/FM
radio stations.'' SoundExchange argues that if respondents had noticed
and been confused by the variation in language, the survey results
would have shown an increase of ``unsure'' responses with respect to
free streaming radio services once alternate language was introduced,
and that no such evidence of confusion exists. SX RPFFCL (to Services)
]] 288-290.
SoundExchange also suggests that Professor Zauberman adequately
clarified in his testimony that simulcast listeners do have some
ability to customize their experiences. Professor Zauberman testified
that ``there are multiple ways in which we customize our experiences or
select the world around us'' and that, with regard to opportunities to
personalize on-line streams of AM/FM radio stations, station choice is
one aspect of customization. 8/27/20 Tr. 4271. SoundExchange then
offers that other experts in this proceeding have a shared
understanding of the functionality available through simulcasts. SX
RPFFCL (to Services) ] 288; 8/26/20 Tr. 4121-25 (Hanssens) (simulcasts
of AM/FM broadcasts and free streaming radio services like Pandora are
``very comparable mediums'' that ``share key attributes'' and compete
with one another).\101\
---------------------------------------------------------------------------
\101\ SoundExchange also references Orszag WRT ] 35 (given that
users can choose to listen to a particular genre of music for both
simulcast and custom radio, the user experience is not necessarily
much different).
---------------------------------------------------------------------------
SoundExchange adds that Professor Zauberman's testimony regarding
variations in definitional language not constituting a best practice
was not his ultimate conclusion. SX RPFFCL (to Services) ] 290; 8/27/20
Tr. 4217 (Zauberman) (the suggested ultimate conclusion being that the
Zauberman Survey provides the most reliable data of any survey or
experiment in the proceeding and that its findings are highly
consistent with the Hanssens and Simonson Surveys).
SoundExchange offers that Professor Hauser's trial testimony
regarding ``cheap talk'' is beyond the scope of his written testimony
and unsupported by the academic literature he mischaracterized at
trial. SX RPFFCL (to Services) ] 291; SX PFFCL ]] 1259-1261.
SoundExchange adds that even if the asserted ``cheap talk'' effect did
exist, the Services have not attempted to quantify it, with regard to
Professor Zauberman's survey or any other survey in this proceeding. SX
RPFFCL (to Services) ] 291. SoundExchange also offers that the critique
of Q3 is misplaced, as a zero time allocation on one specific day in
the following week is not unreasonable nor does it indicate that
respondents would not actually pay for their survey selections in the
real world. SX RPFFCL (to Services) ] 292.
SoundExchange submits that Professor Zauberman's focus on music
listening was entirely appropriate in light of the focus and scope of
this proceeding. It adds that Professor Zauberman's approach struck an
appropriate balance between providing a comprehensive list of options
(including ``do something other than listen to music'') and the risk of
making his survey unwieldy and confusing. SoundExchange points out that
the Services offer no evidence that survey respondents actually had
difficulty remembering what non-music options are available to them in
the world. SX RPFFCL (to Services) ]] 295-296.
SoundExchange notes that Professor Zauberman's testimony indicates
why he chose the survey format. With regard to respondents who may have
had an existing paid subscription but did not use it in the past thirty
days, Professor Zauberman designed the survey order to avoid ambiguity
or complicating the survey and creating non-uniformity that risked
privileging some options over others. SX RPFFCL (to Services) ] 297; 8/
27/20 Tr. 4181-82, 4184-85, 4239 (Zauberman). SoundExchange offers that
Dr. Leonard's testimony that inactive subscriptions are ``not
uncommon'' is poorly supported by the record. SoundExchange also
criticizes, as conflicting, the NAB's argument that thirty days is too
long for respondents to remember their own listening behavior
accurately, and that thirty days is not long enough because a
respondent may not have used his or her subscription service in the
past 30 days SX RPFFCL (to Services) ]] 297-299. SoundExchange posits
that the Services' critique regarding new versus existing physical
copies of recordings flows from an unwarranted assumption: That
respondents who would go back to their existing CD collections and
start listening to them again would not also make new purchases in
order to supplement their collections with new music. SX PFFCL ] 780;
8/6/20 Tr. 843-47 (Willig). It also points out that the Hanssens and
Simonson Surveys, which do distinguish between new purchases and
existing collections, find over twice the amount of diversion to new
purchases of physical copies as the Zauberman Survey does. SX PFFCL ]
781, Compare Willig WDT ] 47, fig.6 (14.8% diversion to new CDs, vinyl
records, and MP3s based on Zauberman Survey), with Trial Ex. 5608 app.
F at tbl.4B (CWRT of Itamar Simonson) (Simonson WRT) (comparing data
from the Hanssens Pandora Survey, Simonson's Modified Hanssens Survey,
and Hanssens Replication, reflecting a range of 27.8% to 29.9%
diversion to new physical or digital recordings of music).
SoundExchange offers that all of the survey experts acknowledged
that tools other than attention checks can be used to ensure that
respondents are engaged in a survey and that such tools were used in
the Zauberman Survey. SX PFFCL ]] 766, 716-717. SoundExchange also
points to Professor Hauser's testimony on attention checks, which
according to SoundExchange, indicates that attention checks are not
currently viewed as required under best practices, noting his statement
that attention checks are now ``becoming widely used.'' SX PFFCL ] 766;
8/27/20 Tr. 4334-35 (Hauser).
Addressing criticism of the Zauberman Survey's failure to address
the possibility that some respondents would in fact pirate sound
recordings, SoundExchange observes that none of the surveys in the
proceeding asks respondents whether they might obtain music through
piracy. 8/10/20 Tr. 1118-19 (Willig). SoundExchange offers that there
is no reason to think respondents would truthfully answer that they
would engage in illegal activity. 8/26/20 Tr. 4143-44 (Hanssens).
Moreover, Professor Hanssens made clear that he would not expect
respondents to interpret the term ``own'' to encompass theft. Id. at
4142-43 (Hanssens). He also noted that the survey gave respondents
options such as diverting listening to ``other'' sources, through which
respondents could express their intent to steal recordings. Id. at 4143
(Hanssens).
SoundExchange suggests that while a number of respondents to the
Zauberman Survey allocated zero time to a replacement option they had
[[Page 59482]]
previously selected, any attempt to convert this observation into a
critique misunderstands the structure of Professor Zauberman's time
allocation questions. It offers that there is no inconsistency in
respondents indicating that they would replace a noninteractive
streaming service with a particular music-listening option and also
indicating that they do not expect to listen to that option on one
specific day of the following week. SX PFFCL ] 784-785; 8/27/20 Tr.
4197-98 (Zauberman); 8/6/20 Tr. 848-50 (Willig). SoundExchange goes on
to offer that the Services cite to no evidence to support the
insinuation of inconsistency in the survey results. SX PFFCL ] 787.
d. Judges' Conclusions on the Zauberman Survey
Upon consideration of the entirety of the record, including the
facts and arguments indicated above, on balance, the Judges find the
Zauberman Survey to be reasonably reliable evidence. There is some
validity to the criticisms regarding definitional inconsistency and
diversion related to existing/owned physical recordings. However,
viewed in light of the results of the other surveys, these criticisms
of the Zauberman Survey seems to have had a minimal effect. At most,
the criticisms go to the weight assigned to the Zauberman Survey
results.
2. Share of Ear Report
Professor Willig used data from Edison Research's quarterly ``Share
of Ear'' study as a secondary data source as a basis for fallback
values inputted into his theoretical models, and as a sensitivity check
to the Zauberman Survey. The Services assert that the Share of Ear data
contain troublesome ambiguities. Services PFFCL ]] 265-268; Leonard WRT
]] 23-29.
SoundExchange responds to the criticism of the Share of Ear data by
pointing out that such concerns have essentially been mooted. Professor
Willig acknowledged at trial that, for purposes of computing diversion
ratios and calculating opportunity cost, Share of Ear is ``is not
nearly as well founded . . . as making use of the Hanssens Survey or
the modified Hanssens Survey or the Zauberman Survey.'' SX RPFFCL (to
Services) ] 265.
3. Hanssens Pandora Survey and Sirius XM Survey
a. Description of the Hanssens Surveys
i. Purpose and Design
Several experts relied, in part, on the results of the Hanssens
Surveys. See, e.g., Shapiro WDT at 16; 20-21, tbl.2; 28, tbl.5; Willig
WRT ]] 30-35. The Judges, therefore, test the underlying survey data on
which he relied to assess their reliability or their strength in
supporting various modeling conclusions.
Sirius XM and Pandora retained Professor Dominique Hanssens to
conduct two consumer surveys--the ``Pandora Survey'' and the ``Sirius
XM Survey. The Hanssens Surveys measured how consumers would respond if
their noninteractive streaming services changed by the loss of access
to any given record company's repertoire, including what alternative
sources of music, if any, listeners of free internet radio services
music on Sirius XM over the internet would change their listening to as
a result of hypothetical loss of music options. Hanssens WDT ]] 13, 33,
39-40 & app. 6. The Pandora Survey addressed listeners of free internet
radio and his Sirius XM Survey addressed listeners of Sirius XM's
subscription webcasting service. Id. ] 20. The two surveys pose
comparable hypotheticals and proceed in parallel. Id. ]] 33, 66 & Apps.
6 & 12.
Professor Hanssens sought to answer the following questions: (a)
Whether listeners would change their listening if they were
dissatisfied because music selection across the category was
``degraded'' as described in the hypothetical given to
respondents,\102\ (b) whether listeners would change their listening to
alternative sources of music (as opposed to non-music) in that
instance, (c) which alternative sources of music they would increase
listening to, if any, and (d) how listeners would allocate increased
listening, if any, across the alternative music sources they
identified).\103\ Id. ]] 21-22.
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\102\ The study considered the hypothetical that services were
limited by the loss of access to any given record company's
repertoire, which was addressed in the survey by asking respondents
what they would do in the event that they noticed all relevant
services stopped streaming songs by some popular artists and some
newly released music. Hanssens WDT ]] 13, 21-22. This approach was
intended for the focus to be on cases where that change in music
availability is noticed and therefore generates responses to that
specific scenario, as opposed to the more general scenario of simple
label suppression. 8/26/20 Tr. 4091 (Hanssens).
\103\ The Hanssens survey thus posits a degradation of a
listening option (i.e., loss of repertoire), as distinguished from
the Zauberman survey, which posited the unavailability of a
listening option.
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The Pandora Survey indicated that 60.1 percent of the sample of
listeners of free internet radio services would decrease listening to
free internet radio services in the event that the music selection
across all free internet radio services were degraded. Of the
respondents who indicated that they would decrease listening to free
internet radio services or listen to free internet radio about the same
amount, 63.5 percent would increase listening to alternative sources of
music under this scenario. When forced to make a tradeoff between
multiple options of alternative sources of music, the sample of
listeners indicated that they would increase their watching or
listening to music in videos on YouTube or social media the most (11.6
points on average), followed by listening to live radio broadcasts of
music through a radio (9.8 points on average), and then followed by
listening to music on a new free On-Demand music streaming service (7.7
points on average). Hanssens WDT ] 18.\104\
---------------------------------------------------------------------------
\104\ Respondents were asked to allocate 100 points across the
alternative music sources they previously selected based on how much
they would listen to these different sources. Hanssens WDT app. 12.
---------------------------------------------------------------------------
The Sirius XM Survey indicated that 36 percent of the sample of
listeners of music on Sirius XM over the internet would decrease their
listening to that service in the event that the music selection
available on that service were degraded. Of the respondents who
indicated that they would decrease listening to music on Sirius XM over
the internet or listen to about the same amount of music on that
service, 58.9 percent would increase listening to alternative sources
of music under this scenario. When forced to make a tradeoff between
multiple options of alternative sources of music, by an allocation of
points on average, the sample of listeners indicated that most of their
increased listening would be on an existing Sirius XM satellite radio
subscription. Hanssens WDT ] 19.
Professor Hanssens's surveys were conducted by respondents on a
traditional desktop computer, laptop notebook computer, or tablet
computer. The surveys included several screening questions. Qualified
respondents had to pass several standard attention check questions and
satisfy certain demographic quotas to ensure the survey respondents
were not statistically different from the typical demographics of
Pandora or Sirius XM on the internet users, depending on the particular
survey. The survey response rate, completion rate, and incidence rate
were all within the typical range for internet surveys, and the sample
size was large enough to draw conclusions regarding the key questions
posed in the survey. Additionally, the survey was extensively
pretested. Id. ]] 26-29, 36-37, 56-59, 65-67.
[[Page 59483]]
Professor Hanssens applied other quality assurance measures
designed to ensure that respondents provided informed and reliable
responses. In the Pandora Survey, prior to the first substantive
question (P20), Professor Hanssens provided respondents with
descriptions and well-known examples of free internet radio, On-Demand
Music Streaming, and Paid internet Radio categories. Id. ] 32.
Additional preliminary questions helped identify the target population
for the Pandora Survey and were designed to provide respondents with an
accurate set of alternative music options in the main questionnaire, in
which they were asked to identify services they would listen to more if
the music selection on free internet radio services were degraded. Id.
] 30.
ii. Pandora Survey Results
In order to assess which alternative sources of music respondents
would choose in the event that a webcaster lost access to a particular
record company's repertoire, Professor Hanssens instructed respondents,
``Imagine you were not satisfied with [a free internet radio service
the respondent indicated listening to in a typical week] because you
noticed that it had stopped streaming songs by some of your favorite
artists and some newly released music. Imagine that all other free
internet radio services stopped streaming those same songs as well.''
Hanssens WDT ] 33; 8/26/20 Tr. 4091 (Hanssens) (explaining that this
language is intended for the focus to be on cases where that change in
music availability is noticed and therefore generates responses to that
specific scenario, as opposed to the more general scenario of simple
label suppression).
The Hanssens Pandora survey then proceeded as follows.
Respondents were asked (in question P20), ``Which of the following
actions, if any, would you consider taking in the event that you were
not satisfied with free internet radio services because their selection
of songs changed in this way?'' The survey offered the following answer
choices: ``I would use free internet radio services less; I would use
free internet radio services about the same amount; I would use free
internet radio services more; Don't know/unsure.'' Id. ]] 34, 39;
Appendix 7 at 120; 8/26/20 Tr. 4097 (Hanssens).
Among the 506 respondents to question P20, 60.1 percent responded
that they would use free internet radio services less, 35.8 percent
responded that they would use free internet radio services about the
same, and 4.2 percent responded that they did not know or were unsure
about how their listening habits would change. Hanssens WDT ] 40.\105\
Those who indicated that they did not know or were unsure about how
their listening habits would change were not included in subsequent
calculations as it is not possible to know what they would do if the
music selection across all free internet radio services were degraded.
Hanssens WDT ] 40 n.46.
---------------------------------------------------------------------------
\105\ The results of P20 are reported in Table 1.
---------------------------------------------------------------------------
Respondents who indicated that they would listen to free internet
radio services less or about the same amount were asked question P30:
``Which other actions from the following, if any, would you consider
taking in the event that you were not satisfied with free internet
radio services because their selection of songs changed in this way?''
Those respondents were provided the following two categories: ``Consume
non-music entertainment content'' and ``Listen to music using ways
other than free internet radio'' and, for each, were asked whether they
would ``increase doing this, make no changes to how much I do this,
decrease doing this, don't know/unsure.'' Id. ]] 34, 42, Appendix 7 at
121.
In hearing testimony Professor Hanssens noted that, while the non-
music options (and descriptive examples) were presented ``for
completeness reasons,'' the results were not used as they are ``not the
focus of [the] work.'' 8/26/20 4097-98 (Hanssens).
The results of P30 are reported in Table 2, below.
BILLING CODE 1410-72-P
[GRAPHIC] [TIFF OMITTED] TR27OC21.000
[[Page 59484]]
Id. ] 42.
In the analyses that followed question P30, the 53 respondents who
indicated in that they would listen to alternative sources of music
less (35) or who did not know or were unsure about whether they would
change their music consumption (15) were excluded. Hanssens WDT ] 43
n.50.
Respondents who indicated that they would increase listening to
alternative sources of music were asked question P40: ``In which of the
following ways, if any, would you increase listening to music in place
of free internet radio in a typical week?'' Respondents were then
provided specific alternative music sources to which they would
consider increasing their listening, including the types of services
the respondents had previously responded they were already using in
their responses to the screening questions. Hanssens WDT ]] 34. 46-48,
Appendix 7 at 122; 8/26/20 Tr. 4098 (Hanssens).
The results of P40 are reported in Table 3, below.
[GRAPHIC] [TIFF OMITTED] TR27OC21.001
Hanssens WDT ] 49.
The final substantive question, P50, presented respondents who had
responded to question P40 that they would increase listening to
multiple alternative music sources with the alternative music sources
they selected in P40 and instructed them to ``Please divide 100 points
across the different ways of listening to music based on how much you
think you would use each alternative in a typical week.'' Id. ]] 34,
52, Appendix at 123. This question was designed to allow the individual
listener to rank the relative importance of answer options. 8/26/20 Tr.
4098 (Hanssens). Professor Hanssens explained that he asked this
question in terms of point allocations rather than in absolute time or
percentages of time in order to avoid the cognitively difficult
``quantification of time,'' and to better assess relative importance,
which may be obscured by absolute expressions of time. 8/26/20 Tr. 4099
(Hanssens).
The results of P50 are reported in Table 4, below.
[[Page 59485]]
[GRAPHIC] [TIFF OMITTED] TR27OC21.002
Hanssens WDT ] 53.
4. Simonson's Replicated and Modified Hanssens Surveys
a. Description of the Simonson Surveys
SoundExchange also engaged Professor Simonson to assess the
testimony of several witnesses, including Professor Hanssens. As part
of that task, Professor Simonson ran a replication of the Hanssens
Pandora Survey (Hanssens Replication survey), as well as a modified
version of that survey (Modified Hanssens survey). Simonson WRT ] 12.
Professor Simonson adopted the same methodology and screening
criteria that Professor Hanssens used in the Hanssens Pandora Survey.
Id. ]] 88; 8/27/20 Tr. 4282-83 (Simonson). The Modified Hanssens survey
retained all aspects of the original Pandora survey, except it omitted
any mention of user dissatisfaction. The Modified Hanssens survey
modified the instructions given to respondents, which Professor
Hanssens had intended to focus on cases where listeners noticed the
change in music availability. Professor Simonson made the change out of
concern that one may assume that the Hanssens Surveys' results apply
only to those listeners who would have been dissatisfied by the change
in repertoire, perhaps relying on the Reiley Label Suppression
Experiments to support assumptions that very few users would in fact be
dissatisfied and change their listening. Therefore, the scenario
changed from:
Imagine that you were not satisfied with this service because
you noticed that it had stopped streaming songs by some of your
favorite artists and some newly released music. Imagine that all
other free internet radio services stopped streaming those same
songs as well.
to
Imagine that this service stopped streaming songs by some of
your favorite artists and some newly released music. Imagine that
all other free internet radio services stopped streaming those same
songs as well.
Simonson WRT ]] 94-95. The Modified Hanssens survey also removed the
instruction that ``you were not satisfied'' in other places throughout
the survey. Id. ]] 94-96.
Additionally, in the Modified Hanssens survey, for those
respondents who indicated that they ``would use free internet radio
services less'' in the hypothetical scenario, respondents were asked an
additional question, intended to allow analysis of the magnitude of
these respondents' likely change in listening:
You indicated that you would use free internet radio services
less in the event that all free internet radio services had stopped
streaming songs by some of your favorite artists and some newly
released music. In that case, how much less time would you spend
listening to free internet radio services in a typical week?
Select one only.
1. 1-9% less
2. 10-24% less
3. 25-49% less
4. 50-74% less
5. 75-99% less
6. 100% less
7. Don't know/unsure
Simonson WRT ] 89.
Professor Simonson indicated at trial that the results of the
Replication survey and Modified Hanssens survey indicate that the
Hanssens Pandora Survey is reliable because it can be replicated with a
different panel and at a different time of year. 8/27/20 Tr. 4283
(Simonson). Additionally, Professor Simonson stated that ``removing the
`you are unsatisfied' instruction from the Modified Hanssens Survey did
not generally result in large alterations to the data, relative to
either the original Pandora Survey or the Replication Survey. This
similarity indicates that the survey data largely applies to all
relevant listeners, not only to the subgroup who would be dissatisfied
with a change in repertoire.'' Simonson WRT ] 99 (footnote omitted).
The results of the respective surveys regarding the actions
respondents would take if free internet radio services were degraded
(Hanssens question P20) are reflected below.\106\
---------------------------------------------------------------------------
\106\ Professor Simonson's analysis of the Hanssens survey data
only included the respondents who were not excluded by reason of
their responses to the screening questions and P20 and P30, as
described above, the number of such respondents totaling 432. The
total number of qualifying respondents in the Replication survey was
424. The total number of qualifying respondents in the Modified
Hanssens survey was 372.
---------------------------------------------------------------------------
[[Page 59486]]
[GRAPHIC] [TIFF OMITTED] TR27OC21.003
Simonson WRT ] 98.
The results of the respective surveys regarding other actions, if
any, respondents would consider taking in the event that free internet
radio services were degraded (original Hanssens question P30) are
reported below. Simonson WRT 244.
[[Page 59487]]
[GRAPHIC] [TIFF OMITTED] TR27OC21.004
The results of the respective surveys regarding which of the
following ways, if any, respondents would increase listening to music
in place of free internet radio in a typical week (original Hanssens
question P40) are reflected below.
[[Page 59488]]
[GRAPHIC] [TIFF OMITTED] TR27OC21.005
Simonson WRT ] 98.
The Modified Hanssens survey results for regarding the magnitude of
respondents' likely change in listening (Q225) are reflected below.
[[Page 59489]]
[GRAPHIC] [TIFF OMITTED] TR27OC21.006
BILLING CODE 1410-72-C
Simonson WRT 243.
b. Criticisms of the Hanssens Surveys
SoundExchange engaged Professor Itamar Simonson to examine whether
the Hanssens surveys were likely to produce unbiased, reasonably
accurate estimates regarding the impact of a loss of access to any
given record company's repertoire on listening to the free internet
radio services at issue and on switching to alternative sources of
music. Simonson WRT ] 66. While Professor Simonson found the Hanssens
surveys relatively reliable, he asserted the surveys contained several
flaws. Simonson WRT ]] 64-65. SoundExchange also engaged Professor
Zauberman to examine the Hanssens Surveys calculation. Trial Ex. 5607
]] 1-2 (WRT of Gal Zauberman) (Zauberman WRT).
Professor Simonson criticized the Hanssens survey questions for
mixing music with unrelated categories, such as videogames and movies,
leading to a ``diversification bias,'' which allegedly encouraged
respondents to select to non-music switching options and an
underestimation of switching from one music service to another. He
pointed to research, demonstrating that the mere fact that respondents
are presented simultaneously with multiple options causes them to
spread their choices among the options instead of choosing only the
option they like most. He indicated that a survey designer can decrease
the percentage of respondents who indicate they will switch from one
music service to another by presenting respondents with options from a
wide range of options and that the Hanssens Surveys do just that by
leading respondents to consider a wide set of switching options,
including options that are unrelated to music. Simonson WRT ]] 67-74
(citing Itamar Simonson, The Effect of Purchase Quantity and Timing on
Variety Seeking Behavior, 27 J. Marketing Research 150 (1990); Daniel
Read & George Loewenstein, Diversification Bias: Explaining the
Discrepancy in Variety Seeking Between Combined and Separated Choices,
1 J. Experimental Psychol.: Applied 34 (1995); and Schlomo Benartzi &
Richard H. Thaler, Naive Diversification Strategies in Defined
Contribution Saving Plans, 91 Am. Econ. Rev. 79 (2001); and Craig R.
Fox, David Bardolet & Daniel Lieb, How Subjective Grouping of Options
Influences Choice and Allocation: Diversification Bias and the
Phenomenon of Partition Dependence, 134 J. Experimental Psychology:
Gen. 538 (2005); Craig R. Fox, David Bardolet & Daniel Lieb, Partition
Dependence in Decision Analysis, Resource Allocation, and Consumer
Choice, 3 Experimental Bus. Research 229 (2005)).
Professor Simonson also took issue with the sequence of Hanssens
survey questions. He criticized the surveys for asking about the
various options the respondents may consider before asking them to
select among those options. In Professor Simonson's opinion, informed
by published research, asking respondents to consider a long list of
options biases the respondents' subsequent responses. He opined that
while offering such ``consideration set'' options may be appropriate in
scenarios involving costly and often relatively irreversible decisions,
it is not appropriate in the context of selecting a music service,
which involves low cost, low risk, and easily changed purchase
decisions. Relatedly, Professor Simonson suggested that research
suggests that an unrealistic consideration set can also create bias in
follow-up questions such that the list of considered options is likely
to influence subsequent choices made by respondents. Simonson WRT ]]
75-81 (citing Barbara E. Kahn & Donald R. Lehmann, Modeling Choice
Among Assortments, 67 J. Retailing 274 (1991); Itamar Simonson, The
Effect of Product Assortment on Consumer Preferences, 75 J. Retailing
347 (1999); Armin Falk & Florian Zimmermann, A Taste for Consistency
and Survey Response Behavior, 59 CESifo Econ. Studies, no.1, 181
(2012); and Itamar Simonson, The Effect of Buying Decisions on
Consumers' Assessments of Their Tastes, 2 Marketing Letters 5 (1991)).
Professor Simonson indicated that the Hanssens Surveys ignored the
impact that a change in repertoire would have on services' ability to
attract new users. He noted that while Hanssens Surveys attempted to
measure whether existing service users might change their listening
behavior, the surveys did not examine or attempt to quantify the impact
of offering a more limited music
[[Page 59490]]
repertoire on a services' ability to attract new users. Professor
Simonson posited that ignoring the impact on potential users, Professor
Hanssens understated the impact that the loss of a label's content
would have on the relevant services. Simonson WRT ]] 82-84.
SoundExchange also notes that this focus on existing customers
indicates that the surveys at most measure only part of the impact that
losing a record label would have on these services. SX PFFCL ] 788.
Professor Zauberman faulted the Hanssens surveys for not allowing
respondents to respond on their smartphones, despite the fact that a
large proportion of users stream music via smartphone. Zauberman WRT ]]
82-88. He noted that other relevant surveys could be completed on
smartphones and suggested that those surveys tended to have younger
participants who are likely to listen to more music, and to replace
Free Streaming Radio with Paid streaming services at higher rates than
those who took the survey on other devices. Zauberman WRT ]] 86-88.
SoundExchange alleges that this may cause any calculation of diversion
ratios based on the Hanssens surveys to be conservative. SX PFFCL ]
758.
Professor Zauberman asserted that the Hanssens surveys were
confusing for respondents, offering that survey practices dictate that
hypotheticals should be posed simply, not as instructions about how
respondents should feel. He added that the surveys contained too many
response options that are overly wordy, making it difficult for a
respondent to keep track of all relevant information. Professor
Zauberman alleged that respondents were presented with too many
response options that were zero-royalty options causing the responses
to be biased towards such zero-royalty options. He also faulted the
surveys for use of the typical week as a timeframe for respondents as
being contrary to best survey design practices, and suggested that a
time frame described as ``a typical week'' may be ambiguous to some
respondents. Zauberman WRT ]] 88-95.
c. Responses to Criticisms of the Hanssens Surveys
In response to criticism of the Hanssens surveys, Pandora/Sirius XM
offers, in part, that Professor Simonson demonstrated convincingly that
the Hanssens surveys were reliable by replicating them using an
entirely new sample, and obtaining very similar results. Pandora and
Sirius XM's Corrected Proposed Findings of Fact and Conclusions of Law
] 111 (Pandora/Sirius XM PFFCL). Pandora/Sirius XM offers that the
Hanssens surveys actually overestimate diversion, in that his scenario
contemplates the loss of consumers' favorite artists, which does not
necessarily simulate real-world conditions given that the loss of a
label may not be coincident with the loss of all of the works of an
artist and may not be coincident with the loss of a favorite artist.
Pandora/Sirius XM PFFCL ] 112; 8/26/20 Tr. 4091-96, 4099-4101
(Hanssens). Pandora/Sirius XM adds that the Hanssens surveys reflect
only the subset of Pandora users who would actually be affected by the
degradation in the sense that they noticed it and were dissatisfied as
a result, not simply any Pandora user subject to the suppression. 8/26/
20 Tr. 4093, 4101, 4154-56.
Pandora/Sirius XM notes that Professor Hanssens did not actually
use the non-music data but, rather, included it merely for completeness
reasons. Pandora/Sirius XM PFFCL ] 115. Pandora/Sirius XM also states
that no empirical analysis of alleged diversification bias was offered.
Instead, they indicate, Professor Simonson only offered citations to
academic articles discussing the phenomenon. Pandora/Sirius XM PFFCL ]
114. Similarly, Pandora/Sirius XM indicates that Professor Simonson did
not offer any empirical evidence to support his critique that the
sequence of Professor Hanssens's questions, requiring respondents to
consider options before choosing them, could have biased his results.
Pandora/Sirius XM PFFCL ] 116. Pandora/Sirius XM adds that the survey
was designed to minimize any confusion, including instructing
respondents to take their time reviewing the questions and providing a
link to the descriptions and examples in every subsequent question.
Pandora/Sirius XM PFFCL ] 110. Additionally, Pandora/Sirius XM
clarifies that the intent of the Hanssens survey was to evaluate the
behavior of listeners, not potential listeners. Pandora/Sirius XM PFFCL
] 117. The Services also observe a lack of empirical evidence that a
failure to conduct the surveys on smartphones had any effect on the
results. Services RPFFCL ] 760.
d. Criticism of Professor Simonson's Modified Hanssens Surveys
Pandora Sirius XM offers that Professor Simonson conceded that his
modified surveys, designed to test the impact of including language of
explicit dissatisfaction, did not, generally, result in large
alterations to the data relative to either the original Pandora Survey
or the Replication Survey. Pandora/Sirius XM PFFCL ] 118; Simonson WRT
] 99; 8/27/20 Tr. 4285 (Simonson); id. at 4315-16; 8/26/20 Tr. 4094
(Hanssens) (noting same). Pandora Sirius XM points out that both
Professor Simonson and Professor Hanssens agreed that this lack of
impact on Professor Hanssens's survey is likely due to the fact that
dissatisfaction is implicit in a hypothetical referencing the loss of
some of respondents' favorite artists and some newly released music.
Pandora/Sirius XM PFFCL ] 119.
Pandora Sirius XM indicates that Professor Simonson's question 225,
intended to allow analysis of the magnitude of respondents' likely
change in listening, is flawed and unreliable. Pandora/Sirius XM PFFCL
] 122. Professor Hanssens posited that the question does not accurately
measure the likely change in listening. He asserts that the loss of a
particular label fundamentally differs from the loss of favored artists
or newly released music because artists are presented on more than one
label, and many people do not know which labels represent which
artists. 8/26/20 Tr. 4092-96 (Hanssens). He adds that the question is
limited to people who actually notice the change and are negatively
affected by it, which he notes is not coincident with all Pandora
listeners. And, he offers that, without a proper basis for a
respondent's volume of listening, it is not possible for a respondent
to generate a reliable response on the amount that would be lost. 8/26/
20 Tr. 4096 (Hanssens). Finally, Professor Hanssens criticizes the
answer ranges offered in Question 225, asserting that they are so wide
and unequal that they are imprecise, biased, and unreliable. 8/26/20
4096 (Hanssens).
e. Responses to Criticisms of Professor Simonson's Modified Hanssens
Surveys
SoundExchange counters that the criticism of the language of
explicit dissatisfaction is essentially an acknowledgment that there is
no need to instruct respondents to imagine they are dissatisfied by
label blackout because dissatisfaction follows naturally from the loss
of content. SX RPFFCL (to Pandora/Sirius XM) ] 119.
SoundExchange indicates that any notion that the loss of a label
differs fundamentally from loss of favored artists or newly released
music is unsupported by the evidence and contrary to Professor
Hanssens's own testimony, including his describing the loss of access
to any given record company's repertoire. SX RPFFCL (to Pandora/Sirius
XM) ] 122, 112. SoundExchange rejects the notion that
[[Page 59491]]
the survey is limited to a subset of users, instead asserting that it
addresses aggregate consumer reaction in the event consumers are aware
of label blackout, as they would be in any real world circumstance. SX
PFFCL (to Pandora/Sirius XM) ] 122. Finally, SoundExchange offers that
the suggestion that respondents should have been asked to report their
current listening time is undermined by the fact that allocations of
absolute time are notoriously difficult for respondents to answer. SX
RPFFCL (to Pandora/Sirius XM) ] 122.
f. Judges' Conclusions Regarding the Hanssens and Simonson Surveys
Upon consideration of the entirety of the record, including the
facts and arguments indicated above, on balance, the Judges find the
Hanssens Pandora Survey as well as the Simonson's Replicated and
Modified Hanssens Surveys to be probative as to diversion behaviors of
listeners of noninteractive streaming services regarding a loss of
content and on switching to alternative sources of music.
Notwithstanding the criticisms of the surveys, the Judges find the
overall conduct of the surveys to have been rigorous and generally
faithful to applicable best practices. Further, the replication and
modification of the surveys, with generally consistent results,
reinforce the Judges' finding that the collective results are probative
in this proceeding. The Judges find that Professor Simonson's
modifications (removing indications of dissatisfaction) ultimately had
little impact on the results. Additionally, the Judges are persuaded
that the issues raised regarding question 225 in the modified Hanssens
survey, especially the criticism of the response ranges and
interpretation of them, while not completely discounting of the
results, do have merit. Therefore, the Judges rely more heavily on the
results of the two consistent and replicated surveys.
The overall structure of the Sirius XM survey was the same as the
structure of the Pandora survey, and Professor Hanssens simply
substituted ``Sirius XM over the Internet'' for ``free Internet radio
services'' where necessary. Hanssens WDT ] 59. It included 150
respondents, with only 131 non-excluded respondents. Hanssens WDT ] 70
n.93. SoundExchange alleges that the sample size of Professor
Hanssens's Sirius XM Survey was very small, making the results
imprecise. Zauberman WRT ] 96. Professor Zauberman's analysis of
Professor Hanssens's Sirius XM Survey indicated confidence intervals
that are extremely wide. Professor Zauberman testified that the level
of imprecision is problematic, especially when the estimates are then
used for subsequent analyses. Id., citing Table 6. Pandora/Sirius XM
asserts that the sample size of the Sirius XM survey was sufficient to
draw statistically valid conclusions. Pandora/Sirius XM PFFCL ] 109.
The Judges agree with the critique of the sample size of the
unreplicated survey. Therefore, the Judges do not find sufficient basis
to rely on the Sirius XM Survey.
B. Evaluation of Benchmark Evidence
1. The Subscription Benchmark/Ratio-Equivalency Models
A SoundExchange economic expert witness, Mr. Orszag, presents a
benchmark analysis to estimate the statutory royalty rate to be paid by
noninteractive subscription services. Orszag WDT ]] 76-86. On behalf of
Pandora, Professor Shapiro presents his benchmark analysis for this
subscription royalty rate. Shapiro WDT at 39-40; see also id. at 30-38
(Professor Shapiro's ad-supported benchmark analysis containing
elements also applicable to his subscription benchmark analysis).
Mr. Orszag and Professor Shapiro each claims that his benchmarking
model faithfully applies the Judges' ``ratio equivalency'' benchmarking
model applied in Web IV. Unsurprisingly, therefore, each of them
criticizes the other's model as failing to follow that Web IV model.
The Judges first set forth the essential elements of Mr. Orszag's
adaptation of the Web IV ``ratio equivalency'' model and the criticisms
of that approach. The Judges then engage in the same approach with
regard to Professor Shapiro's model--identifying its essential
elements--followed by Mr. Orszag's critiques. The Judges then proceed
to a more granular analysis of the dueling positions of these
economists and set forth factual findings in these regards. Finally,
the Judges set forth the benchmark rates that follow from their
analysis and findings regarding the models proffered by these two
experts.
a. Mr. Orszag's Ratio-Equivalency Model
As noted above, Mr. Orszag engages in a benchmark analysis to
estimate an appropriate statutory royalty to be paid to record
companies by noninteractive services for subscription services. Orszag
WDT ] 9. Mr. Orszag concludes that rates set in the interactive
subscription service market are reasonable and appropriate benchmark
rates, subject only to a downward adjustment to reflect the added value
of interactivity in that proposed benchmark market. Id. ]] 9, 11. By
his approach, Mr. Orszag estimates a $0.0033 per-play royalty rate for
performances on subscription services. Orszag WDT ]] 9, 86 & tbls.6,7.
He proposes that the Judges adjust the rates to reflect annual changes
in the Consumer Price Index, in a manner similar to the approach
adopted in Web IV. Orszag WDT ] 8.
Mr. Orszag finds the subscription interactive market to be an
appropriate benchmark for the target noninteractive subscription market
because (1) the sellers/licensors (record companies) are identical; (2)
the buyers/licensees, although not identical, are sufficiently similar;
and (3) the right being sold/licensed is identical in both markets,
i.e., the right to play a sound recording. Id. ]] 54-56.
In his benchmark comparison, Mr. Orszag avers that he is following
the ``ratio equivalency'' approach undertaken by the Judges in Web IV.
Orszag WDT ] 74. In Web IV, the Judges set forth the ``ratio
equivalency'' formula as follows:
A/B = C/D
In this Web IV ratio equivalency approach:
[A] = Avg. Retail Interactive Subscription Price
[B] = Interactive Subscriber Royalty Rate
[C] = Avg. Retail Noninteractive Subscription Price
[D] = Noninteractive Subscriber Royalty Rate
Web IV, 81 FR at 26337-38.\107\
---------------------------------------------------------------------------
\107\ The ``ratio equivalency'' adopted by the Judges had been
proffered by SoundExchange's economic expert witness, Professor
Daniel Rubinfeld. Web IV, 81 FR at 26337. The Judges' reliance on
Professor Rubinfeld's rationale for the use of the ratio equivalency
approach is relevant in the present proceeding, as discussed infra.
---------------------------------------------------------------------------
However, Mr. Orszag does not define inputs [A], [B], and [C] as
they had been identified in Web IV. Instead, he defines these four
inputs as follows:
[A] = Total Benchmark Subscription Revenue
[B] = Total Benchmark Subscription Royalty Payments
[C] = Total Noninteractive Subscription Revenue
[D] = Noninteractive Subscriber Royalty Rate
8/11/20 Tr. 1224-1226 (Orszag).\108\
---------------------------------------------------------------------------
\108\ Input [C] is identified above as revenue from
``noninteractive'' services. However, Mr. Orszag used three mid-tier
services with limited interactivity--Pandora, iHeart and Napster
(Rhapsody)--as his proxies for statutory noninteractive services.
Mr. Orszag's use of these proxy services creates a dispute separate
from the overarching modeling dispute considered here, and that
dispute is addressed infra when the Judges examine the more granular
issues relating to these two benchmarking models. Also, note that
item [D] in the Web IV formula and Mr. Orszag's model are identical
because [D] is not a modeling input but rather the output generated
by the formula (i.e., the proposed statutory royalty rate).
---------------------------------------------------------------------------
[[Page 59492]]
Mr. Orszag testifies that he departs from the Judges' Web IV
definitions of inputs [A], [B], and [C] for two reasons, neither of
which, he asserts, contradicts the Judges' rationale for using the
``ratio equivalency'' approach in Web IV. Quite the contrary, he
testifies that these departures were required, in order to make the Web
IV approach meaningful in the present proceeding. First, Mr. Orszag
notes that in Web IV, the Judges used per play rates as input [B]
because ``none of the percentage-of-revenue prongs in the greater-of
agreements in the record has been triggered, which may suggest that the
parties to those agreements viewed the per-play rate as the rate term
that would most likely apply for the length of the agreement.'' Web IV,
81 FR at 26325. In other words, in Web IV the per-play rates were the
effective rates.
Second, Mr. Orszag testifies that this Web IV factual basis for
using a stated per-play rate is no longer applicable because royalty
payments under current interactive agreements are predominantly made
pursuant to ``percentage of revenue'' prongs'' rather than per-play
prongs, which are included ``only occasionally'' in current interactive
agreements. Instead, according to Mr. Orszag, most current interactive
agreements in the market instead contain a ``greater of'' rate
formulation that includes a ``per-subscriber'' prong together with the
``percent-of-revenue'' prong. Orszag WDT ] 77.
As the value for his conception of [A], Mr. Orszag uses the gross
revenues generated by Spotify from the performance of sound recordings
from the three Majors and the Merlin-affiliated Indies over the most
recent twelve-month period, April 2018-March 2019. Orszag WDT ]] 76,
83-84, 86, tbl.7.\109\
---------------------------------------------------------------------------
\109\ Mr. Orszag also analyzes data from Apple Music, Pandora,
Amazon Music Unlimited, iHeart, Google, and Rhapsody, in addition to
Spotify. He also obtains revenue data for the calendar year 2018.
Orszag WDT tbls.6-7. However, he only uses the Spotify revenue data
for the more recent of the two periods. Mr. Orszag also relies
solely on Spotify royalty data from the same time period. Relying on
the Spotify data for the most recent period ultimately yields
[REDACTED] royalty rates in terms of percent-of-revenue and per-play
rates [REDACTED] interactive services across each time period, id.,
which is [REDACTED] for the noninteractive services within Mr.
Orszag's data set.
Mr. Orszag states that he utilizes this lower royalty rate
because he believes that [REDACTED]--a factor that weighs against
any downward adjustment for the Majors' complementary oligopoly
market power. Orszag WDT ] 86. This market power issue is discussed
at length elsewhere in this Determination.
---------------------------------------------------------------------------
For his version of [B], Mr. Orszag uses the royalties paid by
Spotify to the Majors and the Indies. Again, he selected Spotify data
over the same period, April 2018-March 2019, out of the seven total
interactive services he considered. See supra note 109.
To identify a percent-of-revenue rate from inputs [A] and [B], Mr.
Orszag calculates the reciprocal of ([A])/([B]), which is the percent
of revenue paid as royalties (i.e., ([B])/([A])). The A/B ratio of
these data for Spotify over the relevant period is set forth below:
Revenues [A] = $[REDACTED]
Royalties [B] = $[REDACTED]
The ([A])/([B]) ratio of the above figures equals [REDACTED]:1.
Expressing this ratio factor as a reciprocal ([B])/([A])--thus
expressing a percent of revenue royalty--results in a royalty rate
calculation of [REDACTED]% (rounded). Orszag WDT ]] 84-85 & tbl.7.\110\
---------------------------------------------------------------------------
\110\ In calculating the benchmark revenue and royalty totals
(i.e., [A] and [B]) Mr. Orszag excludes all plans which Spotify
offered at discounts off full retail prices, e.g., Spotify's family,
student, employee, and trial plans, as well as its promotional
offerings. Orszag WDT ] 85 tbl.7. Pandora criticizes his decision to
omit from his analysis the revenues, royalties and play counts
generated by these discount plans, as discussed infra.
---------------------------------------------------------------------------
In order to obtain a value for [C] in his model, Mr. Orszag selects
Pandora, iHeart, and Rhapsody as his mid-tier proxies for the
noninteractive service sector. Orszag WDT tbl.6. He testifies that he
chose these three services because they had entered into direct
licenses with record companies, thereby allowing him access to royalty
statements containing reliable and necessary information. Orszag WDT ]
85 & tbl.7.
Having obtained values for [A], [B], and [C], Mr. Orszag can
calculate a value for [D], his proposed statutory royalty rate for
subscription services. He begins by multiplying the percent-of-revenue
rate he derives from the left side of his model ([REDACTED]%) by the
total revenues ([C]), $[REDACTED], for his three noninteractive
proxies. Orszag WDT ] 85 & tbl.7.
Despite computing a percent-of-revenue rate in the benchmark market
SoundExchange does not propose a percent-of-revenue statutory royalty
rate; rather, it proposes a per-play rate. According to Mr. Orszag, a
per-play rate is preferable in order to avoid difficulties arising out
of (1) defining revenue across business models; (2) separating out the
sound recording revenue royalty base when music is bundled downstream
with the sale of other items; and (3) accounting for a service's
potential business practice of strategically lowering downstream
prices. Orszag WDT ] 82. Accordingly, Mr. Orszag needs to apply his
[REDACTED]% royalty percentage--derived from the left-hand/interactive
benchmark market--so as to calculate a per play royalty rate for the
right-hand/noninteractive target market.
To effect this conversion to a per play metric, Mr. Orszag divides
the foregoing revenue figure by the number of plays on Pandora, iHeart,
and Rhapsody over the relevant period (May 2018-April 2019), which is
[REDACTED] plays. The quotient of that division equals $0.0033 per
play, which is the value for [D] in Mr. Orszag's model and therefore
his recommended per play rate for noninteractive subscription services.
Orszag WDT ]] 85-86 & tbl.7.\111\
---------------------------------------------------------------------------
\111\ Determining this per-play rate from the same Figure 7 data
in another manner, Mr. Orszag notes that his three proxies for
noninteractive subscription services had a combined average revenue
per play of $[REDACTED] ($[REDACTED] [REDACTED] divided by
[REDACTED] billion plays) in the May 2018-April 2019 period.
Multiplying this average revenue per play by the [REDACTED]% royalty
rate for interactive subscription services results in the per-play
royalty of $0.0033. Orszag WDT ] 85 & tbl.7.
---------------------------------------------------------------------------
b. Pandora's Criticisms of Mr. Orszag's Application of the ``Ratio
Equivalency'' Model
The Services claim that the ``first and foremost error'' in Mr.
Orszag's subscription benchmark analysis is his failure to correctly
apply the Web IV ``ratio equivalency model.'' Shapiro WRT at 24-27.
This alleged error supposedly begins with Mr. Orszag's insertion of
different inputs into that Web IV model.
More specifically, the Services point out that Mr. Orszag's
benchmark royalty input [B] is not a contractual per-performance
royalty rate as in Web IV but rather the total royalties paid by his
benchmark service, Spotify. 8/19/20 Tr. 2892-93 (Shapiro). Similarly,
the Services note that Mr. Orszag did not use in the two numerators of
his ``ratio equivalency'' formula (i.e., [A] and [C]), respectively)
the ``average monthly retail subscription prices'' that were used in
the Web IV formulation of the model. Rather, Mr. Orszag substituted for
[A] Spotify's total subscription revenue and for [C] the total
subscription revenue earned by Pandora, iHeart, and Rhapsody, his
``mid-tier'' (i.e., limited interactive) proxies for a noninteractive
subscription services. See Services PFFCL ] 163 (and record citations
therein).
The Services take issue with Mr. Orszag's method of solving for
[D], total
[[Page 59493]]
royalties to be paid. Again, Mr. Orszag multiplies his calculated
[REDACTED]% interactive (benchmark) royalty rate by the total
noninteractive revenue and (in the final step of his analysis) divides
the total target [noninteractive] royalties [D] by the total plays on
the three mid-tier services. See Services PFFCL ] 163 (citing Orszag
WDT ] 85, tbls.6-7.)
According to the Services, the effect of Mr. Orszag's foregoing
``ratio equivalency'' approach is as follows:
[R]ather than charging the target statutory services the same per-
play rate as the benchmark services [before any adjustments], as in
Web IV, his model is set up to compute a rate where the target
market services . . . based on their prior revenues and play counts
. . . instead pay the same percentage of revenue as the benchmark
services.
Services PFFCL ] 164 (citing Shapiro WRT at 25); 8/19/20 Tr. 2897
(Shapiro).
The Services criticize the foregoing approach by Mr. Orszag on
several grounds. First, the Services find his modeling to be
irreconcilable with the Web IV Determination in which, they claim, the
Judges affirmatively rejected a percentage-of-revenue royalty metric
for the statutory license. Services PFFCL ] 24 (citing Web IV, 81 FR at
26325-26).\112\
---------------------------------------------------------------------------
\112\ To be clear, in Web IV, the Judges did not reject the use
of ``percent-of-revenue'' royalties because they were legally or
economically inappropriate. Rather, the Judges there expressly
rejected SoundExchange's proposed ``greater-of'' rate proposal and
chose to utilize only the per play rates within such benchmarks
because the evidence demonstrated that ``none of the percentage-of-
revenue prongs in the greater-of agreements in the record has been
triggered.'' Web IV, 81 FR at 26325. Thus, the Judges did not reject
the concept of using a percent-of-revenue based royalty rate as a
benchmark for noninteractive services for legal or economic reasons
but rather for factual reasons particular to the Web IV record. Cf.
SDARS III, 83 FR at 65221-22, 65229, and Phonorecords III, 84 FR at
1934 (both adopting percent-of-revenue royalty rates).
---------------------------------------------------------------------------
Second, the Services find Mr. Orszag's approach to be
``unjustified'' (as well as ``roundabout'' and ``unnecessary'') because
SoundExchange is not actually advocating for a percent-of-revenue
royalty but rather for a per-play rate. 8/19/20 Tr. 2893 (Shapiro);
Shapiro WRT at 27-28. Alternately stated, the Services claim that
because the royalty being set is a per-play royalty and not a
percentage-of-revenue rate, the appropriate starting point for the
benchmarking exercise is a per-play rate derived in the benchmark
market and then subjected to any adjustments necessary to correct for
potential differences between the benchmark and target markets. Shapiro
WRT at 24-25; Peterson WDT ]] 13, 15.
As stated supra, before the Judges analyze Mr. Orszag's benchmark
ratio equivalency approach and the objections thereto, they find it
beneficial to next consider Professor Shapiro's benchmark ratio
equivalency model and Mr. Orszag's objections thereto. Thereafter, the
Judges can better compare and contrast these two benchmark models. The
Judges proceed in that manner below.
c. Professor Shapiro's Subscription Model
Professor Shapiro also uses the interactive market as his
benchmark, relying on direct licenses between eleven interactive
services \113\ and the three Majors (Sony, Universal, and Warner).
Shapiro WDT at 41; 8/19/20 Tr. 2826 (Shapiro). He compares the
interactive benchmark market to the noninteractive target market by
purporting to use the Web IV framework. More particularly, Professor
Shapiro asserts that he is using the same definitions as used in Web IV
for inputs [A], [B], and [C] in his ``ratio'' equivalency model in
order to generate output [D] as a per-play rate.
---------------------------------------------------------------------------
\113\ The eleven interactive services are Amazon Prime, Amazon
Unlimited, Apple, Deezer, Google Music, Napster, Pandora, Slacker,
SoundCloud, Spotify, and Tidal. Shapiro WDT at 40 tbl.10.
---------------------------------------------------------------------------
By his approach, Professor Shapiro proposes that the statutory rate
for subscription services fall within a range between $[REDACTED] and
$[REDACTED] per play. He also proposes that the range should be indexed
to for inflation, using 2019 as the base year (i.e., the same year from
which he obtained data), over the 2021-2025 rate period. Shapiro WDT at
2.
To compute a value for [A] in his ratio equivalency model,
Professor Shapiro utilizes the same category of values as used by
Professor Rubinfeld in Web IV--the monthly retail price for
undiscounted subscription plans--which is $9.99 per month. 8/19/20 Tr.
2828 (Shapiro) (``I'm following very closely what was done in Web IV by
Professor Rubinfeld, actually, and then adopted by the Judges . . .
based on the . . . retail prices for these plans, and that's [$]9.99 .
. . .'').
To calculate input [B], Professor Shapiro analyzes the most recent
12-month period for which data was available, May 2018 through April
2019. He calculates the average ``effective'' per-performance royalty
rates paid by ten of the eleven services (weighted by each service's
percentage of total performances).\114\ The plays by the largest
interactive services, [REDACTED] and [REDACTED], account for
[REDACTED]% and [REDACTED]% of total plays, respectively, thus
dominating the weighted average. Shapiro WDT at 40 tbl.10. Professor
Shapiro then divides (i) the total royalties paid by the ten
interactive services in his model\115\ by (ii) the number of
interactive plays, to obtain a value for [B], $[REDACTED], his
effective per-play rate in the interactive benchmark market. Id.\116\
---------------------------------------------------------------------------
\114\ Professor Shapiro excludes [REDACTED] from the calculation
``due to insufficient data,'' but the exclusion has de minimis
impact, he asserts, because [REDACTED] accounted for only
[REDACTED]% of the 358.7 billion plays in Professor Shapiro's
benchmark grouping. Shapiro WDT at 40.
\115\ Unlike Mr. Orszag, Professor Shapiro calculates [B]
(effective per-play rate) by utilizing the revenue and royalties
generated by all interactive plans, including discounted interactive
plans such as student, family and military plans, in addition to the
revenue from undiscounted plans. And (because he is calculating an
effective per-play rate in the benchmark interactive market),
Professor Shapiro also incorporates into his calculation of [B] the
number of interactive plays. 8/19/20 Tr. 2827 (Shapiro). By
contrast, when calculating his value for [A], Professor Shapiro
instead uses only the full (undiscounted) retail price of an
interactive service rather than including in the value of [A] the
retail price of discounted interactive plans. These issues are
addressed in connection with the discussion of the more granular
benchmark model issues, infra.
\116\ The total interactive royalties and interactive plays thus
are inputs used to calculate the value of [B] in Professor Shapiro's
model rather than stated inputs in the ratio.
---------------------------------------------------------------------------
Professor Shapiro avers that his only departure from the Web IV
approach is in his calculation of input [B], a departure born of
necessity. Specifically, he notes that he could not use a per-play rate
in the interactive benchmark market because (as Mr. Orszag also
acknowledges) the majority of contracts between the Majors and the
interactive services no longer contains a stated (headline) per-play
prong. Thus, he had no alternative but to substitute an ``effective''
per-play rate as input [B]. Shapiro WDT at 41.
Of particular note here is a distinction between Professor
Shapiro's approach and that taken by Mr. Orszag because the latter does
not calculate a per-performance ``effective'' rate in the interactive
benchmark market. Rather, as discussed supra, Mr. Orszag calculates the
``effective'' percent-of-revenue paid as royalties in the benchmark
interactive market ([REDACTED]%).
Claiming to continue to follow Web IV, Professor Shapiro next
identifies the weighted average retail subscription price for the
noninteractive proxies on the right-hand side of his ratio, $4.99/
month, as the value for [C], the numerator in the right-hand side of
the ``ratio equivalency'' formula. Shapiro WDT tbl.9; 8/19/20 Tr. 2828
(Shapiro). Thus, having identified values for inputs [A], [B], and [C],
his model solves
[[Page 59494]]
for [D], including an implicit interactivity adjustment \117\ that is a
function of the ratio equivalency formula. This value (before any
further adjustments) is $[REDACTED] per play.\118\
---------------------------------------------------------------------------
\117\ Note that Professor Shapiro also proposes an additional
``second interactivity adjustment,'' which the Judges address infra
in their analysis of the details of Professor Shapiro's ratio
equivalency benchmarking model.
\118\ Professor Shapiro's $[REDACTED] per play (prior to
adjustments other than an initial interactivity adjustment which is
implicit in the model) is calculated as follows:
(1) $[REDACTED] divided by $[REDACTED] equals $[REDACTED]
divided by [D]
(2) cross-multiplying: $[REDACTED] multiplied by [D] equals
$[REDACTED] multiplied by $[REDACTED]
(3) calculating the above step: $[REDACTED] multiplied by [D]
equals [REDACTED]
(4) dividing both sides by $[REDACTED] solves for [D] equals
$[REDACTED] (rounded)
---------------------------------------------------------------------------
d. SoundExchange's Criticisms of Professor Shapiro's Benchmark Model
As an initial matter, SoundExchange does not categorically reject
Professor Shapiro's benchmarking approach. Rather, it asserts that
identifying the effective per performance rate paid by the interactive
services is not the ``necessary'' starting point for such an analysis.
SX RPFFCL (to Pandora/Sirius XM) at 67 (emphasis added). In a similar
vein, SoundExchange asserts that ``there is simply no reason why one
must base the analysis on effective per-play rates in the benchmark
market . . . .'' SX PFFCL ] 111 (emphasis added).
Nonetheless, SoundExchange finds Professor Shapiro's application of
the Web IV approach wanting. As an initial matter, SoundExchange
disagrees with Professor Shapiro's understanding that the Web IV model
should be applied so as to generate a per-play rate in the benchmark
(interactive) market. Rather, SoundExchange argues that in Web IV the
Judges required that the denominators [B] and [D] should reflect the
effective royalty rate--in whatever manner that royalty rate was
established in the benchmark market--so that the ratios [A]/[B] and
[C]/[D] would be equivalent. And, the present record reflects that most
of the interactive (benchmark) rates are set, as a matter of contract
(that is to say, in the market), as a percent of revenue. (This is in
contrast to the record in Web IV which revealed that, pursuant to
marketplace contracts, the royalty rate was set on a stated per-play
basis).\119\ Given this change in market reality, SoundExchange asserts
that--for the ratios to be equivalent in the benchmark and target
market--the ratio [B]/[A] is the effective benchmark royalty rate. SX
PFFCL ] 105 (citing 8/11/20 Tr. 1226 (Orszag) (``[B] over [A]
representing the effective percentage of revenue royalty rate paid by
the benchmark service'')).
---------------------------------------------------------------------------
\119\ SoundExchange also relies on statements in Web IV
indicating that the Judges there were intending to set a per-play
rate that effectively provided record companies with the same
percentage of revenue in the target (noninteractive) market as in
the benchmark (interactive) market. See SX RPFFCL (to Pandora/Sirius
XM) ] 189 (citing Web IV, 81 FR at 26326, 26338). The Judges discuss
infra how those Web IV statements bear on the ratio equivalency
issues raised in the present proceeding.
---------------------------------------------------------------------------
According to SoundExchange, it is for the foregoing reason that
Professor Shapiro should not have taken his intermediate step of
deriving an effective per-play rate in the benchmark (interactive)
market. Rather, according to SoundExchange, he should have solved for
[D] (the statutory rate, by (1) applying the benchmark (interactive)
percentage derived from the ratio [B]/[A], (2) multiplying that
percentage by [C], and (3) dividing that product by the number of
noninteractive plays. Simply put, SoundExchange (unsurprisingly)
asserts that, in order to follow the Web IV approach, Professor Shapiro
needed to utilize Mr. Orszag's approach.\120\
---------------------------------------------------------------------------
\120\ As noted supra, this criticism relates solely to the
modeling aspects of Professor Shapiro's benchmark model.
SoundExchange levels other criticisms at Professor Shapiro's
application of his benchmark model, which are discussed infra.
---------------------------------------------------------------------------
e. The Judges' Analysis and Findings Regarding the ``Ratio
Equivalency'' and Benchmarking Issues
SoundExchange and Pandora accuse each other of misapplying the
Judges' ratio equivalency approach adopted in Web IV. However, the
broadsides by each side miss the mark, as explained below. The parties'
attacks are off-target because, in Web IV, the effective rates upon
which the Judges relied were also the stated per-play rates in the
benchmark (interactive) agreements.
Thus, Pandora is incorrect in arguing that Mr. Orszag misapplies
Web IV. Rather, consistent with Web IV, he relies on and applies the
royalty terms in the benchmark agreements which are based on a percent-
of-revenue royalty prong within their greater-of rate formulae.
Therefore, it is incorrect to say that Mr. Orszag acted in a manner
inconsistent with Web IV by (1) using benchmark (interactive) total
revenue as the metric for [A]; (2) using benchmark (interactive) total
royalties for [B]; (3) calculating the reciprocal, [B]/[A], as the
effective benchmark (interactive) percent-of-revenue royalty rate; and
(4) applying that percent ([REDACTED]%) to the total revenue in the
target (noninteractive) market.
But, neither has Professor Shapiro run afoul of Web IV. Consistent
with Web IV, Professor Shapiro calculates an effective per play rate in
the benchmark (interactive) market by applying the actual prong
utilized in that market--the percent-of-revenue prong--and then
identifies an [A]/[B] ratio to apply to the target (noninteractive)
market. In Web IV, the Judges also explicitly identified a per-play
rate as the appropriate rate to use for [B] and, as undertaken by
Professor Shapiro, utilized the retail price for the benchmark
(interactive) subscription as the value for [A].\121\
---------------------------------------------------------------------------
\121\ Moreover, as noted supra, SoundExchange does not reject
Professor Shapiro's approach but rather asserts only that his
starting point of identifying the effective performance rate paid by
the interactive services is neither necessary nor mandatory. That is
a far cry from an outright rejection. Further, the fact that such an
approach might not be necessary or mandatory does not mean that it
is inappropriate or without significant value.
---------------------------------------------------------------------------
But, then a puzzle presents: How can both approaches be both
correct and thus incorrect? Are we faced with a paradox analogous to
that of ``Schr[ouml]dinger's Cat''? \122\ The resolution of the paradox
lies in two points: (1) When the Judges in Web IV extracted the ratio
equivalency methodology out of the record evidence, they intentionally
eliminated the linkage between per-play rates and percent-of-revenue
rates in the ``greater-of'' rate formulae present in the benchmark
interactive market agreements; and (2) in the present proceeding,
benchmark (interactive) royalties are paid predominantly as a
``percent-of-revenue,'' whereas in Web IV they were paid on a per-play
basis.\123\ The Judges analyze below the impact of these two factors on
the application of the benchmark models in the present proceeding.
---------------------------------------------------------------------------
\122\ ``Schr[ouml]dinger's Cat'' refers to a thought experiment
regarding a theory of quantum mechanics involving a cat--sealed in a
box with a flask of poison and a radioactive source--that, under the
theory, conceptually may simultaneously be alive and dead.
``Schr[ouml]dinger's Cat'' has been extended in popular culture as a
way to identify something as a paradox, unfeasible, or working
against itself. See https://www.dictionary.com/e/tech-science/schrodingers-cat/?itm_source=parsely-api (last visited May 25,
2021).
\123\ In fact, the record reflects that [REDACTED] and that
[REDACTED]. 8/11/20 Tr. 1207-08 (Orszag); 8/20/20 Tr. 3000
(Shapiro). See SX PFFCL ] 112 (and record citations therein).
Although the Services do not acknowledge such a sweeping
abandonment of stated per-play rates, Professor Shapiro recognizes
that ``[REDACTED].'' Shapiro WDT at 39.
---------------------------------------------------------------------------
i. De-Coupling of Contractual Per-Play and Percent-of Revenue Rates in
Web IV
The contrasting attempts by Mr. Orszag and Professor Shapiro to
follow the Web IV ``ratio equivalency'' faithfully derive from the
particular
[[Page 59495]]
factual and economic circumstances in Web IV. In that proceeding,
SoundExchange had not proposed a stand-alone per-play rate. Rather, it
had proposed that the Judges adopt a ``greater-of'' rate structure, in
which the statutory subscription royalty rate would be the greater of
(1) $0.0025 per play and (2) 55% of service revenue. Web IV, 81 FR at
26335. In support of that structure, SoundExchange, through its
economic expert, Professor Daniel Rubinfeld, asserted, inter alia, that
(1) ``the per-play prong provides a guaranteed revenue stream'' and (2)
``the percentage-of-revenue prong allows record companies to share in
any substantial returns generated by a Service.'' Web IV, 81 FR at
26324. Thus, SoundExchange proposed the per-play rate--not as a stand-
alone value, but rather as a partial metric--one that it believed
served as a ``guarantee''--a floor on the percent-of-revenue
effectively paid as royalties.\124\
---------------------------------------------------------------------------
\124\ Professor Rubinfeld apparently relied on per-play
royalties as input [B] in his ``ratio equivalency'' approach because
the per-play prongs were the ones triggered in the market and his
intention was to faithfully utilize actual market data.
---------------------------------------------------------------------------
As noted supra, in Web IV the Judges rejected the ``greater-of''
structure and adopted a per-play rate structure. But, their decision
was not unrelated to the valuation of the royalty payments as a
function of revenue. Rather, the Judges adopted the per-play rate
approach in reliance upon Professor Rubinfeld's testimony that his
``ratio equivalency'' methodology resulted in a per-play royalty
payment ($0.0025) that approximated 55% of service revenue, which, as
noted above, was SoundExchange's percent-of-revenue royalty proposal.
Web IV, 81 FR at 26324 n.44, 26326. Thus, in Web IV the Judges
understood that the per-play rate was not proposed as a purely
independent measure of the value of an individual play, but rather as a
metric that was also designed to approximate a minimum royalty rate of
55% of revenue.
Importantly, when the Judges in Web IV de-coupled the percent-of-
revenue and per-play rates, rejecting the former approach and adopting
the latter, the Judges also eliminated the capacity of the per-play
rate to serve its limited function as a form of ``guarantee.'' Thus,
the royalty rate paid by noninteractive subscription services during
the Web IV 2016-2020 rate period--as adjusted (for other reasons) by
the Judges from $0.0025 to $0.0022 for 2016--did not correspond with
any particular percent-of revenue floor. Rather, the effective percent-
of-revenue paid as a royalty would vary with the level of
noninteractive service revenue and quantity of plays.\125\
---------------------------------------------------------------------------
\125\ By contrast, if the Judges had adopted only a percent-of-
revenue structure, the royalty paid by a noninteractive service
obviously would have remained at that fixed percentage.
---------------------------------------------------------------------------
With Web IV having severed the link between percent-of-revenue and
per-play rates, the attempts in this proceeding by Mr. Orszag and
Professor Shapiro to adopt the Web IV ratio equivalency approach--in
order to set a per-play rate derived from a percent-of-revenue rates--
are problematic because, as in Web IV, the per-play rate is untethered
to a percent-of revenue rate. Indeed, despite their best efforts,
neither Mr. Orszag nor Professor Shapiro could synthesize what Web IV
had (for good reason) torn asunder.
ii. In the Benchmark (Interactive) Market, Per-Play Rates Were Paid in
the Web IV Era; but in the Web V Era Percent-of Revenue Rates Are Now
Paid
Whereas in Web IV the actual rate in the benchmark (interactive)
market and the proposed target statutory rate were both per-play rates,
in this Web V proceeding the actual benchmark rate is now most often a
percent-of-revenue rate. Despite this important change in the benchmark
(interactive) market, the parties agree that the statutory rate should
remain a per-play rate.
Accordingly, the parties' criticisms not only miss the mark, they
fail to illuminate the issue at hand. The Judges need to revisit the
economic principles identified in Web IV that undergird the ratio
equivalency approach in order to apply that formula to the present
record.
The concept of ratio equivalency is based on the principle that
record companies, as licensors, in a hypothetical unregulated world
``would want to make sure that the marginal return that they could get
in each sector [interactive and noninteractive] would be equal, because
if the marginal return was greater in the interactive space than the
noninteractive . . . you would want to continue to pour resources,
recordings in this case, into the [interactive] space until that
marginal return was equivalent to the return in the noninteractive
space.'' Web IV 81 FR at 26344. This is an example of ``a fundamental
economic process of profit maximization,'' id., one that ``pervades
much of [e]conomics: A rational seller or licensor will ``[a]llocate
resources among alternative uses so as to keep the marginal returns
equal, or as near equal as possible [because] if marginal products
aren't equal, there's a gain to be had by reallocating some resources
from the use with the lower marginal product and assigning them where
the marginal product is higher.'' Armen A. Alchian & William R. Allen,
Universal Economics at 102 (2018) (summarizing this principle as ``the
equalization of marginals at the maximum aggregate return''). In the
present case, this economic logic implies that rational profit-
maximizing record companies will seek to earn the same return for each
relevant ``unit'' of value across both the interactive and
noninteractive markets.
In Web IV, the metric for the royalty rate was per play, i.e., each
individual performance of a copy of a sound recording. However,
downstream revenue is not generated on a per-play basis. Rather, in the
case of streaming subscriptions, marginal revenue can be generated by
incremental increases in the number of subscriptions.\126\ A record
company would seek to avoid a scenario where it loses marginal royalty
revenue on each subscription dollar if listeners who would otherwise
have chosen to become interactive subscribers instead decide to become
noninteractive subscribers. By equalizing the percent of revenue paid
as royalties per subscription dollar, the rational record company is
indifferent regarding to which of these two forms of music services a
consumer decides to subscribe.\127\ (And, it should also be noted, on
the cost (supply) side, a particular feature of copies of sound
recordings is that their transmission does not generate a marginal
physical production cost. See Phonorecords III Dissent, 84 FR at 1976
(and citations therein)).\128\
---------------------------------------------------------------------------
\126\ Services could also hypothetically increase marginal
revenue simply by raising subscription prices. There is no evidence
in the record, though, indicating that services have the market
power to increase subscription prices charged within various
segments of the retail market.
\127\ Of course, concern for substitution is appropriate only if
the two services are indeed substitutes among consumers. This
important point is considered infra.
\128\ The Phonorecords III majority Determination does not
conflict with this economic point.
---------------------------------------------------------------------------
This is the precise point on which Professor Rubinfeld relied and
as to which the Judges in Web IV agreed. Thus, the actual economic
concern in Web IV was setting rates based on a per-play rate that was a
marketplace proxy for a minimum percent-of-revenue earned by an assumed
substitute service, i.e., interactive services (approximately 55%),
which generates marginal opportunity costs.\129\
---------------------------------------------------------------------------
\129\ To be clear, that concern is not the end of the story.
Potential adjustments also need to be considered to reflect
effective competition, differences in WTP for substitutes (for
example, because of interactivity differences), and inconsistent
definitions of a ``play'' between service types (the ``skips''
issue).
---------------------------------------------------------------------------
[[Page 59496]]
In the present case, SoundExchange makes this point repeatedly,
citing to language in the Web IV Determination. See, e.g., id. at 26338
(``[G]iven Dr. Rubinfeld's assumption that the ratios should be equal
in both markets, the per-play royalty rate for noninteractive services
[D] (i.e., the statutory rate) would also have to provide record
companies with the same minimum percentage of revenue out of [C] (the
average monthly retail noninteractive subscription price).'') (emphasis
added); id. at 26344 (``Dr. Rubinfeld acknowledged that his `ratio
equivalency' was intended to create a rate whereby every marginal
increase in subscription revenue would result in the same increase in
royalty revenue, whether that marginal increase in subscription
occurred in the interactive market or the noninteractive market.'')
(emphasis added); id. at 26324 n.44 (noting that Dr. Rubinfeld's ratio
equivalency per-play methodology resulted in an interactive royalty
payment generally ranging from 50% to 60% of subscription revenues,
with most falling between 55% and 60%); id. at 26338 (the per-play
rates relied upon by Dr. Rubinfeld implied these same express percent-
of-revenue rates as set forth in the ``greater-of'' formulae in the
interactive direct licenses). To buttress this point, SoundExchange
notes that the Judges' restatement in SDARS III of the ``ratio
equivalency'' model is consistent with the understanding that this
approach is intended to equalize royalties as a percent of revenue. SX
PFFCL 119 (citing SDARS III, 83 FR at 65243 n.137).
The Judges agree with SoundExchange's assertion in this regard.
Accordingly, the Judges find that the Web IV ``ratio equivalency''
approach was properly intended to approximate and equalize percent-of-
revenue royalties for interactive and noninteractive subscriptions--on
the assumption that interactive and noninteractive subscriptions were
1:1 substitute products for consumers downstream. If and when such
substitution exists, Mr. Orszag's ``ratio equivalency'' approach is the
more appropriate methodology.
Nonetheless, based on the record in this proceeding, the Judges do
not find good reason to apply Mr. Orszag's benchmark rate other than in
a partial manner. That is, because the ``ratio equivalency'' approach
is economically premised on a presumed high substitutability (cross-
elasticity in economic parlance) between interactive and noninteractive
subscriptions, this equivalency cannot be economically pertinent where,
as here, the record presents the Judges with facts in conflict with
that presumption.
Again, recall that in Web IV, the Judges stated: ``Dr. Rubinfeld's
`ratio equivalency' assumes a 1:1 `opportunity cost' for record
companies, whereby, on the margin, a dollar of revenue spent on a
subscription to a noninteractive service is a lost opportunity for
royalties from a dollar to be spent on a subscription to an interactive
service.'' Web IV, 81 FR at 26344-45 (emphasis added). To make clear
that the Web IV Judges found this 1:1 substitutability to be a
presumption (and certainly not an axiom), they rejected SoundExchange's
attempt to extend this 1:1 substitution argument to the ad-supported
market in order to equalize royalties as a percent of revenues in that
market with the percent applicable in the subscription interactive
market. In rejecting this attempted extension of the 1:1
substitutability presumption, the Judges took note of a sharp dichotomy
in the willingness to pay (WTP) of listeners in each market. Web IV, 81
FR at 26345-46, 26353.
However, the Judges did apply a 1:1 substitutability of
subscription interactive services for subscription noninteractive
services in Web IV and noted its limited application:
Dr. Rubinfeld's interactive benchmark is only applicable when,
inter alia:
Revenues in both markets are derived from subscription revenues
and are thus reflective of buyers with a positive WTP for streamed
music; [and] functional convergence and downstream competition for
potential listeners indicate a sufficiently high cross-elasticity of
demand as between interactive and noninteractive services, provided
the noninteractive subscription rate is reduced to reflect the
absence of the added value of interactivity . . . .
Web IV, 81 FR at 26353 (emphasis added). Applying these principles, Web
IV held:
When the segment of the market at issue consists of willing
buyers/licensees who are providing access through subscription-based
listening to listeners who have a WTP for either interactive or
noninteractive services that are close substitutes, then Dr.
Rubinfeld's ``ratio equivalency'' is reasonably based on revenues.
Web IV, 81 FR at 26348 (emphasis added).
These quoted portions of Web IV show that the Judges dichotomized
between Dr. Rubinfeld's use of the ``ratio equivalency'' model by
rejecting it for the ad-supported noninteractive services but applying
it to subscription noninteractive services. But these quoted portions
also demonstrate that the Judges applied a ``ratio equivalency'' across
the benchmark and target subscription markets by presuming that
subscribers' revealed positive WTP for both interactive and
noninteractive services was sufficient to show the necessary cross-
elasticity and, relatedly, that each product was a close substitute for
the other (after making an adjustment for interactivity.\130\
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\130\ Such an assumption was not unreasonable as there were no
``opportunity cost'' surveys such as in the present case indicating
the extent of cross-elasticity or substitutability of interactive
and noninteractive subscriptions. As discussed, infra, that
evidentiary absence does not exist in the present proceeding. Also,
in Web IV, the $0.0025 benchmark (adjusted to $0.0022) that presumed
this 1:1 substitutability was consistent with Pandora's own proposed
benchmark derived from its noninteractive market agreement with
[REDACTED]. Web IV, 81 FR at 26405.
---------------------------------------------------------------------------
In the present proceeding, a consumer survey in evidence,
commissioned by SoundExchange--the Zauberman Survey--provides relevant
information regarding the question of whether and to what extent
subscription interactive services are substitutes for subscription
noninteractive services. As analyzed and applied by one of
SoundExchange's other economic expert witnesses, Professor Willig, the
Zauberman Survey indicates that only 11.5% of subscribers to
noninteractive services would divert to listening to subscription
interactive services if their noninteractive subscription service were
no long available. See Willig WDT ] 47 fig.6.\131\ These survey results
indicate there is far less than the 1:1 substitution ratio between
subscription interactive services and subscription noninteractive
services that was presumed in Web IV. This SoundExchange-proffered
evidence indicates that Mr. Orszag's per-play rate--derived from his
ratio equivalency approach--has only limited applicability.
---------------------------------------------------------------------------
\131\ The Hanssens Survey indicates, according to Professor
Shapiro, that this diversion to new interactive subscriptions would
be even smaller, measuring [REDACTED]%. Shapiro WDT at 28 tbl.5.
This lower figure would not alter the weights assigned to the
benchmarking and ratio-equivalency models.
---------------------------------------------------------------------------
Moreover, in Web IV and also in SDARS III, the Judges laid out this
precise critique of a ratio equivalency approach proffered by Mr.
Orszag, with the Judges also relying on survey evidence to make the
point:
The survey results highlight a . . . criticism . . . of Mr.
Orszag's ratio equivalency approaches. . . . [T]he economic
rationale support[ing] a ratio equivalency approach requires
`significant competition, or a high cross-elasticity of demand,
between
[[Page 59497]]
[the target market] and [the benchmark market] . . . . [A] limited
degree of head-to-head competition . . . will not suffice. . . .'
Web IV, 81 FR at 26353 . . . .
In Web IV, the Judges stated that the ratio equivalency approach
might be appropriate if the record reflected . . . a sufficiently
high cross-elasticity of demand as between interactive and
noninteractive services, provided the noninteractive subscription
rate is reduced to reflect the absence of the added value of
interactivity. . . . 81 FR at 26353.
In the present case, Mr. Orszag did not provide either
qualitative or quantitative evidence of a sufficiently high cross-
elasticity. . . . [T]he survey results reported by SoundExchange's
own survey witnesses . . . indicated that there is no such high
substitutability between subscribership to interactive services and
[the target market.] These survey conclusions negate any complete or
overwhelming ratio equivalency Mr. Orszag has posited.
SDARS III, 83 FR at 65247 (emphasis added).\132\
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\132\ The Judges are perplexed by SoundExchange's decision to
propose a per-play rate as opposed to a percent-of-revenue rate. Mr.
Orszag could have more simply applied his [REDACTED]% percent-of-
revenue rate as the applicable benchmark rate (subject to any
warranted adjustments). Further, the Judges note that the Majors and
the services revealed their [REDACTED] in the interactive market--a
market that is unregulated and [REDACTED] to the record companies
than the noninteractive market. Compare Orszag WDT tbl.4 (2018 U.S.
interactive subscription revenue was $[REDACTED]) with id. tbl.6
(2018 U.S. subscription revenue for Mr. Orszag's noninteractive
proxies (including Pandora) was $[REDACTED], [REDACTED]% of the
interactive revenue). There is no reason provided in the record to
explain why SoundExchange and Mr. Orszag would find practical issues
relating to revenue definition--which were insufficient to reject a
percent-of-revenue rate in the far larger and unregulated
interactive market--to be so vexing in the noninteractive market as
to necessitate the conversion of the benchmark percent-of-royalty
rate into a statutory per-play rate.
---------------------------------------------------------------------------
iii. The Judges' Application of Mr. Orszag's and Professor Shapiro's
Models
In sum, Professor Shapiro's model is more of a traditional
benchmarking model. He identifies the interactive market as similar in
terms of licensors, licensees, and licensed works, and he proposes
adjustments (discussed infra) that allegedly correct for differences
between the otherwise analogous benchmark and target markets. On the
other hand, Mr. Orszag's approach is essentially an ``opportunity
cost'' model more than it is a traditional ``benchmark model.'' Because
SoundExchange's survey evidence, as applied by Professor Willig,
reveals the limited applicability of the opportunity cost approach, the
model cannot be extended to the entire market.
Therefore, the Judges find it necessary to apportion the
applications of Professor Shapiro's benchmark result and Mr. Orszag's
benchmark result. The Judges find it reasonable to apportion 11.5% of
Mr. Orszag's proposed benchmark rate toward the subscription benchmark
rate.\133\ The Judges apply the remaining and greater weight, 88.5%
(i.e., 1-.115), to the more traditional benchmark approach undertaken
by Professor Shapiro that relies on the broad similarities in terms of
rights, licensors, and licensees, without adding assumptions regarding
substitution patterns between the target noninteractive subscription
market and the benchmark interactive subscription market.
---------------------------------------------------------------------------
\133\ The Judges prefer Mr. Orszag's approach over Professor
Shapiro's approach for the portion of the market in which the
relevant cross-elasticity/substitutability is high. As the Judges
noted in SDARS III, if and when the opportunity cost approach is
appropriate, it can be superior to a benchmark approach in
estimating the statutory rate. SDARS III, 81 FR at 65231 (``When
properly weighted, the opportunity cost approach is tantamount to a
useful benchmark, because the weightings are quite analogous to (and
more precise than) the `adjustments' the Judges consistently make to
proposed benchmarks.'') (emphasis added).
---------------------------------------------------------------------------
The Judges will apply these apportionments to each expert's
proposed rate after the Judges consider the more granular criticisms of
each expert's approach and the proposed adjustments to those rates.
iv. The Parties' Granular Criticisms of Their Adversary's Subscription
Benchmarking
Having resolved the differences between Mr. Orszag and Professor
Shapiro regarding the overarching issue of how to apply ratio
equivalency and benchmarking principles, the Judges now turn to the
detailed critiques of each approach.
(A) SoundExchange's Granular Criticisms of Professor Shapiro's
Benchmarking and the Judges' Analysis and Findings Regarding Those
Criticisms
(1) Professor Shapiro's Inclusion of Discount Plan Royalties and Play
Counts in Calculating a Value for [B], the Effective Per-Play Royalty
in the Benchmark (Interactive) Market
SoundExchange criticizes Professor Shapiro for including the
royalties and play counts associated with interactive services'
discount plans in order to calculate the value of [B] in his
benchmarking model. More precisely, Professor Shapiro calculates an
effective interactive (benchmark) per-play royalty rate [B] by
including in his numerator the total royalties paid and, in his
denominator, the play counts--not only for the interactive services'
full-price ($9.99) subscription plans but also for discount plans, such
as student, family, and military plans. 8/19/20 Tr. 2931 (Shapiro);
Shapiro WDT, app. D.1.B n.7.
According to Mr. Orszag, this has the effect of lowering the
effective per-play rates in the benchmark market and therefore the
proposed rates for the target market. To make this point, he compares
his calculation of the weighted average subscription per-play rate
excluding discount plans--$[REDACTED] per play--with Professor
Shapiro's effective per-play rate for the same services including
discount plans--$[REDACTED] per play. Trial Ex. 5603 ] 88 (WRT of Jon
Orszag) (Orszag WRT).
In response, Professor Shapiro asserts that it would be
inappropriate to hand-pick a subset of the market (i.e., just the full-
price plans) in order to generate the per-play rate because the
statutory rate will apply to royalties generated by all subscribers
regardless of whether they subscribe to a full-price or discounted
plan. 8/19/20 Tr. 2852-53, 2898-99 (Shapiro).
The Judges agree with Professor Shapiro that the identification of
a per-play benchmark rate in his model for subscription services should
be based on the royalties and play counts of all plans. There is no
valid reason to cherry-pick among the plans when calculating this
benchmark input because all noninteractive services offering
subscription plans will pay the calculated per-play royalty across all
plans, whether full price or discounted.\134\
---------------------------------------------------------------------------
\134\ Mr. Orszag claims that interactive discount plans should
be ignored because [REDACTED] engages in much less discounting. He
claims that this difference requires the Judges to look only at
full-price plans in order to make an ``apple-to-apples'' comparison.
SX RPFFCL (to Pandora/Sirius XM) ] 186 (citing 8/11/20 Tr. 1215
(Orszag)). But, Pandora analogizes to another food group
(characterizing this point as a ``red herring''), namely one that is
unresponsive to the need to consider that all noninteractive
subscription services will pay the statutory per play rate,
regardless of whether they engage in discounting. Pandora/Sirius XM
PFFCL ] 186 (citing 8/19/20 Tr. 2852-53 (Shapiro)). The Judges
disagree with SoundExchange's reliance on the different degrees of
discounting. Discount plans are forms of price discrimination,
designed to increase overall revenue. There is no reason why the
manner in which different services generate revenue should affect
the calculation of per play rates in this benchmarking exercise,
unless the Judges were asked by the parties to consider setting
different royalty rates for full-price and discount subscription
plans (which no party has requested).
---------------------------------------------------------------------------
(2) Professor Shapiro's Use of Full Subscription Prices Rather Than
Average Revenue per User (ARPU) for the Values of [A] and [C]
SoundExchange also criticizes Professor Shapiro's inputs for the
values for [A] and [C] in his benchmarking model, which represent the
monthly
[[Page 59498]]
downstream retail price of the interactive benchmark subscriptions and
the proxies for the noninteractive services, respectively. 8/19/20 Tr.
2936-37 (Shapiro). SoundExchange asserts that Professor Shapiro should
have used the Average Revenue per User (ARPU) for these values (which
would have incorporated any lower discounted retail prices) rather than
the full retail subscription prices for [A] and [C], which were $9.99
and $4.99, respectively. For the first time in this proceeding, at the
hearing, SoundExchange, through Mr. Orszag, sought to raise a concern
that Professor Shapiro's use of retail prices rather than ARPU for [A]
and [C] is improper. He maintained that because Professor Shapiro used
all plans, including discounted plans, to calculate the effective per-
play rate ([B]), as described above, while neglecting the discount
plans' ARPU when providing values for [A] and [C], Professor Shapiro's
model ``[REDACTED].'' 8/11/20 Tr. 1387-88 (Orszag).\135\ In Mr.
Orszag's opinion, because Professor Shapiro calculates effective per-
play royalty rates in a manner that includes all plans (including
discount plans), he likewise should have based the interactivity
adjustment on the effective payment for all plans, including discount
plans. 8/10/20 Tr. 1164-67 (Orszag).
---------------------------------------------------------------------------
\135\ As noted supra, the first of Professor Shapiro's proposed
two-part interactivity adjustment is implicit in the ratio
equivalency approach and, for presentation purposes, is more
naturally considered as an element of the modeling rather than as a
stand-alone adjustment.
---------------------------------------------------------------------------
Further to this argument, SoundExchange notes that Professor
Shapiro acknowledges that identifying what customers actually pay on a
per-subscriber basis is preferable to relying on an undiscounted price
that is paid by many, but not all, of the subscribers. SX PFFCL ] 136
(citing 8/19/20 Tr. 2939 (Shapiro)). In addition, SoundExchange
explains that, although the use of discount plans is a form of price
discrimination, Professor Shapiro concededly did not build this price
[REDACTED] only on the full prices for subscriptions as his values for
[A] and [C]. SX PFFCL ] 137 (citing 8/19/20 Tr. 2958-59 (Shapiro)).
SoundExchange then uses its post-hearing PFFCL submissions to set
forth its proposed new analysis, in which it suggests several different
potential ARPU levels that could be used to substitute for [A], the
retail price paid in the benchmark interactive market. See SX PFFCL ]]
139-140 (and references cited therein).
However, the Services emphasize that none of SoundExchange's
witnesses raised an objection in their written rebuttal testimonies to
Professor Shapiro's use of retail prices as the metric for [A] and [C]
in any of the witnesses. The Services further aver that no witness at
the hearing proffered alternative ARPU calculations for use as values
for [A] and [C]. See Pandora/Sirius XM PFFCL ] 191. Moreover, the
Services note that this issue has already been resolved at the hearing,
when a proffer by SoundExchange of testimony from Mr. Orszag was met
with a motion by the Services to bar such testimony. At the hearing,
after extended argument and colloquy, 8/25/20 Tr. 3821-28 (argument and
colloquy), the Judges sustained the Services' objections to the
presentation by Mr. Orszag of his belated attempt to raise this issue
and attempt to utilize ARPU data for the first time from the witness
stand in an attempt to support that new analysis because such 11th-hour
testimony and data review would constitute delinquent and thus improper
``new analysis.'' 8/25/20 Tr. 3821-28 (Chief Judge Feder) (``[T]his is
a new analysis. The objection is sustained.'').
Moreover, the Services note that contrary rebuttal arguments were
certainly available for them to raise, if SoundExchange had advanced
this assertion in a timely fashion. First, they take note that there is
no established manner by which the industry calculates ARPU for
discount plans. As Professor Shapiro and Mr. Orszag both testify, there
is no uniform method employed by the various services for making that
calculation, and SoundExchange has provided no evidence to the
contrary. 8/19/20 Tr. 2943-44 (Shapiro); 8/11/20 Tr. 1199-1200 (Orszag)
(conceding that ``there are some differences between how [the Majors]''
account for family plans in their ARPU calculations). Second, they note
that the several discount-based ARPU ratios [A]:[C] suggested by
SoundExchange as supporting Mr. Orszag's unadmitted ``new analysis''
are themselves contradicted by the ARPU-based ratio for Pandora's own
interactive ``Premium'' service and its Pandora Plus service. 8/19/20
Tr. 2853-54, 2855-56 (Shapiro).
Additionally, Professor Shapiro opines that his reliance on the
ratios of full price retail subscriptions to effective per-play rates
is a cleaner method to isolate the value of interactivity, and an
inclusion of discount plans would inject confounding issues relating to
the bundling of use by family plan members. 8/26/20 Tr. 3932 (Shapiro)
(distinguishing (1) his use of royalties and plays from all plans as
identifying an effective per-play rate to cover all plays from all
plans from (2) the attempt to measure the ``value of interactivity,
that's $9.99 versus $4.99, nicely isolated for particular individual
undiscounted plans''); see also Pandora/Sirius XM PFFCL ] 190.
The Judges find that SoundExchange cannot resurrect this belated
argument in its post-hearing submissions, through counsel, after the
Judges had already ruled that the issue had been delinquent when
presented for the first time at the hearing. Moreover, SoundExchange
has not presented any argument in its post-hearing submissions to
suggest that the Judges should revisit their decision. Indeed, the
dispositive effect of SoundExchange's delinquency in making this
argument remains manifest; having had no timely and proper notice of
this argument, the Services and their witnesses had no ability to
prepare a contrary argument.
Additionally, as the Judges note supra, the Services have
identified specific rejoinders to Mr. Orszag's ``new analysis,'' which
could not be explored thoroughly because SoundExchange did not raise
this issue in a timely manner. Further, the Judges note that Professor
Shapiro's reliance on the use of undiscounted retail prices as his
values for [A] and [C] was consistent with the Judges' formulation of
the ratio equivalency approach in Web IV.
For these reasons, the Judges do not give any weight to
SoundExchange's arguments in this regard.\136\
---------------------------------------------------------------------------
\136\ To be clear, the Judges are not making any substantive
finding regarding how they would rule if a timely argument were to
be made in a subsequent proceeding regarding the merits of using
ARPU values for numerators [A] and/or [C].
---------------------------------------------------------------------------
(3) Professor Shapiro's Generation of a Per-Play Rate in the Benchmark
Market
SoundExchange also asserts that Professor Shapiro's generation of
an effective per-play rate in the benchmark interactive market ``is
inconsistent with market reality.'' SX PFFCL ] 112. This is an odd
critique, in that Mr. Orszag and SoundExchange are themselves proposing
a per-play rate structure, the very approach it claims to be at odds
with ``market reality.'' See Services RPFFCL ] 112 (``If the . . .
shift from interactive services paying under per-play metric to a
percentage-of-revenue metric really had . . . market-wide relevance . .
. one would have expected [Mr. Orszag] to propose a percentage-of-
revenue rate for statutory purposes.''). Further, because both
SoundExchange and Pandora propose a per-play rate generated from a non-
per-play benchmark, a conversion to a per-play rate must occur at some
point in the analysis, and SoundExchange does not
[[Page 59499]]
adequately explain why making this conversion in the benchmark market
(early in the analysis) is any more in accord with ``market reality''
than engaging in the conversion in the target noninteractive market as
a final step. Indeed, as noted at the outset of the Judges'
presentation of SoundExchange's critique of Professor Shapiro's
benchmark, they explicitly assert only that his setting of a per-play
rate in the benchmark market is neither necessary nor mandatory--not
that it was improper. See supra, section IV.B.1.d.
(B) The Services' Criticisms of Mr. Orszag's Benchmarking and the
Judges' Analysis and Findings Regarding Those Criticisms
(1) SoundExchange's Reliance on Pandora's Data
The Services criticize Mr. Orszag for relying only on Pandora's
revenue and play counts in his ratio equivalency approach. Services
PFFCL ] 29 (and record citations therein). However, SoundExchange
responds by noting that Pandora Plus has an [REDACTED]%+ market share,
making it a highly suitable data source. Further to this point,
SoundExchange notes that, when appropriate, the Judges have relied in
past proceedings on facts and data attributable to entities with
significant market share. SX RPFFCL (to Services) ] 29.
The Judges find the Services' criticism to be without merit. Mr.
Orszag acted reasonably and in a manner consistent with the Judges'
past reliance upon data from a significant industry participant.
Moreover, as the Judges have said on several other occasions, the
statutory rate-setting process does not instruct the Judges to protect
any particular business model. Thus, Mr. Orszag's decision to rely on
data from the largest noninteractive service with arguably the most
successful business model (in terms of market share) can hardly be
considered improper.
(2) Mr. Orszag's Model Will Not Generate a Royalty Equal to [REDACTED]%
of Revenue Across Noninteractive Services
The Services also object to Mr. Orszag's approach because his
model's per-play royalty rate will not equate with [REDACTED]% of any
noninteractive service's revenue (including Pandora) unless, by
coincidence, it has revenues and a play count that generate that
effective percentage royalty level. Accordingly, the Services maintain
that Mr. Orszag's approach cannot even generate its ``foundational
premise'' of ``ratio equivalency,'' whereby noninteractive services pay
the same percentage of revenue rate as paid by interactive services in
the benchmark market. Shapiro WRT at 28; 8/19/20 Tr. 2893-95 (Shapiro).
Relatedly, the Services claim that Mr. Orszag fails to identify revenue
and play counts for any existing statutory service, and for this reason
as well he thus had not analyzed whether any such service would in fact
pay [REDACTED]% of its revenues in royalties if it paid $0.0033 per
performance. Services PFFCL ] 174.
The first criticism is correct but uninformative. It is but a
specific example of a more general criticism: Any rate or rate
structure set by the Judges can (and likely will) affect different
regulated entities somewhat differently and also be rendered inaccurate
or obsolete during the five-year rate term by changes in the
marketplace. This is closely analogous to the well-known concept of
``regulatory lag'' in public utility regulation. See Alfred E. Kahn, 1
The Economics of Regulation 54 (1970) (``regulatory lag'' results from
the fixing of a rate for a period of time and the inability of
regulated companies to maintain rates of return that were deemed
satisfactory at the inception of the rate period'').
The second criticism is also off-target. As SoundExchange states by
way of response, Pandora's subscription service indeed would pay
essentially [REDACTED]% of its revenue as royalties pursuant to Mr.
Orszag's proposed per-play rate (because [REDACTED]), and Mr. Orszag
multiplied his proxy revenues by his [REDACTED]% benchmark royalty rate
and then divided by the number of noninteractive proxy plays) SX RPFFCL
(to Services) ] 174. While it is true that Pandora Plus is not a
statutory service, the parties (including Pandora) have used it as a
proxy for such services in this proceeding, subject to adjustments for,
inter alia, differences in interactivity, if appropriate.\137\ Thus,
the appropriate response by the Services is not to urge the Judges to
reject outright this proxy-based analysis, but rather to: (1) Propose
proper adjustments that would purportedly align the benchmark proxies
to the statutory market; and/or (2) propose alternative benchmarks
(which the Services have done).
---------------------------------------------------------------------------
\137\ Further, if the Services wanted to avoid a per play rate
that would generate different effective percent-of-revenue royalty
rates for different entities, it could have proposed a percent-of-
revenue rate, either in its direct case or as a rebuttal to Mr.
Orszag's benchmark per play rate proposal. Instead, the Services,
like SoundExchange, propose only a per-play rate, that will also
necessarily generate different effective percent-of-revenue royalty
rates for different noninteractive services, depending upon their
revenues and play counts. Also, as discussed infra with regard to
Professor Shapiro's proposed additional (second) interactivity
adjustment, the record evidence does not demonstrate that the
Pandora Plus mid-tier service, priced at $4.99, is more valuable
downstream than a statutorily-compliant noninteractive service,
making Mr. Orszag's use of mid-tier services, Pandora Plus, iHeart
and Napster (Rhapsody), as proxies for revenue and play count-
purposes a reasonable modeling choice. See Orszag WDT ]] 176-179.
---------------------------------------------------------------------------
(3) Mr. Orszag Fails To Identify a Per-Play Rate That Adequately
Captures the Value of Individual Plays
Next, the Services assert that Mr. Orszag's reliance on a percent-
of-revenue centric benchmarking approach fails to adequately capture a
value attributable to each play of the sound recording, which is the
metric he proposes. Shapiro WDT ] 47. The Judges reject this criticism.
A fundamental rationale for Mr. Orszag's modeling approach, as the
Judges discussed above, is that the value to be generated in this
market for ``second copies'' of sound recordings lies not in the
recordings of songs whose marginal (non-opportunity) cost is zero and
whose marginal revenue is non-existent (because listeners do not pay
per song as with a juke box), but rather in the revenue derived from
subscribers (and advertisers in the ad-supported market). Thus, there
is no economic ``value'' inherent in the ``second copies'' of the sound
recordings from a marginalist perspective. Of course, there is
tremendous value in the sound recordings themselves, in terms of the
costs of artist discovery, development, recording and promotion, and--
not to be deemphasized--the entrepreneurial profit generated by
creating value through the assembly of such inputs. The record
companies recoup those costs, avoid opportunity costs and generate
profits by percent-of-revenue royalty pricing.
Thus, the Services' criticism of the fact that Mr. Orszag's
approach does not capture some hypothetical inherent value of a sound
recording is a red herring. Cf. Phonorecords III, 84 FR at 1931 n.64,
1946 n.110 (explaining why the existence of different pricing regimes
for the same music demonstrates the absence of an ``inherent value'' in
copies of musical works, notwithstanding the significant ``first copy''
value of musical works).
(4) Mr. Orszag's Rate Is Far Above the Present Statutory Rate
The Services note that Mr. Orszag's $0.0033 proposed benchmark rate
is
[[Page 59500]]
almost 50% above the statutory rate the Judges set in Web IV
(originally $0.0022, now $0.0023 as adjusted for inflation)--using the
same benchmarking approach Mr. Orszag claims to be following now. This
substantial divergence is anomalous, according to the Services, and
serves as a ``red flag'' that Mr. Orszag's methodology departs
significantly from Web IV. See 8/19/20 Tr. 2896-97 (Shapiro).
The Judges find this criticism wholly unpersuasive. Each rate case
is a de novo proceeding, based upon the contemporaneous circumstances
in the relevant markets (benchmark and target) as demonstrated by the
record evidence. Cf. Phonorecords III, 84 FR at 1944 (``The statute is
plain in its requirement that the rates be established de novo each
rate period''). There is no a priori reason why the rate in Web V
should bear any particular relationship to the rate in Web IV.
Moreover, this assertion appears self-serving because, as SoundExchange
notes, Professor Shapiro advocates for a subscription royalty rate
between $0.0005 and $0.0016, far below the current Web IV rate. Shapiro
WDT at 2.
(5) Mr. Orszag's Proposed $0.0033 Per-Play Rate [REDACTED] Than the
Effective Rate Paid by His Mid-Tier Proxies
Next, the Services assert that Mr. Orszag's use of the three mid-
tier proxies to generate his $[REDACTED] per-play rate [REDACTED] than
the $[REDACTED] effective per-play rate actually paid by mid-tier
services under the applicable percent-of-revenue rate. Shapiro WDT at
37-39 & tbl.9; 8/12/20 Tr. 1564-65 (Orszag); Orszag WDT ]] 84-85; 8/13/
20 Tr. 1958-59 (Orszag).
The Judges find this argument unpersuasive. For the Judges to make
a meaningful comparison of Mr. Orszag's proposed rate and the effective
rates paid by mid-tier services, they would need evidence that sheds
light on how those effective rates had been calculated from the actual
percent-of-revenue rates (or other rate tiers) applicable to those mid-
tier services. The Judges find that the record does not provide a basis
to make such an examination.
(6) Mr. Orszag's Benchmark Interactive Rates [REDACTED] but He Proposes
an Increase in the Statutory Noninteractive Rate
The Services criticize Mr. Orszag for--on the one hand--noting that
benchmark interactive rates [REDACTED] while--on the other hand--
calling for a significant increase in the noninteractive subscription
royalty rate. But the Judges find that this reveals no ipso facto
inconsistency. Factors particular to the noninteractive market could
cause the rate in that market to increase and converge with the
subscription interactive rate, which could be falling. Additionally,
SoundExchange notes that the operative marketplace metric in the
benchmark interactive market changed from the per-play metric to the
percent-of-revenue measure from the Web IV to the Web V period.\138\
Thus, Mr. Orszag (who was not a witness in Web IV) has relied on new,
contemporaneous material to generate his opinion regarding changes in
the market. The Judges find that the deviation between his proposed
rate arising from his expert analysis, and the prior rate, does not
raise a concern.
---------------------------------------------------------------------------
\138\ The Judges discuss the significance of that change supra,
section IV.B.1.e.ii.
---------------------------------------------------------------------------
(7) Mr. Orszag's Exclusion of Revenues and Royalties From Discount
Plans in His Calculation of Inputs [A] and [B] in His Ratio Equivalency
Model
The Services assert that Mr. Orszag errs in excluding discount
plans from his ratio equivalency model. SoundExchange responds by
noting that the interactive services--Spotify in particular--engage in
[REDACTED] discounting/price discrimination than the noninteractive
services (or [REDACTED] in the model), such that including discount
plans would fail to generate an apples-to-apples comparison. Orszag WRT
]] 83, 87; 8/11/20 Tr. 1215 (Orszag).
This is essentially the reciprocal of SoundExchange's criticism of
Professor Shapiro's inclusion of discount plans in calculating [B], his
percent-of-revenue rate in the benchmark market (en route to a per-play
rate in that market). Here, the Judges find no sufficient reason for
Mr. Orszag's exclusion of discount plan royalty and revenue data from
his calculation of [A] (his total revenue input) and [B] (his total
royalty input (en route to his percent-of-revenue rate in the benchmark
market). As the Judges explained in connection with the reciprocal
argument pertaining to Professor Shapiro's inclusion of such data,
because the statutory rate will apply to all plays across all plans the
per-play rate should be derived from data across all plans.
But SoundExchange makes a point that at first blush is anomalous:
It notes that, had Mr. Orszag included discounted plans in his
analysis, the [REDACTED]% percent-of-revenue rate he calculates would
have increased to [REDACTED]%, Orszag WRT ] 89 n.198.\139\ This has the
effect, Mr. Orszag notes, of increasing the royalty rate in his
benchmark interactive market from $0.0033 to $0.0035. Orszag WRT ] 89 &
n.198; see also SX PFFCL ]] 95-96. Moreover, the Services expressly do
not dispute that their criticism in this regard causes Mr. Orszag's
benchmark rate to increase. See Services RPFFCL ]] 95-96.
---------------------------------------------------------------------------
\139\ Because the percent-of-revenue rate is [REDACTED]%, the
[REDACTED]% rate which is inclusive of discount plans necessarily
includes royalties that were paid on other prongs in the [REDACTED]
in Spotify's license agreement. In fact, Mr. Orszag's calculation of
a [REDACTED]% ``undiscounted plan'' royalty rate (rather than
exactly [REDACTED]%) likewise suggests that Spotify paid [REDACTED].
---------------------------------------------------------------------------
So, why did SoundExchange decline to include the discounted plans
in its analysis? As noted above, Mr. Orszag claims that he ignored
discount plan data because the target mid-tier [REDACTED] service has
far fewer discount subscribers, and he wants to make an apples-to-
apples comparison. But the clear appropriateness of including discount
plan data, together with the fact that including such data would have
been significantly in SoundExchange's interest, makes its decision to
exclude discount plan data something of a mystery, to say the least.
To wrap this mystery in an enigma, the Services continue their own
apparent self-destructive argument, asserting that (1) the
noninteractive market indeed offers a wide array of subscription plan
discounts, including in particular SiriusXM's internet service, and (2)
in any event, no economic principle supports Mr. Orszag's requirement
of this particular apples-to-apples approach. See Services RPFFCL ]]
93-94. Perplexingly (at least initially), SoundExchange still declines
to forego this argument and declare victory, and simply accept the
higher [REDACTED]% rate arising from the Services' criticism.\140\
Likewise, the Services refuse to ``let sleeping dogs lie'' and stop
arguing against themselves for an analysis that generates a rate of
[REDACTED]%--which is [REDACTED]% above [REDACTED]%.
---------------------------------------------------------------------------
\140\ The difference between these rates is certainly not de
minimis. SoundExchange argues, for example, that the [REDACTED] paid
by Spotify to the Majors in their most recent contracts, from
[REDACTED]% to [REDACTED]%, reflects [REDACTED] in the competitive
nature of the upstream interactive market.
---------------------------------------------------------------------------
One may reasonably inquire: What is going on here? \141\ Why the
facial
[[Page 59501]]
anomaly of SoundExchange advocating for the lower [REDACTED]% of
revenue rate and the Services arguing for the higher [REDACTED]%? The
answer appears to lie in the fact that, under Professor Shapiro's
approach, the higher royalty total in the benchmark market must be
divided by the number of plays by subscribers. When Spotify's discount
plans are included, the percentage increase in the total number of
plays (the denominator) [REDACTED] than the percentage increase in
royalties (the numerator). It appears to the Judges that Mr. Orszag and
SoundExchange were willing to sacrifice applying the [REDACTED]% of
revenue percentage that would have increased their proposed per-play
rate to $0.0035, in order to avoid relying on discount plans whose
inclusion would bolster Professor Shapiro's model that includes
discount plan play counts which thus decreases the per-play rate in the
benchmark market. Conversely, Professor Shapiro and the Services were
willing to acknowledge that if Mr. Orszag had included discount plans
in his model, and the Judges fully applied his approach, they risked a
higher statutory rate of $0.0035 per play. But the Services were
apparently willing to take that risk, in order to bolster their general
position that discount plan data be included, a position that, if
adopted by the Judges, would add evidentiary weight to Professor
Shapiro's model. In sum, it seems to the Judges that a good dose of
game theory motivated the litigation strategy of the parties.
---------------------------------------------------------------------------
\141\ See John Kay & Mervyn King, Radical Uncertainty at 10
(2020) (Two prominent economists, John Kay and Mervyn King, note:
``The question `What is going on here?' sounds banal, but it is not.
. . . [R]epeatedly . . . people immersed in technicalities . . .
have failed to stand back and ask, `What is going on here?''')
---------------------------------------------------------------------------
As discussed supra in connection with Professor Shapiro's
benchmark, the Judges find that all revenues, royalties and plays,
regardless of whether they are generated via discounted or undiscounted
plans, must be included in the benchmarking analyses. That means Mr.
Orszag's benchmark of $0.0033 in fact should be increased to $0.0035
when all discounted revenues, royalties and plays are included.\142\
Likewise, that means that Professor Shapiro's benchmark (interactive)
effective per-play rate likewise properly considers all revenues,
royalties and plays in that market. See Pandora/Sirius XM PFFCL ] 186
n.19 (``The effective per-play rate for all plans, as calculated by
Professor Shapiro ($[REDACTED]), is [REDACTED] than the per-play rate
for solely full-priced plans ($[REDACTED]).'').\143\
---------------------------------------------------------------------------
\142\ The Judges could leave Mr. Orszag's proposed rate at
$0.0033 per play, because he never revised his opinion to propose
such a rate. However, the Judges take note that (as stated supra)
the Services do not dispute the fact that including discount plans
raise the per-play rate in Mr. Orszag's modeling to $0.0035.
Further, because the Judges are including discounted plan data in
Professor Shapiro's modeling in that it makes economic sense to do
so, the Judges find it is their obligation under the section 114
rate setting standard to utilize consistent economic analysis when
evaluating Mr. Orszag's proposed rate model and resultant rates,
when, as here, there is an evidentiary record to support such
consistency.
\143\ These per-play differences indicate the monetary impact of
SoundExchange's exclusion of discount plans, even though they
increased Mr. Orszag's proposed statutory rate from $0.0033 to
$0.0035. That is an increase of 6.1%. However, if discount plans
were likewise excluded from Professor Shapiro's analysis, his
effective per-play rate would be reduced from $[REDACTED] to
$[REDACTED], a decrease of [REDACTED]%. These per-play differences
likewise explain why the Services wanted to include discount plans,
because that inclusion (compared to full price plans only) reduced
Professor Shapiro's benchmark rate [REDACTED] Mr. Orszag's benchmark
rate. Assuming quite reasonably that neither SoundExchange nor the
Services could predict with any certainty which of the two benchmark
approaches the Judges were more likely to adopt (if either), or in
what proportions, it made rational sense for them to make their best
prediction of the outcome and then choose the approach to the
discount plan inclusion/exclusion issue based on which position
maximized their litigation return. If that is not what they did,
then the Judges are left with the absurdity of both parties arguing
against their interests, even after the issue had been joined in the
proceeding.
---------------------------------------------------------------------------
v. Explicit Adjustments to the Subscription Benchmarks of Professor
Shapiro and Mr. Orszag
Having considered the structures of the benchmarking and ratio
equivalency models of Mr. Orszag and Professor Shapiro, and having
considered the granular criticism of their respective applications of
their models, the Judges now turn their attention to the choices made
by these experts regarding whether to apply any additional, explicit
adjustments to the subscription rates they derive from their models.
And, if the Judges find that any additional adjustments are warranted,
they determine the size of any such adjustment.
(A) Professor Shapiro's Proposed Second Interactivity Adjustment
Professor Shapiro's first interactivity adjustment is discussed
supra, as it is part and parcel of his ratio equivalency model. But
Professor Shapiro also proposes a second additional (i.e., cumulative)
interactivity adjustment, to be added on to his first interactivity
adjustment.
According to Professor Shapiro, his first interactivity adjustment,
while necessary, is not sufficient. The insufficiency arises, he
asserts, because the mid-tier services that he utilizes to identify a
retail price ([C] in his model) are not statutory noninteractive
services. Rather, as mid-tier subscription services, they offer limited
interactivity, at a full retail price of $4.99 per month. Shapiro WDT
at 37-38, tbl.9; 8/19/20 Tr. 2828 (Shapiro). Thus, Professor Shapiro
proposes an additional second ``interactivity adjustment, which he
avers is necessary to fully adjust for the difference between the value
of a fully interactive service ([A] in his model) and a statutorily-
compliant noninteractive service.
In support of this further adjustment, Pandora asserts that the
general purpose for making an ``interactivity adjustment'' is to
reflect the incremental downstream market value generated by
interactive functionality. Pandora/Sirius XM PFFCL ] 188 (citing
Shapiro WDT at 38-39, 42; 8/12/20 Tr. 1505-10 (Orszag). Professor
Shapiro claims that his first interactivity adjustment follows the Web
IV approach by identifying the ratio of: (1) Subscription retail prices
for his selected interactive services (identified above) to (2)
subscription retail prices for his selected target market, the mid-tier
services (also identified above). Shapiro WDT at 37-38 & tbl.9; 8/19/20
Tr. 2828 (Shapiro); see also Web IV, 81 FR at 26348. The average
monthly full subscription price of the interactive services he reviewed
was $9.99. The average monthly subscription price of the mid-tier
services he reviewed was $4.99. Thus, the ratio of [A]:[C] is 2:1.
Shapiro WDT at 37-39; 8/19/20 Tr. 2828 (Shapiro).
But because that first (implicit) interactivity adjustment
measures--at the retail level ([A]/[C])--the difference in the value of
interactivity to consumers between a fully interactive service and a
partially interactive (mid-tier) service, Professor Shapiro asserts
that a second interactivity adjustment is necessary--to measure the
value of the further difference between mid-tier level interactivity
and a noninteractive (statutory) service. Shapiro WDT at 38-39; 8/19/20
Tr. 2830-33 (Shapiro).
However, unlike with his first interactivity adjustment, Professor
Shapiro does not measure the difference in value by identifying a
difference in the downstream market between the (unregulated) retail
values of: (1) The mid-tier limited interactive subscription services
and (2) a measure of statutorily-compliant noninteractive subscription
services. Instead, Professor Shapiro examines the upstream market,
comparing: (1) The effective per-performance royalty paid by consumers
for his selected mid-tier subscription services, $[REDACTED]; to (2)
the 2019 statutory royalty for noninteractive services, $0.0023, which
was the most recent inflation-adjusted rate established by Web IV.
Shapiro WDT at 37-39 & tbl.9. According to Professor Shapiro, using
this upstream royalty
[[Page 59502]]
differential is actually more direct than using the downstream retail
price differential as a proxy for upstream value, because the purpose
of the analysis is to determine the value of interactivity within the
licensed rights in the upstream market. 8/19/20 Tr. 2830-32 (Shapiro).
Thus, Professor Shapiro's additional interactivity analysis results in
a further adjustment, reducing his proposed statutory royalty (before
any additional adjustments) by an additional [REDACTED]%. Shapiro WDT
at 39.\144\
---------------------------------------------------------------------------
\144\ $[REDACTED]-$[REDACTED] = [REDACTED]. This royalty
difference, in percentage terms, is [REDACTED]% (rounded), i.e.,
$[REDACTED]/$[REDACTED]. Professor Shapiro expresses this royalty
difference, equivalently, as the ratio of $[REDACTED] / $[REDACTED]
= [REDACTED]:1 ([REDACTED] / [REDACTED] = [REDACTED] (rounded), and
[REDACTED]-[REDACTED] = [REDACTED], or [REDACTED]%).
---------------------------------------------------------------------------
Professor Shapiro further asserts that this second interactivity
adjustment is consistent with the express language in Web IV. There,
the Judges relied on the ``ratio equivalency'' argument proffered by
SoundExchange's economic expert, Professor Rubinfeld. As with Professor
Shapiro's approach, Professor Rubinfeld first compared ratios of
interactive services to limited interactive services. The Judges
utilized the implicit first adjustment discussed above. But
additionally, as Professor Shapiro notes, the Judges found that
Professor Rubinfeld should have made this second adjustment, if
sufficient data was in evidence, to account for the different value of
interactivity in the limited interactive market and the statutorily-
compliant noninteractive market. Shapiro 8/19/20 Tr. 2832-33 (Shapiro).
Relying on the foregoing point from Web IV, Professor Shapiro then
combines his 2:1 initial interactivity adjustment--reducing the
effective royalty rate he had derived from the interactive market,
$[REDACTED] by 50%, down to $[REDACTED]--and then further reducing that
rate by an additional [REDACTED]% pursuant to his second interactivity
adjustment, down to $[REDACTED]).\145\
---------------------------------------------------------------------------
\145\ $[REDACTED] x [REDACTED] = $[REDACTED] (rounded up from
$[REDACTED]).
---------------------------------------------------------------------------
SoundExchange does not disagree with Professor Shapiro's assertion
that a benchmark model consistent with Web IV requires an interactivity
adjustment. However, SoundExchange avers that Mr. Orszag's model, which
it contends is more faithful to the Web IV approach, properly adjusts
implicitly for the value of interactivity (as discussed infra). SX
PFFCL ] 100.
SoundExchange argues that Professor Shapiro's second interactivity
adjustment is improper.\146\ SoundExchange bases this argument on two
assertions. First, SoundExchange notes that the additional
functionality of the Pandora Plus mid-tier service (compared to the
previous Pandora One statutory subscription service) [REDACTED],
precluding reliance on a royalty rate nominally attached to a
particular tier of service within that bundle. SX PFFCL ] 155 (and
record citations therein). SoundExchange asserts that the [REDACTED] is
confirmed by a Pandora executive, who testified that the purpose of
this increased functionality in the mid-tier subscription service
(compared with the noninteractive functionality of the former statutory
subscription service) was to ``creat[e] additional opportunities to
upsell subscribers over time to Pandora Premium.'' Phillips WDT ] 22.
Accordingly, SoundExchange avers that Pandora's WTP $[REDACTED] for
mid-tier functionality does not represent an unambiguous measure of the
marginal value to Pandora of such functionality, but rather reflects,
or certainly includes, the value of the mid-tier service as a marketing
tool. Also, SoundExchange--relying on testimony from Professor
Shapiro--speculates that [REDACTED]. SX RPFFCL (to Pandora/Sirius XM) ]
197 (citing 8/19/20 Tr. 2962 (Shapiro)).
---------------------------------------------------------------------------
\146\ SoundExchange also contends that Professor Shapiro's first
interactivity adjustment, implicit in his model, is improperly
inflated because Professor Shapiro (consistent with Web IV) utilizes
only full retail value for [A] and [C] to identify his 2:1
interactivity ratio (as had been calculated in Web IV). Instead,
SoundExchange avers that Professor Shapiro should have used the
overall ARPU attributable to all retail plans, including the
discount plans, which would have been lower than the average retail
prices, especially in the interactive benchmark market (input [A] in
the model). The Judges have discussed this issue in detail supra,
section IV.B.1.d, in connection with SoundExchange's criticism of
Professor Shapiro's selection of values for [A] and [C]. As
explained there, the Judges ruled at the hearing that SoundExchange
had failed to timely raise this issue, as required, in its written
rebuttal statement and included rebuttal testimonies, and that it
therefore constituted delinquent and improper ``new analysis.''
Further, the Judges noted that the evidence in the hearing was
inconclusive as to how ARPU is measured in the industry, and that
the several ARPU values mentioned in other contexts were not
sufficient to support the ``new analysis'' the Judges declined to
admit into the record at the hearing.
---------------------------------------------------------------------------
SoundExchange also emphasizes that the retail monthly subscription
price for the Pandora Plus mid-tier service is $4.99--the same price as
Pandora charged for its predecessor Pandora One statutory service.
Phillips WDT ]] 18, 20; Orszag WDT ] 179; 8/19/20 Tr. 2960 (Shapiro).
SoundExchange relies further on Professor Shapiro's testimony to assert
that the absence of an increase in this subscription price demonstrates
the absence of a marginal increase in market value from the additional
mid-tier functionality, given that, under Web IV, the upstream demand
for licensed interactivity is a ``derived demand,'' i.e., it is a
function of downstream retail demand. 8/19/20 Tr. 2959-2960 (Shapiro)
(``[T] this is derived demand. Since we're talking about the
subscription side, it would be based on the customers who were paying,
the subscribers.'').
Pandora has a different explanation of how the concept of ``derived
demand'' affects this second interactivity issue. Pandora asserts that
it had anticipated, ex ante the Pandora Plus offering, that an increase
in the downstream value of that service would be reflected in an
increase in the quantity of Pandora Plus (mid-tier) subscriptions
compared with the quantity of Pandora One (noninteractive)
subscriptions, as Pandora maintained the $4.99 monthly subscription
price. SoundExchange discounts the economic value of this argument,
asserting that only an increase in revenue per play unit--not a
potential increase in total revenue--is probative of an increase in the
value of the increase in licensed functionality. Orszag WDT ] 179
(``[T]here is no reason to think that the difference in functionality
between Pandora One and Pandora Plus changed the amount of revenue per
play . . . .''); 8/12/20 Tr. 1574 (Orszag) (``[T]he right question then
to ask is: Was there a change in revenue per-play?'').
The Judges find Professor Shapiro's attempt to make a second
interactivity adjustment inappropriate. They find compelling the fact
that the mid-tier retail $4.99 monthly subscription price was unchanged
from the monthly price for Pandora's prior statutorily-compliant
service (Pandora One). Also, the Judges find unwarranted Professor
Shapiro's reliance on the difference between the effective per-play
upstream royalty rate Pandora agreed to pay ($[REDACTED]) for its mid-
tier Pandora Plus service and the statutory royalty rate of
$[REDACTED]. The interactivity adjustment as described in Web IV
reflects differences in retail prices ([A] and [C]) in the ratio
equivalency model), not upstream royalty rates. As SoundExchange
correctly notes, those upstream rates can be affected by the fact that
they are set in a contract that [REDACTED]. Further, as Professor
Shapiro conceded in a colloquy with the Judges during the hearing, the
$[REDACTED] effective per-play rate--by Professor Shapiro's own
conception
[[Page 59503]]
of the Majors' complementary power--could also embody a premium for
that market power. 8/19/20 Tr. 2838-39 (Shapiro) (``it's true that we
might be getting a measure that is somewhat inflated [in] comparison
[with] if there were more competition to offer those rights . . . .
[Y]ou might want to give [the second interactivity adjustment] a
haircut if you thought it was infected by complementary oligopoly power
. . . .''); see also 8/25/20 Tr. 3644-46 (Peterson) (witness unable to
preclude that the upstream royalty premium includes a market power
effect that he treats as an interactivity value). However, Professor
Shapiro did not parse the $[REDACTED] rate to separate out this
additional factor. In similar fashion, Professor Shapiro does not
consider the extent to which the mid-tier services allow subscribers
unlimited skips (plays of less than thirty seconds) for which no
royalty is owed, unlike statutory noninteractive services (as discussed
infra). Because the Judges are making separate adjustments for
effective competition (to curtail the effect of the Majors'
complementary oligopoly power) and for skips, Professor Shapiro's
second interactivity adjustment could double-count those adjustments,
as Professor Shapiro acknowledged in his colloquy with the Judges,
quoted above.\147\
---------------------------------------------------------------------------
\147\ Although it might be possible to adjust the $[REDACTED]
royalty rate to parse the effective competition and skips values
therein, Professor Shapiro did not do so at the hearing, and, in
fairness to SoundExchange, the Judges find in the exercise of their
discretion that it would be unreasonable for the Services or the
Judges, sua sponte, to attempt to make these adjustments, post-
hearing, in this Determination. See Johnson v. Copyright Board, 969
F.3d 363, (2020) (parties must be provided adequate notice of issues
to be considered and resolved at the hearing, to ``ensure[] that
agencies provide a fair process in which each party is able `to
present its case or defense . . ., to submit rebuttal evidence, and
to conduct such cross-examination as may be required for a full and
true disclosure of the facts' that bear on the agency's decision and
choices.'') (internal citation omitted).
---------------------------------------------------------------------------
Further, the second interactivity adjustment mentioned in Web IV,
on which Professor Shapiro relies, did not provide for an adjustment
based on an increase in the number of subscriptions sold and the
increased revenue that may have resulted from those additional
subscriptions. And, whether Pandora believed ex ante that it might
generate additional revenue, or whether ex post some additional revenue
may have been generated, there is no support for incorporating these
revenue metrics into a model predicated on downstream retail
prices.\148\
---------------------------------------------------------------------------
\148\ Professor Shapiro's attempt to rely on increases in
revenues to support his second interactivity adjustment to his ratio
equivalency adjustment appears to be inconsistent with his criticism
of Mr. Orszag's reliance on a revenue-based application of the ratio
equivalency model. Additionally, there is nothing in the record
sufficient to indicate how any estimated increase in subscriptions
(and thus revenues) generated by the mid-tier Pandora Plus service
would impact the value of [C], given the inadequacy (discussed
above) of simply applying the difference in upstream effective per-
play royalty rates.
---------------------------------------------------------------------------
Accordingly, the Judges shall not make this second interactivity
adjustment.\149\
---------------------------------------------------------------------------
\149\ Because the Judges reject Pandora's proposed second
interactivity adjustment on other grounds, they do not address
SoundExchange's argument that, because the mid-tier rate [REDACTED],
the mid-tier rate cannot be examined in isolation.
---------------------------------------------------------------------------
(B) Professor Shapiro's Proposed Skips Adjustment
Professor Shapiro also proposes to apply a skips adjustment to his
benchmark subscription rate. The skips adjustment, he avers, is
necessary to account for the fact that [REDACTED], by contrast,
noninteractive services do not have the right to avoid paying royalties
for plays under thirty seconds under the Copyright Act. Shapiro WDT at
39. This difference in what constitutes a royalty-bearing play results
in a [REDACTED] calculated per-play rate for on-demand services (who
pay on a [REDACTED]) than for statutory services (who must pay for all
plays). Peterson WDT ] 67.
In Web IV, as Professor Shapiro notes, the Judges applied a skips
adjustment to correct for this disparity. Web IV, 81 FR at 26350-51,
26639; 8/19/20 Tr. 2847 (Shapiro). Moreover, the need to account for
the play count differential in the benchmark and target markets is not
disputed in this proceeding. 8/11/20 Tr. 1191 (Orszag); 8/25/20 Tr.
3632 (Peterson).
Applying the most current data for Pandora, Professor Shapiro
determines that performances of less than 30 seconds constitute about
[REDACTED]% of total performances. Shapiro WDT at 39. Accordingly,
given Professor Shapiro's royalty rate of $[REDACTED], which includes
the first interactivity adjustment (but not the second interactivity
adjustment rejected by the Judges supra), this skips adjustment would
reduce that rate by [REDACTED]%.
SoundExchange questions the data on which Professor Shapiro relies
in making his skips adjustment. Specifically, it notes that the data he
uses to calculate this [REDACTED]% skips adjustment applies to
noninteractive plays that were available on all three tiers of
Pandora's service--ad-supported, mid-tier and fully interactive. See 8/
20/20 Tr. 3028-29 (Shapiro). According to Mr. Orszag, this multi-tier
sourcing of the skips data indicates that the Pandora skips rate is
probably overstated. He bases this conclusion on the fact that the
subscription tiers (Plus and Premium), unlike statutory services,
provide their subscribers with unlimited skips, likely resulting in
subscribers to those tiers skipping more songs. Orszag WRT ] 120.
SoundExchange notes that Professor Shapiro agrees. See 8/20/20 Tr.
3030-32 (Shapiro).
In rebuttal, Professor Shapiro characterizes this issue as
overblown, because [REDACTED]. Specifically, Pandora Plus and Pandora
Premium have [REDACTED] and [REDACTED] subscribers, respectively, out
of a total of [REDACTED] Pandora listeners. The remaining [REDACTED]
listeners access Pandora Free. 8/20/20 Tr. 3031-32 (Shapiro); Phillips
WDT ]] 5, 20-21. Accordingly, Professor Shapiro characterizes the
number of noninteractive skips occurring on the subscription tiers is
[REDACTED].
SoundExchange counters this point by noting that, although the
impact of [REDACTED], Professor Shapiro nonetheless fails to measure
this effect and reduce his skips adjustment accordingly. Conversely,
the Services attack SoundExchange's criticism as being speculative and
devoid of empirical support. The Judges find that, although there is no
dispute that [REDACTED], SoundExchange does not bear the burden of
quantifying, or at least estimating, the impact of the fact that
listeners on the subscriber tiers would generate some of the reported
skips. That is, because the adjustment is proffered by the Services,
there is no apparent reason why SoundExchange should be required to
assume the burden of proving the extent of the adjustment.
At a minimum, it is certainly reasonable, based on the record of
the number of users and subscribers across Pandora tiers, as set forth
above, that the percentage of skips would approximate the percent of
Pandora customers who comprise the subscription tiers. That percent is
[REDACTED]% ([REDACTED] / [REDACTED]).\150\ Applying this [REDACTED]%
reduction in the [REDACTED]% the skips adjustment
[[Page 59504]]
proffered by Professor Shapiro reduces that skips adjustment to
[REDACTED]% (i.e., [REDACTED] x ([REDACTED]-[REDACTED]) = [REDACTED]
(rounded to [REDACTED]%). Thus, Professor Shapiro's proposed royalty
rate, incorporating his first interactivity adjustment (but rejecting
the second), of $[REDACTED], needs to be reduced by [REDACTED]% to
$[REDACTED] (i.e., $[REDACTED] x (1-[REDACTED]), which rounds to
$[REDACTED] per play.
---------------------------------------------------------------------------
\150\ The percentage of noninteractive skips attributable to
subscribers might be higher than this percent, because subscribers
have unlimited skips, but that percentage might also be lower,
because subscribers have revealed a preference (by paying to
subscribe) for utilizing on-demand features rather than
noninteractive features. Thus, utilizing the relative percentages of
subscribers is a reasonable middle ground for this small difference,
and is certainly preferable to disregarding the skips adjustment in
its entirety, when it is undisputed that such an adjustment is
necessary.
---------------------------------------------------------------------------
This $[REDACTED] per-play rate does not include an adjustment to
generate a rate that offsets the Majors' complementary oligopoly power,
in order to reflect a market that is effectively competitive. The
Judges turn next to that adjustment.
(C) Professor Shapiro's Proposed Effective Competition Adjustment
Before considering Professor Shapiro's proposed ``effective
competition'' adjustment, it is instructive to recall the Judges'
separate detailed analysis \151\ of the effective competition issue and
the associated necessary adjustments. To summarize, the Judges offset
the 12% effective competition adjustment by an appropriate portion of
the [REDACTED] in the effective royalty rate (from [REDACTED]% to
[REDACTED]%) that [REDACTED] \152\ [REDACTED] for any analysis in which
Spotify is the benchmark or ratio equivalency comparator. If the
benchmark is the interactive market as a whole, then the Judges apply
the 12% effective competition adjustment, minus ([REDACTED]% x the
market revenue share attributable to [REDACTED] x the share of their
royalties paid at or about the [REDACTED]%-of-revenue level).
---------------------------------------------------------------------------
\151\ See supra, section III.
\152\ SoundExchange asserts that [REDACTED]% of revenue after
Spotify obtained that [REDACTED]. However, there is insufficient
detail in the record relating to [REDACTED]'s negotiations with the
Majors, the overall structure of its rates and which tiers of
service pay which rates. (In fact, there is evidence that [REDACTED]
continues to pay royalties at a rate of [REDACTED] percent-of-
revenue. Peterson WRT, tbl.5). Thus, the Judges do not lump the
Apple royalty rate together with the Spotify rate, but they do
include [REDACTED]'s data in connection with Professor Shapiro's
overall industry data.
---------------------------------------------------------------------------
But Professor Shapiro proposes a different effective competition
adjustment for his subscription benchmark.\153\ As his ``alternative
market-power adjustment,'' Professor Shapiro compares the royalty rate
paid by [REDACTED] for its [REDACTED]. He relies on this comparison
because of what he understands to be an important difference between
the [REDACTED]: Whereas most interactive subscription services have a
repertoire of approximately [REDACTED] songs they make available to
subscribers, [REDACTED] subscribers have access to [REDACTED] songs.
Given this disparity, Professor Shapiro opines that for [REDACTED]
listeners the full repertoires of each Major are not ``Must Haves,''
because customers do not expect to find all their favorite artists and
recordings on [REDACTED] as they would with a standalone interactive
subscription service. Shapiro WDT at 37-40.
---------------------------------------------------------------------------
\153\ Professor Shapiro proffers an identical effective
competition adjustment for his subscription benchmark rate and his
ad-supported rate. Because he presents his ad-supported first in his
WDT, he essentially incorporates by reference his ad-supported
effective competition adjustment. The text immediately following
this footnote, is based on Professor Shapiro's substantively
identical effective competition adjustment to his ad supported
benchmark rate.
---------------------------------------------------------------------------
Professor Shapiro then takes note that the per-performance royalty
rate paid by [REDACTED] for its [REDACTED] service is significantly
below the general effective rate for interactive services.
Specifically, he relies on the fact that the effective rate for
[REDACTED] is $[REDACTED] cents per play, compared with the $[REDACTED]
per-play effective rate for other interactive services. Relying on this
difference, Professor Shapiro computes the ratio of the two rates--
$[REDACTED]/$[REDACTED], which yields his proposed adjustment factor of
[REDACTED]1, implying an effective competition adjustment of
[REDACTED]%.\154\Id.
---------------------------------------------------------------------------
\154\ The [REDACTED]:1 factor implies a percentage difference in
the two rates of [REDACTED]%. The rate differential is thus 1-
[REDACTED] = [REDACTED]. Thus, Professor Shapiro's proposed
effective competition adjustment is [REDACTED]% (rounded).
---------------------------------------------------------------------------
SoundExchange asserts that Professor Shapiro's subscription
benchmark should not be reduced by an effective competition adjustment.
It notes Professor Shapiro's characterization of [REDACTED]'s effective
per-play rate of $[REDACTED] as an effectively competitive rate.
SoundExchange finds this assertion particularly important because that
rate is essentially identical to Spotify's effective per-play rate on
its subscription service of $[REDACTED] per play.\155\ See SX PFFCL ]]
483-489 (and record citations therein). Moreover, SoundExchange
emphasizes that Professor Shapiro himself concedes that the effective
rate for Spotify's subscription service, in his opinion, is ``the upper
bound for a competitive rate.'' 8/20/20 Tr. 3116-17 (Shapiro).
---------------------------------------------------------------------------
\155\ Spotify avers that, at most, a downward effective
competition adjustment of approximately [REDACTED]% would be
warranted for Professor Shapiro's benchmark, reflecting the
difference between the $[REDACTED] ([REDACTED]) and $[REDACTED]
([REDACTED]) rates. SX PFFCL ] 487.
---------------------------------------------------------------------------
Separate and apart from the foregoing issue, SoundExchange asserts
that the [REDACTED] royalty rate is an inappropriate input for
computing an effective competition adjustment. Specifically,
SoundExchange argues that [REDACTED]'s royalty rate is [REDACTED]
because: (1) [REDACTED] offers listeners only a limited number of new
releases,\156\ (2) [REDACTED], and (3) [REDACTED]. Orszag WRT ] 112;
Trial Ex. 5610 ]] 6-7, 9 (WRT of Aaron Harrison).
---------------------------------------------------------------------------
\156\ SoundExchange notes that Professor Shapiro concedes it
would be reasonable to reduce his [REDACTED]-based effective
competition adjustment to reflect [REDACTED]'s possibly [REDACTED]
have access. 8/20/20 Tr. 3120 (Shapiro).
---------------------------------------------------------------------------
In response, Pandora concedes that the use of [REDACTED] for this
comparative analysis is not ``perfect,'' but asserts that benchmarking
exercises are fraught with inherent complexities, and thus rarely meet
that standard. Pandora also seeks to dismiss the defects in this aspect
of its benchmarking exercise by noting that Mr. Orszag failed to
identify the need for an effective competition adjustment. Pandora/
Sirius XM PFFCL ] 219. These arguments are meritless. Although the
Judges disagree with Mr. Orszag regarding the need for this adjustment,
his opinion in no way serves to support Pandora's reliance on
[REDACTED]'s rate to propose a [REDACTED]% effective competition
adjustment, which must succeed or fail on its own merits. And the
acknowledgement by Pandora that this benchmarking exercise is less than
perfect simply begs the question of whether it is so imperfect as to be
given no weight in the Judges' benchmarking analysis.
With regard to the substantive merits of Professor Shapiro's
proposed adjustment, Pandora does not deny that he acknowledges that
his adjustment could reasonably be [REDACTED], particularly the
[REDACTED]. However, Pandora chastises Mr. Orszag for failing to
quantify the effect of the limited catalog. The Judges find Pandora's
response unavailing. Because it is Professor Shapiro who proffers
[REDACTED] as a comparator for effective competition purposes, Pandora
and he bear the burden of producing evidence that this limited service
serves the purpose for which Professor Shapiro intends.
Pandora also asserts that [REDACTED]'s commercial presence--
[[Page 59505]]
despite its limited repertoire--confirms that the catalogs of all
Majors are not ``Must Haves,'' which is why its effective per-play rate
is [REDACTED] $[REDACTED]. 8/20/20 Tr. 3119 (Shapiro). The Judges
disagree. [REDACTED]'s limited repertoire is more suggestive to the
Judges of a significantly differentiated service compared to other
interactive services and to noninteractive services. Because [REDACTED]
is offered for [REDACTED], and does not accept advertising, it is
relatively unique.\157\ There is no sufficient evidence in the record
indicating that a subscription or ad-supported music service
(interactive or noninteractive) could survive commercially if it
operated with [REDACTED]'s limited repertoire.
---------------------------------------------------------------------------
\157\ In fact, [REDACTED]'s availability to all [REDACTED]
suggests it is offered as a sort of ``loss-leader,'' rather than as
a stand-alone downstream source for direct monetization.
---------------------------------------------------------------------------
Additionally, the Services make no response to SoundExchange's
contention that [REDACTED] receives a lower rate because it serves as a
funnel, converting [REDACTED] listeners to [REDACTED] subscribers. The
absence of a Services' response is especially relevant because, as
discussed infra, Professor Shapiro agreed that the funneling/conversion
capacities of another interactive service, Spotify, need to be taken
into account when using Spotify's royalty rates (in the ad-supported
market) as a benchmarking input.\158\
---------------------------------------------------------------------------
\158\ The Judges agree with the Services that SoundExchange's
claim that Amazon had relatively greater bargaining leverage (as the
record companies' primary physical product distributor) is belied by
the [REDACTED] $[REDACTED] per-play royalty rate for [REDACTED]. See
Shapiro WDT at 42 tbl.10. But the other issues discussed above, are
sufficient bases to doubt the usefulness of the [REDACTED] royalty
rate as a benchmark.
---------------------------------------------------------------------------
The Judges now turn from the question of whether the [REDACTED]
royalty rate is substantively an appropriate benchmarking input, to
SoundExchange's other argument--that if the $[REDACTED] per-play
[REDACTED] rate is an effectively competitive rate, then so too is
Spotify's effective $[REDACTED] per-play royalty rate. The Judges find
that SoundExchange's assertion in this regard is of little practical
importance as an opposition to Professor Shapiro's subscription
benchmark model.
If the Judges were to treat Professor Shapiro's characterization of
the [REDACTED] $[REDACTED] per-play rate as essentially an admission
that the Spotify effective per-play rate of $[REDACTED] is also
effectively competitive, the setting of a benchmark rate by the Judges
would be little changed. Applying Professor Shapiro's proffered
[REDACTED]% effective competition adjustment on his $[REDACTED]
interactive benchmark generates an effectively competitive rate of
$[REDACTED], (which would then be subject other potential adjustments).
But the [REDACTED] rate of $[REDACTED] that Professor Shapiro opines to
be ``effectively competitive'' is virtually identical (and it too would
then be subject to the same potential additional adjustments). Thus,
substituting the [REDACTED] effective royalty rate for Professor
Shapiro's effective competition adjustment would be inconsequential.
(D) Professor Shapiro's Subscription Benchmark Rate as Adjusted by the
Judges
In sum, the Judges find as follows with regard to Professor
Shapiro's proposed subscription benchmark rate:
1. The effective interactive industrywide interactive benchmark
rate of $[REDACTED] per play is reasonable.
2. The first interactivity adjustment of 2:1 is appropriate,
properly reducing his interim calculation to $[REDACTED] per play
(rounded).
3. The second (cumulative) interactivity adjustment is rejected.
4. The skips adjustment is reduced to [REDACTED]%, properly
reducing the interim calculation to $[REDACTED] (rounded).
5. The [REDACTED]% effective competition adjustment proposed by
Professor Shapiro is rejected.
6. The Judges apply the lower effective competition adjustment
supported by their overall ``effective competition'' analysis:
a. -[REDACTED]%
b. [REDACTED] \159\ x [REDACTED] \160\
---------------------------------------------------------------------------
\159\ See Orszag WDT tbl.4.
\160\ See Peterson WRT fig.5; see also 8/25/20 Tr. 3706
(Peterson) [REDACTED]; 8/11/20 Tr. 1209 (Orszag) (As between the
[REDACTED]
---------------------------------------------------------------------------
c. = [REDACTED]%
d. $[REDACTED] x (1-[REDACTED]) = $[REDACTED] x [REDACTED] = 0.0025
(rounded).
(E) Interactivity ``Adjustment'' to Mr. Orszag's Benchmark
Mr. Orszag avers that his benchmark model directly and implicitly
accounts for the difference in interactivity between the benchmark and
target markets, and that any further such adjustment would be
unnecessary and improper. In particular, he states that it is his use
of the effective percentage of revenue rate paid by interactive
subscription services that allows his model to account for the impact
of interactivity. More specifically, he testifies that, when he
multiplies that benchmark percent-of-revenue rate by the lower revenues
in the target market (relative to the benchmark market), the product
equals a lower royalty. This lower royalty, he concludes, reflects the
lower value consumers place on a service that lacks on-demand
functionality. Orszag WDT ] 79. Alternately stated in terms of the
ratio-equivalency model, the interactivity difference is implicitly
modeled because the revenue figure in the target market--the right-hand
numerator [C]--is substantially less than the revenue figure in the
benchmark (interactive) market numerator [A]--given that the benchmark
subscription service price is substantially higher than the
subscription price in the benchmark market and the number of
subscriptions in the benchmark market is substantially greater.
The Services do not make any specific challenge to Mr. Orszag's
claim that his model implicitly includes an interactivity adjustment.
To be sure, the Services vigorously challenge the appropriateness of
his model, including its failure, in their opinion, to properly apply
the ratio equivalency benchmarking model in Web IV.\161\ But, assuming
arguendo that Mr. Orszag's subscription benchmarking model is otherwise
appropriate, the Services offer no new or specific criticism regarding
its implicit interactivity adjustment, as explained by Mr. Orszag.\162\
---------------------------------------------------------------------------
\161\ See discussion supra, section IV.B.1.e.
\162\ The Services do criticize Mr. Orszag for not making a
``second'' interactivity adjustment to reflect the greater
interactivity of the mid-tier services that constitute Mr. Orszag's
target market, relative to the noninteractivity of statutory
services. However, as explained supra, section IV.B.1.e.v(A), in
connection with Professor Shapiro's proposed further interactivity
adjustment, the Judges find no sufficient evidence in the record or
basis in the Web IV approach to support a finding that there is
greater market value in these mid-tier services compared with
statutory services.
---------------------------------------------------------------------------
(F) Skips Adjustment to Mr. Orszag's Benchmark
According to Mr. Orszag, his benchmarking model also directly and
implicitly accounts for the skips differential from the benchmark
market to the target market, despite the fact that his benchmark data
is weighted very heavily toward Pandora, which, under its direct
license agreements with the record companies, pays royalties for skips
(unlike the benchmark services). This difference does not affect Mr.
Orszag's proffered per-play royalty rate because in his model he
divides the target market's total royalties due by the
[[Page 59506]]
number of target market plays--including skips--yielding a per-play
rate that accounts for skips. That per-play rate accounts for skips
because (1) the royalties generated by the skips are included in the
numerator and (2) the number of skips are included in the denominator,
in the same manner as full plays, thus canceling each other out and not
changing the per play royalty calculation. 8/11/20 Tr. 1191-92, 1249-50
(Orszag).\163\
---------------------------------------------------------------------------
\163\ For example, assume all plays (including skips) generate
$240,000 in royalties (the numerator), and the total number of plays
(including skips) totals 120,000,000 plays. The per-play royalty
(including skips) is $0.0020 ($240,000 / 120,000,000 plays =
$0.0020). Now also assume 20,000,000 of these plays were skips. If
in Mr. Orszag's model skips were explicitly eliminated, there would
be only 100,000,000 plays in the denominator (120,000,000 plays-
20,000,000 plays = 100,000,000 plays), and only $200,000 in
royalties in the numerator ($240,000-(20,000,000 plays $0.0020 in
royalties) = $240,000-$40,000 = $200,000. Now, with skips
eliminated, Royalties / Plays = $200,000 / 100,000,000 = $0.0020--
the same per-play royalty rate with or without skips.
---------------------------------------------------------------------------
In his WRT, Professor Shapiro asserts that Mr. Orszag had
improperly failed to make an explicit skips adjustment. Shapiro WRT at
33. At the hearing, however, Professor Shapiro acknowledges that Mr.
Orszag's approach indeed does not require a separate skips adjustment.
8/20/20 Tr. 3025-26 (Shapiro).
The Judges agree that Mr. Orszag's ratio equivalency benchmarking
model, to the extent it is otherwise useful and appropriate, does not
require a skips adjustment.\164\
---------------------------------------------------------------------------
\164\ Mr. Orszag acknowledges though that the two services other
than Pandora included in his model's target market (iHeart and
Rhapsody) do not report or pay for skips, which would require a
skips adjustment. However, according to Mr. Orszag, those two
services constitute a de minimis portion of the total plays in his
target market. See 8/11/20 Tr. 1230 (Orszag). The Services agree
that: (1) Mr. Orszag's ratio equivalency approach is [REDACTED]'s
revenue-per-play; (2) Pandora pays for skips; and (3) the net effect
of (1) and (2) is to minimize the impact of Mr. Orszag's failure to
include a skips adjustment for iHeart and Rhapsody. Nonetheless, the
Services aver that the absence of a skips adjustment for the iHeart
and Rhapsody plays has an ``unquantified effect'' on Mr. Orszag's
benchmark subscription royalty rate. Services RPFFCL ] 240. Although
a benchmark proponent should quantify or estimate a benchmark input
that would be significant, here the Judges find that the Services
have essentially acknowledged the correctness of Mr. Orszag's skips
analysis, and that the ``unquantified effect'' would be of little
consequence.
---------------------------------------------------------------------------
(G) Effective Competition Adjustment to Mr. Orszag's Benchmark
As explained in the separate section of this Determination
analyzing the effective competition issue, SoundExchange maintains that
the enhanced power of its benchmark interactive service, Spotify, has
allowed it to exert countervailing power in its negotiations with the
Majors that fully offsets their complementary oligopoly power. See SX
PFFCL ]] 259-493 (asserting that no competition adjustment is required
because the benchmark agreements on which Mr. Orszag's analysis is
based reflect effectively competitive rates). For this reason, Mr.
Orszag makes no effective competition adjustment to his proposed
subscription benchmark rate.
However, as the Judges stated supra in their analysis and findings
regarding the effective competition adjustment, it is appropriate to
adjust downward Mr. Orszag's Spotify-based ratio equivalency rate as
follows:
(1) Apply the 12% downward adjustment;
(2) [REDACTED] that adjustment by [REDACTED] percentage points to
reflect Spotify's [REDACTED]; and
(3) multiply the rate from step (2) by [REDACTED]%, the percent of
revenue paid by Spotify at the [REDACTED]% level).\165\
---------------------------------------------------------------------------
\165\ Unlike their adjustments to Professor Shapiro's approach,
the Judges do not reduce Spotify's impact by multiplying by
Spotify's market share, because Mr. Orszag uses only Spotify data in
his benchmark market analysis, whereas Professor Shapiro uses a
weighted average of multiple interactive services in his benchmark
market analysis.
---------------------------------------------------------------------------
(H) Mr. Orszag's Subscription Benchmark Rate as Adjusted by the Judges
The Judges do not make any adjustments to Mr. Orszag's proffered
benchmark other than the foregoing effective competition adjustment.
Based upon the analysis in the Judges' discussion of effective
competition, supra, they calculate their effective competition
adjustment to Mr. Orszag's $0.0033 benchmark per-play rate as follows:
1. The Judges adjust Mr. Orszag's proffered benchmark rate to
reflect both the complementary oligopoly power of the Majors (12%) and,
in partial mitigation, the extent to which Spotify paid the [REDACTED]
percent-of-revenue royalty rate instead of the [REDACTED]% rate
(reflecting Spotify's bargaining power).
2. The [REDACTED] of this royalty rate from [REDACTED]% to
[REDACTED]% reflects a [REDACTED]% [REDACTED] royalties.
3. To determine the extent to which Spotify paid (approximately)
the [REDACTED] percent-of-revenue rate, the Judges note that
[REDACTED]% of its royalties were paid on that basis. Peterson WRT,
fig.5.
4. [REDACTED]% x [REDACTED] = [REDACTED]% (rounded).
5. The complementary oligopoly adjustment is [REDACTED]%-
[REDACTED]%, which equals [REDACTED]%.
6. Mr. Orszag's adjusted rate is calculated as $[REDACTED] x (1-
[REDACTED]), which equals $0.0032 (rounded).
f. The Judges' Synthesis of the Adjusted Rates of Professor Shapiro and
Mr. Orszag
As explained supra, Professor Shapiro's benchmark approach has a
weight of 88.5%, and Mr. Orszag's has a weight of 11.5%, in the Judges
synthesized rate based on the benchmark/ratio equivalency approach. The
synthesis of their two models, as adjusted by the Judges, is set forth
below:
The Shapiro Subscription Benchmark Rate:
$0.0025 x 0.885 = $0.00221
+
The Orszag Subscription Benchmark Rate:
$0.0032 x 0.115 = $0.00037
=
$0.00258 rounded to $0.0026
Accordingly, the Judges find that the benchmark-derived rate for
noninteractive subscription services is $0.0026 per play.
2. The Ad-Supported Benchmark Models \166\
---------------------------------------------------------------------------
\166\ The Judges use the phrase ``ad-supported services'' to
refer to nonsubscription services throughout this Determination.
---------------------------------------------------------------------------
a. SoundExchange's Ad-Supported Benchmark Model
On behalf of SoundExchange, Mr. Orszag uses a benchmarking analysis
quite similar to his subscription benchmark model considered supra.
First, although he is modeling the ad-supported market, his approach
again looks to the subscription interactive market as the benchmark,
using Spotify as the proxy. Next, he calculates an effective percent-
of-revenue royalty paid by Spotify in the subscription interactive
market, and then converts that benchmark percent-of-revenue rate into
an ad-supported per-play rate by dividing royalties by the number of
noninteractive plays. Orszag WDT ] 96.
Mr. Orszag acknowledges that in Web IV the Judges rejected this
approach, i.e., the use of subscription interactive services as a
benchmark for ad-supported noninteractive services. See Web IV, 81 FR
at 26344-46 (significant divergence in WTP between downstream
subscription and ad-supported consumers negates a finding of
substantial cross-substitution from subscribership to ``free to the
listener'' use, thus rendering inapplicable
[[Page 59507]]
Professor Rubinfeld's attempted extension of the ratio equivalency
approach to the ad-supported calculation of ad-supported royalties).
Notwithstanding this Web IV finding, Mr. Orszag opines that his
particular model, and new market developments, combine to distinguish
his approach from that rejected in Web IV.
First, in his WDT, Mr. Orszag asserts that the present record
evidence demonstrates there is sufficiently greater substitution
between the benchmark and target markets than was shown in Web IV,
justifying his use of interactive services as a benchmark for ad-
supported services. Orszag WDT ] 88. Moreover, Mr. Orszag takes issue
with the Judges' finding in Web IV that the ad-supported listeners did
not reveal a positive WTP. He asserts that, from an economic
perspective, listeners reveal a positive WTP, in that they subject
themselves to listening to advertising, which, he argues, is itself a
form of payment in time rather than in money.
However, Mr. Orszag does not attempt to measure the dollar value of
that time to these listeners. Rather, he notes that the noninteractive
services earn revenue from the advertising revenue they receive for
making advertising time available on those services, a portion of which
the noninteractive services can pay as royalties to the record
companies. Mr. Orszag avers that, if it were really true that listeners
to ad-supported service have a zero willingness to pay, then ad-
supported services themselves should also have zero willingness to pay,
which plainly is not the case. Orszag WDT ] 90; 8/11/20 Tr. 1240-41
(Orszag). Mr. Orszag also points to record evidence, including Pandora
documents, indicating that [REDACTED]. Trial Ex. 5056 at 26. Another
Pandora document on which Mr. Orszag relies states that ``[REDACTED]''
Trial Ex. 5061 at 2; Orszag WDT ] 93.
Nonetheless, although Mr. Orszag acknowledges that the sound
recording and streaming industry perceives ad-supported listeners as
having a ``low'' WTP, Orszag WRT ] 75, SoundExchange points out that a
Services' witness, T. Jay Fowler, Director of Product Management for
Music Products at YouTube (a division of Google), speculates that this
``may be only a temporary or transitory phenomenon,'' because consumers
need time to understand the value of streamed music and thus make the
switch from an ad-supported to a subscription service. Trial Ex. 1100 ]
17 (WDT of T. Jay Fowler); SX PFFCL ] 164. In furtherance of this
argument, Mr. Orszag also relies on evidence from Professor Willig's
application of data from the Zauberman Survey, which Mr. Orszag
characterizes as showing a high cross-elasticity of demand for
noninteractive ad-supported listening and interactive ad-supported
subscribership. That survey evidence, as applied by Professor Willig,
indicates that 9.1% of respondents would switch from ad-supported
noninteractive services to a new on-demand subscription, if their ad-
supported noninteractive service was not available. Willig WDT ] 47,
fig.6 (panel A).\167\
---------------------------------------------------------------------------
\167\ The Hanssens Survey indicates, according to Professor
Shapiro, that this diversion to new interactive subscriptions would
be [REDACTED], measuring [REDACTED]%. Shapiro WDT at 21, tbl.2. This
lower figure would not alter the weights assigned to the
benchmarking and ratio-equivalency models. The Judges note, though,
that despite finding the Zauberman Survey less reliable in other
respects than the surveys by Professors Hanssens and Simonson (the
latter replicating Professor Hanssens's survey work) only the
Zauberman Survey asks respondents directly to identify the source of
music to which they would divert if noninteractive subscription
services were not available (The Hanssens and Simonson surveys ask
more ambiguously what respondents would do if they noticed all
relevant services had stopped streaming songs by some popular
artists and some newly released music. Hanssens WDT ]] 13, 21-22.)
---------------------------------------------------------------------------
Based on the foregoing rationale, Mr. Orszag utilizes the same
``ratio equivalency'' model as he used for the subscription tier.
SoundExchange summarizes his application of this approach to the ad-
supported model as follows:
[A] and [B] remain the total revenue earned by and total royalty
paid by Spotify for its subscription interactive service. As before
and for the same reasons provided in Mr. Orszag's benchmark analysis
for noninteractive subscription services . . . the analysis
conservatively uses the effective [percent of royalty] rates paid by
Spotify as the basis for the proposed per-play rate for statutory
ad-supported noninteractive services. . . . And as before, Mr.
Orszag excluded family, student, military, employee, and trial and
promotional products in calculating the effective rates because
these products are unlikely to be relevant to an ad-supported
service. . . . [C] is now the revenue earned by the [noninteractive]
ad-supported service.
SX PFFCL ]] 168-169 (and record citations therein).\168\
---------------------------------------------------------------------------
\168\ As with his subscription model, Mr. Orszag excluded
family, student, military, employee, and trial and promotional
products in calculating the effective rates, claiming that these
products would not likely be relevant to an ad-supported service.
Orszag WDT ] 97. And, as noted in the above quote, for the revenue
of noninteractive services ([C] in his model) Mr. Orszag uses
revenue earned by Pandora and iHeart. 8/11/20 Tr. 1248 (Orszag);
Orszag WDT ] 98.
---------------------------------------------------------------------------
The effective percent-of-revenue rate in Mr. Orszag's benchmark
market, [B]/[A], of course remains at [REDACTED]% (because he uses the
same benchmark market). Mr. Orszag multiplies that [REDACTED]%
effective rate by the noninteractive ad-supported gross revenue for
Pandora and iHeart, and then divides by the corresponding number of
plays in the target noninteractive ad-supported market. Id. ] 98.\169\
His computations and results are set forth in the table below
(excerpted from Orszag WDT tbl.9):
---------------------------------------------------------------------------
\169\ Calculated from a different perspective, Pandora and
iHeart's combined average revenue per play was $[REDACTED]
[REDACTED] for the twelve-month period ending April 2019. This
average revenue per play, when multiplied by the percentage-of-
revenue royalty rate for interactive subscription services, results
in the per-play royalty rates for noninteractive ad-supported
services. Id. ] 98.
---------------------------------------------------------------------------
Table 9--Noninteractive Ad-Supported Benchmark, May 2018-April 2019
[RESTRICTED]
[REDACTED]
The resulting proposed royalty rate for noninteractive ad-supported
services is $0.0025 per play, as presented in the right-hand column of
the table above. Id. ] 99.\170\
---------------------------------------------------------------------------
\170\ With regard to potential adjustments to his proposed rate,
Mr. Orszag opines first that, as with his subscription benchmark
model, his ad-supported mode contains an implicit interactivity
adjustment, because it relies on the lower revenue of the ad-
supported noninteractive market as the value of [C] (compared to the
higher revenue of the benchmark interactive subscription market.
Next, Mr. Orszag finds no reason to make either a skips or an
effective competition adjustment, for the same reasons discussed
supra in connection with his subscription benchmark model.
---------------------------------------------------------------------------
b. The Services' Criticism of Mr. Orszag's Benchmark Ad-Supported Model
in His WDT
As an initial matter, the Services criticize the fundamentals of
Mr. Orszag's ratio equivalency model in this ad-supported context for
the same reasons they criticize his use of this model formulation in
his subscription market analysis. Again, they criticize what they
construe as Mr. Orszag's improper re-characterization of the Web IV
ratio equivalency approach because he: (1) Defines [A]and [C] as
revenue inputs; (2) fails to identify a per-play rate [B] in the
benchmark market; (3) applies the percent-of-revenue paid in the
benchmark market to the target market; and (4) uses play counts in the
target market instead of the benchmark market to generate per-play
rates.
Additionally, the Services criticize Mr. Orszag's decision to input
the percentage-of-revenue royalty rate applicable to subscription
interactive services as an appropriate data point for calculating the
ad-supported noninteractive royalty, given the clear rejection of that
approach in Web IV. Further, the Services aver that Mr.
[[Page 59508]]
Orszag's ad-supported modeling: (1) Fails to address the difference in
the ways the two services generate revenue (advertising versus consumer
subscription payments); (2) fails to demonstrate (or even calculate)
comparable demand elasticities between the two categories of services
as required by Web IV; (3) fails to demonstrate comparable WTP as the
between the ad-supported and subscription services; (4) fails to
demonstrate an opportunity cost even close to approximating the 1:1
opportunity cost (cross-elasticity) between the two categories of
service; and (5) fails to apply Spotify's own ad-supported rates into
the analysis. Services RPFFCL ] 158 (and record citations therein).
Among these criticisms, the Services highlight what they assert are
the two principal problems in Mr. Orszag's model. First, they point to
his decision to duplicate his subscription ``ratio equivalency'' model
by simply substituting noninteractive ad revenue for subscription
revenue. They note that the identity and motivations of the different
classes of payors--advertisers who pay for listeners' attention, on the
one hand, and subscribers who pay for uninterrupted access to music, on
the other--renders misguided any attempt to apply the ratio equivalency
model in this manner.
Further, the Services emphasize that Mr. Orszag fails to
demonstrate how users' willingness to listen to ads can be converted
into a dollar value. What the market evidence does reveal, the Services
state, is directional in nature--that the amount such users would pay
(if any) must be less than the subscription price of an on-demand
service. See Leonard WRT ] 54 (noting that, by revealed preference,
consumers have demonstrated that their WTP to avoid ads is less than
that of subscribers to paid services); see also Peterson WRT ]] 38, 40.
Relatedly, the Services maintain that Mr. Orszag does not provide a
reason for his assumption--incorporated into his model--that the amount
advertisers pay to transmit ads to noninteractive listeners is actually
a proxy for the WTP for music of noninteractive listeners. See Peterson
WRT ] 38 (advertiser WTP for listener attention may be completely
unrelated to listeners' WTP for music, and therefore is not a basis to
assert that ad-supported services, whose listeners are clearly price
sensitive, have an elasticity of demand comparable to that of
subscription services); see also 8/25/20 Tr. 3702-03 (Peterson) (same).
In fact, the Services argue that advertising revenue generated by an
ad-supported service is materially determined by that service's own
investment and skill in building an advertising platform that will
attract advertiser dollars. 8/20/20 Tr. 3248 (Shapiro). And, in
particular, Pandora has invested significantly to create its
advertising platform, allowing it to receive substantially higher
advertising rates and more advertising revenue than other ``free-to-the
listener'' noninteractive streaming services.
Specifically, the Services, and Pandora in particular, emphasize
Pandora's unique ability to attract and monetize advertisers--a return
on its investment of billions of dollars. They note that this revenue
generation is unconnected to the level of functionality it offers. 8/
20/20 Tr. 3218-20 (Shapiro) (testifying that Pandora's investment in
``systems [on] which . . . advertisers compete for . . . space''
increases the per-play revenue Pandora receives in a way that has
``nothing to do with the rights they have licensed, but, rather, with
their own capabilities.''); Herring WDT (Web IV) ] 11 (``Pandora
derives more than 80% of its revenue from the sale of advertising. . .
.'').
Further in this regard, the Services maintain there is no evidence
that advertiser payments are correlated with the particular level of
interactivity offered by a service, a correlation, they assert, is
implicitly assumed by Mr. Orszag's adoption of a ratio equivalence
relationship between subscriber payments in the interactive space and
advertisers' payments in the noninteractive space. See Services PFFCL
]] 26-27 (and citations therein). As Dr. Leonard testifies, advertisers
``have no reason to prefer advertising on a service with greater
interactivity. . . .'' Leonard WRT ] 54.\171\
---------------------------------------------------------------------------
\171\ The irony of this criticism by the Services is not lost on
the Judges. On the one hand, the Services argue that interactivity
is irrelevant on the ad-supported tier, because the payors (the
advertisers) are uninterested in the functionality of the system.
Yet, as discussed infra, the Services propose that the Judges make
two interactivity adjustments to the ad-supported rate.
---------------------------------------------------------------------------
Even if listeners' tolerance for advertisements could be construed
as a form of ``payment'' for noninteractive listening, the Services
maintain that this would still be insufficient to justify Mr. Orszag's
adoption of a ratio equivalence between the two broad categories of
services. See Shapiro WRT at 38-40 (citing Web IV, 81 FR at 26349);
Peterson WRT ]] 36-40 (citing Web IV, 81 FR at 26353). More
specifically, the Services maintain that Mr. Orszag's model cannot
address the Judges' point in Web IV that ``[t]he ratio equivalency
approach assumes that listeners who willingly pay for a subscription to
a service have a WTP equal to the WTP of those who use ad-supported
(free-to-the-listener) services.'' Web IV, 81 FR at 26345. (emphasis
added). Moreover, the Services point out that Mr. Orszag himself
concedes that consumers of advertising-supported and subscription
services have a different WTP. 8/12/20 Tr. 1548 (Orszag). This
underscores the relevance of the Services' claim that Mr. Orszag did
not provide, or even attempt to provide, the demonstration of
comparable demand elasticities that the Judges previously required. See
Web IV, 81 FR at 26349. And the Services point to Dr. Peterson's
testimony, in which he notes that the low WTP of ad-supported listeners
indicates that their demand is far more elastic than the demand of
interactive subscribers. 8/25/20 Tr. 3702 (Peterson); Peterson WRT ]
37.
Turning to the particular issue of cross-elasticity, the Services
note the Zauberman Survey, as applied by Professor Willig, reveals that
about 90% of ad-supported noninteractive listeners are unwilling to pay
for a subscription interactive service. Services RPFFCL ] 165. This
point, the Services claim, underscores the importance of their
criticism that neither Mr. Orszag nor the survey evidence demonstrates
the existence of a sufficiently high cross-elasticity of demand between
ad-supported noninteractive listening and subscription interactive (on
demand) listening to support the application of Mr. Orszag's ratio
equivalency. In this vein, the Services emphasize that Mr. Orszag does
not deny that he has not demonstrated the 1:1 opportunity cost required
by the Web IV ``ratio equivalency'' approach, i.e., that, in this
context, a dollar spent by an advertiser on an ad-supported
noninteractive service would otherwise be spent on a subscription to an
interactive service, or, alternatively, that if users discontinued
listening to an ad-supported noninteractive service, the resulting
reduction in advertising revenue would otherwise create a commensurate
increase in subscription revenue for an interactive service. See 8/13/
20 Tr. 1948 (Orszag).
The Services further claim that SoundExchange's reliance on
Pandora's internal documents, Trial. Exs. 5056 and 5061, is misplaced.
They point out that neither of these documents actually shows how many
[REDACTED]. Services RPFFCL ] 163 (and record citations therein).
Similarly, the Services maintain that SoundExchange has the relevant
direction of the evidence wrongly reversed with regard to its analysis
of Spotify's customer
[[Page 59509]]
behavior. That is, the fact that [REDACTED] % of Spotify's subscribers
had originally used Spotify's ad-supported service provides no useful
information regarding the appropriate metric: How many Spotify ad-
supported users in fact have a WTP for a Spotify subscription. Indeed,
the Services note, SoundExchange's argument in this regard is belied by
Mr. Orszag, who acknowledges that only [REDACTED]% of Spotify's ad-
supported listeners convert to Spotify's subscription tier within the
first two years using Spotify's ad-supported service. Services RPFFCL ]
164 (citing Orszag WRT ] 75 n.167).
c. The Judges' Analysis and Findings Regarding Mr. Orszag's Ad-
Supported Benchmark Model From His WDT
The Judges reject the ad-supported model Mr. Orszag presents in his
WDT.\172\ At an obvious level, his approach deviates from the Judges'
finding in Web IV, in which they rejected the use of a ratio
equivalency formula that utilized subscription inputs on the left-hand
benchmark side of the model. Moreover, Mr. Orszag's rationale for his
departure from Web IV is unavailing. There is simply no evidence to
support his assertion that there is anything approaching a 1:1
substitutability (cross-elasticity) from interactive services to
noninteractive services.
---------------------------------------------------------------------------
\172\ Alternatively, in his WRT and hearing testimony, in
response to the models proffered by Professor Shapiro and Dr.
Peterson, Mr. Orszag acknowledges that it is also reasonable to rely
on Spotify's effective ad-supported percent-of-revenue paid as the
benchmark rate, rather than the subscription percent-of-revenue it
pays (as he proposes in the benchmark model) in his WDT. The Judges
analyze Mr. Orszag's alternative approach infra, after considering
the models proposed by Professor Shapiro and Dr. Peterson, that also
use Spotify's ad-supported service as a benchmark.
---------------------------------------------------------------------------
Perhaps in recognition of the fact that the 9.1% substitution
figure he cites from the Zauberman Survey does not reflect significant
cross-elasticity, Mr. Orszag adds in a footnote, that ``no particular
level of cross-elasticity is necessary for one market to serve as an
appropriate benchmark for another market.'' To support this point, he
presents as an example, quoted in part supra, the hypothetical that the
subscription price for a cable television service in Chicago may be
``an ideal benchmark'' to use in order to set an appropriate
subscription price for a cable television service in Philadelphia,
``even though there is zero cross-elasticity for cable services between
the two cities, because residents of Philadelphia cannot access the
Chicago service and vice versa.'' Orszag WDT ] 95 n.132. But this
example only underscores the narrow relevancy of a ratio equivalency
approach and its implicit assumption of a substitutability of (or
proximate to) 1:1, to constitute effective cross-substitutability.\173\
---------------------------------------------------------------------------
\173\ The Judges incorporate by reference here their citations
to Web IV and SDARS III, supra, in their consideration of Mr.
Orszag's subscription model, pertaining to the import of the absence
of sufficient cross-elasticity. See discussion supra, section
IV.B.1.e.ii.
---------------------------------------------------------------------------
In this regard, Mr. Orszag's ``inter-city'' analogy reflects a
subtle but important shift in his reasoning: He is dispensing with the
Web IV/Professor Rubinfeld underpinning of the ratio equivalency
model--high cross-substitutability (assumed or actual)--and asserting
that his approach is consistent with the more traditional pure
benchmarking approach, which relies on the similarity--not the cross-
elasticity or substitutability--between sellers/licensors, buyers/
licensees, and the rights being transferred between the benchmark and
target products. The Judges' discern from Mr. Orszag's distinction a
confirmation of their rationale for relying substantially on Professor
Shapiro's benchmarking approach, because the cross-elasticity/
substitutability revealed by the record is relatively low, whether in
the subscription market (as discussed supra) or in the ad-supported
market (as discussed here).\174\
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\174\ The Judges also agree with the Services that Mr. Orszag's
failure to estimate the own-elasticities of demand for his benchmark
and target services compromises his attempt to apply the Web IV
benchmark approach. ``Own-elasticities'' of demand reflect the
responsiveness of quantity demanded to increases or decreases in the
price of a product--typically a negative (inverse) relationship, as
represented in the downward-sloping demand curve. Cross-elasticity
measures the responsiveness of demand for product A in response to a
change in the price of product B--a positive relationship for
substitute products. See generally Robert S. Pindyck & Daniel L.
Rubinfeld, Microeconomics at 33-36 (8th ed. 2013). As the Judges
have noted in both SDARS III and Web IV, a significant level of
cross-elasticity (proven or reasonably presumed) is necessary for
the ratio-equivalency model to be broadly applicable, or else, as
here, its application is limited by the extent of cross-elasticity
demonstrated between the benchmark and target markets. Own
elasticities can also be relevant because they indicate the relative
pricing power of each tier of service (a low elasticity (i.e., high
inelasticity) indicates relatively greater pricing power, and vice
versa, pursuant to the Lerner Equation discussed in Web IV). If own-
elasticities are roughly equal, then the services have a roughly
equal concern over the impact on quantity (and thus revenue) of a
change in retail prices, making the ratio equivalency model more
appropriate, ceteris paribus. Further, high own-elasticity can be
suggestive of significant cross-elasticity with regard to clearly
substitutable products. A relatively high own-elasticity suggests
that a given percentage increase in price will engender a larger
percentage decrease in quantity, that is likely to result in
substitution of a product sufficiently similar in price and
characteristics, even in the absence a more specific measuring of
cross-elasticity, such as through the use of consumer surveys.
---------------------------------------------------------------------------
The Judges also place no weight on Mr. Orszag's assertion that the
willingness of ad-supported listeners to subject themselves to
advertisements indicates a positive WTP. Although there is certainly
disutility in listening to advertising that is annoying, uninformative
or irrelevant, other advertising can be pleasant or amusing (or at
least neutral), informative or relevant. Also, advertising
interruptions allow a user to take advantage of the break to attend to
other personal necessities. Moreover, ad-supported listeners are made
aware of the presence of advertising, so they are already a self-
selected cohort of consumers who have a tolerance for advertising. In
any event, measurement of the cost of any disutility would be
difficult, and Mr. Orszag certainly did not attempt to do so.
Additionally, by choosing an ad-supported service, as Dr. Leonard
notes, listeners have revealed a preference (given their budget
constraints and utility preferences \175\) for that bundle of music +
advertising over pure music priced at $4.99 per month or more. And of
course, an immediate problem with Mr. Orszag's assertion is that the
payments of advertising revenues reflect the WTP of advertisers--not
the WTP of listeners. (Again, Mr. Orszag does not attempt to convert
listener time into a direct monetary measure.)
---------------------------------------------------------------------------
\175\ Economic jargon often obscures reality. ``Budget
constraints'' refer to consumers' limited incomes; for example, poor
people will not have extra cash to spend on music, even if they
would prefer the ``utility'' of an ad-free service, because they
cannot transfer spending from necessities to the luxury of a
subscription to a music service.
---------------------------------------------------------------------------
Further, advertising, like music, is an ``experience'' good. One
does not know that certain advertising will be useful or not until it
is heard. And in this context, it is important to appreciate that
technological advancements in targeted advertising make it much more
likely that advertising will be more useful to listeners than the
former more blunderbuss approach.\176\
---------------------------------------------------------------------------
\176\ The Judges do not endorse in full Pandora's criticism that
the record companies should not receive royalties based on
advertising revenues generated by Pandora's arguably superior
advertising platform. As SoundExchange notes, noninteractive
services, including Pandora, also benefit from the superior
identification, development and promotion of sound recordings and
artists. Moreover, the advertising revenue is derived from the
presence of listeners, who are attracted to Pandora in large measure
because of the music produced by the record companies. Therefore,
the advertisers' demand, and Pandora's investments in better
monetization of that advertiser demand, are derived in part from the
attributes of, and investments in, the underlying sound recordings.
It is more accurate to state that Pandora's advertising revenues are
jointly produced as a consequence of what economist call a ``joint
production function,'' consisting of the quality of: (i) The record
companies' music; (ii) Pandora's curation of the music; and (iii)
Pandora's advertising platform. See 8/20/20 Tr. 3248 (Shapiro)
(``the revenue earned [by Pandora's ad-supported service] is a
combination of the music . . . creating the experience, the person .
. . listening more, and then how much money can be collected per-
play will depend also in an important way on value brought by the
service [including] [Pandora's skill at monetization.'').
Additionally, the purpose of a rate setting process, whether by
negotiating counterparties in an unregulated market or by the
Judges, is to apply economic analysis to determine how the overall
value of these inputs will be allocated as between licensors and
licensees. Although each side of the licensing market can accurately
claim that its investments are responsible for generating value, and
that the other side is wrongly appropriating that value for itself,
such self-serving claims do nothing to assist in the allocation of
value and, hence, the setting of royalty rates. See generally
Richard Watt, Revenue Sharing as Compensation for Copyright Holders,
8 Rev. Econ. Res. Copyright Issues 51, 56 & n.8 (2011) (economically
a royalty rate derived from a percent-of-revenue approach is
analogous to an ad valorem tax on the service).
---------------------------------------------------------------------------
[[Page 59510]]
All of these advertising-related concerns were not addressed in the
record, and their absence makes Mr. Orszag's speculation regarding
listeners' revelation of a positive WTP unpersuasive.
In order to distill value from advertising revenues, the Judges
agree with Dr. Leonard that Mr. Orszag would have been better served if
he had analyzed the ad-supported tier as a ``multi-sided platform,
where listeners, record companies and advertisers converge to create
economic value for all participants. See Leonard WRT ] 54; 8/24/20 Tr.
3561 (Leonard) (describing advertising-supported services as ``two-
sided platform[s]'' connecting users to advertisers and distinguishing
them from subscription services for which there is no ``other side of
the market that you need to be worried about''); see generally David S.
Evans & Richard Schmalensee, Matchmakers: The New Economics of
Multisided Platforms (2016); Ruth Towse, Dealing with Digital: The
Economic Organisation of Streamed Music, 42 Media Culture & Society,
no. 7-8, 1461 (2020).\177\
---------------------------------------------------------------------------
\177\ Dr. Evans and Professor Schmalensee define a ``multi-sided
platform'' as:
A business that operates in a physical or virtual place (a
platform) to help two or more different groups find each other and
interact. The different groups are called `sides.' For example,
Facebook operates a virtual place where friends can send and receive
messages, where advertisers can reach users, and where people can
use apps and app developers can provide those apps.
Evans & Schmalensee, supra, at 210. Professor Towse notes the
particular application of multi-sided platform economics to the
analysis of ad-supported music services. Towse, 42 Media Culture &
Society, at 1465 (``In the streaming market, the upstream price is
negotiated by the [Digital Service Provider] for the rights to
stream the music . . . for ad-based services, [it is] the price
charged to the advertiser. It is an obvious application of platform
economics.'') (emphasis added).
The Judges note that Mr. Orszag essentially endorses a platform-
based approach in his WRT and hearing testimony, by acknowledging
the appropriateness (in his model) of using revenue from the ad-
supported service rather than subscription revenue. His testimony in
that regard is discussed infra.
---------------------------------------------------------------------------
Additionally, the Judges find that the documents indicating that
many Spotify subscribers originated as ad-supported listeners is
uninformative. The Judges agree that the relevant measure is the extent
to which ad-supported listeners convert to subscribers. Interestingly,
that figure, [REDACTED]%, (as noted supra) is [REDACTED] to the 9.1%
substitution figure from the Zauberman Survey (cited supra), which
tends to confirm the low cross-elasticity between ad-supported and
subscription tiers. Similarly, the internal Pandora documents on which
SoundExchange relies do not [REDACTED], but rather purportedly
estimate, [REDACTED].
In sum, the Judges find no sufficient basis to apply the
benchmarking approach for the ad-supported noninteractive market that
Mr. Orszag proffers in his WDT.\178\
---------------------------------------------------------------------------
\178\ The Judges' rejection of Mr. Orszag's ad-supported
benchmark model moots any issues regarding his ad-supported
benchmark adjustments.
---------------------------------------------------------------------------
d. Professor Shapiro's Ad-Supported Benchmark Model
Professor Shapiro's ad-supported benchmark comes from the
interactive ad-supported market. According to Professor Shapiro, this
is an appropriate and direct benchmark, consistent with Web IV, in
which the Judges likewise used ad-supported benchmarks to develop the
ad-supported statutory rate.\179\
---------------------------------------------------------------------------
\179\ More particularly, in Web IV, the Judges relied on
noninteractive ad-supported benchmarks: the Pandora/Merlin and
iHeart/Warner agreements.
---------------------------------------------------------------------------
To apply this benchmark, Professor Shapiro begins by calculating
weighted average effective per-play royalty rates. Specifically, he
begins by analyzing the effective per-play rates paid by Spotify and
SoundCloud \180\ to the Majors for performances on their ad-supported
interactive tiers from May 2018 through April 2019--which he calculates
as $[REDACTED] per play. Shapiro WDT at 33, 36 & tbl.8; 8/19/20 Tr.
2900 (Shapiro). As discussed supra, although he includes SoundCloud
data, essentially, the $[REDACTED]. Shapiro WDT at 36 & tbl.8; 8/19/20
Tr. 2900 (Shapiro). Professor Shapiro further testifies that, to his
knowledge, $[REDACTED] was the [REDACTED] at that time. 8/19/20 Tr.
2900 (Shapiro).
---------------------------------------------------------------------------
\180\ It is undisputed that SoundCloud is not comparable to the
target market services primarily because it has a high level of
user-generated content and lacks access to the full catalogs of the
record companies. 8/11/20 1408-09 (Orszag). Further, unlike other
services, SoundCloud has always been mainly a platform where
unsigned artists can post their music for downstream discovery.
Harrison WDT ] 12; Trial Ex. 5289 at 7. The Services maintain that
the issue regarding SoundCloud's suitability as a benchmark is
``much ado about nothing,'' because [REDACTED], Services RPFFCL ]
206, and Professor Shapiro notes that [REDACTED] 8/19/20 Tr. 2100
(Shapiro). Accordingly, the Judges do not rely on SoundCloud as an
appropriate benchmark.
---------------------------------------------------------------------------
More particularly, Professor Shapiro divides: (1) The total royalty
fees paid by Spotify and SoundCloud to each Major between May 2018 and
April 2019; by (2) the play counts on their ad-supported interactive
tiers during the same period. Shapiro WDT at 36 & tbl.8, 63 (Appx. D).
Professor Shapiro includes in his (pre-adjustment) $[REDACTED] per-
play rate a previously omitted [REDACTED]. Shapiro WDT at 31 & Appx. D
at 1. This [REDACTED] was needed because, pursuant to its contract with
[REDACTED].\181\
---------------------------------------------------------------------------
\181\ However, Professor Shapiro declines to include a similar
[REDACTED] payment by Spotify to Warner, asserting that the payment
data he had been provided reflected a global true-up payment rather
than a U.S. payment, without information to enable a break-out of
the U.S. portion of the ``true-up.'' Shapiro WDT, app. D at 1 n.3;
8/19/20 Tr. 2911-12 (Shapiro). The Judges discuss the [REDACTED]
issue infra.
---------------------------------------------------------------------------
In addition, Professor Shapiro includes in his (pre-adjustment)
$[REDACTED] per-play proposed rate a value for [REDACTED]. Professor
Shapiro calculates this further value at $[REDACTED] per play. Shapiro
WDT at 33 n.47; Appx. D at 1-2 & n.4; see also Trial Ex. 4044 at 14,
43; Trial Ex. 5037 at 58-63 ([REDACTED]).
Before considering potential adjustments to his $[REDACTED]
benchmark rate that may be required to account for differences between
the benchmark and target markets, Professor Shapiro characterizes this
$[REDACTED] per-play interactive market derived rate as exceeding an
``upper bound for the zone of reasonableness'' for ad-supported
services. He reaches this opinion because he finds it would be
``unreasonable for [noninteractive services] to pay more per-
performance for streams of sound recordings than the rate . . . for . .
. interactive performances,'' which, because of its greater
functionality, he characterizes as ``far more valuable'' than
noninteractive performances). Shapiro WDT at 37.\182\
---------------------------------------------------------------------------
\182\ To be clear, this benchmarking approach is not the ratio
equivalency method. Because Professor Shapiro is applying effective
noninteractive rates as his benchmarks, his model does not require
an assumption of a particular level of substitution (cross-
elasticity) between the benchmark and target markets that would
affect the per-play rate in the target market.
---------------------------------------------------------------------------
[[Page 59511]]
i. Professor Shapiro's Adjustments
Professor Shapiro proposes the same three adjustments to his
benchmark rate for ad-supported webcasters as he did for his
subscription benchmark rate: (1) An interactivity adjustment; (2) a
skips adjustment; and (3) an effective competition adjustment. Shapiro
WDT at 37-40. He supports the application of all three adjustments on
the same general bases he advocates for making these adjustments to his
subscription benchmark, as discussed supra.
(A) Professor Shapiro's Proposed Interactivity Adjustment
Professor Shapiro proposes to make the same two-step adjustment he
applies to the subscription benchmark. He relies on the principle he
applies in the subscription market, viz., that ``the rights conferred
to play music interactively . . . are much more valuable than the
rights conferred for statutory services. . . .'' Shapiro WDT at 33-34.
To make this adjustment--and even though Professor Shapiro eschews
reliance on the ratio equivalency approach for this ad-supported
benchmark--he proposes that his unadjusted $[REDACTED] benchmark be
reduced by 50% by applying the same 2:1 ``ratio equivalency'' ratio
that the Judges have only applied in connection with subscription
services. Shapiro WDT at 38-39. To apply this ratio adjustment in the
ad-supported context, Professor Shapiro relies on the relative retail
prices charged by ten leading subscription interactive services, $9.99
per service, and three mid-tier services (offering limited
interactivity), $4.99 per service.\183\ This adjustment reduces
Professor Shapiro's benchmark rate from $[REDACTED] to $[REDACTED].
Shapiro WDT at 38-39.
---------------------------------------------------------------------------
\183\ The services on which Professor Shapiro relies are the
same as those he relied on to make this adjustment in the
subscription market (Pandora Plus, Slacker LiveXLive Plus, and
Napster unRadio).
---------------------------------------------------------------------------
Professor Shapiro testifies that he found further support for his
2:1 interactivity adjustment and the concomitant rate reduction to
$[REDACTED] by comparing: (1) The rate Pandora pays Warner for limited
Premium Access on-demand intervals on Pandora Free: $[REDACTED]; with
(2) the noninteractive rate Pandora pays Warner: $[REDACTED] for
noninteractive plays on its noninteractive tier. Trial. Exs. 5126,
4031; Shapiro WRT at 34. Similarly, Professor Shapiro notes that
Pandora's contract with Sony contains a per-play royalty rate of
$[REDACTED] for noninteractive performances on its ad-supported
noninteractive service, Trial. Exs. 5012 at 10; 5024 at 3, compared
with a $[REDACTED] rate for interactive plays on that same ad-supported
noninteractive tier. Shapiro WRT at 34 n.93.
As he asserts regarding his proposed subscription benchmark
interactivity adjustment, Professor Shapiro claims the above 2:1
adjustment remains insufficient because it compares the retail
subscription price from the benchmark market to mid-tier services with
limited interactive features--not to statutory noninteractive services.
Shapiro WDT at 38. To complete the interactivity adjustment to account
for this point, Professor Shapiro proposes (again, as with his
subscription benchmark) to make an adjustment that reflects the
percentage difference between: (1) The effective per-play mid-tier
royalty rate for subscription services, $[REDACTED]; and (2) the
statutory rate paid by subscription noninteractive services: $0.0023.
Shapiro WDT at 30 & tbl.5, 38-39. This percentage difference is
[REDACTED]%, based on a [REDACTED]:1 ratio of $[REDACTED]:$[REDACTED].
Id. Applying this [REDACTED]% adjustment on top of the 2:1 adjustment
reduces Professor Shapiro's interim rate (before any other adjustments)
from $[REDACTED] to $[REDACTED].
However, in an acknowledgement that Spotify's ad-supported mobile
tier (a part of his benchmark service) is less than fully interactive,
with functionality more like that of a mid-tier limited interactive
service, Professor Shapiro testifies that it would be reasonable for
the Judges to apply only his second interactivity adjustment--i.e., the
[REDACTED]:1 that he asserts adjusts for the difference between the
value of (1) mid-tier services; and (2) statutorily-compliant
functionality. 8/19/20 Tr. 2905. Applying only this second
interactivity adjustment, Professor Shapiro lowers his $[REDACTED] per-
play rate (described above) to $[REDACTED] (subject to the additional
adjustments detailed below).
(B) Professor Shapiro's Proposed Skips Adjustment
Professor Shapiro next proposes to make a skips adjustment, which
he asserts is required because noninteractive licensees are required by
statute to pay for plays under thirty seconds, but the benchmark
interactive services do not pay for such truncated plays. Shapiro WDT
at 39. Applying the same analysis as in his subscription benchmark
model, and noting that recent Pandora data shows less-than-thirty
second performances account for about [REDACTED]% of total radio
performances, he derives a [REDACTED]:1 ratio for his skips adjustment.
Shapiro WDT at 39. This adjustment lowers Professor Shapiro's benchmark
rate for ad-supported services from $[REDACTED] to $[REDACTED]
(applying both of his interactivity adjustments), or from $[REDACTED]
to $[REDACTED] (applying only his second interactivity adjustment).
(C) Professor Shapiro's Proposed Effective Competition Adjustment
Professor Shapiro proposes the same effective competition
adjustment here, as he did for his subscription benchmark. That is, he
calculates the difference between the effective per-performance rates
paid to the Majors by [REDACTED] interactive service ($[REDACTED]) and
the weighted average of the effective per-performance rates paid by ten
other major on-demand streaming services ($[REDACTED]). Shapiro WDT at
39-40, 42 & tbl.10. This results in a [REDACTED]:1 adjustment factor.
This adjustment lowers Professor Shapiro's benchmark rate for
advertising supported webcasters from $[REDACTED] to $[REDACTED] (if
both interactivity adjustments are applied) or from $[REDACTED] to
$[REDACTED] (if only the second interactivity adjustment is made). 8/
19/20 Tr. 2906-2907 (Shapiro).\184\
---------------------------------------------------------------------------
\184\ The Judges consider Professor Shapiro's proposed effective
competition adjustment in light of (1) their finding that the 12%
steering adjustment remains appropriate; and (2) SoundExchange's
criticism, discussed infra.
---------------------------------------------------------------------------
As discussed in detail supra,\185\ the Judges found that the 12%
effective competition adjustment derived in Web IV--based on the pro-
competitive effects of steering--remains the best measure, ceteris
paribus, for transforming rates inflated by the Majors' complementary
oligopoly market power into effectively competitive rates. But, as also
noted above, all other things were not equal (comparing the Web IV and
Web V evidence) in the subscription benchmarking exercise, whereas
here, the [REDACTED].\186\
---------------------------------------------------------------------------
\185\ See supra, section III.C
\186\ See supra, section III.D
---------------------------------------------------------------------------
e. SoundExchange's Criticisms of Professor Shapiro's Ad-Supported
Benchmark Model
i. Professor Shapiro's Decision Not To Include the [REDACTED] Value
Professor Shapiro declines to apply a [REDACTED].\187\ He explained
in his
[[Page 59512]]
WDT that, although he applies a [REDACTED], he declines to apply a
Warner ``true-up'' because it is his understanding that, although
``[REDACTED].'' Shapiro WDT at 63; Appx. D at 1 n.3 (emphasis added);
see also 8/19/20 Tr. 2911-12 (Shapiro).\188\
---------------------------------------------------------------------------
\187\ A ``true-up'' in this context is an increase in total
royalties paid at the end of the year. The additional royalties are
due because, although [REDACTED]'' See 9/3/20 Tr. 5668 (Harrison);
Shapiro WDT at 31 n.47.
\188\ The omission of this [REDACTED] is significant. When this
royalty payment is included, Professor Shapiro's (unadjusted)
benchmark rate increases from approximately $[REDACTED] to
approximately $[REDACTED]. Compare Orszag WRT tbl.8 with 8/19/20 Tr.
2912 (Shapiro) (describing the impact of applying or not applying
the [REDACTED]).
---------------------------------------------------------------------------
However, Mr. Orszag, in his WRT, asserts that Professor Shapiro
should have made the [REDACTED]. Moreover, Mr. Orszag identified the
document upon which he relies as supportive of this testimony. Orszag
WRT ] 80 n.178 (identifying the royalty statement document as
``SOUNDEX_W5_NATIVE_PROD_000751_RESTRICTED.xlsx.'' (henceforth the
``000751'' document)).\189\ SoundExchange had produced the ``000751''
document to the Services in discovery, and Professor Shapiro
specifically identified it as one of the documents he reviewed in
preparing his written testimony. Shapiro WDT, Appx. C; see also id.
app. D at 1 & n.1 (identifying the documents on which Professor Shapiro
relies to calculate ad-supported royalty payments as
SOUNDEX_W5_NATIVE_PROD_000001-001558, a sequence that includes
``000751,'' the document identified by Mr. Orszag).
---------------------------------------------------------------------------
\189\ This document was not proffered as evidence at the hearing
and, accordingly, is not part of the hearing record.
---------------------------------------------------------------------------
Professor Shapiro had an opportunity at the hearing to contest Mr.
Orszag's written rebuttal testimony in this regard, and, if he had
contested that testimony, to explain why the aforementioned document
was insufficient. Professor Shapiro did continue to claim at the
hearing that [REDACTED]'' but he did not address Mr. Orszag's assertion
that the document the latter cited, the ``00751'' document, in fact
[REDACTED]. 8/19/20 Tr. 2911-12 (Shapiro) (Professor Shapiro asserting
that he ``[REDACTED]).
The Judges find Professor Shapiro's failure to offer a substantive
rebuttal relating to this document to be especially problematic
because, as noted above, Professor Shapiro had already reviewed that
document, had possession of it (or access to it) and presumably was
familiar with its contents. Further, in its post-hearing proposed
findings, the Services continue to ignore the ``07751'' document,
asserting that ``Mr. Orszag did not calculate the value of the true-up
himself or provide the data required to do so.'' Pandora/Sirius XM
PFFCL ] 225. But, as noted above, Mr. Orszag did identify a document
that he said contained the necessary data, and that specific testimony
remained unchallenged.
It is also noteworthy that Google's expert economic witness, Dr.
Peterson, having access to the same data, decided to apply the
[REDACTED] in toto. 8/25/20 Tr. 3780 (Peterson) [REDACTED]''); see also
8/10/20 Tr. 1172-73 (Orszag) (``Dr. Peterson and I have similarly found
the same result . . . .'').
Professor Shapiro's failure to challenge the sufficiency of the
document identified by Mr. Orszag, combined with Dr. Peterson'
application of a [REDACTED] convinces the Judges that Professor
Shapiro's failure to apply a [REDACTED] was incorrect. Applying this
[REDACTED] increases Professor Shapiro's ad-supported benchmark rate,
before any adjustments, from $[REDACTED] to $[REDACTED] (rounded).
Orszag WRT tbls.7 & 8.\190\
---------------------------------------------------------------------------
\190\ Mr. Orszag, like Professor Shapiro, includes in his
calculation of the Spotify effective rate the value of marketing
considerations (alternatively valued at the functionally equivalent
rate $[REDACTED] per-play) in the agreements between Spotify and
major record companies. Compare Shapiro WDT at 31 n.47 & app. D at 2
with Orszag WRT tbls. 7 & 8.
---------------------------------------------------------------------------
ii. Professor Shapiro's Failure To Account for the Funneling
(Conversion) Value of Spotify's Ad-Supported Service
Mr. Orszag claims that a fundamental problem with Professor
Shapiro's use of the Spotify ad-supported tier as a benchmark is that
he fails to account for the fact that this benchmark also incorporates
a successful and thus valuable feature: The ability to convert users to
Spotify's more lucrative subscription tier. Orszag WRT ] 72.
SoundExchange notes that, at the hearing, Professor Shapiro
acknowledges this point. First, as a general matter, he agreed that the
more promotional a music service is of other revenue streams (net of
substitution for other revenue streams, the lower the royalty rate the
service should be able to negotiate. Then, specifically, Professor
Shapiro admitted that, if [REDACTED], then [REDACTED] 8/19/20 Tr. 2967
(Shapiro).
Mr. Orszag further explains that the importance of funneling ad-
supported users into paid subscriptions is thus a [REDACTED] component
of the bargain between the record companies and Spotify. That value is
manifested in the parties' negotiations by the record companies'
[REDACTED]. Orszag WRT ] 73.
Another SoundExchange economic witness, Professor Tucker, places
Spotify's funneling/conversion value in the broader contemporary
economic context of ``freemium'' pricing models. More particularly, she
notes the need for sellers to experiment constantly with different ways
of ``nudging people to upgrade'' and reminding them of the potential
benefits of the premium paid product, '' so as to overcome the risk
that customers will become ``anchored to a zero price.'' 8/17/20 Tr.
2116 (Tucker). Professor Tucker opined that the record companies'
[REDACTED] was a striking application of the commercial necessity to
funnel and convert to a premium service. Id. at 2120-21. (Tucker).
The Services contend that SoundExchange has failed to demonstrate
adequately the [REDACTED]. Also, they contend record company witnesses
have indicated that, notwithstanding any discounts/penalties based on
listener tenure, the record companies have [REDACTED] Services RPFFCL
]] 179-183 (and record citations therein).
Notwithstanding these rejoinders, the Services propose that, if the
Judges find Spotify's ad-supported tier rates to include [REDACTED],
rather than reject the ad-supported rates as benchmarks, the Judges
should adjust the Spotify ad-supported benchmark rate upwards in an
attempt to isolate and remove the [REDACTED] in that rate tier. See 8/
19/20 Tr. 2912 (Shapiro). In that regard, Professor Shapiro agreed that
other potential evidence exists to calculate this adjustment: The
express terms in [REDACTED] 8/19/20 Tr. 2912-13, 2914 (Shapiro)
(agreeing with Judge Strickler's suggestion that the [REDACTED]); see
generally Services PFFCL ] 146; Pandora/Sirius XM PFFCL ]] 242-243 (and
record citations therein).
The Judges find that, despite the various incentives and market
power that may have led to the [REDACTED],\191\ the [REDACTED], serve
as a useful basis by which to isolate the [REDACTED]. Indeed, as
discussed at length infra, the parties have adopted a basis by which to
apply these [REDACTED].
---------------------------------------------------------------------------
\191\ Any potential impact from differences in market or
bargaining power, such as from the licensors' complementary
oligopoly market structure, Spotify's unique position as a pureplay
service, interactivity differences or play counts, is addressed by
the Judges elsewhere in this Determination, both generally and with
specific regard to the experts' rate proposals.
---------------------------------------------------------------------------
Having considered SoundExchange's criticisms of Professor Shapiro's
establishment of a benchmark, the
[[Page 59513]]
Judges next proceed to a consideration of SoundExchange's criticisms of
the potential adjustments proffered by Professor Shapiro.
iii. Criticism of Professor Shapiro's Interactivity Adjustment
Taking on Professor Shapiro's first interactivity adjustment,
SoundExchange challenges the correctness of applying a supposed value
for interactivity derived from the subscription market in the ad-
supported market. More particularly, SoundExchange asserts, relying on
Professor Shapiro's own testimony, that the added value, if any, of
interactive functionality depends on its value to consumers in the
downstream market. In a subscription market, SoundExchange avers the
service's demand for interactive functionality is a derived demand,
arising from its downstream customers' WTP for interactive
functionality. SX RPFFCL (to Pandora/Sirius XM) ] 229 (citing 8/19/20
Tr. 2975-76 (Shapiro)).
In contrast to a subscription market, SoundExchange maintains, an
ad-supported service's demand for interactive functionality would be
irrelevant to the calculation of advertisers' WTP for advertisements,
and the users' willingness to listen to them. Id. (citing 8/19/20 Tr.
2977-80 (Shapiro)). Thus, SoundExchange maintains that Professor
Shapiro errs in using an interactivity adjustment derived from the
subscription market to adjust his ad-supported rates. In further
support of this argument, SoundExchange relies on the testimony of two
of the Services' economists, testifying for the NAB and Google,
respectively, in this proceeding. Id. (citing Leonard WRT ] 54 (``[T]he
relationship between revenue generation and interactivity is
substantially different for ad-supported than for subscription
services.''); and 8/25/20 Tr. 3702-03 (Peterson) (``[I]t's really the
willingness to pay of advertisers and the ability of the service to
attract advertisers that is going to affect the revenue on the service.
It's not listeners that are providing that revenue.'')).
Turning to Professor Shapiro's second interactivity adjustment
based on mid-tier subscription services, SoundExchange offers the same
criticism as it asserts immediately above because this adjustment is
also derived from the subscription market. SX RPFFCL (to Pandora/Sirius
XM) ] 230. SoundExchange also raises the criticism of this second
interactivity adjustment it makes in connection with Professor
Shapiro's subscription benchmark adjustments. That is, SoundExchange
re-asserts that Professor Shapiro: (1) Entirely ignores consumer WTP to
pay in the downstream market by relying on upstream royalty
differentials; (2) cannot cite to evidence any positive WTP of
consumers in the downstream market for the additional functionality
that Pandora obtained for its mid-tier Pandora Plus service; (3)
wrongly dismisses the fact that the subscription price for Pandora's
prior noninteractive service was the same ($4.99) as its subsequent
mid-tier Pandora Plus service; (4) merely speculates that the
additional functionality of Pandora Plus may have increased consumer
demand compared to demand for its prior noninteractive service; (5)
ignores the fact that any increase in subscribership that may have
occurred simply adds more plays and more revenue, without necessarily
changing revenue per play; (6) fails to address the fact that
[REDACTED] and (7) wrongly uses a statutory rate (the $0.0023 rate) as
his base against which to compute the percentage value added by
Pandora's mid-tier service. See SX PFFCL ]] 143-156 (and record
citations therein).
SoundExchange also takes issue with the implicit premise that
Spotify's ad-supported service has the full functionality necessary to
justify the interactivity adjustments Professor Shapiro proposes. It
notes that (as Professor Shapiro himself acknowledges), although
Spotify's ad-supported service is fully interactive when used on a
desktop, its mobile service is not fully interactive, but rather
provides a ``shuffle'' feature that lets listeners select an artist or
playlist and hear a somewhat randomized stream of tracks by that artist
or from that playlist. See 8/19/20 Tr. 2985 (Shapiro).\192\ However,
SoundExchange notes that Professor Shapiro does not reduce his proposed
interactivity adjustment to reflect the lower functionality of the
mobile service, 8/19/20 Tr. 2986 (Shapiro), even though he acknowledges
that ``[REDACTED]'' and its [REDACTED] 8/19/20 Tr. 2986-87
(Shapiro).\193\
---------------------------------------------------------------------------
\192\ Spotify's mobile shuffle service also allows up to 6 songs
from an album within a 60 minute period, compared to the statutory
sound recording performance complement which allows only 3 songs
from an album within a 3 hour period. See Peterson WDT ] 45 n.33.
\193\ It was for this reason that Professor Shapiro proposes the
alternative interactivity adjustment approach, as discussed supra,
whereby only the difference between the mid-tier royalty rate and
the statutory rate (his ``second'' interactivity adjustment) would
be applied. However, SoundExchange characterizes this approach as a
``tactical retreat'' without economic meaning, because Professor
Shapiro offers no explanation for why an interactivity adjustment
for a mid-tier subscription service-with the same functionality
available on both desktop and mobile devices-is applicable to
Spotify's ad-supported service (with functionality that differs
depending on whether the music is delivered via a mobile or a
desktop method). SX RPFFCL (to Pandora/Sirius XM) ] 233.
---------------------------------------------------------------------------
SoundExchange also takes issue with Professor Shapiro's reliance on
the per-play rates of $[REDACTED] for Premium Access plays on Pandora's
noninteractive service. It notes that, for example, Sony's contract
with [REDACTED]'' Trial Ex. 5097 at 1. Accordingly, SoundExchange
maintains that these per-play rates embody a promotional value, and
thus do not reflect the stand-alone value of on-demand functionality on
Pandora's ad-supported service.
iv. Criticism of Professor Shapiro's ``Skips'' Adjustment
SoundExchange questions the probative value of the data upon which
Professor Shapiro relies for his [REDACTED]% skips adjustment on the
same basis as it challenges his application of this data to his skips
adjustment in the subscription market. To recap the criticism,
SoundExchange notes that Professor Shapiro acknowledges that this data
came from noninteractive plays available on all three tiers of
Pandora's service--ad-supported, mid-tier and fully interactive. 8/20/
20 Tr. 3028-29 (Shapiro). As a consequence, Mr. Orszag asserts, the
[REDACTED]% ``skips'' rate is likely overstated because subscribers to
Pandora's two interactive tiers have unlimited skips, making them more
likely to skip when accessing noninteractive plays on those two tiers.
Orszag WRT ] 120. SoundExchange notes that Professor Shapiro agrees but
testifies that any such upward bias would have had a de minimis impact,
so he did not measure the effect. 8/20/20 Tr. 3030-32 (Shapiro).
v. Criticisms of Professor Shapiro's Effective Competition Adjustment
SoundExchange asserts that no effective competition adjustment is
warranted. Because Professor Shapiro proffers the same [REDACTED]%
effective competition adjustment to the ad-supported rate as he does to
the subscription rate, for the same reasons, SoundExchange sets forth
the same substantive opposition. See SX PFFCL ]] 487-489. Accordingly,
the Judges' recitation of that argument supra is incorporated by
reference here.\194\
---------------------------------------------------------------------------
\194\ See supra, section IV.B.1.e.v(C).
---------------------------------------------------------------------------
SoundExchange also repeats its argument regarding the virtual
equivalency of the $[REDACTED]
[[Page 59514]]
effective per-play rate for [REDACTED] and the $[REDACTED] effective
per-play rate for Spotify. Again, SoundExchange notes that Professor
Shapiro characterizes this [REDACTED] rate as effectively competitive,
whereas he asserts that [REDACTED] reflects the Majors' complementary
oligopoly power. See SX PFFCL ]] 483-486 (and record citations
therein).
f. The Judges' Analysis and Findings Regarding Professor Shapiro's
Proposed Adjustments
i. Professor Shapiro's Proposed First and Second Interactivity
Adjustments
The Judges reject Professor Shapiro's proposed interactivity
adjustments to his proposed ad-supported rate. In reaching this
finding, the Judges agree with SoundExchange that the concept of added
economic value for interactivity is not a suitable basis to adjust
downward a proposed benchmark rate. Advertisers, not listeners, pay the
royalties. And there is insufficient evidence to establish that
advertisers' payments to noninteractive ad-supported services are a
function of the level of interactivity of that service.\195\ Moreover,
Professor Shapiro's attempt to apply the 2:1 interactivity adjustment
derived from the subscription market is not only unsupported, it is
ironic, because Professor Shapiro has rightfully chastised Mr. Orszag
for applying subscription market data to divine an ad-supported rate,
as discussed supra.
---------------------------------------------------------------------------
\195\ To be sure, listeners to ad-supported services may well
prefer interactive functionality to noninteractive functionality,
because the former provides greater utility. The problem is that
such a preference is not revealed in this multi-sided platform
context because the listeners do not make purchasing decisions.
---------------------------------------------------------------------------
The Judges also decline to endorse Professor Shapiro's alternative
proposal to apply only his second interactivity adjustment. As the
Judges explained supra regarding Professor Shapiro's proffer of this
[REDACTED]% adjustment in the subscription market, there is no
sufficient evidentiary basis to use the entirety of the upstream
royalty differences to generate downstream differences in interactivity
value, nor is there sufficient evidence that any of the royalty
difference ($[REDACTED]) reflected actual value differences, given the
$4.99/month price for both Pandora's prior Pandora One statutory
subscription service and its subsequent Pandora Plus mid-tier
subscription service. Moreover, because this royalty differential
relates to the subscription market, the Judges find it (like professor
Shapiro's proffered first interactivity adjustment) to be uninformative
with regard to the ad-supported market.
ii. Professor Shapiro's Proposed Skips Adjustment
SoundExchange does not add any other criticisms of Professor
Shapiro's skips adjustment to its discussion of his ad-supported
adjustment to his subscription skips adjustment. Accordingly, the
Judges adopt (and incorporate by reference here) the same analysis and
the same finding of a [REDACTED]% skips adjustment as they found for
the subscription market.
iii. Professor Shapiro's Proposed Effective Competition Adjustment
Because Professor Shapiro's proffered ad-supported effective
competition adjustment, and SoundExchange's criticism thereof, are
identical to their positions regarding this potential adjustment in the
subscription market, the Judges incorporate by reference here their
rejection of that adjustment, and the reasons for that rejection.\196\
---------------------------------------------------------------------------
\196\ See supra, section IV.B.1.e.v(C). The Judges add, though,
that Professor Shapiro's ad-supported methodology appears to shed
light on Pandora's decision (discussed supra) to propose an
effective competition adjustment ([REDACTED]%) based on the
difference between the interactive average royalty rate
($[REDACTED]) and the [REDACTED] royalty rate ($[REDACTED]), rather
than the difference between the $[REDACTED] average rate and
[REDACTED]s $[REDACTED] effective per-play rate. Because Pandora
uses the Spotify ad-supported rate as its benchmark, if it
identified Spotify's effective per-play rate (based on a [REDACTED])
as effectively competitive, it could not then rely on that rate to
generate a downward effective competition adjustment, as exposed by
SoundExchange. That would have significantly increased Pandora's
proposed benchmark rate.
---------------------------------------------------------------------------
The Judges' rejection of Professor Shapiro's proposed effective
competition adjustment does not mean that no such adjustment is
warranted. Rather, the Judges apply the same analysis to the ad-
supported sector as they have in the subscription context. However, the
Judges' application of that approach here in the ad-supported sector
differs from their analysis in the subscription sector. To recap, in
the subscription sector, [REDACTED].\197\ Thus, when applying the
[REDACTED]% effective competition adjustment based on the price-
competitive impact of steering, the Judges offset the percentage
difference between the [REDACTED]% and [REDACTED]% rates--[REDACTED]%--
to set an effective competition adjustment of [REDACTED]% (i.e.,
[REDACTED]%-[REDACTED]%).
---------------------------------------------------------------------------
\197\ Under the 2017 Agreements, [REDACTED]. Shapiro WDT at 40,
tbl.10; see also Orszag WDT ] 153 & tbl.15 ([REDACTED]).
---------------------------------------------------------------------------
However, in the ad-supported sector, [REDACTED]. Indeed, the Majors
[REDACTED]. Ultimately, the Majors and Spotify [REDACTED]. Trial Ex.
4040 (Universal/Spotify 2017Agreement); Trial Ex. 5038 (Warner/Spotify
Agreement).
With regard to the headline per-play rates, the 2017 Universal-
Spotify Agreement [REDACTED]. Compare Trial Ex. 2062, Fees Annex, p. 3
(2013 Agreement) with Trial Ex. 4040, Fees Annex, p.1 of 3; see also
Harrison WDT ] 24 (noting [REDACTED]); Shapiro WRT at 19 n.60
([REDACTED]. Similarly, [REDACTED]. Compare Trial Ex. 5020 ex. I (Rate
Card) (2013 Agreement) with Trial Ex. 5038 app. 1 (Rate Card) (2017
Agreement).\198\
---------------------------------------------------------------------------
\198\ The Sony/Spotify 2013 and 2017 Agreements [REDACTED]. See
Trial Exs. 5074 (2013 Agreement) and 5011 (2017 Agreement); see also
Orszag WDT, fig.6..
---------------------------------------------------------------------------
In the other tier of its 2017 Agreements with [REDACTED], Spotify
[REDACTED]. Spotify has been paying royalties [REDACTED] 2017
Agreements because that [REDACTED]. 8/20/20 Tr. 3085-86 (Shapiro); 8/
11/20 Tr. 1233 (Orszag). But, as Mr. Harrison of Universal
acknowledged, [REDACTED]. 9/3/2020 Tr. 5710-11 (Harrison); SX PFFCL ]
291 (acknowledging the [REDACTED]). Further, there is no evidence to
indicate that the effective per-play rate on the ad-supported tier
[REDACTED] under Spotify's 2017 Agreements with the other two Majors,
i.e., Warner or Sony.
Mr. Harrison asserts that the reason Spotify's [REDACTED] was
because Spotify was [REDACTED]. But the ability of a licensor to
extract value from a licensee's [REDACTED] is precisely the sort of
``heads-I-win, tails-you-lose'' advantage that the Judges noted in
SDARS III is part-and-parcel of a licensor's complementary oligopoly
power. SDARS III, 83 FR at 65228. Accordingly, the 2017 Agreement
between Universal and Spotify, with regard to the ad-supported rates
(and unlike with regard to the subscription rates), is consistent with
an undiminished exercise of complementary oligopoly power.\199\
---------------------------------------------------------------------------
\199\ The Judges discussed this phenomenon elsewhere in this
Determination, regarding the Majors' obtaining a share of the value
of Pandora's investment in the monetization of its advertising
platform. In that context and in the present context, the extent to
which the Majors can share in the increase in advertising revenue is
a function of their complementary oligopoly power (as is every
aspect of the rate-setting process). This particular aspect of the
Majors' complementary oligopoly power is mitigated by the Judges'
general inclusion of the [REDACTED]% effective competition
adjustment, which is broadly intended to offset all aspects of the
Majors' complementary oligopoly power (that is not otherwise offset
by Spotify's countervailing power in the subscription benchmark
market).
---------------------------------------------------------------------------
Additionally, by obtaining [REDACTED] in the 2017 Agreements,
Universal and Warner [REDACTED],
[[Page 59515]]
relative to their 2013 Agreements, [REDACTED]. Thus, [REDACTED] of the
2017 Agreements, these Majors had [REDACTED]--which, as noted above,
[REDACTED], according to Mr. Harrison.
The Judges find these facts to belie any assertion that [REDACTED].
Thus, the effective competition adjustment on the ad-supported tier
remains at [REDACTED]%, as it pertains to Professor Shapiro's benchmark
rate.
g. Applying the Skips and Effective Competition Adjustments
Because the Judges do not apply any interactivity adjustment to
Professor Shapiro's ad-supported benchmark rate, they adjust the
$[REDACTED] per-play ad-supported rate by first applying the
[REDACTED]% adjustment for skips, which reduces the rate to
$[REDACTED]. The Judges then apply the effective competition adjustment
of [REDACTED]. The resulting rate is $[REDACTED] ($[REDACTED])
rounded).
3. Supplementation by Mr. Orszag and Professor Shapiro to Their
Original Ad-Supported Benchmarking Approaches
Both Mr. Orszag and Professor Shapiro supplement their ad-supported
benchmarking models in manners that narrow the differences between
their proposed rates. Each expert's supplemental position is examined
seriatim below.
a. Professor Shapiro Acknowledges the Propriety of Adjusting His
Proposed Spotify Ad-Supported Benchmark Rate Higher To Account for
Spotify's Ability To Funnel Ad-Supported Users Into Its Higher Royalty-
Bearing Subscription Tier
Professor Shapiro takes notice of SoundExchange's criticism that
his ad-supported benchmark model fails to account for Spotify's added
value as a funneling tool, converting ad-supported listeners into
subscribers who pay a higher retail price and generate higher
royalties. 8/19/20 Tr. 2912 (Shapiro) (``[[REDACTED]''); see also
Orszag WRT ] 72. Further, for benchmarking purposes in this proceeding,
Pandora assumes that [REDACTED]a value to the Majors that [REDACTED].
Pandora/Sirius XM PFFCL ] 241.\200\
---------------------------------------------------------------------------
\200\ Consistent with this assumption, the Judges have described
supra the ad-supported rate structure in Spotify's agreements with
Universal and Warner, respectively, that provide Spotify [REDACTED].
---------------------------------------------------------------------------
Having adopted this assumption, Professor Shapiro testifies that
the appropriate response is not to disregard Spotify's ad-supported
tier rates. Rather, the correct approach is to address Spotify's ad-
supported rate structure by [REDACTED]. 8/19/20 Tr. 2912 (Shapiro);
Shapiro WRT at 42.
Taking note of the aforementioned Spotify agreements with Warner
and Universal, Professor Shapiro focuses on the per-play royalty rates
Spotify pays [REDACTED]): $[REDACTED].\201\ Each of these rates,
Professor Shapiro notes, represents a [REDACTED]% [REDACTED] the base
per-play minimum specified in the agreements. Shapiro WRT at 43;
Harrison WDT ] 67 (regarding the Universal agreement); Adadevoh WDT ]
21 (regarding the Warner Agreement).
---------------------------------------------------------------------------
\201\ There is no evidence of a comparable [REDACTED] rate in
its agreement with Sony.
---------------------------------------------------------------------------
According to Professor Shapiro, it would be appropriate to use the
[REDACTED]users, as the basis for an upward adjustment to his benchmark
rate, in order to [REDACTED]. In other words, [REDACTED]. 8/19/20 Tr.
2912-14 (Shapiro).
Professor Shapiro at first intended to adjust his benchmark rate
higher to reflect the full [REDACTED]% [REDACTED]. However, Mr. Orszag
pointed to a fact that indicated Professor Shapiro would actually
overstate his benchmark if he applied [REDACTED]. Specifically, Mr.
Orszag testified:
You just can't take the rate and [REDACTED]. That would be
inappropriate. One would want to weight by the number of subscribers
who have been--have been [REDACTED] [REDACTED].
8/11/20 Tr. 1382 (Orszag). Mr. Orszag used this data to determine
that, to adjust the proposed royalty rate derived by Professor Shapiro
(and by Dr. Peterson), as well as the proposed royalty rates he
derived--to eliminate the funneling/conversion value in the rate
structure--required a [REDACTED] adjustment (a [REDACTED]) in their
respective rates. 8/11/20 Tr. 1382, 1405-06 (Orszag); 8/25/20 Tr. 3816
(Orszag).\202\
---------------------------------------------------------------------------
\202\ Mr. Orszag calculated this [REDACTED] adjustment from a
worksheet he utilized in this proceeding that had been produced by
SoundExchange to the Services in discovery, Bates #W5 00492-00502).
8/11/20 Tr. 1408 (Orszag) (promising to identify the underlying
worksheet the next hearing day); 8/12/20 Tr. 1486 (identification of
the worksheet the next hearing day by David Handzo, Esq, counsel for
SoundExchange, without objection).
---------------------------------------------------------------------------
Professor Shapiro analyzed this background worksheet and came to
the same conclusion as Mr. Orszag, quantifying the smaller upward
adjustment of [REDACTED]% to the proposed rate, rather than
[REDACTED]%. Compare 8/25/20 Tr. 3816 (Orszag) (``Professor Shapiro in
his testimony has introduced a new adjustment. He proposed a [REDACTED]
x adjustment to the Spotify Free rate . . . that works to correct the
[REDACTED] that are associated with the Spotify Free benchmark. And
with that, I am more comfortable with that benchmark. '') with 8/19/20
Tr. 2913, 2921, 2970 (Shapiro) (``I have calculated, for the same
calculation he did . . . that the proper adjustment would be a
[REDACTED] adjustment factor. . . . [W]e did the same calculation and
we both got to this same number.. . . And that ratio is also
[REDACTED]. So we're doing the same thing.. . . I [had] said something
like the [REDACTED], but Mr. Orszag corrected me and pointed out it
should be [REDACTED].'').
Applying this [REDACTED] factor to the Judges' calculation
(conducted supra) of Professor Shapiro's benchmark effective rate for
ad-supported noninteractive services, $[REDACTED], results in a final
effective rate of $[REDACTED] (i.e., $[REDACTED] x [REDACTED]), or
$0.0023 (rounded).
b. Mr. Orszag Acknowledges the Propriety of Using Spotify's Ad-
Supported Service as a Benchmark for the Statutory Benchmark Service
Although SoundExchange and Mr. Orszag continue to advocate for the
latter's subscription benchmark-based rate of $0.0025 as the statutory
ad-supported rate,\203\ Mr. Orszag subsequently testified that he had
become ``comfortable'' as well with applying Spotify's ad-supported
rate as the benchmark in his own ratio equivalency model. He came to
this conclusion after discerning that ``[t]he percentage of revenue for
the Spotify subscription tier is virtually the same as the percentage
of revenue for the Spotify Free tier.'' 8/25/20 Tr. 3809 (Orszag).
---------------------------------------------------------------------------
\203\ ``I continue to believe that license agreements for
subscription on-demand services can be useful benchmarks for
statutory ad-supported services.'' Orszag WRT ] 75.
---------------------------------------------------------------------------
More particularly, he notes that the effective percent-of-revenue
rate paid by [REDACTED] (i.e., as a percent of advertising revenue) is
[REDACTED]%. Peterson WDT, ] 51. By comparison, the royalty rate on
which Mr. Orszag relies in his WDT is based on a very similar
[REDACTED]% subscription market effective rate paid by [REDACTED].
Orszag WDT, tbls.7, 9.
Mr. Orszag notes, though, that his percent of revenue calculation
differs from the calculations of Dr. Peterson and Professor Shapiro.
Dr. Peterson bases his royalty percentage on net revenue, which is
lower than gross revenue. By contrast, Mr. Orszag makes
[[Page 59516]]
his percent-of-revenue calculation off Spotify's gross revenues. The
revenue figure (whether gross or net) is the denominator in the
calculation of effective percent-of-revenue royalties. (The royalties
paid comprise the numerator.). Thus, Dr. Peterson's [REDACTED]% figure,
Mr. Orszag acknowledges, must be restated using gross revenues, to make
an apples-to-apples comparison with Mr. Orszag's benchmarking approach.
Mr. Orszag performs this restatement and re-calculates Spotify's
effective percent-of-revenue royalty payments, on a gross revenue
basis, as [REDACTED]%. Orszag WRT ] 71 n.155. Mr. Orszag also notes
that the effective percent-of-revenue rate (apparently on gross
revenues) determined through Professor Shapiro's data is similar, at
[REDACTED]% (after correcting for (1) Professor Shapiro's acknowledged
double-counting in connection with the [REDACTED]) and (2) his decision
not to provide [REDACTED].). Orszag WRT ] 71 nn.155-156.
Mr. Orszag explains that, when establishing percent-of revenue
rates using net advertising revenues, his own ratio equivalency
approach (not the benchmarking approach of either Dr. Peterson or
Professor Shapiro) per-play rates decrease by [REDACTED]%, from
$[REDACTED] to $[REDACTED] (a $[REDACTED] reduction). Id.\204\
Specifically, when Mr. Orszag applies Dr. Peterson's [REDACTED]% of
revenue figure, Mr. Orszag calculates a per-play royalty of $[REDACTED]
($[REDACTED] rounded). Similarly, when Mr. Orszag applies Professor
Shapiro's [REDACTED]% rate, Mr. Orszag calculates an effective per-play
rate of $[REDACTED] (which also rounds to $[REDACTED]). Orszag WRT ] 71
n.156.
---------------------------------------------------------------------------
\204\ To be clear, Mr. Orszag is here plugging in calculations
of percent-of-revenue rates in the benchmark market by using Dr.
Peterson's and Professor Shapiro's own percent-of-revenue
calculations in order to generate a percent-of-revenue rate in the
benchmark market that Mr. Orszag, using his ratio equivalency model,
then applies to the target market; Mr. Orszag is not applying his
percent-of-revenue calculations, as derived from these other two
experts, in their benchmarking models. See Services PFFCL ]] 48-56
(and record citations therein).
---------------------------------------------------------------------------
In his WRT, Mr. Orszag continues to cast doubt, though, on
Spotify's ad-supported rate as a useful benchmark. He emphasizes that
Spotify's ad-supported tier is ``wholly different'' from, inter alia,
statutory noninteractive ad-supported services because of the former's
separate attribute as a [REDACTED] funneling tool, inducing ad-
supported listeners to convert to subscribership and its concomitant
higher royalty payments. Orszag WRT ]] 72-75. However, as noted supra,
when the [REDACTED] adjustment was made to control for the separate
value of funneling/conversion,\205\ Mr. Orszag became, if not a full-
fledged convert, ``more comfortable'' with the ``Spotify Free
benchmark.'' 8/25/20 Tr. 3816 (Orszag).\206\
---------------------------------------------------------------------------
\205\ Mr. Orszag also contends that the [REDACTED] rate is still
too low because: (1) Some Spotify ad-supported listeners ultimately
convert to the subscription tier [REDACTED]; and (2) Spotify's
contract with the Majors require it to [REDACTED]. Orszag WRT ]] 73,
75 n.167. However, the Services convincingly note that: (1)
[REDACTED]; and (2) there is no evidence that [REDACTED], resulting
in a loss of revenue. Services RPFFCL ]] 195, 204; see also 8/19/20
Tr. 2971 (Shapiro) (noting that an adjustment based on additional
revenue arising from an [REDACTED].'').
\206\ The Services nonetheless do not agree with the methodology
utilized by Mr. Orszag, as it does not reflect the need to make any
appropriate adjustments. Id.; Pandora/Sirius XM PFFCL ] 244 n.33.
However, the Judges examine the relative merits of the Services'
proposed adjustments separately, in their analysis of each expert's
model. The salient point here though is that Professor Shapiro's
approach (and Dr. Peterson's approach) yield effective per-play
royalty rates on the ad-supported tiers that are quite proximate,
prior to the consideration of particular adjustments.
---------------------------------------------------------------------------
When Mr. Orszag applies the [REDACTED] adjustment to reflect the
number of Spotify listeners [REDACTED], his proposed rate--derived from
his ratio equivalency model but using Spotify's ad-supported data--
increases from $[REDACTED] to $[REDACTED] See 8/11/20 Tr. 1406
(Orszag).
The final step in this analysis would be to apply an appropriate
adjustment for effective competition. For the reasons discussed, supra,
regarding the effective competition adjustment necessary for Professor
Shapiro's ad-supported benchmark rate, the Judges apply the same 12%
effective competition adjustment.
Applying the 12% effective competition adjustment to Mr. Orszag's
$[REDACTED] rate reduces his ad-supported rate, to $[REDACTED] ($0.0024
rounded).
As in the subscription market analysis, the Judges need to weight
the relative impacts of: (1) The benchmark approach of Professor
Shapiro (joined in the ad-supported analysis by the identical rate
identified by the Judges from Dr. Peterson's analysis) and (2) Mr.
Orszag's (de facto) ratio equivalency approach. The Judges use the same
approach here as they did supra for the subscription rate. That is,
they look to the Zauberman Survey,\207\ as applied by Professor Willig,
for SoundExchange's' estimate of the diversion ratio from ad-supported
noninteractive listeners to a new ad-supported interactive service,
which is [REDACTED]%.\208\
---------------------------------------------------------------------------
\207\ As the Judges noted regarding their use of the Zauberman
Survey in their subscription rate calculation, although they find
the Zauberman Survey less reliable in other respects than other
surveys in the record, only the Zauberman Survey asks respondents
directly the necessary diversion question, here, to identify the
source of music to which they would divert if noninteractive ad-
supported services were not available, not if they were merely
downgraded.
\208\ Professor Willig estimated the number of monthly plays on
Pandora to be [REDACTED]. Willig WDT ] 45. The diversion of monthly
plays to interactive ad-supported services (i.e., to a service such
as Spotify's) is [REDACTED], according to Professor Willig's
application of the Zauberman Survey. Willig WDT, fig.6 (panel A).
[REDACTED]=[REDACTED]% (rounded).
---------------------------------------------------------------------------
Thus, Mr. Orszag's $0.0024 rate has a weight of [REDACTED]% in the
calculation of the overall benchmark rate in the ad-supported market.
Professor Shapiro's $0.0023 rate has a weight of [REDACTED]% (i.e., 1-
[REDACTED]). The resulting rate is $0.0023 (rounded).\209\
---------------------------------------------------------------------------
\209\ [REDACTED].
---------------------------------------------------------------------------
4. Dr. Peterson's Ad-Supported Benchmark Model
a. Dr. Peterson's Interactive Benchmark
Dr. Peterson, testifying on behalf of Google, derived his ad-
supported benchmark analysis from the interactive ad-supported market.
According to Dr. Peterson, this is an appropriate benchmark, consistent
with Web IV, in which the Judges used ad-supported benchmarks to
develop the ad-supported statutory rate. 8/25/20 Tr. 3631 (Peterson);
Peterson WDT ]] 10, 12. Google and Dr. Peterson posit that Spotify's
ad-supported service is the closest benchmark available for statutory
ad-supported services. Google LLC's Amended Proposed Findings of Fact
and Conclusion of Law ] 24 (Google PFFCL); 8/25/20 Tr. 3633-34
(Peterson). Google further suggests that the Judges have indicated a
preference toward benchmark analysis and that prior determinations have
tended to eschew non-benchmark-based approaches. Google PFFCL ] 13-18;
Web IV, 81 FR at 26320, 26327; Distribution of Cable Royalty Funds,
Final Allocation Determination, 84 FR 3352, 3602 (Feb. 12, 2019) (2010-
13 Cable Allocation Determination).
To apply his benchmark, Dr. Peterson began by calculating effective
per-play royalty rates, derived from the royalties paid by Spotify to
Warner, UMG, Sony, Merlin and Ingrooves on a percent-of-revenue
[REDACTED], in which the other [REDACTED]. Peterson WDT ]] 10, 48-51;
8/25/20 Tr. 3634 (Peterson) (explaining that he divided the total
royalties paid or to be paid by the reported royalty-bearing plays for
[[Page 59517]]
each label); Peterson WDT ]] 13, 48.\210\ Dr. Peterson used the
payments due under the [REDACTED]. 8/25/20 Tr. 3636-3637 (Peterson)
([REDACTED]). Under the Spotify licenses, Dr. Peterson found that the
effective per-play rates [REDACTED]. Peterson WDT ]] 10, 48-51.
---------------------------------------------------------------------------
\210\ Dr. Peterson also analyzed SoundCloud Limited's
(SoundCloud) licenses with UMG and Warner for the SoundCloud ad-
supported tier to corroborate his findings based on the five Spotify
licenses. The SoundCloud licenses were offered as confirmatory
benchmarks rather than primary benchmarks because the SoundCloud ad-
supported tier includes comparatively less than a full catalog of
content and significant user-generated content. Peterson WDT ] 11.
As previously indicated, the Judges find that SoundCloud is not
comparable to the target market services primarily because it has a
high level of user-generated content and lacks access to the full
catalogs of the record companies. 8/11/20 1408-09 (Orszag). Further,
unlike other services, SoundCloud has always been mainly a platform
where unsigned artists can post their music for downstream
discovery. Harrison WDT ] 12; Trial Ex. 5289 at 7.
---------------------------------------------------------------------------
On behalf of SoundExchange, Mr. Orszag, as noted supra, proposed
that an upward adjustment was necessary to address the funneling/
conversion value [REDACTED], namely a [REDACTED] adjustment (a
[REDACTED]% increase) in the respective rates. 8/11/20 Tr. 1382, 1405-
06 (Orszag); 8/25/20 Tr. 3816 (Orszag).\211\ Dr. Peterson set forth
that any adjustment to Spotify ad-supported rates to account for value
attributable to funneling or conversion of users from ad-supported to
paid subscription tiers that may occur should not look toward funneling
occurring from the Spotify ad-supported tier to the Spotify
subscription tier, but instead should seek to assess the difference in
the upselling capabilities of the Spotify ad-supported benchmark
compared to statutory services. Dr. Peterson noted that Mr. Orszag did
not attempt such an analysis, despite evidence that statutory services
are funneling consumers into subscription offerings. Therefore, he
suggested, the Judges should reject Mr. Orszag's incomplete attempt to
support a [REDACTED]x upward adjustment without comparing the upsell
potential of Spotify against statutory services such as Google,
Pandora, and iHeart. Peterson WDT ]] 60-61.
---------------------------------------------------------------------------
\211\ Pandora and Sirius XM's expert witness Professor Shapiro
also accepted a similar [REDACTED] upward adjustment. See, e.g., 8/
19/20 Tr. 2913, 2921, 2970 (Shapiro) (``I have calculated, for the
same calculation he did . . . that the proper adjustment would be a
[REDACTED] adjustment factor. . . . [W]e did the same calculation
and we both got to this same number. . . . And that ratio is also
[REDACTED]. So we're doing the same thing. . . . I [had] said
something like the [REDACTED], but Mr. Orszag corrected me and
pointed out it should be [REDACTED].'').
---------------------------------------------------------------------------
Dr. Peterson further countered Mr. Orszag's suggested adjustment by
offering that the premise for applying an upsell adjustment is
unfounded. He argued that the evidence does not support the notion that
[REDACTED] that accounts for the conversion of users to subscription
tiers. Instead, he contended that the labels [REDACTED]. Google notes
testimony from executives at Warner Music and UMG regarding both
[REDACTED]. Dr. Peterson suggested that Mr. Orszag's analysis was
erroneous because he arrived upon a ratio using headline per-play rates
([REDACTED]) to form a proposed adjustment to apply to Dr. Peterson's
analysis, which is based on effective rates [REDACTED]. Peterson WDT ]]
62-65.
Relatedly, in the hearing Dr. Peterson offered an alternative
adjustment to account for funneling or conversion from ad-supported to
paid subscription, whereby the starting point for his analysis (to
which his proposed adjustments would be applied) would be the
[REDACTED] for ad-supported customers who used the ad-supported service
[REDACTED], as opposed to the payments due under the [REDACTED]. He
reasoned this starting point may be appropriate if the Judges feel they
need additional adjustment for funneling value, because any funneling
value, [REDACTED], would have been exhausted or otherwise be de
minimis. And, he offered, that was the amount [REDACTED] was willing to
accept under the agreement. 8/26/20 Tr. 3955, 3960, 3961-63 (Peterson).
b. Dr. Peterson's Adjustments
Dr. Peterson and Google proposed four adjustments to the benchmark
rates for ad-supported webcasters: (1) An interactivity adjustment, (2)
a skips adjustment, (3) an effective competition adjustment, and (4) a
marketing adjustment. Peterson WDT ]] 15.\212\
---------------------------------------------------------------------------
\212\ Dr. Peterson's testimony also suggested that the decrease
in length of the average hit song indicates that per-play rates
should decrease. Peterson WDT ]] 78-79 (suggesting that a hit-driven
station would have to play more songs per hour such that any
decrease in the statutory rate is likely to be offset, at least
partially, by an increase in the number of royalty-bearing plays).
Google did not argue for such an adjustment but instead suggested
the issue as a reason to view its rate proposal as a modest one.
Google PFFCL ] 79.
---------------------------------------------------------------------------
i. Dr. Peterson's Proposed Interactivity Adjustment
Dr. Peterson proposed a downward interactivity adjustment because
the benchmark agreements he used are from an interactive market,
whereas the target, statutory market is for non-interactive. 8/25/20
Tr. 3632, 3638 (Peterson). His testimony noted that interactive
services receive a greater grant of rights (including the ability to
let listeners hear on-demand whatever songs they want whenever they
wish) and that licensors expect higher rates from interactive licenses
than non-interactive licenses. Peterson WDT ] 52; 8/25/20 Tr. 3648
(Peterson).
Dr. Peterson proposed a downward interactivity adjustment of
[REDACTED]%. 8/25/20 Tr. 3632 (Peterson); Peterson WDT ]] 15(a), 55.
His proposal came from his comparison of [REDACTED] [REDACTED] service
to the statutory rate. 8/25/20 Tr. 3642 (Peterson); Peterson WDT ]] 53-
55. Peterson explained that [REDACTED] service, while meeting most of
the statutory criteria, is not eligible for the statutory license
because it [REDACTED], and that [REDACTED]. 8/25/20 Tr. 3641-43
(Peterson); Peterson WDT ]] 53, 54. Dr. Peterson offered that the
incremental amount [REDACTED] agreed to pay above the statutory rate is
a useful measure of how a willing buyer and willing seller value the
additional interactive functionality. Peterson WDT ] 54; see also 8/25/
20 Tr. 3649, 3678-79 (Peterson). He set forth that the [REDACTED]%
difference represents an incremental premium [REDACTED] paid for non-
statutory functionality and that the difference is not meaningfully
influenced by the statutory rate, but rather, that the comparison with
the statutory rate allows for calculation of the delta between the
respective rates. 8/25/20 Tr. 3632; 3646 (Peterson).
ii. Dr. Peterson's Proposed Skips Adjustment
Dr. Peterson also proposed to make a skips adjustment, which he
asserts is required because the noninteractive licensees are required
by statute to pay for plays under thirty seconds, but the benchmark
interactive services do not pay for such brief plays. Peterson WDT ]
67. Dr. Peterson set out that the effective per-play rate he calculated
(total royalties paid/reported streams) has a denominator (streams 30
seconds or longer) that excludes plays for which a statutory service
would pay, thus leading to a higher per-play rate for interactive
services. Peterson WDT ] 67. Based on information from Spotify on the
number of total plays and plays of less than 30 seconds on its ad-
supported interactive service, Dr. Peterson calculated that a downward
adjustment of [REDACTED]%, applied to Spotify's effective per-play rate
results in what Spotify would have paid on a dollar-per-stream basis.
See 8/25/20 Tr. 3680-81 (Peterson); Peterson WDT ]] 15(c), 68. He
proposed an alternative skips adjustment by calculating the adjustment
to the statutory rate that would be required for statutory payments to
remain unchanged if
[[Page 59518]]
statutory services were to pay only on performances of 30 seconds or
longer. He offered that relevant information provided from Pandora
showed that on its ad-supported radio service [REDACTED]% of total
performances are less than 30 seconds, thus leading him to arrive at an
alternative [REDACTED]% reduction in the benchmark rate to account for
skips. Id.
iii. Dr. Peterson's Proposed Effective Competition Adjustment
As with other participants and experts, Google and Dr. Peterson
propose that a competition adjustment is necessary because labels have
complementary oligopoly power in the benchmark market for licensing of
music services, which means those rates do not reflect effective
competition, but rather they result in royalty rates set at
supracompetitive levels even higher than a single monopolist would
charge. 8/25/20 Tr. 3652-53 (Peterson); see also Peterson WDT ]] 19,
21-22, 34-35. Dr. Peterson offered that the consumer expectation that
all interactive services will have the full catalog of each significant
record label means that the labels' catalogs do not substitute for one
another and are instead ``must haves'' for interactive services, which
thus creates a licensing market where the major labels have
complementary oligopoly power. 8/25/20 Tr. 3653 (Peterson); Peterson
WDT ]] 33, 57.
Dr. Peterson also set out that statutory streaming services have a
greater ability to steer listeners' experience than interactive
services, using techniques such as designing playlists to meet
listeners' tastes that omit recordings from certain labels or reducing
the number of plays for a given label's recordings if the license rate
is too high. Dr. Peterson opines that this ability to steer is a marker
of effective competition. Peterson WDT ] 58-59. He sought to replicate
such effective competition through his competition adjustment, which
reflects a statutory licensee's ability to avoid high license rates by
substituting or steering away from high royalties. Peterson WDT ]] 65-
66; see also 8/25/20 Tr. 3662 (Peterson). Dr. Peterson offered an
analysis that chiefly used a Pandora-Merlin agreement that was in
effect at the time of Web IV, which required Pandora to increase (i.e.,
steer toward) Merlin spins by at least 12.5% and allowed Pandora to
effectively engage in significant steering without negative reaction,
to arrive at a proposed lower bound for his downward competition
adjustment of 11.1%-12.5/(100+12.5) = 11.1%. Peterson WDT ]] 62, 65.
Dr. Peterson also looked to an agreement between iHeart and Warner, in
effect at the time of Web IV, with a different [REDACTED] structure
which required iHeart to pay royalties to Warner [REDACTED] at the time
the deal was struck, which Dr. Peterson found indicative of an
intention to steer of more than 50%. Peterson WDT ] 63. In his
analysis, he set out that evidence of the ability to steer ranges from
[REDACTED]% in the case of the Pandora/Merlin agreement to more than
50% in the case of iHeart/Warner. Dr. Peterson also looked at Pandora's
steering experiments, cited in the Web IV determination, finding some
consumer resistance to steering at a rate of 30%, thus arriving at a
proposed upper bound for the downward competition adjustment of
[REDACTED]% [REDACTED]. Peterson WDT ]] 62, 65.
Dr. Peterson asserted that his competition adjustment is
conservative because it is calculated based only on a reasonable
ability to steer, which does not fully address or compensate for
complementary oligopoly power. 8/25/20 Tr. 3662-63, 3664-65 (Peterson).
He added that other market data supports that even higher levels of
steering are possible in the target noninteractive market, again noting
evidence that Pandora engaged in steering toward Merlin by [REDACTED]%
(instead of [REDACTED]%), without negative feedback. Peterson WDT ] 62.
iv. Dr. Peterson's Proposed Marketing Adjustment
Dr. Peterson offered that a marketing adjustment to the Spotify
benchmark licenses may not be appropriate. While he recognized that the
agreements [REDACTED], he concluded that the value of [REDACTED] may be
zero. The provisions, he indicated, [REDACTED]. Peterson WDT ] 69. Dr.
Peterson offered that the marketing value stated in the Spotify
benchmark licenses likely does not reflect [REDACTED]. Peterson WDT ]]
69-70. Dr. Peterson calculated a potential valuation by allocating the
total advertising value across active countries and dividing the value
of advertising attributable to the United States by the number of
performances. Dr. Peterson determined this additional unadjusted value
at $[REDACTED] per play. To address any uncertainty of the actual value
of such negotiated advertising in the current record, Dr. Peterson
calculated the adjusted Spotify benchmark range with and without the
advertising adjustment. Peterson WDT ]] 71, 75. Google argues that no
advertising adjustment is justified, given the acknowledged
uncertainties in assigning specific valuation and admitted inability to
value such benefits on a dollar-for-dollar basis with the value stated
in the agreements. Google PFFCL ]] 66-69.
v. Dr. Peterson's Application of His Proposed Adjustments
The range of Dr. Peterson's proposed adjustments are reflected
below, in Dr. Peterson's Figure 2. Peterson WDT ] 74.
The top section of each panel shows the unadjusted benchmark rates
and the adjusted rates based on three adjustments (Interactivity,
Competition and Skips adjustments). In order to determine the benchmark
rate reflecting these adjustments the unadjusted rate is multiplied by
one minus the adjustment for each rate. Thus, the adjusted rates are
equal to:
Adjusted Rate = (1-Interactivity Adj) x (1-Competition Adj) x (1-Skips
Adj) x Unadjusted Rate.
Peterson WDT ] 74.
The top panel of Figure 2 uses the [REDACTED]% Skips adjustments
and the bottom panel uses the [REDACTED]% skip rate. The adjustment
range of [REDACTED]% to [REDACTED]% using the Pandora free tier skips
data is arrived at by applying, to the Unadjusted Rate, Dr. Peterson's
proposed interactivity adjustment of [REDACTED]%, Skips adjustment of
[REDACTED]% (Pandora free tier), and competition adjustment of
[REDACTED]%. The adjustment range of [REDACTED]% to [REDACTED]% using
the Spotify free tier skips data is arrived at by applying Dr.
Peterson's proposed interactivity adjustment of [REDACTED]%, skips
adjustment of [REDACTED]% (Spotify free tier), and competition
adjustment of [REDACTED]%. The range of adjusted rates before
accounting for the potential value of marketing support is $[REDACTED]
to $[REDACTED] per play. Dr. Peterson offered the midpoint of this
range as being a reasonable estimate of a rate, when treating
advertising allowances as having no value. That midpoint is equal to
$[REDACTED] per play. Peterson WDT ] 74; Figure 2.
Both the top and bottom panels of Figure 2 show the calculation of
the adjusted value of advertising in the benchmark agreements. The top
row of the middle section reflects the unadjusted value of advertising
per play in the United States. The value is calculated by allocating
the total advertising value across active countries and dividing the
value of advertising attributable to the United States by the number of
performances. The adjusted advertising ranges are calculated in the
[[Page 59519]]
same way as the adjusted rates indicated above, where the adjusted rate
= (1-Interactivity Adj) x (1-Competition Adj) x (1-Skips Adj) x
Unadjusted Rate. The range of adjusted benchmark rates including the
stated value of advertising allowances is $[REDACTED] to $[REDACTED]
per play. Dr. Peterson offered the midpoint of this range as being a
reasonable estimate of a rate, when advertising allowances are
included. The midpoint is equal to $[REDACTED] per play. Peterson WDT
]] 75-76.
Figure 2--The Adjusted Benchmarks [RESTRICTED]
[REDACTED]
c. SoundExchange's Criticisms of Dr. Peterson's Ad-Supported Benchmark
Model
SoundExchange acknowledges that the Judges have found benchmark-
based approaches useful in the past. However, SoundExchange disputes
that the Judges have expressed a preference of benchmarking over other
approaches, such as modeling. Instead, it offers that the Judges have
assessed each type of analysis on the merits, as established by the
record in each case. SoundExchange's Corrected Replies to Google's
Amended Proposed Findings of Fact and Conclusions of Law ]] 14-17 (SX
RPFFCL (to Google)).
SoundExchange also initially disputed that the benchmarks proposed
by Google are appropriate. SoundExchange argues that Dr. Peterson
improperly used Spotify's ad-supported rates as a benchmark, suggesting
that subscription interactive services are a better starting point than
ad-supported interactive services. SoundExchange also urged that
Spotify's ad-supported service should not be used as a benchmark
without an upward adjustment to account for its [REDACTED] ability to
promote sales of subscriptions. SX RPFFCL (to Google) ]] 22-26.
However, in the hearing Mr. Orszag testified that he had become
``comfortable'' with applying Spotify's ad-supported rate as the
benchmark in his own ratio equivalency model. He came to this
conclusion after discerning that [REDACTED].'' 8/25/20 Tr. 3809
(Orszag). When a [REDACTED] adjustment was made to control for the
separate value of funneling/conversion, Mr. Orszag became, if not a
full-fledged convert, ``more comfortable'' with the ``Spotify Free
benchmark.'' 8/25/20 Tr. 3816 (Orszag).
i. SoundExchange's Criticisms of Dr. Peterson's Proposed Interactivity
Adjustment
SoundExchange faults Dr. Peterson's interactivity adjustment
because, in its view, the adjustment is not based sufficiently on the
incremental value placed on the interactive functionality by consumers
in the downstream market. It notes that in past cases the Judges have
accepted interactivity adjustments based on downstream market value,
evidenced by consumers' willingness to pay for the functionality. It
offers that there is little evidence from Google that consumers
actually value the additional functionality that [REDACTED] obtained
under its direct licenses and that, in fact, the additional
functionality on [REDACTED]'s ad-supported service was minimal. SX
PFFCL ] 228-231; Web IV, 81 FR at 26345, 26348; see also Web II, 72 FR
at 24902 (accepting SoundExchange's interactivity adjustment, based on
average consumer subscription price and the average per-subscriber
royalty rate for on-demand services). SoundExchange adds that Dr.
Peterson was unable to indicate whether increased functionality
generated more revenue per play on the ad-supported tier. SX PFFCL ]
232; 8/11/20 Tr. 1401 (Orszag). It adds that, per [REDACTED] (Trial Ex.
5321), [REDACTED]. SX PFFCL ] 232. SoundExchange suggests that the true
motivation for [REDACTED] to license the increased functionality was to
offer customers a sample of the full interactive function as a way to
promote and upsell its subscription interactive service. SX PFFCL ]]
235-236; 8/31/20 Tr. 4646 (Phillips).
SoundExchange asserts that Dr. Peterson's interactivity
adjustment--being based on a comparison of [REDACTED]'s effective per-
play rate for its ad-supported [REDACTED] service to the statutory
rate--is based in part on the statutory rate, which violates
requirements that benchmark rates be free from the influence of
regulation. Sound Exchange raises further issues with regard to the
relationship between the negotiated and statutory rates, with Mr.
Orszag testifying that if the statutory rate that Dr. Peterson relied
on in his adjustment is too low (as SoundExchange argues it is) then
Dr. Peterson's interactivity adjustment will be too large. SX PFFCL ]]
237-239; Orszag WRT ] 95.
ii. SoundExchange's Criticisms of Dr. Peterson's ``Skips'' Adjustment
SoundExchange questions the probative value of the data upon which
Dr. Peterson relies for his [REDACTED]% skips adjustment on the same
basis as it challenges his application of this data to Professor
Shapiro skips adjustment. SoundExchange notes that Dr. Peterson's data
came from noninteractive plays available on all three tiers of
Pandora's service, ad-supported, mid-tier, and fully interactive. 8/20/
20 Tr. 3028-29 (Shapiro). As a consequence, Mr. Orszag asserts, the
[REDACTED]% ``skips'' rate is likely overstated, because subscribers to
Pandora's two interactive tiers have unlimited skips, making them more
likely to skip when accessing noninteractive plays on those two tiers.
Orszag WRT ] 120. SoundExchange notes that Professor Shapiro agrees
with the concern in principle but testified that any such upward bias
[REDACTED], so he did not measure the effect. 8/20/20 Tr. 3030-32
(Shapiro).
SoundExchange also takes issue with Dr. Peterson's alternative
skips adjustment and its reliance on the Spotify ad-supported service's
skip rate [REDACTED]%), alleging Dr. Peterson's analysis is faulty for
only considering the benchmark market's skip rate and ignoring the
target market's skip rate. It argues that Spotify pays for its ad-
supported service on a percentage of revenue basis and, therefore,
whether Spotify's skip rate is [REDACTED]% has no impact on what
Spotify pays the record companies on the percentage of revenue basis.
It notes Mr. Orszag's view that the benchmark market's skip rate may
only be used if there is a basis to assume that the benchmark market
and the target market have the same skip rate and that there is no
evidentiary basis for such a conclusion. SX PFFCL ]] 244-247.
iii. SoundExchange's Criticisms of Dr. Peterson's Effective Competition
Adjustment
SoundExchange criticizes Dr. Peterson's analysis asserting that it
relied on stale evidence, from the time of Web IV, namely a 2014
agreement between Merlin and Pandora, a 2013 agreement between iHeart
and WMG, and a 2014 litigation experiment conducted by Pandora.
SoundExchange argues that the market for subscription interactive
services has changed since Web IV, and that the increased competition
would require a downward shift of the competition adjustment used in
Web IV. It adds that the application of the evidence from Web IV would
need to account for the differing market evidence used in that
proceeding, involving many services and not just the
[[Page 59520]]
service with the [REDACTED]. SX PFFCL ]] 490-493.
iv. SoundExchange's Reaction to Dr. Peterson's Proposed Marketing
Adjustment
SoundExchange reiterates that value is derived by the record
companies in the relevant agreements through provisions for the
streaming services to provide marketing support in the form of
uncompensated advertisements to the record labels. SX PFFCL ]] 490-493.
It points out that Dr. Peterson calculated proposed adjustments based
on advertising benefits and that Google should not be able to walk away
from the adjustments. SX RPFFCL (to Google) ] 69.
d. The Judges' Analysis and Findings Regarding Dr. Peterson's Ad-
Supported Benchmark Model
As an initial matter, the Judges clarify that they do not strictly
adhere to any preference toward any particular method of analysis,
benchmark or otherwise, but instead assess all reasoned analyses on
their merits and on the record of each case.
Taking into account the entirety of the record, the Judges
determine that it is appropriate to utilize the proposed benchmarks
from the interactive ad-supported market, provided that an appropriate
conversion adjustment is applied.\213\ The Judges apply the
aforementioned [REDACTED] adjustment to the rates for [REDACTED]).
Where negotiated provisions place a value on funneling in the benchmark
agreements, the Judges find an adjustment is appropriate. While Dr.
Peterson started his analysis with the higher-end per-play rate under
the [REDACTED] for customers who [REDACTED], the Judges note that this
is not necessarily the [REDACTED]. The Judges find that Mr. Orszag's
proposal is a superior mode to account for the value of funneling.
However, as there is insufficient evidence and analysis of analogous
funneling value in the [REDACTED], the Judges make no such adjustment
to those benchmark rates.
---------------------------------------------------------------------------
\213\ The Judges find insufficient basis to find that any shift
in song length is not adequately accounted for in the benchmark
markets.
---------------------------------------------------------------------------
Applying this [REDACTED] factor to Dr. Peterson's calculated per-
play rates for [REDACTED], results in a final effective rate of
$[REDACTED] (i.e., $[REDACTED] x [REDACTED]) or $[REDACTED] (rounded)
[REDACTED]; and $[REDACTED] (i.e., $[REDACTED] x [REDACTED]) or
$[REDACTED] (rounded) for [REDACTED]. The starting point benchmark per-
play rates calculated by Dr. Peterson for [REDACTED] remain.
i. The Judges' Analysis and Findings Regarding Dr. Peterson's Proposed
Adjustments
(A) The Judges' Analysis and Findings Regarding Dr. Peterson's Proposed
Interactivity Adjustments
Based on the entirety of the record, the Judges decline to apply
Dr. Peterson's--proposed interactivity adjustments. The Judges agree
with SoundExchange that the record does not clearly demonstrate added
economic value for interactivity as a suitable basis to adjust the
proposed benchmark rates downward. Advertisers, not listeners, pay the
royalties. And there is insufficient evidence to establish that
advertisers make payments to noninteractive ad-supported services based
upon the level of interactivity of that service.
While we do not foreclose the possibility of a record that may
allow measuring interactivity value by looking toward how the service
and the labels (as opposed to downstream users) value that
interactivity in an ad-supported context, on this record the Judges
will not apply an interactivity analysis which fails to appropriately
consider oligopoly power in a direct deal such as the proposed
[REDACTED] benchmark. The Judges' decline to apply the proposed
interactivity adjustment in part because the record, [REDACTED],
indicates that major labels exert oligopoly power in similar direct
deals. When Judge Strickler asked Dr. Peterson whether any of the
proposed [REDACTED]% adjustment for interactivity constitutes a
complementary oligopoly premium, he conceded that he could not preclude
that oligopoly power could be a cause of the higher rate. 8/25/20 Tr.
3645 (Peterson). Absent accurate consideration of oligopoly power,
which is persuasively established elsewhere, we find it inappropriate
to apply the proposed interactivity adjustment.
(B) The Judges' Analysis and Findings Regarding Dr. Peterson's Proposed
Skips Adjustment
As indicated previously, the Judges are in agreement with
SoundExchange's criticisms of both Professor Shapiro's and Dr.
Peterson's skips adjustment for ad-supported services. Additionally the
Judges agree that the reliance on the Spotify ad-supported service's
skip rate ([REDACTED]%) as a basis for adjustment is in error. The
Judges agree that there is insufficient basis to conclude that the
benchmark market and the target market have the same skip rate, and
that absent reliable evidence to that effect a direct adjustment as
proposed would be incorrect. Accordingly, and based on the entire
record, the Judges adopt (and incorporate by reference here) the same
analysis and the same finding of a [REDACTED]% skips adjustment as they
found for the subscription market.
(C) The Judges' Analysis and Findings Regarding Dr. Peterson's Proposed
Competition Adjustment
Taking into account the entirety of the record, the Judges are
persuaded of the necessity to apply an effective competition
adjustment. For the reasons discussed with regard to the effective
competition adjustment to Professor Shapiro's ad-supported benchmark,
the Judges apply a 12% effective competition adjustment to Dr.
Peterson's ad-supported rate. The Judges' Analysis and Findings
regarding Dr. Peterson's Proposed Marketing Adjustment.
Based on the entirety of the record, the Judges find that it is
appropriate to apply the marketing adjustment, as offered by Dr.
Peterson. While we note that Google and Dr. Peterson offer rationales
that an adjustment may not be appropriate, Dr. Peterson also found a
basis to place a value on this factor. Additionally, while Dr. Peterson
offers calculations performed with and without the marketing
adjustment, his ultimate analytical step, finding a midpoint within the
range of rates he calculated, was done based on calculations that
included the marketing adjustment. Finally, we are in agreement with
SoundExchange that Google has not offered a sufficient basis to
distance itself or the Judges from applying a factor offered by
Google's own expert analysis.
ii. Dr. Peterson's Benchmark Rate as Adjusted by the Judges
In sum, the Judges find as follows with regard to Dr. Peterson's
proposed ad-supported benchmark rate:
1. The effective ad-supported benchmark per-play rates of
$[REDACTED] for [REDACTED], $[REDACTED] for [REDACTED], $[REDACTED] for
[REDACTED], $[REDACTED] for [REDACTED], and $[REDACTED] for [REDACTED]
are in the range of a reasonable starting point.
2. Applying the [REDACTED] factor to account for funneling/
conversion to Dr. Peterson's calculated per-play rates for [REDACTED],
results in a final effective rate of $[REDACTED] (i.e., $[REDACTED] x
[REDACTED]) or $[REDACTED] (rounded) for
[[Page 59521]]
[REDACTED]; and $[REDACTED] (i.e., $[REDACTED] x [REDACTED]) or
$[REDACTED] (rounded) for [REDACTED] The starting point benchmark per-
play rates calculated by Dr. Peterson's for [REDACTED] remain
respectively as $[REDACTED], $[REDACTED], and $[REDACTED].
3. The interactivity adjustment is rejected.
4. The skips adjustment is reduced to [REDACTED]%, properly
reducing the interim calculation to $[REDACTED] (rounded) for
[REDACTED], $[REDACTED] (rounded) for [REDACTED], $[REDACTED] (rounded)
for [REDACTED], $[REDACTED] (rounded) for [REDACTED], and $[REDACTED]
(rounded) for [REDACTED].
5. The 24% effective competition adjustment proposed by Dr.
Peterson is rejected.
6. The Judges apply the 12% effective competition adjustment. This
effective competition adjustment properly reduces the interim
calculation to $[REDACTED] (rounded) for [REDACTED], $[REDACTED]
(rounded) for [REDACTED], $[REDACTED] (rounded) for [REDACTED],
$[REDACTED] (rounded) for [REDACTED], and $[REDACTED] (rounded) for
[REDACTED].
7. Applying the Marketing adjustments set forth by Dr. Peterson,
increasing the per-play rates as follows of $[REDACTED] [$[REDACTED] +
$[REDACTED]] for [REDACTED], $[REDACTED] [$[REDACTED] + $[REDACTED]]
for [REDACTED], $[REDACTED] [$[REDACTED] + $[REDACTED]] for [REDACTED],
$[REDACTED] [$[REDACTED] + $[REDACTED]] for [REDACTED], and $[REDACTED]
[$[REDACTED] + $[REDACTED]] for [REDACTED].
8. The range of adjusted rates is $0.00197 and $0.00228 per play,
and the midpoint of $0.002125, when rounded (or, more precisely,
rounded further) is $0.0021, which is a reasonable estimate of the rate
applying the Judges' modifications to Dr. Peterson's model.
5. Separate Rate for Nonportable Services
a. Google's Proposal
Google seeks a separate rate for certain nonportable uses, citing
the statutory directive that the Judges ``shall distinguish among the
different types of services then in operation.'' 17 U.S.C.
114(f)(1)(B). Google argues that the rise of nonportable smart speaker
devices, and streaming services tailored to those devices, has created
such a different type of service. Google PFFCL ]] 91-92. It offers that
separate rates for nonportable uses have been adopted by the Board in
other regulations and that the Judges should set a separate rate for
nonportable, nonsubscription services that is 50% of whatever headline
rate the Judges set for portable nonsubscription services. Google PFFCL
]] 93-94. Specifically, Google seeks a per-performance rate for the new
type of service that it refers to as ``Nonsubscription Nonportable
Webcasting Services'' which Google proposes to define as ``a service
offered by a Licensee that makes an Eligible Transmission available
solely over a nonportable device, such as a smart speaker, a smart home
appliance, or a personal computer.'' Google Proposed Rates and Terms at
3.
Google offers proposed benchmark licenses between major labels
([REDACTED]) with Google as evidence in support of its proposal, which
include [REDACTED]. Google PFFCL ] 102. It [REDACTED]. Google PFFCL ]
103. Google asserts that the [REDACTED] reflect an understanding that
consumers are willing to pay an incremental amount for the ability to
take music with them on phones and portable devices. Google PFFCL ]
104. Google also points toward lower rate structures for certain
nonportable services in the context of the mechanical compulsory
license under 17 U.S.C. 115. Google PFFCL ] 105.
b. SoundExchange's Criticism of Google's Proposal for a Separate Rate
for Nonportable Services
SoundExchange asserts that Google has not established that
streaming services that are available only on nonportable devices are a
different type of service warranting a different rate, and that there
is no evidence that a willing buyer and willing seller would agree to
lower rates for such a service. SX RPFFCL (to Google) ] 94. It contends
that Google confuses nonportable devices with nonportable services in
its attempts to highlight ``Nonsubscription Nonportable Webcasting
Services'' as an allegedly different type of service. SoundExchange
argues that the dichotomy that Google proposes is undermined by the
fact that portable services can also be consumed on nonportable
devices. SX RPFFCL (to Google) ] 96. SoundExchange challenges the
notion that any growing popularity of smart speakers supports the
notion that streaming services that can only be operated on a smart
speaker are growing in popularity or exist as a different type of
service. SX RPFFCL (to Google) ] 97. It argues that Google ``bears the
burden of demonstrating not only that'' nonportable services ``differ[]
from other forms of commercial webcasting, but also that [they differ]
in ways that would cause willing buyers and willing sellers to agree to
a lower royalty rate in the hypothetical market.'' SX RPFFCL (to
Google) ] 100 (citing Web IV, 81 FR at 26320 (applying that principle
to simulcasters)).
SoundExchange contends that the proposed benchmark agreements do
not match up with Google's rate proposal. It notes that the [REDACTED].
Through Mr. Orszag, SoundExchange posits that [REDACTED] and does not
support the notion that the rate should be half of the per-performance
rate for a service available on a broader range of devices. SX RPFFCL
(to Google) ] 94; Orszag WRT ]] 139-140.
SoundExchange further addresses concerns that the proposed
benchmarks do not provide useful information about the per-performance
rate for a service tier accessible on multiple nonportable devices to
which a willing buyer and a willing seller would agree. SX RPFFCL (to
Google) ] 101. It notes that even if the offered [REDACTED] were
relevant, it would be inappropriate to attribute all of the difference
in [REDACTED] to nonportability because the rates are also driven by
the fact that they are for single-device services, which excluded
classes of devices that would be eligible under Google's proposed rates
and terms, e.g., a personal computer. SoundExchange suggests these
distinctions discount the notion that [REDACTED]. SX RPFFCL (to Google)
]] 102-104, 110. SoundExchange also challenges the notion that the
cited rates for certain nonportable mechanical licensing royalties are
not appropriate support for Google's proposal because they address
different rights to different works with different sellers. SX RPFFCL
(to Google) ]] 104-106.
c. The Judges' Analysis and Findings Regarding Google's Proposal for a
Separate Rate for Nonportable Services
Based on the entirety of the record the Judges are not persuaded
that Google has established the basis for a separate rate for
Nonsubscription Nonportable Webcasting Services. While the Judges have
concerns about the extent to which the [REDACTED] and the appropriate
use of mechanical rates within the context of the section 115
compulsory regime as persuasive evidence for the purpose of sustaining
a separate rate, those are relatively minor concerns. The Judges find
the case for a separate rate is most profoundly undermined because the
requested rates would extend far beyond the bounds of the proposed
benchmark agreements.
[[Page 59522]]
The benchmark agreements are tied to [REDACTED] and to very
specific device characteristics,\214\ whereas the requested rate (and
defined bounds) are not tied or specifically limited to the same
specific types of devices, nor are they limited to [REDACTED]. This
makes them poor benchmarks and makes for a poor case for the existence
of the requested distinct different type of service. Furthermore,
Google did not adequately acknowledge or offer appropriate adjustments
to account for the fairly profound distinctions between its request and
the limitations represented in its proposed benchmarks. While the
Judges may amend a request to comport with the offered evidence, on
this record we find an inadequate basis to do so. Additionally, in a
case such as this where the request diverts so profoundly from the
offered benchmark evidence, prudence compels the Judges not to engage
in such refining of the requested rates or terms.
---------------------------------------------------------------------------
\214\ [REDACTED], Trial Ex. 5090 at 37 ([REDACTED] [REDACTED]);
[REDACTED], Trial Ex. 1006 at 50 [REDACTED]); [REDACTED], Trial Ex.
1010 at 65-66 ([REDACTED]).
---------------------------------------------------------------------------
C. Evaluation of Game Theoretic Modelling Evidence
1. Professor Willig's Shapley Value Model
Professor Willig describes his Shapley Value Model as a ``multi-
party bargaining approach.'' Willig WDT ] 9. He explains that his
Shapley Value Model is a form of economic game theory that assumes a
``cooperative'' relationship among the bargaining parties, id. ] 12,
providing a ``generalized solution to the problem of how to apportion
among the members of a multi-party bargaining group the surplus created
by their productive cooperation with each other.'' Id. ] 14.\215\
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\215\ A ``cooperative'' game assumes that the participants'
``joint action agreements are enforceable,'' and are distinguished
from ``non-cooperative games,'' ``in which such enforcement is not
possible, and individual participants must be allowed to act in
their own interests.'' Avinash Dixit et al., Games of Strategy 26
(3d ed. 2009).
---------------------------------------------------------------------------
Professor Willig's Shapley Value Model indicates a royalty rate for
ad-supported noninteractive services of $0.0028 per play in 2021, and,
for subscription noninteractive services, a per-play royalty rate of
$0.0030 in 2021. Willig WDT ] 55. He derives these 2021 royalty rates
from the average royalty rates over the entire five-year (2021-2025)
rate period generated by his Shapley modeling, which are $0.0030 and
$0.0031 for the ad-supported and subscription services,
respectively.\216\
---------------------------------------------------------------------------
\216\ More particularly, Professor Willig derives his proposed
2021 rates from his five-year average by discounting back from the
mid-point of the rate period to the start of the period, using the
Federal Reserve Open Market Committee's inflation forecast. Id.
---------------------------------------------------------------------------
According to Professor Willig, the Shapley Value Model has
properties that make it well suited for establishing royalties in this
proceeding. He explains that this modeling, when combined with relevant
data, identifies the following values and properties:
1. The ``fallback value'' which any party (record company or
streaming service in the present case) could create on its own without
an agreement among one or more of the other parties. Willig WDT ] 13.
2. The extra value--the Shapley ``surplus''--that the parties
collectively could generate in ``notional'' \217\ agreements with the
other parties, above their fallback values. Id.
---------------------------------------------------------------------------
\217\ The Judges use ``notional'' to identify the negotiations
assumed in Shapley Value modeling, and to distinguish those ersatz
negotiations from the ``hypothetical'' negotiations the Judges must
construct to establish the statutory royalty rates. More precisely,
the ``notional'' Shapley Value negotiations generate ``notional''
royalty rates that may: (1) Constitute a ``hypothetical'' rate that
would constitute an effectively competitive rate; (2) fail to
reflect a ``hypothetical'' effectively competitive rate; or (3)
serve as a building block that, with adjustments or offsets, is an
input into a ``hypothetical'' effectively competitive rate.
---------------------------------------------------------------------------
3. The ordering of ``every possible combination of unilateral,
bilateral and multilateral deals that may be struck by the different
parties.'' Id. ] 14.\218\
---------------------------------------------------------------------------
\218\ As Professor Willig explains: ``In Shapley Value analysis
there are always N! (i.e., N factorial) different arrival orderings,
where N is the number of negotiating parties. For example, with
three negotiating parties, there are 3! (i.e., 3 x 2 x 1) = 6
different arrival orderings. Id. ] 20 n.13.
---------------------------------------------------------------------------
4. The portions of the surplus--the ``incremental contribution''--
that each party adds to the total amount of value created, is
``assessed as increments to every possible combination of unilateral,
bilateral, and multilateral deals that may be struck by the different
parties . . . .'' Id.
5. Each party's ``incremental contribution'' is then averaged
across all such combinations.'' Id.
Each party's average incremental contribution is its Shapley Value.
Id. ] 16 (``The Shapley Value accorded to a party rests on the value
that it brings to the group's cooperation, taking into account all the
subsets of the group to which it can join.'').
To further explain the Shapley Value concept, Professor Willig
provides the following example: \219\
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\219\ In this proceeding, the economic experts appropriately
proffer potentially illuminating examples (as in the accompanying
text) in an attempt to state clearly the principles and methods
underlying their work. The Judges find their use of such examples to
be consistent with the evidentiary principles set forth in 37 CFR
351.10(e).
The concept of a Shapley Value is best understood by reference
to a simple analogy. Imagine that parties A, B, and C are
negotiating a deal in person. Party C can be the first, the second,
or the third to arrive in the room. The value it brings to the
bargaining table may be contingent on the order in which it arrives.
For example, if Party C is last to the negotiation it may have more
bargaining power as a result of its ability to hold up or frustrate
consummation of a deal to which Parties A and B are otherwise
amenable. When C is first to the negotiation, it has no bargaining
power over the others. Shapley analysis takes into account all such
possible differences in Party C's bargaining power that are
contingent on its order of arrival to the negotiation. It does so by
taking the average of each ``incremental value'' created by Party C
in each possible sequence of arrivals. As such, Party C's Shapley
Value will only be high relative to the other parties' Shapley
Values if, on average, it brings a relatively high incremental value
---------------------------------------------------------------------------
to all possible orderings and sub-orderings of Parties A, B, and C.
Id. ] 15.
The value of a sub-set--i.e., a Shapley coalition--prior to joinder
by other parties to the notional negotiation, is denominated as its
``Characteristic Function.'' The calculation of its Characteristic
Function is ``necessary to assess and delineate the value that can
result from the cooperation of any subset of the overall cooperating
group.'' Id. ] 17. The value of each coalition's Characteristic
Function is based on the fundamental economic principle that a
coalition of willing sellers (like any individual seller) ``is assumed
to act in the manner that maximizes the collective surplus of the
coalition.''. Willig WDT app. C at C-4 (] 6 therein); see also id. app.
F at F-4 (] 7 therein) (same). After specifying these coalitions and
calculating the maximum values of their characteristic functions, the
modeler can derive Shapley Values for each party to the notional
Shapley ``negotiation.'' Id. ] 33.
Professor Willig contends that Shapley Value modeling is related to
the royalties that are to be determined in the present proceeding, with
the record companies and the noninteractive streaming services
constituting the ``arriving'' participants. The record companies must:
(1) Recover their opportunity costs,\220\ identified as their fallback
values in Professor Willig's model; and (2) receive their Shapley
Values, i.e., their average share of the surplus they contribute across
all arrivals. Thus, unless royalty payouts are high enough to at least
allow the
[[Page 59523]]
record companies to receive their fallback values (i.e., their
opportunity costs) plus their Shapley Values, they would not license
their repertoires to the noninteractive services. In similar fashion,
the noninteractive services will receive their average share across all
arrival orderings, corresponding to their Shapley Values (also
calculated across all arrivals, of Shapley-derived Surplus). See Willig
WDT ] 24 (describing this application of Shapley Value modeling).
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\220\ ``The opportunity cost'' of anything of value is what you
must give up to get it,'' and thus ``is inseparably bound up with
choice.'' John Quiggin, Economics in Two Lessons: Why Markets Work
So Well, and Why They Can Fail So Badly 15 (2019).
---------------------------------------------------------------------------
According to Professor Willig, in this proceeding, a record
company's ``opportunity costs'' include any marginally higher royalties
it might have earned by licensing to other distribution methods (such
as, e.g., interactive services), rather than licensing its sound
recordings to noninteractive services.\221\ Thus, he claims that
Shapley Value modeling is ``an appropriate approach for assessing rates
that would be negotiated in the hypothetical marketplace for
noninteractive webcasting [because it] fit[s]within the requirements of
the relevant legal statute.'' Id.
---------------------------------------------------------------------------
\221\ Note that his application of the opportunity cost concept
does not include the value of additional royalties that a record
company would have earned by licensing its sound recordings to
noninteractive services--such as royalties earned because some
listeners to terrestrial radio, (which does not pay sound recording
royalties) might have converted to noninteractive listening (as
indicated by the surveys presented in this case, discussed infra,
section IV.A). These negative opportunity costs (opportunity
benefits) would need to be offset against the opportunity costs
described by Professor Willig in the accompanying text, to determine
the net value of all opportunities foregone. See Paul J. Ferraro and
Laura O. Taylor, Do Economists Recognize an Opportunity Cost When
They See One? A Dismal Performance from the Dismal Science, 4 J.
Econ. Analysis & Pol'y 1, 7 (2005) (``An avoided benefit is a cost,
and an avoided cost is a benefit. Thus, the opportunity cost . . .
is . . . the net benefit forgone.'') (emphasis added).
---------------------------------------------------------------------------
a. The Specifications in Professor Willig's Shapley Value Model
A necessary initial step for an economist constructing a Shapley
Value model is the delineation and enumeration of the parties to the
notional negotiations, i.e., the types and the number of sellers and
buyers (licensors and licensees in this proceeding). Id. ] 25.
According to Professor Willig, this process should ``strike[] a balance
between offering a granular and realistic description of the
hypothetical market [while] maintaining enough simplicity around the
number of entities being modeled such that the model can be readily
solved and necessary data inputs can be estimated.'' Id. ] 26.
In the notional negotiations of his Shapley modeling, Professor
Willig assumes a market with four upstream record companies and two
downstream noninteractive webcasting distributors. Willig WDT ] 25.
Three of these four record companies represent each of the major record
companies (Sony, Warner and Universal) (collectively the Majors), and
the fourth represents a ``combination'' of all independent record
companies (Indies). Id. Thus, these four entities comprise the entirety
of the record company licensors in his market model. The two
noninteractive services represent, respectively, a combination of all
ad-supported noninteractive distributors, and a combination of all
subscription noninteractive distributors, thus comprising the entirety
of the noninteractive licensees. Id. According to Professor Willig,
these assumptions strike the required balance between granular realism
and model tractability. Id.
Professor Willig claims that the assumptions he makes regarding
these specifications are necessary and prudent because they allow the
model to generate the following economic information:
1. The effects of the ``potentially different negotiating
positions'' of the Majors vis-[agrave]-vis the Indies.
2. The difference, if any, in royalty rates, between ad-supported
noninteractive services, on the one hand, and subscription
noninteractive services, on the other.
3. The effects of ``competition between the collective ad-supported
noninteractive distributor and the collective subscription
noninteractive distributor.''
Willig WDT ] 26. Professor Willig adds that his model will generate
royalty rates that are lower than would exist in the actual market
because the model's ``grouping'' of services ``simplifies away rivalry
among the various extant ad-supported noninteractive distributors and
among the various extant subscription noninteractive distributors,
[which] eliminate[es] consideration of competition within these groups
of distributors,'' artificially elevating ``their respective market
power. Id.\222\
---------------------------------------------------------------------------
\222\ This specification may not be a simplification so much as
an approximation of reality. As noted infra, Professor Willig finds
that in the noninteractive market Pandora has a market share of more
than [REDACTED]% in the ad supported and subscription sectors,
respectively, making the ``one noninteractive service''
specification fairly realistic.
---------------------------------------------------------------------------
Next, Professor Willig calculates the value of the ``characteristic
functions'' created by each possible cooperative grouping
(``coalition'') of these six parties to the notional negotiation (i.e.,
the four record companies and two noninteractive distributors). To make
these ``characteristic function'' calculations, he first determines the
value that each party or set of parties contributes upon arriving to
the coalition. Id. ] 27.
Starting with the record companies, Professor Willig defines the
value each brings to these coalitions as ``a function of both the costs
it incurs and the revenue it could generate by licensing its sound
recordings to distributors other than interactive services.'' Id. ] 28.
Professor Willig characterizes this value as a record company's
``fallback value''--i.e., a value it would retain in the absence of
agreements with the noninteractive distributors. Id.\223\
---------------------------------------------------------------------------
\223\ Professor Willig acknowledged that the ``fallback value''
in his model doesn't specify whether that fallback value is
generated from markets that are perfectly competitive,
monopolistically competitive, oligopolistic or monopolistic. 8/5/20
Tr. 378-79 (Willig).
---------------------------------------------------------------------------
According to Professor Willig, in order to determine this fallback
value the model must ``evaluat[e] what would happen if each
noninteractive [service] did not have access to that record company's
music.'' Id. ] 29. In that regard, he testifies that the model must
explain--assuming the absence of noninteractive services from the
market--``how much of each noninteractive [service's] audience would
divert to other music listening options (including to the other
noninteractive distributor).'' Id.\224\
---------------------------------------------------------------------------
\224\ As noted supra, his model does not net out the positive
royalties record companies would earn by listeners who would listen
to a noninteractive service rather than to terrestrial radio (or,
any other non-royalty bearing substitute, such as listening to
existing music sources or listening to less music, for that matter).
---------------------------------------------------------------------------
Because of the importance to his Shapley Value Model of the value
of this diversion, Professor Willig begins the model-building aspect of
his testimony by describing the type of data necessary to calculate the
diversionary impact of noninteractive services. Specifically, he
explains that his model requires the following inputs:
1. The size of the audience of each noninteractive distributor;
2. The diversion parameters that represent the proportion of these
audiences that would divert to each alternative mode of distribution;
and
3. The respective share of noninteractive plays for each record
company specified in the model.
Id.
Professor Willig explains that the value the noninteractive
services bring to the notional Shapley negotiation is based on the
profits they can generate, i.e., from the revenues they receive from
subscribers and advertisers, less
[[Page 59524]]
``various costs''--including the copyright royalties noninteractive
services pay to music publishers for musical works. Id. ] 30. These
costs of course do not include the sound recording royalties, as these
are the ``unknowns'' for which the Shapley Value model is intended to
solve. See id. ] 30.
Professor Willig's Shapley Value Model treats licenses from all
three Majors as essential to the viability of a noninteractive service,
in each Shapley subset of negotiating parties. As Professor Willig
notes, incorporating this ``must have'' input into the Shapley Value
model means that ``without access to the sound recordings of all three
of the major record companies, a noninteractive distributor does not
operate and contributes zero profits to the rest of the subset of the
bargaining parties.'' Willig WDT ] 31.\225\
---------------------------------------------------------------------------
\225\ By contrast, Professor Willig's model does not assume that
the repertoires of the specified aggregate of Indies are ``must
have'' inputs for a noninteractive service. Rather, his model
assumes that a noninteractive service without access to all of the
Indies' sound recordings would not suffer a complete loss of profits
attributable to the Indies, but would instead would see a decline in
profits commensurate with listeners' preferences for content carried
by [I]ndies.'' Id.
---------------------------------------------------------------------------
To support his treatment of each Major as a ``Must Have,''
Professor Willig relies on an abundance of record facts and prior
statements by the Judges, as enumerated below.
First, Professor Willig notes that, in Web IV, the Judges stated
that ``[t]here appears to be a consensus that the repertoire of each of
the three Majors is a `must have' in order for a noninteractive service
to be viable.'' Web IV, 81 FR at 26373 (emphasis added). This statement
by the Judges was supported by testimony in Web IV. In that proceeding,
Professor Michael Katz, the NAB's economic expert witness, and
Professor Shapiro, testifying for Pandora, both declined to conclude
that the Majors were not ``Must Haves'' for noninteractive services.
Web IV, 81 FR at 26364. Additionally, in Web IV the Judges found that
the ``Must Have'' status of noninteractive services was demonstrated by
Pandora's own data showing the high percentage of total plays on
Pandora that were comprised of the most popular songs (hits), i.e.,
from the top 5%, 10%, and 20% of ``weekly spins,'' a percentage greater
than the total percent of overall plays of Majors' recordings on
Pandora. As the Judges stated, ``[t]hese `top spin' figures are
indicative of the `must have' aspect of the Majors' repertoire,'' and
explain ``why steering away from [the Majors'] repertoires cannot be
pursued beyond a certain level, and why [Professor] Shapiro candidly
declined to reject the idea that the Majors' repertoires were `must
haves' even though noninteractive services could steer away from them
to an extent.'' Id. at 26373 n.155.
In this proceeding, SoundExchange notes that an even earlier
proceeding took note of the importance to a noninteractive service of
accessing all the ``hits.'' SX PFFCL ] 595 (citing SDARS II, 78 FR at
23064 (quoting a Sirius XM witness who testified that ``Sirius XM is
very hits driven, and they want to have the most successful service
they can, so they're going to use what's popular.'')). Further,
SoundExchange identifies the body of evidence in the present record
that belies a view that a noninteractive streaming service could simply
eliminate a Major's entire repertoire:
Numerous documents produced by Pandora explain that [REDACTED].
Tr. Ex. 5153 at 35-56; see 8/5/20 Tr. 467:17-468:5 (Willig); 8/10/20
Tr. 960:3-961:1 (Willig); see, e.g., Ex. 5156 at 17 [REDACTED] Ex.
5157 at 22 [REDACTED]); Ex. 5154 at 18 ([REDACTED]); Ex. 5155 at 31
([REDACTED]''); Ex. 5158 at 13 [REDACTED]).
SX PFFCL ] 596.\226\
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\226\ SoundExchange also relies on evidence regarding the ``Must
Have'' status of the Majors' individual repertoires to interactive
services. The Judges do not find that evidence germane to the
question of whether the Majors are ``Must Haves'' for noninteractive
services.
---------------------------------------------------------------------------
The only new evidence that the Services proffer that would
potentially support their claim that noninteractive services can move
beyond steering and forego the entire repertoire of a Major are the
results from Pandora' Label Suppression Experiments. However, as
explained in the Judges' consideration of Professor Shapiro's game
theoretic modeling they find that evidence to be deficient and accord
it no weight.
For the foregoing reasons, the Judges find Professor Willig's
decision to treat each of the three Majors as a ``Must Have'' to be
reasonable and proper.
Having specified the ``characteristic functions'' in his model,
Professor Willig derives the algebraic expression of the Shapley Values
for each party in the negotiation styled by the Shapley Value
methodology. Id. ] 33 & app. C. Applying the ``characteristic
function'' concepts he delineated earlier, Professor Willig notes that
his algebraic analysis identifies ``[t]he difference between the
characteristic function for a subset of the parties without the
[noninteractive service] and the characteristic function for that
subset with the [noninteractive service] added . . . .'' Id. at 33.
Applying this mathematical difference, Professor Willig states that his
model allows for the implementation of the applicable ``Shapley Value
algorithm.'' Id. app. C at C-5 (] 9 therein). This algorithm allows
Professor Willig to evaluate ``every possible arrival ordering'' and
determine the negotiating parties' ``incremental value.'' Id.
He then utilizes his model to determine the ``incremental value''
contributed by each ``arriving'' negotiating party identified in his
model, relative to the value created by the parties that preceded the
``arriving'' party. Professor Willig then averages the sum of these
incremental contributions for each negotiating party across all 720
arrival orderings.\227\ Id. Each party's average incremental
contribution constitutes its individual Shapley Value.
---------------------------------------------------------------------------
\227\ Given the presence of six ``players'' in his model, there
are 6! (i.e., 720) arrival orderings.
---------------------------------------------------------------------------
Professor Willig next explains how his model makes the link between
Shapley Values and the royalties to be paid to the record companies:
[O]nce Shapley Values are derived, the corresponding royalties
from the two noninteractive distributors to the record companies can
be computed. These are the payments that result in each party's
bottom line equaling its Shapley Value.
For each [noninteractive service], the total royalty payments it
makes to the record companies must equal the difference between its
profits from its market operations and its Shapley Value.
For each record company, the total royalty payments it receives
must equal the difference between its Shapley Value and the total
compensation it receives from its other sources of distribution,
less its costs of operation.
Id. ] 34; see also id. app. C, p. C-6 (] 10 therein).
b. The Empirical Inputs in Professor Willig's Shapley Value Model
Having specified his Shapley Value Model, Professor Willig then
identifies the following necessary categories of data inputs:
1. Royalty rates that record companies earn from other forms of
music distribution;
2. noninteractive distributors' audience sizes;
3. diversion ratios reflecting the amount of a noninteractive
distributor's audience that would switch to other forms of music
distribution and generate royalties if that noninteractive distributor
were unavailable;
4. record company play shares; and
5. noninteractive distributors' fixed costs and marginal profit
rates.
Willig WDT ] 35. He then explains how he selected the data for each of
these
[[Page 59525]]
five input categories, as described below.
i. Royalties From Other Forms of Distribution
Professor Willig uses ``currently observable'' sound recording
rates as proxies for the sound recording royalty rates that will
prevail during the rate period, 2021-2025. Id. ] 36. The first
alternative category of distribution he considers is comprised of
subscription on-demand streaming music and video services. Professor
Willig obtains the royalty payment data detail for eight such services
\228\ from the royalty statements of the three Majors and Merlin
Network (Merlin), a digital rights agency for independent record
labels. Id. ] 37.\229\ This royalty data reflected payment over the 12-
month period ending March 2019, the most recent four-quarter period for
which data was available to Professor Willig. Id. The average monthly
royalties paid by these eight services, weighted by each service's
subscriber count, was approximately $[REDACTED] per subscriber. See id.
app. D at ex. D.1.
---------------------------------------------------------------------------
\228\ The eight services are: [REDACTED]. Willig WDT app. D, ex.
D.1.
\229\ Merlin is a non-profit association for independent labels
with more than 800 members representing tens of thousands of labels
from 63 countries, including the United States. Orszag WDT ] 25.
---------------------------------------------------------------------------
The second alternative rate/service category Professor Willig
considers is comprised of ad-supported on-demand streaming music and
video services. He obtained the royalty payment data detail for three
such services--Spotify, YouTube (free version) and Vevo. Id. ] 38. The
royalty data was produced by the same four entities that provided the
royalty data for subscription on-demand services, and covered the same
four-quarter time period. The average amount of royalties these three
services paid over this period, weighted by each service's total plays,
was approximately $[REDACTED] per play. See id. app. D at ex. D.2.
The third alternative rate/service category Professor Willig
considers is Sirius XM satellite radio transmission. He obtained data
on effective royalty rates, over the same 12-month period identified
above, from: (i) Statements of Account provided by Sirius XM to
SoundExchange showing the dollar value of royalties paid for satellite
radio performances; and (ii) Sirius XM's SEC Forms 10-K and 10-Q
filings setting forth its subscriber counts. Id. ] 39 & n.21 (and
exhibits referenced therein). Professor Willig uses these data to
compute average monthly subscriber counts, and then divides that count
into average monthly royalties. Id. This division results in Sirius XM
monthly royalties per subscriber of $[REDACTED].\230\
---------------------------------------------------------------------------
\230\ Professor Willig asserts that the royalty rates he
calculated for Sirius XM are ``artificially'' low, because they do
not account for: (i) Royalties paid through licenses directly
negotiated between Sirius XM and certain record companies; or (ii)
royalties that--only since the October 2018 enactment of the Music
Modernization Act--SiriusXM must pay for its performance of sound
recordings fixed prior to February 15, 1972. See id. n.22 (and
accompanying text). However, because Professor Willig does not
provide a basis for the Judges to make an actual or estimated
adjustment based on this assertion, the Judges make no such
adjustment.
---------------------------------------------------------------------------
The fourth alternative royalty-bearing category Professor Willig
considers is generated not by royalty payments from intermediaries, but
rather by consumer payments to purchase digital downloads and physical
music (i.e., CDs and vinyl records). Id. ] 40. He relies on 2018
wholesale and retail sales data from the Recording Industry Association
of America (RIAA) and from a 2018 Annual Music Study by an industry
research firm, MusicWatch, prepared for the RIAA. These data provide
information on the average dollar amount spent by purchasers of sound
recordings in these formats. Id. Professor Willig also relies on
additional 2018 RIAA data on the percent of the retail prices of
digital downloads, CDs and vinyl records, respectively, that is paid as
royalties on sales in these three categories. Id. ] 40 app. D at ex.
D.3. He then multiplies each retail revenue amount by the applicable
royalty percentage, to generate the following calculation of ``average
monthly royalties per purchaser'':
$[REDACTED] for digital download purchasers
$[REDACTED] for CD purchasers
$[REDACTED] for vinyl record purchasers
Professor Willig then calculates an average royalty per purchaser of
$[REDACTED], weighted by retail revenue percentages across these three
sales formats. Id. app. D at ex. D.3.
The fifth (and final) alternative category of distribution
Professor Willig considers is comprised of AM/FM broadcasts (to be
clear, these are broadcasts via terrestrial radio rather than
``simulcasts'' over the internet) and a miscellaneous category for all
other forms of music. Id. at 41.
The royalty rates calculated by Professor Willig for the foregoing
categories are set forth in the figure below:
Figure 4--Royalty Rates for Outside Distributors (RESTRICTED)
[REDACTED]
Willig WDT fig.4.
Professor Willig testifies that in his Shapley Value Model, for the
outside distributors identified in the above table, ``[e]ach of their
respective royalty rates are taken as they actually are or are expected
to be.'' Willig WDT ] 28. Accordingly, ``the options of listening to
broadcast AM/FM radio or not listening to music . . . are modeled
realistically as not producing any royalties for the record
companies.'' Id.; see also 8/5/20 Tr. 406 (Willig) (``I took those
elements of opportunity costs from the market data as they are.''); id.
at 378-79, 488-89 (Willig). SoundExchange notes that Professor Willig's
treatment of ``outside distributors,'' including those that do not
generate any royalties, such as AM/FM radio, is ``[c]onsistent with the
``fork in the road'' approach taken by Professor Willig and adopted in
SDARS III.'' SX PFFCL ] 625 (citing SDARS III, 83 FR at 65328).
ii. Noninteractive Distributors' Audience Sizes
In order to estimate the extent of diversion to alternative
distribution methods and thus the value of the record companies'
opportunity cost in licensing to noninteractive services (in the
hypothetical market), Professor Willig also needs to estimate audience
sizes for the noninteractive distributors. He identifies ``total
numbers of plays per month'' as an appropriate measure to use in order
to gauge audience size. Willig WDT ] 43.
To make this calculation, Professor Willig relies on Pandora's
publicly reported financial projections to estimate its audience size,
see id. ex. D.6, and he relies on SoundExchange's royalty statements
and other data to estimate Pandora's play share of the noninteractive
markets. These data indicate that Pandora which has approximately
[REDACTED]% of the play share of the ad-supported noninteractive market
and an [REDACTED]% play share of the subscription noninteractive
market. See id., app. D at ex. D.4. Professor Willig uses this play
share percentage data as a proxy, to estimate Pandora's audience share
percentage of the noninteractive ad-supported and subscription markets.
He further assumes that Pandora will have the same shares of these
markets throughout the 2021-2025 rate period as it did over the recent
12-month period ending March 2019. Willig WDT ] 43.
Using these Pandora's market shares, Professor Willig grosses up
the Pandora audience size to reflect the total size of the
noninteractive audience in these markets. By this method, he estimates
that the ad-supported noninteractive
[[Page 59526]]
market has an audience of [REDACTED], and that the subscription
noninteractive market has an audience of [REDACTED]. Id. ] 44 & Fig. 5.
To adapt his audience size analysis to his opportunity cost
analysis, Professor Willig converts the play count data into play-per
user and play-per subscriber metrics.\231\ Using Pandora's public
financial projections, see id. app. D, ex. D.6, he divides the
projected average monthly play counts for Pandora's two tiers
(respectively, for the ad-supported and subscription tiers) by the
projected number of active users (for the ad-supported tier) and by the
projected number of subscribers (for the subscription tier). By this
exercise, Professor Willig estimates that ``users of Pandora's ad-
supported service are projected to listen to approximately [REDACTED]
plays per month and subscribers to Pandora's subscription
noninteractive service (i.e., Pandora Plus) are projected to listen to
approximately [REDACTED] plays per month over the 2021-2025 period.''
Id. ] 45.
---------------------------------------------------------------------------
\231\ Professor Willig converts this data into a per-user metric
in order to apply it in conjunction with the per-user information
derived from the survey results upon which he relies in the
development of his opportunity cost estimates.
---------------------------------------------------------------------------
iii. Estimating Opportunity Costs With Diversion Ratios
Professor Willig utilizes the dollar value of the previously
discussed alternative distribution methods--``if a noninteractive
distributor were no longer available in the marketplace''--to estimate
the ``opportunity cost that record companies experience by licensing to
noninteractive distributors instead of only licensing to all the
outside forms of music distribution'' Id. ]] 46, 47. More particularly,
he multiplies these dollar values by the diversion ratios indicated by
the survey work undertaken by another SoundExchange expert, Professor
Gal Zauberman (the Zauberman Survey).\232\ Professor Willig's
opportunity cost estimates for each alternative method of distribution
are set forth in the figure below:
---------------------------------------------------------------------------
\232\ See Zauberman WDT. Professor Zauberman's survey testimony
is discussed elsewhere in this Determination.
[GRAPHIC] [TIFF OMITTED] TR27OC21.007
Willig WDT ] 47 & fig. 6.\233\
---------------------------------------------------------------------------
\233\ Professor Willig provides a detailed explanation of how he
incorporated Professor Zauberman's survey results as inputs in his
calculation of diversion ratios needed to estimate record company
opportunity costs.
---------------------------------------------------------------------------
iv. Record Company Play Shares in the Noninteractive Market
Because Professor Willig constructed his Shapley Value Model to
identify the separate values attributable to each of the Majors and to
his aggregation of Indies, he must identify their separate ``play
shares'' in the noninteractive markets. To estimate these ``play
shares,'' he relies on ``the royalty statements that music streaming
and video services provide to record companies when operating under
directly negotiated license agreements.'' Id. ] 48. More particularly,
he analyzes the most recent monthly royalty statements available for
the 12-month period ending March 2019, from: (i) Nonstatutory streaming
music and video services (with varying degrees of interactivity); (ii)
statutory noninteractive services; and (iii) Pandora's and iHeart's
noninteractive play counts ([REDACTED]).\234\
---------------------------------------------------------------------------
\234\ Even more granularly, Professor Willig evaluates all tiers
of service (with varying degrees of interactivity) on the following
services: Apple Music, Amazon Music Unlimited, Amazon Prime, Google
Play, iHeart (both interactive and noninteractive tiers), Pandora
(both interactive and noninteractive tiers), Napster, Spotify, Vevo,
and YouTube. He notes that play share data from two other
distribution methods--satellite via SiriusXM and physical retail and
digital downloads--were ``not available'' to him. However, he
testifies that he has ``no reason to think the content of any of the
record companies is played with more or less frequency on these
distribution methods, when compared to the distribution methods
(interactive and noninteractive streaming) for which I did have
data.'' Thus, he asserted that he had ``no reason to believe this
additional data would materially change'' his play share estimates.
Willig WDT ] 48 n.26.
---------------------------------------------------------------------------
Professor Willig explains that these royalty statements set forth
the total plays on each service in any given month, itemized by the
record company that owned each copyrighted sound recording. He also
states that he has no reason to believe these shares would be
[[Page 59527]]
substantially different over the 2021-2025 rate period, compared to the
data he had applied. Id.
From this data, Professor Willig calculates the relative
proportions of plays of sound recordings whose copyrights are owned by,
respectively, Sony, Warner, and Universal, as well as from his grouping
of Indies. More specifically, he computes each Major's play share, and
then computes the Indies' play share as equal to 100% minus the sum of
the Majors' shares. Id. at ] 48 & app. D at ex. D.5.
Professor Willig summarized these play shares in the following
figure:
Figure 7: Estimated Play Shares (RESTRICTED)
[REDACTED]
v. Noninteractive Services' Fixed Costs and Marginal Profit Rates
As noted supra, Professor Willig's Shapley Value Model also
requires data quantifying: (i) Each record company's ``fallback
value''; and (ii) the surplus value brought by each of the negotiating
parties to the notional Shapley market negotiations. With specific
regard to the noninteractive services, Professor Willig states that the
value they bring to the notional Shapley negotiations depends on their
ability to generate profits, which subtract out from revenues variable
costs, including the royalties noninteractive services pay for musical
works (but not the sound recording royalties, which, to repeat, are the
outputs of the Shapley Value Model). Willig WDT ] 49. To make this
calculation, Professor Willig compiles categorical data relating to
``fixed costs, variable or marginal costs and the associated marginal
profit rates of noninteractive distributors . . . .'' Id.
c. Professor Willig's Chosen Source of Financial Data
i. Financial Statements vs. Financial Projections
Professor Willig relies on the ``Pandora Merger Proxy,'' dated
December 20, 2018, and filed with the Securities and Exchange
Commission (SEC), Trial Ex. 5045, that described the proposed merger
(subsequently consummated) between Pandora and Sirius XM. Id. & app. D,
ex. D.6 (p.3 therein). Professor Willig utilizes Pandora data
exclusively to represent the noninteractive services because: (i)
Pandora was the only noninteractive service for which he could find
``forward-looking estimates'' of the data that he required; and (ii)
Pandora is the largest noninteractive distributor in the market,
accounting (as noted supra) for more than [REDACTED]% of total plays in
the noninteractive market. Id. & app. D at ex. D.4.
Perhaps in (correct) anticipation of the Services' rebuttal,
Professor Willig explains in detail why he decides to rely on the
``Pandora Merger Proxy''--which included predictions (what he
characterized as ``forward-looking estimates'') of Pandora's future
financial performance, and which Pandora sent to its shareholders in
connection with the then-proposed (and subsequently consummated)
acquisition of Pandora by Sirius XM. More particularly, he explains why
he favored these projections, rather than older data in Pandora's most
recent financial statements contained in its 2017 Form 10-K (annual
report) filed with the Securities & Exchange Commission (SEC), Trial
Ex. 5043, or data even more current than the proxy statement data in
Pandora's financial statements for the first half of 2019. Trial Ex.
5054. See Willig WDT, app. D (] 2 therein).
Professor Willig acknowledges Pandora's ``recent history of
operating losses'' (before and after Sirius XM's proposed acquisition
of Pandora). However, he opines that such operating losses do not
``accurately reflect expectations about the incremental value'' that
Pandora could bring to the notional Shapley Value negotiation
concerning royalty rates for the 2021-2025 period. Willig WDT app. D (]
2 therein). Rather, he states, it is more appropriate to rely on: (i)
Financial projections that undergird ``the approximately $3.5 billion
purchase price paid by Sirius XM'' to acquire Pandora; and (ii)
Pandora's substantial market capitalization of approximately $2.4
billion immediately prior to the announcement of the Sirius XM
acquisition . . . .'' Id. According to Professor Willig, these are
market-based values, and therefore the data on which they were based--
utilized by Pandora's investment bankers as an input into their merger
fairness opinions--are more probative of Pandora's likely financial
performance over the forthcoming 2021-2025 rate period. Willig WDT app.
D (]] 2-3 therein).
Although Professor Willig states a preference for projections as
opposed to the most recent historical financial information, he also
chose to ignore different financial projections created for Pandora by
Sirius XM after it had acquired Pandora. He acknowledges that these
newer financial projections ``[REDACTED].'' Regardless, as a basis for
rejecting these projections, Professor Willig states: ``I
``understand'' Pandora . . . produced [these] additional projections .
. . for these proceedings . . . .[,]''--but he does not attribute his
understanding to any source. Id. ] 3 n.4.\235\
---------------------------------------------------------------------------
\235\ As discussed elsewhere in this Determination, Pandora
vigorously denies the unattributed assertion that it created these
newer projections, labeled ``Long Run Scenarios'' by Sirius XM, for
the purpose of these proceedings.
---------------------------------------------------------------------------
ii. Professor Willig's Reliance on Merger ``Scenario 2'' Data
The Proxy Statement on which Professor Willig elects to rely
contains two different sets of projections, denoted as ``scenarios,''
regarding Pandora's predicted financial future. ``Scenario 1a''
projected a relatively lower value for Pandora, whereas ``Scenario 2''
projected a relatively higher value. Professor Willig elected to
utilize the higher-value Scenario 2 projections, ignoring the lower-
value Scenario 1a projections. He made this decision because he
understood that Pandora's investment bankers relied on the Scenario 2
projections to produce their valuation of Pandora in connection with
the Sirius XM acquisition, and those projections were ``in-line with
the $3.5 billion market price paid by Sirius XM to acquire [Pandora].''
Willig WDT app. D, ] 3 & n.5.\236\ He notes that, by contrast, the
Scenario 1a projections implied valuations substantially below this
$3.5 billion market price.'' Id.
---------------------------------------------------------------------------
\236\ Professor Shapiro concedes that the Scenario 2 data needs
to be taken ``seriously'' and are ``a big deal,'' because they were
included in the ``merger proxy documents . . . used as part of the
acquisition.'' 8/19/20 Tr. 2732-33 (Shapiro).
---------------------------------------------------------------------------
Using the higher-valued Scenario 2 projections, Professor Willig
estimates Pandora's annual fixed costs at $397 million for its Pandora
Free ad-supported service, and annual fixed costs of $85 million for
its Pandora Plus subscription service. He then converts these annual
figures into monthly fixed costs. To convert these monthly Pandora
fixed cost estimates into noninteractive service industrywide data, he
grosses them up by dividing by Pandora's market share (as he did when
grossing up the audience size). Through this method, Professor Willig
estimates monthly fixed costs of $40.4 million for ad-supported
noninteractive services, and $8.9 million for subscription
noninteractive services. Willig WDT app. D, ] 4 & n.6.
Having identified and segregated the fixed costs, Professor Willig
then utilizes the Scenario 2 data for his estimate of Pandora's
variable costs.\237\
[[Page 59528]]
In this regard, Professor Willig also relies on other information,
including a September 24, 2018 report by an investment banking firm
(JMP Securities, engaged to analyze Sirius XM's acquisition of
Pandora), that projected ``content acquisition costs'' for Pandora's
three service tiers (Pandora Free, Pandora Plus and Pandora Premium).
Willig WDT app. D at ex. D.6 (nn.8, 11 and 14 therein).
---------------------------------------------------------------------------
\237\ As noted supra, these variable costs are necessary inputs
in the Shapley Value model because these are costs that must be
subtracted from revenue in order to estimate the ``surplus'' that
can be the shared by the participants in the notional Shapley
arrival orderings.
---------------------------------------------------------------------------
Generally, Professor Willig allocates Pandora's multi-tier variable
costs on a per-tier basis proportionate to each tier's share of
projected total (all-tier) revenue, through 2025, except where he
identifies specific per tier costs. Specifically, these other
identifiable variable costs include: (i) ``Cost of Goods Sold''
(including musical works royalties (performance right and mechanical
rights royalties)); (ii) ``Operating Expenses''; (iii) ``Product
Development Expenses''; (iv) ``Sales and Marketing''; (v) ``General and
Administrative Expenses'' and ``Stock Based Compensation.'' Willig WDT
app. D, ex. D.6 (at 3 therein).
Professor Willig also makes the following revenue-related
assumptions regarding Pandora: \238\
---------------------------------------------------------------------------
\238\ Revenue data is necessary in the Shapley Value Model
because revenue minus variable costs yields the surplus that can be
allocated among the negotiating parties according to their
respective Shapley Values.
---------------------------------------------------------------------------
(i) Revenue growth per subscriber annually from 2021-2025;
(ii) monthly revenue per subscriber for Pandora Plus in 2020;
(iii) annual revenue growth per subscriber for years 2021 to 2025;
(iv) monthly revenue per subscriber for Pandora Plus in 2020; and
(v) continued existence of the 2018 ad-supported and subscription
noninteractive per-play royalty rates from 2021-2025 equal to the
current statutory rates plus an annual 2% inflation rate.
Id. He bases his calculations of these five types of revenue
information on ``the assumptions accompanying the Proxy Scenario 2
projections and recent history which indicate that Pandora Premium is
expected to grow faster than Pandora Plus.'' Id.\239\
---------------------------------------------------------------------------
\239\ Professor Willig also assumes that the number of ad-
supported users for years 2021-2024 should be ``calculated based on
a liner [sic] user growth trend between the 2018 actual and 2025
projected figure. Id.
---------------------------------------------------------------------------
Based on the data upon which he relies, and the assumptions he
makes in connection with that data, Professor Willig estimates an ad-
supported marginal profit rate of $0.0042 per play, and a subscription
marginal profit rate of $0.0048 per play. Willig WDT app. D, ex. D.6
(at 2 therein).\240\
---------------------------------------------------------------------------
\240\ For the avoidance of confusion, the Judges point out that
these figures are not Professor Willig's proposed royalty rates, but
rather his estimated marginal profit rates. His calculation of
royalty rates is discussed infra.
---------------------------------------------------------------------------
iii. Professor Willig's Caveat Regarding the Foregoing Cost and Profit
Data
Although Professor Willig elects to rely in his corrected written
direct testimony on the Scenario 2 data, he recognizes that the data
sets he then possessed when drafting that direct testimony did not
contain granular cost and revenue information regarding Pandora.
Accordingly, the assumptions he was compelled to make, as itemized
supra, were necessarily tentative in nature. Specifically, Professor
Willig acknowledged:
[C]ertain key inputs to the Pandora projections were not
disclosed in Pandora's proxy statements (e.g., projected ad-
supported user and subscriber counts, projected plays, and a
breakdown of subscription revenue into its underlying Pandora Plus
and Pandora Premium component parts). Accordingly, certain
allocation assumptions were required to estimate key parameters from
Pandora's projected financial information. Estimates derived from
these projections may require amendment following the completion of
discovery.
* * * * *
The Pandora projections on which these estimates are based do
not disclose certain key inputs that were used to create the
projections. For instance, the projections do not include a
breakdown of subscription revenue into the portions related to its
Pandora Plus noninteractive and Pandora Premium on-demand services,
respectively, and therefore require an allocation assumption to
exclude Pandora Premium revenue and costs from the analysis.
Moreover, the projections do not include the projected subscriber
counts, active user counts, and play counts underlying the
projections, requiring these figures to be derived so that profit
rates can be computed. Accordingly, the assumptions required to
estimate key parameters for use in my Shapley Value model may need
to be updated following the completion of discovery.
Willig WDT ] 50 n.30, app. D at D-3. Professor Willig did not amend his
direct testimony to update these ``key parameters.''
In Pandora's rebuttal testimony, it criticizes Professor Willig's
assumptions, and demonstrates that the more granular data provided an
accurate description of Pandora's economic condition that served as the
basis for the Scenario 2 projections on which Professor Willig elected
to rely. See Trial Ex. 4109 (WRT of Jason Ryan) (Ryan WRT); Shapiro WRT
(applying Mr. Ryan's economic data).
Later, in his written rebuttal testimony, Professor Willig utilizes
the more granular economic data underlying the Scenario 2 projections
to amend his direct testimony by substituting that data for the
assumptions he had made in his direct testimony. Specifically, he
testified as follows regarding the ``updates'' he made in his rebuttal
testimony (at Appendix L):
These revised profit rate estimates adopt certain of Professor
Shapiro's cost allocation assumptions, his definition of variable
costs, and make use of further details relating to the projections
publicly disclosed in Pandora's merger proxy . . . (including
subscriber counts, Pandora Plus revenues, advertising hours, and
operating expense synergies).
Willig WRT ] 75 n.138.
Further, Professor Willig essentially adopted the analysis
undertaken by Pandora's Vice President of Financial Planning and
Analysis, Jason Ryan, regarding the allocation of advertising revenues;
projected growth of subscription revenue; classification of certain
sales and marketing expenses; classification of product development
costs; and projected number of users, subscribers and plays. See 8/5/20
Tr. 525 (Willig) (``[W]hen you check the numbers that [Mr. Ryan] says
are right against the numbers I use in my rebuttal report, they are
exactly the same.''); see also Willig WRT app. L at 1, 3-4 & nn.2-4, 11
55-58 & 72-74; 8/5/20 Tr. 361-62, 520-25, 527-528 (Willig); SX PFFCL ]]
669-674 (noting that Professor Willig's testimony, mooted many of the
issues raised by Mr. Ryan and Professor Shapiro). Accordingly, the
Judges adopt Mr. Ryan's analysis of the more granular cost and revenue
data necessary to generate Pandora's profit margins on its subscription
and ad-supported services. Additionally, the Judges find that Mr. Ryan,
as a financial executive at Pandora, is a more competent witness to
make the necessary categorizations and allocations of revenue and costs
than Professor Willig.\241\
---------------------------------------------------------------------------
\241\ Thus, the Judges do not rely on Professor Willig's
assertion that the more granular revenue and cost information did
require him to materially change his royalty rate calculations. Id.
More particularly, Pandora asserts that Professor Willig's analysis
is still erroneous in two respects because he: (1) Misallocates
product development costs across the ad-supported and Pandora Plus
services by applying revenue proportions; and (2) fails to deduct
non-music revenue from his calculation of Pandora's margin. Services
PFFCL ]] 277-286 (and record citations therein). These disputes do
not require extended analysis. Suffice it to say, with regard to the
first issue, the Judges repeat their finding that Professor Willig's
attempt--for the first time in rebuttal testimony--to justify his
allocation of product development costs across Pandora's services,
is less credible than the analyses made by Mr. Ryan, who is a fact
witness with direct knowledge of these details regarding Pandora's
product development costs. However, with regard to the second
numbered issue above, Professor Willig explained persuasively that
Pandora's criticism of his treatment of non-music revenue did not
impact the royalty rate he calculated, because he made his profit
calculations on a per-play basis that was unaffected by the
treatment of non-music revenue, in that ``non-music revenue and non-
music listening travel together in roughly equal proportion,'' with
each representing approximately [REDACTED]% of revenue and
listening.'' SX RPFFCL (to Services) ] 284 (and record citations
therein). Moreover, because the amount of listening and revenue at
issue in this allocation is only [REDACTED]% of each metric, the
allocation of this revenue would have only a de minimis impact on
the royalty rate ultimately estimated by Professor Willig's Shapley
Value Model.
---------------------------------------------------------------------------
[[Page 59529]]
d. Professor Willig's Calculation of the Record Companies' Opportunity
Costs
As noted supra, Professor Willig assumes that each of the three
Majors in his Shapley Value Model provides a ``Must Have'' repertoire
for a noninteractive service. Willig WDT app. C at C-1 (] 1 therein).
Therefore, his modeling assumes that ``only when all three [Majors] are
present in a coalition can the [noninteractive service] begin making
profits.'' Id. at C-3 (] 5 therein). This means that ``in any other
case''--including when a noninteractive service obtains licenses from
only one or two Majors--Professor Willig's Shapley Value Model assumes
that the noninteractive service ``cannot operate.'' Id. at C-5 (] 8
therein).
Professor Willig acknowledges that the assumed ``Must Have'' status
of each Major generates ``complementary oligopoly power'' in the
market. However, he understands that the Judges' determination in a
prior proceeding, Phonorecords III, ``credited a Shapley Value analysis
as one way of addressing concerns about complementary oligopoly power
[because] the analysis performed in the proceeding eliminated this
`walk away' power by valuing all possible orderings of the players'
arrivals.'' Willig WDT ] 14 (quoting Phonorecords III, 84 FR at 1933
n.69).\242\
---------------------------------------------------------------------------
\242\ The Judges again discuss the issue of whether the
repertoire of each Major is a ``Must Have'' infra, in connection
with Pandora's assertion that its Label Suppression Experiments
(LSEs) demonstrate that no one Major's repertoire is a ``Must
Have.''
---------------------------------------------------------------------------
e. The Noninteractive Services' Shapley Values Derived by Professor
Willig
By inserting the data inputs, discussed above,\243\ into the
Shapley Value formulas,\244\ Professor Willig derives Shapley Values
and corresponding royalty rates for ad-supported and subscription
noninteractive services, respectively. Id. at 51 & fig.9. These results
are set forth below:
---------------------------------------------------------------------------
\243\ See also Willig WDT app. D.
\244\ See Willig WDT app. C.
[GRAPHIC] [TIFF OMITTED] TR27OC21.008
Because the royalty rates derived by Professor Willig are based in
part on the diversion ratio results obtained from the Zauberman Survey,
i.e., a survey of a sample from the larger population, the royalty
rates are statistically inexact.
[[Page 59530]]
Accordingly, Professor Willig calculates a confidence interval for his
results, utilizing a ``bootstrap procedure'' \245\ that produces a 95
percent confidence interval. This confidence interval establishes
ranges for the royalties from $0.00290 to $0.00299 for the ad-supported
noninteractive royalty rate and of $0.00299 to $0.00316 for the
subscription noninteractive royalty rate. Willig WDT ] 51 & app. E.
---------------------------------------------------------------------------
\245\ The Judges have previously described the ``bootstrap''
procedure in the survey context as ``a sampling of the survey
respondents [that is] itself randomly selected and thereby create[s]
a confidence interval around each of the reported survey results''--
in this case the entirety of the Zauberman Survey. SDARS III, 83 FR
at 65232 n.90. There is no challenge by any of SoundExchange's
adverse parties to this process.
---------------------------------------------------------------------------
Professor Willig emphasizes and explains several features of his
results. First, he points out that ``the resulting Shapley Value for
the ad-supported noninteractive [service] is near zero.'' Id. ] 51. The
reason for this near-zero Shapley Value, he opines, is that ``the
record companies' opportunity costs are high relative to the total
projected profits of [the ad-supported noninteractive services].'' Id.
Stating this point in commercial terms, Professor Willig explains that
it reflects the alleged fact that ``the vast majority of those profits
are necessary to compensate the record companies for the ad-supported
noninteractive distributors' cannibalization of listeners that would
otherwise consume music via other compensatory forms of music
distribution.'' Id.\246\
---------------------------------------------------------------------------
\246\ Professor Willig also finds support for these high
opportunity costs and royalties in: (i) Pandora documents that he
understands [REDACTED]; and (ii) testimony from record company
witnesses that [REDACTED]. See Willig WDT ]] 52-54.
---------------------------------------------------------------------------
f. The Royalty Rates Derived From Professor Willig's Shapley Value
Model
Based on the foregoing analysis, and as stated at the outset of
this description of Professor Willig's modeling, he opines that his
Shapley Value Model generates a royalty rate for ad-supported
noninteractive services of $0.0028 per play for 2021 and for
subscription noninteractive services of $0.0030 per play for 2021.\247\
---------------------------------------------------------------------------
\247\ Professor Willig also uses a different set of survey
results as a check on his Shapley Values and royalty rates.
Specifically, he utilizes data from market research conducted by
Edison Research--known as the ``Share of Ear'' study--that analyzes
the share of time Americans spend listening to all different forms
of music distribution. He concludes that this alternative data set
confirms the royalty rates he derived from the Zauberman Survey
results. Willig WDT ]] 56-60 & ex.F. The Judges analyze this
alternative approach in their discussion of the Services' criticisms
of Professor Willig's Shapley Value modeling, infra section
IV.C.1.g.
Additionally, Professor Willig tested the sensitivity of his
Shapley Value model using a Nash-in-Nash (N-I-N) bargaining
framework, another approach for modeling a multi-party negotiation.
Willig WDT ]] 61-67); 8/6/20 Tr. 738-39 (Willig). Under that
framework, each potential negotiating record company/noninteractive
service pair reaches a ``Nash'' bargain in which the record company
receives its fallback value and each counterparty receives one half
of the surplus created by the deal. Willig WDT ] 62. In these Nash-
in-Nash (N-I-N) negotiations, the parties assume that all other
pairs of parties have reached (or will reach) an equilibrium
agreement. Id. A solution is reached when there is no negotiating
pair with an incentive to change its agreement. See id. ]] 65-66 &
fig.11, app. G. His N-I-N model produces royalty rates similar to
those obtained from Professor Willig's Shapley Value model--royalty
rates for 2021 of $0.0030 per play for ad-supported noninteractive
services and $0.0030 per play for subscription noninteractive
services. Willig WRT ] 82 n.147; 8/6/20 Tr. 739 (Willig).
---------------------------------------------------------------------------
g. The Services' Criticisms of Professor Willig's Shapley Value Model
Approach and the Judges' Analysis and Findings
i. Is Professor Willig's Shapley Value modeling appropriate for setting
noninteractive rates?
(A) Professor Willig's Shapley Value Model is Inconsistent With the
Shapley Modeling in Phonorecords III and Thus Fails to Generate
Effectively Competitive Rates
Professor Willig's Shapley Value Model--like all Shapley modeling--
incorporates all potential ``arrival orderings.'' Therefore, unlike in
the actual market, the modeling does not include any scenario in which
a Major record company can leverage a threat to ``Walk-Away'' from
negotiations into a royalty rate that includes the effect of its
complementary oligopoly status. As noted supra, Professor Willig--
relying on Phonorecords III--thus opines that a Shapley Value analysis
is ``one way of addressing concerns about complementary oligopoly power
. . . .'' Willig WDT ] 14. Therefore, in his opinion his Shapley Value
Model is ``an appropriate approach for assessing rates that would be
negotiated in the hypothetical marketplace for noninteractive
webcasting.'' Id. ] 24.
However, notwithstanding the fact that Shapley modeling includes
all possible ``arrival orderings,'' expert economic witnesses for
Pandora and Google, respectively, argue that Professor Willig's Shapley
Value Model nonetheless incorporates complementary oligopoly power. See
Shapiro WRT at 52, 57 (Jan. 10, 2020); Peterson WRT ]] 82, 85, 100
n.103 (Jan. 10, 2020). As a second criticism, Professor Shapiro further
asserts that Professor Willig misapplies the Shapley Value analysis in
Phonorecords III. Shapiro WRT at 57.
Dr. Peterson summarizes his first criticism and that of Professor
Shapiro regarding the purported presence of a complementary oligopoly
effect in Professor Willig's Shapley Value Model:
Professor Willig explicitly assumes that the major record labels
are essential to a noninteractive streaming service. This implies
that a single label can shut down the service, which allows the
label to guarantee itself a high value or monetary payoff when
acting alone.
* * * * *
[Because] Professor Willig's Shapley Value model explicitly
models the major record labels as being essential . . . each [Major]
can individually extract the value that a monopolist would extract
from the streaming service or distributor. In the Shapley Value
model, this set up allows the essential labels to extract the
monopoly value of their recordings from the streaming service . . .
.
Peterson WRT ] 87.
There is no dispute that in Professor Willig's Shapley Value
Model--when the last arriving party is assumed to be a ``Must Have''
Major--that this last arriving Major will generate the entire value
generated by noninteractive streaming. That monopoly value is repeated
for each of the three Majors when it is the last to arrive in a Shapley
ordering. Thus, when the modeling assumes the presence of complementary
oligopolists--as does Professor Willig's modeling--it preserves a
substantial measure of the Majors' ``Must Have'' power and translates
it into higher shares of the Shapley surplus and, ultimately, higher
royalty rates.
The validity of this criticism is made obvious by the following
simple example, which reveals the different Shapley Values that arise
even though all arrival orderings are present in a Shapley model: \248\
---------------------------------------------------------------------------
\248\ The following examples assume only one service, in order
for the example to be tractable and simply to demonstrate that,
ceteris paribus, changing the number of licensor record companies
alone will change the relative Shapley Values and resulting
royalties. Cf. Phonorecords III, 84 FR at 1950 n.119 (discussing the
practical value of attempting to model effective competition by
limiting the number of ``arrival orderings'' via a reduction in the
number of licensees rather than an increase in the number of
licensors). The Judges are not suggesting that an appropriate
Shapley Value Model would necessarily contain only a single service,
unless supported by the marketplace facts.
Assume the total Shapley Surplus = 12
Assume 2 Majors (``1'' & ``2'') with ``Must Have'' repertoires (i.e.,
complementary oligopolists)
Assume 1 Noninteractive Service, ``S''
[[Page 59531]]
----------------------------------------------------------------------------------------------------------------
Contribution Contribution Contribution
Arrival orderings by S by #1 by #2
----------------------------------------------------------------------------------------------------------------
1, 2, S......................................................... 12 0 0
2, 1, S......................................................... 12 0 0
S, 1, 2......................................................... 0 0 12
1, S, 2......................................................... 0 0 12
S, 2, 1......................................................... 0 12 0
2, S, 1......................................................... 0 12 0
----------------------------------------------------------------------------------------------------------------
Shapley Value for S = 4 (24/6); Shapley Value for #1= 4 (24/6); Shapley
Value for #2 = 4 (24/6)
So, in a Shapley Value model with complementary oligopoly, Service
S pays 8/12 of surplus (67%) toward royalties to Record Companies #1
and #2.
But, compare below the royalty payment by the service if there was
no complementary oligopoly structure, and instead one record company
(#1) owned all the copyrights for sound recordings:
------------------------------------------------------------------------
Contribution Contribution
Arrival orderings by S by #1
------------------------------------------------------------------------
1, S.................................... 12 0
S, 1.................................... 0 12
------------------------------------------------------------------------
Shapley Value for S = 6 (12/2); Shapley Value for #1 = 6 (12/2)
So, in the Shapley Model with monopoly instead of complementary
oligopoly, Service S pays only 6/12 of surplus (50%) toward royalties
to Record Companies #1 and #2, substantially less than if a
complementary oligopoly exists.
Alternatively, the Judges note that, if the market structure
contains two substitute oligopolies that compete with each other
(rather than complementary oligopolies) and each is able to satisfy 50%
of market demand, the Shapley modeling would look as follows:
----------------------------------------------------------------------------------------------------------------
Contribution Contribution Contribution
Arrival orderings by S by #1 by #2
----------------------------------------------------------------------------------------------------------------
1, 2, S......................................................... 12 0 0
2, 1, S......................................................... 12 0 0
S, 1, 2......................................................... 0 6 6
1, S, 2......................................................... 6 0 6
S, 2, 1......................................................... 0 6 6
2, S, 1......................................................... 6 6 0
----------------------------------------------------------------------------------------------------------------
Shapley Value for S = 6 (36/6); Shapley Value for #1 = 3 (18/6);
Shapley Value for #2 = 3 (18/6)
So, in the Shapley Model with substitute competing oligopolies
instead of complementary oligopoly, Service S pays only 6/12 of surplus
(50%) toward royalties to Record Companies #1 and #2, again
substantially less than if a complementary oligopoly exists.\249\
---------------------------------------------------------------------------
\249\ The purpose of these examples is to demonstrate the
significant limitations of a Shapley Value Model that simply takes
as a given the complementary oligopoly structure of the market being
modeled. Monopolies or oligopolies may well exist because of their
``efficiencies and economies of scale and/or their superior
operations.'' Web IV, 81 FR at 26368. Whether any such entity
utilizes such power in a manner that generates rates that are
inconsistent with the workings of an effectively competitive market
is a separate issue not addressed in the application of the Shapley
Value Model in this proceeding. See Web IV, 81 FR at 26335
(distinguishing between ```[c]omplementary oligopoly' power
exercised by the Majors designed to thwart price competition and
thus inconsistent with an `effectively competitive market,' [and]
the Majors' non-complementary oligopolistic structure not proven to
be the consequence of anticompetitive acts or the cause of
anticompetitive results.''). The narrow point here is that the
complementary oligopolistic market structure is not well-modeled via
the Shapley approach, without an adjustment to offset the
complementarity of the ``Must Have'' repertoires, as was done by
Professor Marx in Phonorecords III and adopted by the majority in
Phonorecords III in its application of the Shapley approach.
---------------------------------------------------------------------------
In sum, these examples demonstrate how Shapley Value modeling is
sensitive to the number of participants, the number of orderings,
substitutability and perfect complementarity of the services, even
though in each case all arrival orderings are generated by the Shapley
modeling.
With regard to the second criticism, Professor Shapiro claims:
[T]he Shapley Value models used in Phonorecords III explicitly
avoided complementary oligopoly power among separate copyright
holders for each set of rights by removing the oligopoly. Professor
Willig does not follow that approach to removing complementary
oligopoly power among the major record companies in his Shapley
Value model. As a result, for the very reasons given by the Judges
in Phonorecords III, Professor Willig's model gives additional
returns to the major record companies by endowing them with
complementary oligopoly power.
Shapiro WRT at 57.
In this regard, in Phonorecords III, the Judges analyzed two
Shapley Value models and one ``Shapley-inspired'' model in the same
context of perfect complements/complementary oligopoly. Ultimately, the
Judges combined elements of all three approaches, but, importantly
here, they credited the Shapley Value model of Professor Leslie Marx
for the purpose of calculating the total amount of royalties. In
determining that total, Professor Marx first equalized the number of
licensees in order to reduce the complementary oligopoly effect that is
embodied in a Shapley Value approach, even though the use of Shapley
``arrival orderings'' eliminates the complementary oligopolists'
``walk-away'' (hold-out'') power. In this manner, she intentionally
altered the number of arrival orderings in which one of the
complementary oligopolists provided the entirety of the additional
value. Phonorecords III, 84 FR at 1948-50 (``Professor Marx . . .
offset the concentrated market power that the rightsholders possess,
separate and apart from any holdout power, which the Shapley ordering
algorithm would address . . . address[ing] an issue--market power--that
the Shapley Analysis does not address.'').\250\
---------------------------------------------------------------------------
\250\ In this regard, it should be noted that the Phonorecords
III dissent was in accord with the Majority. The dissenting opinion
pointed to expert testimony and evidence making clear that there is
a distinction between: (1) The ``abuse of market power'' that arises
when a ``Must Have'' licensor holds-out (or threatens to hold out)
during negotiations, in order to earn economic rents arising from
the fragmentation of ownership of ``Must Have'' inputs; and (2) the
presence of existing market power disparities that may otherwise be
implicit in Shapley Value modeling. The former ``abuse'' of market
power is indeed ameliorated by the Shapley Value approach, whereas a
complementary oligopoly effect inconsistent with effective
competition can only be mitigated in Shapley Value modeling if the
modeler adjusts for that market power disparity. See Phonorecords
III, 84 FR 2023 & n.342 (dissenting opinion) (applying consistent
testimony from, and evidence regarding, four economic expert
witnesses, Professors Watt, Marx, Katz and Gans).
---------------------------------------------------------------------------
[[Page 59532]]
Professor Willig's Shapley Value Model specifications deviate in
another important manner from those in the Shapley modeling in
Phonorecords III. In that case, all the economists' Shapley modeling
aggregated the record companies as a single entity, eliminating their
complementary oligopoly power. Moreover, one of the economists who
utilized Shapley Value modeling in that case, Professor Leslie Marx,
utilized two different market structure models--her ``baseline'' model
in which these two perfectly complementary (``Must Have'') rights (for
sound recordings and musical works) were assumed to be owned by a
single collective, and her ``alternative'' model in which these
complementary rights were assumed owned by two separate entities. She
used these two models (like the Judges use their examples above) as a
pedagogical demonstration of how the fragmentation of ownership of
complementary rights leads to higher and more inefficient royalty
rates, even in Shapely modeling that includes (by definition) all
possible arrival orderings.\251\ See Phonorecords III, 83 FR at 2022
(dissenting opinion) (Professor Marx ``made this adjustment to offset
the concentrated market power that the rights holders possess . . .
that the Shapley value approach does not address.''). By contrast,
Professor Willig here models each Major as a separate ``Must Have,''
which incorporates the complementary oligopolists' pricing power,
notwithstanding the inclusion of all arrival orderings.
---------------------------------------------------------------------------
\251\ That is, Professor Marx demonstrated precisely what the
Judges have shown in the example in the text, supra.
---------------------------------------------------------------------------
Professor Willig did not address this aspect of Phonorecords III,
either in his WDT or WRT. At the hearing, the Judges asked Professor
Willig if he had read the Phonorecords III Determination before he
wrote those written testimonies, and he responded: ``Portions of it,
yes [but] I must confess, not the whole thing.'' 8/25/20 Tr. 3863
(Willig). (In both of his written testimonies, though, he identified
the Phonorecords III Determination as a document upon which he relied,
without noting that he did not read it in its entirety. Willig WDT,
app. B at B-2; Willig WRT, app. I. at I-1.).\252\
---------------------------------------------------------------------------
\252\ Professor Willig was also unable to recall, and did not
address, an article on which the Judges expressly relied in Web IV
for the proposition that ``even economists quite unwilling to assume
that a given monopoly or oligopoly structure is inefficient and
anticompetitive bristle at the idea that supranormal pricing arising
from a complementary oligopoly is reflective of a well-functioning
competitive market. Web IV, 81 FR at 26368 (citing Francesco Parisi
& Ben DePoorter, The Market for Intellectual Property: The Case of
Complementary Oligopoly, in The Economics of Copyrights:
Developments in Research and Analysis (W. Gordon and R. Watt eds.
2003).
---------------------------------------------------------------------------
The Judges then asked Professor Willig if he had read the portions
regarding ``the distinction between holdout power and market power . .
. that was . . . actually adopted by way of adjustments by the majority
. . . in Phonorecords III, [or] discuss that Phonorecords III issue in
either of your written testimonies?'' 8/25/20 Tr. 3864 (Willig).
Professor Willig's response made it clear that he had not addressed
that specific issue. Rather, he provided a discursive answer in which
he repeated that his Shapley Value Model ``has at least a prominent
virtue on this very subject that you are mentioning of eliminating any
special hold out power, or market power that derives from the ability
to be a holdout . . . .'' 8/25/20 Tr. 3864-65 (Willig) (emphasis
added). But the usefulness of the Shapley Value approach in eliminating
``hold out power'' was not ``the very subject'' of the Judges'
question. Rather, their inquiry was whether Professor Willig had
addressed the issue in Phonorecords III as to whether the ``arrival
orderings'' themselves embedded the complementary oligopoly power of
the Majors.
Continuing his response to the Judges' inquiry, Professor Willig
further stated that it is necessary to ``to distinguish between the
holdout power and the value that a party to the negotiations brings to
the enterprise. And if one of the parties is a must-have, because it's
so important, well, it shouldn't be denied the value that it brings . .
. you don't want to strip away the value because that's part of the
marketplace and part of the incentives to the parties to do what they
need to do to provide that value.'' 8/25/20 Tr. 3865 (Willig).
But, this too does not resolve the issue of whether the arrival
orderings in his Shapley Value model embed complementary oligopoly
power into his Shapley Values and thus, ultimately, inflate the royalty
rates. Moreover, his answer essentially states that a ``must have''
licensor should retain the value of that status, even though it is an
artifact of the fragmented ownership of the ``must have'' nature of
their repertoires, leading to a consequence where the Shapley Value
modeling would provide the Majors with the value of this artifact,
beyond the considerable value of their repertoires. See Web IV, 81 FR
at 26368 (noting that eliminating the ``must have'' power of
complementary oligopoly does not ``diminish the firm-specific monopoly
value of each Major's repertoire taken as a whole.''). Moreover, the
perfect complementarity generates market consequences that are even
worse than monopoly. See Web IV, 81 FR at 26342 (relying on the ``logic
first identified by Antoine Cournot in 1838, firms offering
complementary products tend to set higher prices than would even a
monopoly seller . . . .'') (emphasis added); see also id. at 26368 &
n.142); 8/18/20 Tr. 2642-43 (Shapiro); 8/25/20 Tr. 3655-56
(Peterson).\253\
---------------------------------------------------------------------------
\253\ Professor Willig did address the type of adjustment made
by Professor Marx to her Shapley Value model in Phonorecords III, in
response to a general question from the Judges. He testified as
follows:
I think it would matter if somehow the majors were collapsed
into a single major. That would affect the results, but in a way
that would deviate from the features of the marketplace that are
realistic and important.
8/5/20 Tr. 323 (Willig). However, the Judges find that changing
the structure of the licensor-side of the market to eliminate
complementary oligopoly effects is necessary. Although the Judges do
not dispute Professor Willig's characterization of that
complementary oligopoly power as ``realistic'' or ``important'' in
an actual market for the licensing of noninteractive services, they
find, as they did in Web IV, that a rate formula incorporating
complementary oligopoly power is antithetical to an effectively
competitive rate.
---------------------------------------------------------------------------
Accordingly, the Judges agree with Professor Shapiro's criticism of
Professor Willig's approach for failing to ``remov[e] complementary
oligopoly power among the major record companies in his Shapley Value
model,'' and ``for the very reasons . . . in Phonorecords III, giv[ing]
additional returns to the major record companies by endowing them with
complementary oligopoly power.'' Shapiro WRT at 57.\254\
---------------------------------------------------------------------------
\254\ To be clear, the Judges do not disagree with Professor
Willig as to the ``Must Have'' status of each Major as a ``Must
Have.'' Rather, as noted in the Judges' prior discussion in this
Determination regarding ``effective competition,'' they continue to
find that an appropriate downward adjustment must be made to royalty
rates that reflect the effects of a complementary oligopoly market
structure. The Judges consider infra whether the record provides a
basis for making the necessary effective competition adjustment to
Professor Willig's Shapley Value Model.
---------------------------------------------------------------------------
ii. Did Professor Willig correctly reject the 2019 ``Long Range
Scenario'' (LRS) for Pandora prepared by Sirius XM?
Pandora also criticizes Professor Willig's decision to ignore the
data contained in Sirius XM's LRS, Trial Ex. 4010, in his calculation
of Pandora's profit margins over the 2021-2025 rate period. Although
Professor Willig
[[Page 59533]]
contends (with no attribution) that this LRS was prepared solely for
this proceeding, Pandora's Vice President of Financial Planning and
Analysis, Jason Ryan, describes the LRS as a document ``generated by
Sirius XM in the ordinary course of business,'' and is intended, inter
alia, to ``guide management in the preparation of its operating budget
and business plan for the next year.'' Ryan WRT ] 36 (emphasis added).
According to Mr. Ryan, the budgets created through Sirius XM's LRS
process ``are also a tool that the Board of Directors of Sirius XM uses
throughout the year to gauge the health of the business and at the end
of the year when assessing performance-based compensation of executive
officers and employees.'' Id. More particularly, Mr. Ryan explains that
the LRS process proceeds in the following manner:
The [REDACTED] flow from our reasonable efforts to plan and
predict the trajectory (contraction or growth) of the business.
Id. ] 38.
Mr. Ryan's testimony is uncontroverted on this point. Further,
there is no record evidence to support Professor Willig's
``understanding'' that Sirius XM's purpose in creating this particular
LRS was to use it as evidence in this proceeding. See Willig WDT app. D
] 3 n.4. There is also no evidence to suggest that Sirius XM
manipulated the financial information in this June 2019 LRS in order to
affect the financial analyses undertaken in this proceeding.\255\
---------------------------------------------------------------------------
\255\ When asked by the Judges why he included this language in
his WDT, Professor Willig testified:
I'm not sure that that's what I had in mind with those words.
Rather, that it had been produced recently relative to the timing of
the submission by me, and it was produced for these proceedings, and
I didn't mean, as I recall, unless there's something that I'm
forgetting, which is always possible, that the LRS data were
actually created just for these proceedings as opposed to produced
for these hearings. . . . I may have had some evidence of the
specialization of the purpose, but I don't recall that now. But what
I surely meant was, at least, that the production was for these
hearings. And I'm well aware that LRS is something that Sirius had
been preparing for its own purposes going back years . . . . So I
don't remember whether it was really produced specifically for these
purposes . . . .
8/5/20 Tr. 366-67 (Willig) (emphasis added). The Judges find
this response equivocal at best, and incomprehensible at worst.
---------------------------------------------------------------------------
Nonetheless, as noted supra, Professor Willig independently
justifies his reliance on the Scenario 2 merger financial data on the
fact that ``Pandora's investment bankers prepared discounted cash flow
valuation analyses using these Scenario 2 projections, which produced
valuations in-line with the $3.5 billion market price paid by Sirius XM
to acquire the company.'' Id. Accordingly, the Judges must examine on
its own merits the Scenario 2 data upon which Professor Willig relies
to compute Pandora's profit margins.
Professor Shapiro takes issue with Professor Willig's claim that
the price paid to Pandora shareholders by Sirius XM is supported by the
Scenario 2 financial projections, noting that the acquisition price was
determined ``in part by synergies not included in Scenario 2 which
considers Pandora as a standalone company.'' Consequently, Professor
Shapiro asserts that the ``discounted cash flow'' set forth in the
Scenario 2 materials does not generate the acquisition price paid by
Sirius XM. Shapiro WRT at 72-73.
The Judges find that Professor Shapiro's criticism neither
compromises the probative value of the Scenario 2 data nor Professor
Willig's reliance on it to support his Shapley Value Model. Although
the ``discounted cash flow'' contained in the Scenario 2 materials,
standing alone, may not generate the actual acquisition price paid by
Sirius XM, Professor Shapiro does not dispute that such information was
relied upon by the investment bankers in their development of an
appropriate price--one that ultimately was accepted by Pandora
shareholders. That purchase price is not disconnected from projections
based on Pandora's economic condition as of the date of the
acquisition.\256\
---------------------------------------------------------------------------
\256\ Professor Shapiro does not assert that the inclusion of
synergistic value necessarily disqualifies financial projections as
useful inputs into a Shapley model in this proceeding. In fact, he
points out that the alternative and subsequent financial projection
in the LRS, on which he relies, explicitly includes ``anticipated
synergies'' in its financial projections. Shapiro WRT at 73.
---------------------------------------------------------------------------
Moreover, the price that willing sellers (here, Pandora
shareholders) agree to pay to a willing buyer (here, Sirius XM),
reflects a price established in a market--the market for corporate
control. See Henry G. Manne, Mergers and the Market for Corporate
Control, 73 J. Pol. Econ. 110, 112 (1965) (``[C]ontrol of corporations
may constitute a valuable asset'' and is purchased and sold in ``an
active market for corporate control. . . .''). The fact that the
purchase price incorporates not only Pandora's capitalized discounted
cash flow, but also the synergistic value assigned to Pandora by the
investment banks and Sirius XM, upon the consummation of the merger,
does not negate the evidentiary usefulness of the financial data
underlying that acquisition price. A company's shares, like any assets,
are appropriately valued at their highest and best use. Given that the
acquisition of Pandora by Sirius XM indeed occurred, it is reasonable
to conclude that Pandora's highest and best use, in terms of market
value, was as a division of Sirius XM.
Accordingly, the Judges find that Professor Willig's reliance on
Scenario 2 data was reasonable.\257\
---------------------------------------------------------------------------
\257\ And as explained infra, the Judges' adoption of certain of
Professor Shapiro's itemized critiques of Professor Willig's data
applications essentially equates the rates generated by Professor
Willig's reliance on the Scenario 2 data and Professor Shapiro's
reliance on LRS data.
---------------------------------------------------------------------------
iii. Professor Shapiro's Calculation of Scenario 2 ``Marginal Profit''
After Applying the Foregoing Criticisms
Professor Shapiro combines the foregoing criticisms based on
Professor Willig's Shapley Value Model data inputs into a recalculation
of marginal profits that is otherwise consistent with Professor
Willig's Scenario 2 approach. The recalculation with regard to the
subscription service is set forth in Figure 6 of Shapiro WRT at 47, and
the recalculation with regard to the ad-supported service is set forth
in Figure 7 of Shapiro WRT at 48. Each figure is reproduced below:
Figure 6: Pandora Projected Margins: Pandora Plus Subscription Service
[RESTRICTED]
[REDACTED]
Figure 6 shows that substituting Professor Shapiro's changes for
Professor Willig's original estimated data inputs results in a
significantly lower per-performance margin at Pandora Plus, the
subscription service. Shapiro WRT at 47. (As noted supra, Professor
Willig also made most of these adjustments in his WRT.) Specifically,
whereas Professor Willig calculated a per-performance margin of
$0.0048, Professor Shapiro re-calculated a per-performance margin of
$[REDACTED].\258\
---------------------------------------------------------------------------
\258\ The impact of these adjustments on the royalty estimates
generated by Professor Willig's Shapley Value Model, together with
the impact of the adjustments to Professor Willig's opportunity cost
calculations, is set forth infra.
---------------------------------------------------------------------------
Figure 7: Pandora Projected Margins: Advertising-Supported Service
[RESTRICTED]
[REDACTED]
Figure 7 shows that substituting Professor Shapiro's changes for
Professor Willig's original estimated data inputs results in a
significantly lower per-performance margin at Pandora Plus, the
subscription service. Shapiro WRT at 46-47. (As noted supra, Professor
Willig also made most of these adjustments in his WRT.) Specifically,
whereas Professor Willig calculated a per-performance margin of
$0.0042, Professor Shapiro re-calculated a per-
[[Page 59534]]
performance margin of $[REDACTED].\259\
---------------------------------------------------------------------------
\259\ The impact of these adjustments on the royalty estimates
generated by Professor Willig's Shapley Value Model, together with
the impact of the adjustments to Professor Willig's opportunity cost
calculations, is set forth infra. The Judges also note that Figures
6 & 7 show that Professor Shapiro's adjustments and corrections to
the original profit margins in Professor Willig's Shapley Value
Model result in Scenario 2 profit margins that are essentially
identical to the profit margins estimated by Professor Shapiro in
the ``alternate forecasts'' based on the LRS and Merger Proxy
Scenario 1A. Shapiro WRT, Figs. 6 & 7 (last two columns).
Accordingly, there is no necessity to consider those alternatives as
necessary to establish different royalty rates in this proceeding.
---------------------------------------------------------------------------
The Judges adopt these adjustments to Professor Willig's profit
margin calculations in his Shapley Value Model.\260\
---------------------------------------------------------------------------
\260\ The Judges explain in text accompanying note 241, supra,
that they rely on Mr. Ryan's categorizations and allocations of
revenues and costs because of his competency with regard to these
issues, given his role as a financial executive, and because of the
Judges' perception of his credibility as a witness. By contrast,
SoundExchange did not proffer an accounting or financial expert to
testify regarding these categorization and allocation issues,
leaving these issues to an economist, Professor Willig. Although
Professor Willig is without question an esteemed economist, the
Judges find that he is not nearly as competent as Mr. Ryan to give
testimony regarding Pandora's financial and accounting issues. See
also 8/5/20 Tr. 306-08 (Willig) (Professor Willig was qualified as
an expert in this case in ``microeconomics, industrial organization,
the use of statistics in economics, and the use of survey research
and economics,'' and was previously qualified in other matters also
as an expert in the economics of antitrust and intellectual property
issues.). Finally, the Judges note that Professor Willig himself, in
his role as an expert economic witness, explained that the
differences in Pandora's marginal profits did not drive his Shapley
Value Model results, because the opportunity costs of the record
companies were so great as to dominate the royalty payout due to
them pursuant to his modeling. Id. at 555 (``the opportunity costs
almost exhaust[] the pre-royalty distributor profits
[because][a]fter the distributor pays out to the labels their
opportunity costs, there is not very much left . . . to split among
the parties.'').
---------------------------------------------------------------------------
iv. Alleged Errors in Professor Willig's Scenario 2 Opportunity Cost
Calculations
Professor Shapiro alleges that Professor Willig made several errors
in his calculation of opportunity costs that resulted in an
overestimation of the opportunity costs incurred by record companies in
his Shapley Value Model.\261\ More particularly, Professor Shapiro
addresses Professor Willig's calculation of these opportunity costs
through the latter's application of the ``diversion rate'' \262\
estimations in the survey undertaken by Professor Gal Zauberman
(Zauberman Survey) to estimate the extent to which listeners to
noninteractive services reported they would divert their listening to
alternative forms of music listening if noninteractive services were no
longer available.
---------------------------------------------------------------------------
\261\ To be clear, the opportunity cost issues addressed in this
section of the Determination do not involve Professor Shapiro's
broader economic argument regarding the asserted ``Must Have''
status of each Major, and the impact of that status on the
calculation of opportunity costs.
\262\ A ``diversion rate'' as used in the Zauberman Survey and
as applied by Professor Willig is the percentage of surveyed
listeners to a noninteractive service who would switch (divert) to
another form of listening to music if the noninteractive service was
not available. Professor Willig multiplies each percentage diversion
rate by the royalty generated per-subscriber (or per-user, for the
ad-supported service) by that other form of listening. The sum of
those products equal Professor Willig's opportunity cost estimate.
Willig WDT ] 47 & fig.6. As discussed supra, that opportunity cost
estimate constitutes an economic cost that record companies must
recover (i.e., as a fallback value). The usefulness of the Zauberman
Survey to calculate such switching, in the face of the Services'
criticism, is separately discussed, elsewhere in this Determination.
---------------------------------------------------------------------------
Professor Shapiro calculates a lower estimated opportunity cost
than calculated by Professor Willig through the latter's application of
the Zauberman Survey. Specifically, Professor Shapiro alleges that
Professor Willig made errors that inflated the opportunity costs
attributable to purchases of CDs, vinyl records (vinyl) and digital
downloads that the survey data indicated would occur if noninteractive
services were unavailable.
(A) Royalties per Purchaser of CDs, Vinyl & Digital Downloads
First, Professor Shapiro alleges that Professor Willig erroneously
calculates the ``CD/Vinyl/Digital Download Royalties per Purchaser''
presented in Exhibit D.3 of the Willig WDT. Professor Willig first
separately calculates these monthly per-purchaser royalties for each of
the three product subcategories--CDs ($[REDACTED] monthly per
purchaser), Vinyl ($[REDACTED] monthly per purchaser) and Digital
Downloads ($[REDACTED] monthly per purchaser). Willig WDT, app. D, ex.
D.3 (Row ``I'' therein). The Zauberman Survey reported the diversion to
all three of these purchases as a single diversion. But to calculate
opportunity costs accurately, Professor Willig needs to unbundle the
monthly per purchaser royalties for each of these three products
separately. Accordingly, in order to generate his estimated opportunity
cost calculation from the bundled categorization in the Zauberman
Survey, Professor Willig attempts to calculate the ``Weighted Average''
of these three royalty figures. Id. (Row ``I,'' Column 4 therein). He
calculates his opportunity cost total for this category--a monthly per
purchase royalty of $[REDACTED]--by weighting each of these three
categories by their share of retail revenue, inter se. Id. (Row ``G'' &
n.4 therein).
According to Professor Shapiro, weighting by share of retail
revenue is incorrect. The correct weighting, he asserts, is by the
number of units purchased per buyer of each of the three formats.
Shapiro WRT, app. D at 81. To demonstrate that weighting by units
purchased is the appropriate method, Professor Shapiro presents a step-
by-step example:
1. Assume 10 individuals buy CDs and 10 individuals buy Digital
Downloads
2. Assume each CD buyer spends an average of $3 per month for CDs
3. Assume each Digital Download buyer spends $9 per month for Digital
Downloads
4. So, total retail revenues are $30 per month for CDs ($3 x 10 people)
5. And, total retail revenues are $90 per month for Digital Downloads
($9 x 10 people)
6. Assume net royalties paid are 50% of retail revenue for each unit of
either product
7. So, CD monthly royalties equal $15 (50% of $30)
8. And, Digital Download royalties equal $45 (50% of $90)
9. Total royalties are therefore $60 ($15 + $45)
10. Because there are 20 assumed buyers (10 for each product) average
monthly royalties per buyer = $3 ($60 / 3)
11. But under Professor Willig's approach, the answer is NOT $3.
12. Professor Willig instead weights the monthly royalties by the share
of retail revenue attributable to each product, CDs or Digital
Downloads.
13. For CDs, this represents 25% of total retail revenue ($3 x 10
people = $30 = 25% of $120)
14. For Digital Downloads, this represents the remaining 75% of total
retail revenue ($9 x 10 people = $90 = 75% of $120)
15. The 25% of total retail revenue attributable to CDs is one-third of
the 75% of total retail revenue attributable to Digital Downloads
16. So, weighting monthly royalty via retail revenue would be done via
the following ratio:
$30 CD revenue x ($1.50 royalty per buyer) + ($90 Digital Download
revenue x $4.50 royalty per buyer) / 30 + 90 = ($45 + $405) / ($120) =
$450 / $120 = $3.75
17. $3.75 is 25% greater than $3.00.
Shapiro WRT at 81-82.
Professor Willig acknowledges that Professor Shapiro's approach is
the correct way to calculate opportunity
[[Page 59535]]
costs for these physical royalties. 8/5/20 Tr. 504 (Willig)
(``Professor Shapiro pointed out that maybe I wasn't perfectly logical
in where I applied my weights, and I think there was some merit to that
point that Professor Shapiro made, so I went back and I changed that. .
. .'').\263\
---------------------------------------------------------------------------
\263\ Professor Willig attempted to add new testimony at the
hearing regarding what he asserted was an unrelated but offsetting
error made by Professor Shapiro in his calculations of these
particular opportunity costs that, combined with Professor Willig's
admitted error, generated a higher opportunity cost of $[REDACTED]
for this category. However, Pandora's counsel interposed a prompt
objection, arguing that this proffered testimony would constitute
``new analysis . . . that's out of bounds.'' SoundExchange's counsel
did not respond when Pandora's counsel asserted this objection, and,
after a scheduled 15 minute mid-afternoon recess, SoundExchange's
counsel proceeded to question Professor Willig on other matters. The
Judges then, sua sponte, afforded SoundExchange's counsel an
opportunity to respond to the objection by Pandora's counsel that
had prevented Professor Willig from testifying on this topic before
the recess, so that the Judges could decide whether to sustain or
overrule the objection raised by Pandora's counsel. However,
SoundExchange's counsel declined to address the objection, claiming
(incorrectly) that the testimony that was the subject of the
objection ``is already in the record.'' 8/5/20 Tr. 504-05; 514-15
(colloquy). Thus, no such testimony regarding an alleged offset as
to Professor Shapiro's physical opportunity cost correction
(accepted by Professor Willig) is in the record. (In SX PFFCL ]]
635-636, SoundExchange attempts to rely on counsel's own analysis of
the record to substitute for the missing testimony by Professor
Willig on this subject. That is plainly unacceptable.).
---------------------------------------------------------------------------
The Judges find Professor Shapiro's re-calculation of these royalty
weights--agreed to by Professor Willig--to be appropriate. The purpose
of this opportunity cost analysis is to estimate the number of units of
each subcategory of product (CDs, Vinyl and Digital Downloads) that
would be purchased by each listener to a noninteractive service if that
service was no longer available, and then multiply the number of units
attributable to each subcategory by the royalty attributable to each
item purchased. This exercise does not implicate retail prices.
Accordingly, Professor Willig's use of retail prices as weights
introduces an irrelevant factor.
Applying the foregoing principles, the weighted average opportunity
cost for these three products is $[REDACTED], rather than the
$[REDACTED] in the Willig WDT, app. D, D.3 (Row ``I,'' column 4
therein). See Shapiro WRT, app. D at 82 (Figure D.1: Correction to
Exhibit D.3 in the Willig WDT, Revised Exhibit D.3 (Row J therein).
(B) Alleged Overestimation of Incremental Expenditures on CDs/Vinyl/
Digital Downloads
Professor Shapiro's next criticism with regard to Professor
Willig's opportunity cost analysis is that it ``overestimates the
incremental expenditures that listeners would make on CDs, Vinyl, and
Digital Downloads if statutory webcasting were no longer available.''
Shapiro WRT at 83. More specifically, Professor Shapiro asserts that
Professor Willig makes two errors in this computation: First, he avers
that Professor Willig allegedly overestimates the amount of money
individuals would spend on CDs, Vinyl and Digital Downloads, an alleged
error that causes Professor Willig to inflate the opportunity cost
input into the Shapley Value Model. Second, according to Professor
Shapiro, Professor Willig allegedly underestimates the number of
individuals who would switch from a noninteractive service and to CDs,
Vinyl and Digital Downloads, an alleged error by which Professor Willig
actually incorrectly reduces the opportunity cost input in the Shapley
Value Model. Id.
With regard to the allegation of overestimating the amount of
spending on these three products, Professor Shapiro understands that
Professor Willig assumes that people who switch some of their listening
from noninteractive to CDs, Vinyl and Digital Downloads will then
incrementally ``spend as much as the average consumer who purchases
those media types.'' Id.\264\ As Professor Shapiro notes, this
assumption carries with it the implicit assumption that these switching
consumers did not buy any of these three products when they were
listening to a noninteractive service, but then bought the same amount
of these music formats as an average user subsequent to the
hypothetical elimination of noninteractive services. Id. In fact,
Professor Willig acknowledges that he treats these substitutions in the
same all-or-nothing manner as the binary choice of whether to subscribe
to an interactive streaming service if noninteractive services were
unavailable. See Willig WDT, app. E, ] 13 (``I estimate incremental
royalties from diversion to [CDs, Vinyl and Digital Downloads] in the
same way as for [subscriptions to] Paid-[On Demand] and [Sirius
XM].'').
---------------------------------------------------------------------------
\264\ As explained above, according to Professor Willig, the
weighted average per consumer is $[REDACTED] per month. However, as
corrected by Professor Shapiro and credited by the Judges, the
properly weighted average monthly spending for these products in the
Scenario 2 analysis is $[REDACTED] per month.
---------------------------------------------------------------------------
Professor Shapiro opines that the proper approach is to treat the
purchase of each of these three products in a manner analogous to the
use of an ad-supported service, where the listener makes marginal
listening decisions on a per performance basis. In support of his
argument, Professor Shapiro enlists a useful supporter--Professor
Willig himself--who, in SDARS III, converted royalties from incremental
purchases of these three products on a per performance basis. Shapiro
WRT at 83 n.205 (citing Professor Willig's SDARS III Written Direct
Testimony at B-5 to B-6). In further reliance on Professor Willig's own
analysis (in the present proceeding), Professor Shapiro points out that
a document on which Professor Willig relied, Trial Ex. 5039, showed
that on-demand listeners spend less per month on these three products
than the average purchaser, generating only $[REDACTED] in monthly
royalties, substantially less than the $[REDACTED] weighted average per
month calculated by Professor Willig or the $[REDACTED] recalculated
weighted monthly average computed by Professor Shapiro. Professor
Shapiro opines that it is unreasonable to conclude (as did Professor
Willig), that noninteractive listeners--with their revealed lower
Willingness-to-Pay for a streaming service--would spend multiple times
more money than on demand listeners on CDs, Vinyl and Digital
Downloads. Shapiro WRT at 83 n.206.
Professor Shapiro further relies on SoundExchange's own survey
expert to support his critique of Professor Willig's estimation of
opportunity cost emanating from the shift by some listeners to
purchases of these three products. That survey expert, Professor
Zauberman, reports that such diverted ad-supported listeners would
allocate only 14.1% of their diverted time to these three products, and
such diverted subscribing listeners would allocate even less of their
diverted time, 9.9%, to these three products. Shapiro WRT at 84 n.207.
According to Professor Shapiro, it is untenable for Professor Willig to
assume that listeners and subscribers who divert such small fractions
of their diverted time to these three products would also purchase
these products in the same quantities (generating the same royalties)
as all consumers who purchase these three products. Shapiro WRT at 84.
Instead, Professor Shapiro claims that it is more reasonable to
assume that people who switch from noninteractive services to these
three products ``would generate incremental royalties consistent with
the proportion of time they divert. . . .'' Id. Once more, he enlists
Professor Willig in support of his position, noting that, in SDARS III,
Professor Willig's opportunity cost calculation applied the same
assumption--estimating incremental
[[Page 59536]]
royalties from CDs and downloads as proportional to incremental
listening to these products. Id.
Professor Shapiro attempts to apply this ``proportionate
diversion'' assumption by applying data from the ``Share of the Ear''
survey to his spending calculations. First, he incorporates in this
analysis his calculation of the weighted average spending of
consumers--$[REDACTED] per month--on all three products. Second,
Professor Shapiro calculates the incremental share of time that people
would devote to these three products after switching from
noninteractive services. Here, he relies on the ``Share of the Ear''
survey, which reports that Pandora subscribers allocate about
[REDACTED]% of their music listening time to streaming music services,
of which [REDACTED]% is spent listening to Pandora. Thus, Pandora
subscribers spend [REDACTED]% ([REDACTED]% x [REDACTED]%) of their
music listening time on Pandora. And, as noted above, according to the
Zauberman Survey, listeners to ad-supported noninteractive services
will divert an average of 14.1% of their time to these three products,
and noninteractive subscribers will divert an average of 9.9% of their
time to these three products.
Putting these data points together, Professor Shapiro explains that
``[t]he product of the share of time allocated to Pandora and the
diversion rate to these three products [yields] the incremental time
allocated to these [three products] in the absence of webcasting. Id.
at 85. So, he calculates that users of the ad-supported service will
allocate an incremental [REDACTED]% (i.e., [REDACTED]% x [REDACTED]%)
of their listening time to these three products and, in the same
manner, subscribers will allocate [REDACTED]% (i.e., [REDACTED]% x
[REDACTED]%) of their listening time to these three products. Id.
The final step in Professor Shapiro's analysis is his comparison of
this incremental listening time to the average time listening to these
three products. To take this step, Professor Shapiro applies additional
data from the ``Share of the Ear Survey.'' That survey reports that the
average music consumer spends [REDACTED]% of his or her listening hours
listening to ``Owned Music,'' which is another way of referring to CDs,
Vinyl and Digital Downloads. As Professor Shapiro notes, this implies
that, for listeners switching away from the ad supported noninteractive
services, incremental spending increases for these three products by
approximately [REDACTED]% (i.e., [REDACTED]%/[REDACTED]%), and, for
listeners switching away from subscriptions to noninteractive services,
the increase is about [REDACTED]% (i.e., [REDACTED]%/[REDACTED]%).
Shapiro WRT app. D at 84-85.\265\
---------------------------------------------------------------------------
\265\ Professor Shapiro acknowledges that the data in the
``Share of Ear'' survey is sufficient only to render his estimates
informed approximations, because that survey [REDACTED]. However,
Professor Shapiro believes this latter point makes his approximation
more favorable to SoundExchange, because he posits that Pandora
Premium subscribers listen to more songs than Pandora Plus
subscribers (apparently because their willingness to pay a higher
subscription price reveals their relatively greater preference to
listen to songs). Thus, because the switching subscriber group in
the survey includes such increased listening, their switching
decisions would be greater than the switching behavior of Pandora
Plus subscribers alone, raising the reported diversion ratio for
these three products, raising the calculated opportunity cost and,
accordingly, increasing the proposed royalty rate for subscription
services derived by Professor Willig's Shapley Value Model. Id. at
85 n.210. The Judges acknowledge these limitations in the Share of
Ear survey, but they agree with Professor Shapiro that these issues
are insufficient to reject his criticisms based on that survey's
data.
---------------------------------------------------------------------------
Professor Shapiro acknowledges that he is using data on switches in
listening time (from noninteractive services to these three products)
in order to estimate changes in the total monthly amount spent on those
three products. Id. at 85. However, he considers increases in listening
to be a reasonable proxy for increased purchases, rather than a
confounding conflation of two data sets. Id. The Judges agree, and find
his use of this change in listening to be a reasonable window into the
likely changes in purchases. People who would increase their listening
to music via these three products would need to purchase such
products,\266\ and it would be highly irrational for people to purchase
these new products but not ``consume'' them, in order to substitute for
their lost listening to noninteractive services.
---------------------------------------------------------------------------
\266\ People who would choose instead to substitute (in whole or
part) listening to their already-owned CDs, Vinyl and Digital
Downloads would not necessarily purchase new quantities of these
three products, but because that potential behavior is ignored in
Professor Shapiro's analysis here, the opportunity cost is skewed
higher by his decision to ignore such consumer behavior in this
context. (However, Professor Shapiro does attempt to adjust for the
additional purchases by switchers who also switch by listening to
their existing collections of these three products, as discussed
below.)
---------------------------------------------------------------------------
Applying the foregoing changes, Professor Shapiro makes the
following revisions to Professor Willig's calculation of per person
monthly incremental royalties for people who switched from
noninteractive services to these three products:
For switching from ad-supported noninteractive services,
Professor Shapiro calculates incremental royalties of $[REDACTED]
(i.e., $[REDACTED] x [REDACTED]% x ([REDACTED]%/[REDACTED]%), less
than Professor Willig's calculation of $[REDACTED]; and
For switching from subscription noninteractive services,
Professor Shapiro calculates incremental royalties of $[REDACTED]
(i.e., $[REDACTED] x [REDACTED]% x ([REDACTED]%/[REDACTED]%), less
than Professor Willig's calculation of $[REDACTED].
Id. at 85-86.
The Judges find Professor Shapiro's foregoing corrections to be
reasonable and appropriate.
Professor Shapiro's next opportunity cost adjustment, relating to
these three products pertains to what he alleges is Professor Willig's
failure to address incremental purchases by ``consumers who already
listen to [owned] CDs, Vinyl, and Digital Downloads . . . .'' Id. at
86. As noted supra, this correction is contrary to Pandora's interest
because it increases the opportunity cost associated with diversions to
these three products, and, ceteris paribus, increases the royalties
paid by Pandora under Professor Willig's Shapley Value Model.
Professor Shapiro notes that the Zauberman Survey finds that 69% of
listeners to an ad-supported noninteractive service and 67% of
listeners to a subscription noninteractive service would divert some of
their time to these three products in the absence of such
noninteractive services. However, Professor Willig does not estimate
any opportunity cost associated with these listeners.\267\ This result
suggests that these individuals would divert some time to buying and
listening to new purchase of these three products, thereby creating an
additional opportunity cost that would generate incremental royalties
to the record companies under Professor Willig's Shapley Value Model.
Shapiro WRT, app. D at 86.
---------------------------------------------------------------------------
\267\ Professor Willig classifies respondents in the Zauberman
survey as ``new'' buyers of these three products only if they
indicate both that they have not listened to CDs, Vinyl, and Digital
Downloads in the previous 30 days and that they would listen to
these media in case the webcaster went away. Under this definition,
Professor Willig finds that [REDACTED]% of the listeners to the
advertising-supported webcasters and [REDACTED]% of listeners to the
subscription-based webcasters qualify as new buyers of CDs, Vinyl,
and Digital Downloads. See Willig WDT, Fig.6.
---------------------------------------------------------------------------
According to Professor Shapiro, the correct opportunity cost
associated with these purchases can be estimated as the product of: (1)
These listener shares ([REDACTED]% for ad-supported listeners and
[REDACTED]% for
[[Page 59537]]
subscribers, multiplied by (2) the incremental monthly royalties per
buyer of these three products, which Professor Shapiro (as discussed
above) calculated as $[REDACTED] for ad-supported switching and
$[REDACTED] for subscription switching.
Professor Shapiro therefore adjusts the opportunity cost associated
with switching to these three products to $[REDACTED] (i.e.,
$[REDACTED] x [REDACTED]%) for switching ad-supported users and to
$[REDACTED] (i.e., $[REDACTED] x [REDACTED]%) for switching
subscribers. Shapiro WRT, app. D at 86; see also id.at Fig. 8.
The Judges find Professor Shapiro's adjustments in connection with
the three products (CDs, Vinyl and Digital Downloads) to be reasonable
and appropriate bases to increase the opportunity cost arising from
diversions to these products.
(C) The Treatment of Non-Music and AM/FM Diversion in Professor
Willig's Opportunity Cost Analysis
Google's economic expert witness, Dr. Peterson, finds fault with
Professor Willig's application of the results of the Zauberman Survey,
by which he assumes that all the plays diverted from noninteractive
services would be recaptured through listeners' accessing of royalty-
bearing plays. Specifically, Dr. Peterson testifies as follows:
[Professor] Willig's model assumes that the entire ad-supported
non-interactive statutory streaming business can be shut down, and
the music industry won't lose a single performance. So that's
inconsistent with how economists think of choice, and it's
inconsistent with commonsense. If there are people whose favorite
way to listen to music is through a Pandora-like service, we would
certainly expect them to expand their listening hours as well and
find opportunities to use that service when they would not listen to
another service.
And . . . the evidence for this is . . . in the Zauberman
surveys, where if you take the service away, some people say they
will spend some of their day doing something other than listening to
music. So it is incorrect to assume that all of the performances are
preserved if you shut down the service.
8/25/20 Tr. 3734-35 (Peterson). This point ties in directly to the
calculation of opportunity cost. As Dr. Peterson further notes, because
the Zauberman Survey asks respondents how they would replace time spent
listening to noninteractive services, those who would substitute non-
royalty bearing activities would, necessarily, if noninteractive
services were available, substitute away from the non-royalty bearing
activities and listen to royalty-bearing noninteractive services. 8/25/
20 Tr. 3735 (Peterson) (``[T]he consequence . . . of course, is that if
you join the [noninteractive] service, [the label] gain[s] . . .
performances and the opportunity cost of the performances on the
services is reduced as a result [and] this leads to an overstatement of
opportunity costs.'') (emphasis added).
During cross-examination, Dr. Peterson made this point in greater
detail in a manner that is well-worth quoting in full:
Q. And do you recall that one of the [Zauberman Survey]
switching options was do something other than listen to music?
A. That is an option in the Zauberman Survey that I think is not
properly reflected in Dr. Willig's model.
Q. Well, just looking at the survey, since the survey does
contemplate people doing something other than listening to music, if
a . . . free non-interactive service was taken away, some people
would go back to doing things other than istening to music, right?
A. That's correct.
Q. And doesn't that account for the idea that free non-
interactive services could expand listening overall?
A. That free non-interactive services would expand listening
overall?
Q. Right.
A. Oh, that's exactly my point. So . . . Dr. Willig's model says
if there are a million plays on the service, and the must-have
labels shut it down, a million plays are diverted and a million
plays are collected in the aggregate by the labels . . . . That's
the assumption that's built into his model. And I'm asserting, I
think what you just said, which is that that's not a very good
assumption because some people would say, well, I loved Pandora but
since I can't have Pandora . . . I'm going to read a book. And so
there would be fewer performances overall. And so that aspect of Dr.
Zauberman's survey is not at all reflected in the mathematics of Dr.
Willig's model. And that's--that's a problem.
Q. But looking at the survey, it does allow for the possibility
that the--that the service could expand listening or not expand
listening? That option is there in the survey, right?
A. But not in his model. I mean, it--and it actually doesn't
really play into his opportunity cost either, which is very
important here. So I disagree wholeheartedly with what you're
saying.
8/25/20 Tr. 3799-3800 (Peterson) (emphasis added).
The Judges agree with Dr. Peterson. The Shapley Value Model
constructed by Professor Willig overstates the opportunity costs
because it does not consider the ``opportunity benefits'' \268\
generated by listeners to noninteractive services who would otherwise
divert to a non-royalty bearing activity, such as reading a book, as
Dr. Peterson notes. But this defect in Professor Willig's opportunity
cost calculation goes further, extending to any non-royalty bearing
activity undertaken by a diverted listener, including listening to AM/
FM (terrestrial radio).
---------------------------------------------------------------------------
\268\ See Ferraro and Taylor, supra, at 7 (``An avoided benefit
is a cost, and an avoided cost is a benefit. Thus, the opportunity
cost . . . is . . . the net benefit forgone.'') (emphasis added).
---------------------------------------------------------------------------
As noted supra, AM/FM (terrestrial) radio stations do not pay
royalties for their performances of sound recordings (because the
Copyright Act does not confer a general public performance right on
sound recording copyright owners). However, if noninteractive services
attract listeners who would otherwise divert to terrestrial radio (as
survey data in evidence indicate), there is a ``negative opportunity
cost'' (i.e., an ``opportunity benefit'') foregone by the record
companies if they were to refuse to license noninteractive services.
For example, at current statutory rates, the foregone ``opportunity
benefit'' would be $0.0018 per play listened to by terrestrial
listeners who would have otherwise accessed music via an ad-supported
noninteractive service if it existed, and $0.0023 per play listened to
by terrestrial listeners who would have otherwise accessed music via a
subscription noninteractive service if it existed.
These ``opportunity benefits'' foregone are likely not de minimis,
as the surveys in evidence in this proceeding indicate a significant
amount of diversion to these alternatives by respondents who completed
the survey. See, e.g., Zauberman Survey ]] 24-27 (85% of ad-supported
noninteractive listeners would spend 27% of their diverted time
listening to AM/FM radio over-the-air, and 79% of noninteractive
subscribers would spend 18% of their diverted tine listening to AM/FM
radio in this royalty-free manner--if their form of noninteractive
services were unavailable). See also id. (48% of ad-supported
noninteractive listeners would spend 16% of their diverted time doing
something other than listening to music and, for subscribers to
noninteractive services, 50% would spend 10% of their diverted time in
these non-royalty-bearing activities). As noted supra, the
``opportunity benefit'' of these lost listeners is $0.0018 and $0.0023
for the plays diverted during such time periods from the ad-supported
and subscriber noninteractive services, respectively.
SoundExchange notes though that Professor Willig engaged in a
similar treatment of AM/FM listening, with his so-called ``fork in the
road approach,'' that the Judges adopted in SDARS III, leaving
interactive royalties unadjusted downward (thus not adjusting
[[Page 59538]]
downward to correct for their complementary oligopoly power and not
adjusting upward to reflect the absence of sound recording royalties
for AM/FM plays). But, the NAB points out, although Professor Willig's
``fork in the road'' testimony in SDARS III went unchallenged on cross-
examination and in Sirius XM's proposed findings, see SDARS III, 83 FR
at 65238, the Services are challenging the point here. Thus, the NAB
asserts that the appropriateness of that approach is properly at issue
in this proceeding.
The Judges agree with the NAB in this regard. All rate proceedings
are conducted de novo, and any factual determinations made in a prior
proceeding therefore certainly can be considered anew now.
The Judges find that Professor Willig's ``fork in the road''
approach does not adequately address the opportunity cost issue raised
by Dr. Peterson. It is insufficient and off-point to treat lost
listeners who divert to any non-royalty bearing alternatives as simply
irrelevant to the complementary oligopoly premium attached to
interactive opportunity costs. In fact, as Dr. Peterson makes clear,
such non-royalty bearing alternatives--because they substitute for
royalty-bearing noninteractive plays--generate what can be called
``opportunity benefits.''
In addition to the ``opportunity benefit'' point addressed above,
the NAB makes a separate legal criticism of Professor Willig's ``fork
in the road'' approach. Specifically, the NAB argues:
[T]o the extent including supracompetitive royalty inputs in an
opportunity cost analysis yields supracompetitive outputs, those
outputs are inconsistent with the established legal standard
requiring the rates set here to reflect effective competition. Web
IV, [81 FR 26316] at 26332. Further, as a legal matter, there is a
fundamental difference between complementary oligopoly rates for
sound recording rights in interactive services and the lack of
royalties for terrestrial radio play. The latter is a function of a
Congressional judgment enshrined in federal copyright law. See 17
U.S.C. 106(6); id. sec. 114(a). The existence of complementary
oligopoly power, in contrast, has never been blessed by Congress. To
the contrary, this body has always regarded the majors'
complementary oligopoly power as a feature of the market that must
be corrected in establishing rates here. There is no sense in which
it would be legally appropriate for the Judges to similarly
``correct'' lack of royalties resulting from the lack of a legally
recognized public performance right for terrestrial radio play of
sound recordings.
NAB PFFCL ] 136 n.34. In response, SoundExchange argues as follows:
For the first time at any point in this proceeding, NAB offers a
lengthy argument against the ``fork in the road'' analysis offered
by Professor Willig and endorsed by the Judges in SDARS III. See [83
FR 65210] at 65238. This is completely inappropriate argumentation
that, despite being offered as a ``finding of fact,'' is tellingly
bereft of even a single supportive citation to the record in this
case. See NAB PFFCL p.1 n.1. Notably, both Dr. Leonard and Professor
Shapiro made explicit at trial that they were not challenging this
concept.
SoundExchange's Corrected Replies to NAB's Proposed Findings of Fact
and Conclusions of Law ] 136 (footnote) (SX RPFFCL (to NAB)).
SoundExchange's reply is unavailing. The NAB's argument is not in
the form of a proposed ``finding of fact.'' Rather, it quite clearly is
in the nature of a proposed ``conclusion of law.'' \269\ Further,
SoundExchange has not substantively replied to the NAB's argument.\270\
---------------------------------------------------------------------------
\269\ The NAB did not label ] 136 n.34 of its PFFCL as a
conclusion of law. See NAB PFFCL at 1 n.1. However, the parties'
labeling of separate portions of their post-hearing filings as
proposed ``findings of fact'' or ``conclusions of law'' does not
prevent the Judges from independently considering whether a
particular proposal is either factual or legal, based upon the
substance of the proposal. Indeed, because these submissions are
merely proposals, neither the substance nor labeling of the
submissions by the parties is binding on the Judges. Here, the NAB
specifically argues that it would not be ``legally appropriate'' for
the Judges to offset the complementary oligopoly effect based on the
lack of a ``legally recognized public performance right for
terrestrial radio play of sound recordings.'' NAB PFFCL ] 136 n.34
(emphasis added). Clearly, as a matter of substance, this assertion
is a proposed legal conclusion.
\270\ SoundExchange neither responded substantively to this
legal argument in its post-hearing Reply to the NAB, nor during
closing arguments that followed the submission of the Proposed
Findings of Fact and Conclusions of Law. See 11/19/20 Tr. 6062 et
seq. (closing arguments).
---------------------------------------------------------------------------
Moreover, the Judges conclude that the legal substance of the NAB's
argument is persuasive. The absence of a public performance right for
sound recordings on terrestrial radio--and hence the absence of any
attached royalty obligation--was a statutory decision by Congress. The
Judges identify no legal authority by which they may use that
Congressional decision as an offset against the effect of complementary
oligopoly power on the rate setting process. Moreover, because there is
no royalty paid by terrestrial broadcasters for playing sound
recordings, there is no basis for the Judges to simply assume either
the existence or extent of a positive royalty, if such a public
performance right actually existed. Indeed, regardless of the economic
merits, the issue of whether such a public performance right and an
associated royalty obligation should be created remains a matter of
dispute in the legislative arena. Compare https://www.soundexchange.com/advocacy/closing-the-amfm-radio-royalty-loophole/
(asserting that ``the reality is that AM/FM radio--terrestrial
broadcast radio--uses music to draw an audience that in turn allows
broadcasters to bring in $14.5 billion/year of revenue from
advertising. While paying nothing for their primary product!'') with
https://www.nab.org/documents/newsroom/pressrelease.asp?id=4130
(asserting the allegedly ``tremendous benefits of free, promotional
airplay for musicians and labels.'').
Finally, the Services also make a further factual challenge
regarding Professor Willig's ``fork in the road approach.'' While not
directly challenging that approach as a device for offsetting
complementary oligopoly effects from the zero terrestrial royalty
payments, Dr. Leonard, the NAB's economic expert witness, asserts that
this ``fork in the road'' approach does not address the complementary
oligopoly impact of the ``Must Have'' nature of the Majors, which makes
a noninteractive service's ``no license'' negotiating strategy
untenable. 8/24/20 Tr. 3411-13 (Leonard).
The Judges find Dr. Leonard's point to be helpful. Elsewhere in
this determination, the Judges make essentially the same point
regarding the imbedding of a complementary oligopoly effect in the
``arrival orderings'' in Professor Willig's Shapley Value Model. Dr.
Leonard's testimony in this regard is helpful because it makes clear
that the ``fork in the road'' approach simply does not address this
separate inclusion of a complementary oligopoly effect on the rates
derived from Professor Willig's Shapley Value Model.
v. The Adjusted Opportunity Costs in Professor Willig's Shapley Value
Model, Incorporating the Foregoing Changes in the Opportunity Cost
Attributable to Music Purchases
Based on the foregoing adjustments accepted by the Judges,
Professor Willig's opportunity cost calculation must be adjusted, as
set forth in the figure below:
Figure 8: Correcting Professor Willig's Opportunity Cost Calculations
[RESTRICTED]
[REDACTED]
Shapiro WRT at 50, Fig.8.
As the above table shows, Professor Shapiro's adjustments reduce
the opportunity cost for ad-supported services from $[REDACTED]
(Professor Willig's estimate) to $[REDACTED] (Professor Shapiro's
adjusted estimate).
[[Page 59539]]
For subscription services, these adjustments would reduce Professor
Willig's opportunity cost estimate from $[REDACTED] to Professor
Shapiro's adjusted estimate of $[REDACTED]. Id.; see also Willig WDT ]
47, Fig. 6.\271\
---------------------------------------------------------------------------
\271\ In an attempt to find data consistent with his opportunity
cost derived from the Zauberman Survey and other surveys in this
proceeding, Professor Willig considered listening information
generated by the Edison Research ``Share of Ear'' survey. Willig WDT
]] 56-60 & app. F. However, on cross-examination, Professor Willig
admitted that ``it's absolutely my view that the [S]hare of the
[E]ar study is not nearly as well founded for this purpose . . . .
[I]n many ways it's really not really comparably informative for the
issue at hand . . . .'' 8/10/20 Tr. 1100 (Willig); see also Leonard
WRT ]] 23-29 (explaining that ``royalty calculations based on the
`Share of Ear' survey are flawed'' because, inter alia, they
``ignore[ ] that some users already have subscriptions and already
own CD/Vinyl/Digital Downloads [so that] [p]lays diverted to these
options would not represent an opportunity cost to
SoundExchange.''). When both the proponent of survey evidence and
the adversary decline to endorse its usefulness, the Judges will not
consider that evidence as confirmation of other surveys, and the
Judges place no weight on data generated by the Share of the Ear
survey.
---------------------------------------------------------------------------
However, according to Professor Shapiro, the ``Share of Ear''
analysis by Professor Willig erroneously inflates these opportunity
costs, by overestimating the diversion rates to new subscriptions and
new owned media purchases. Shapiro WRT, app. D at 86. Accordingly,
Professor Shapiro rebuts this alternative approach by explaining the
alleged limitations in Professor Willig's methodology and presenting an
adjusted version that Professor Shapiro claims is a superior
application of the ``Share of Ear'' data.
vi. The Impact of All of Professor Shapiro's Data Input and Opportunity
Cost Adjustments to Professor Willig's Calculation of Statutory
Royalties in the Scenario 2 Approach
Applying all of Professor Shapiro's data and opportunity cost
adjustments to Professor Willig's Scenario 2 approach, the Judges find
that the royalty rates proposed by Professor Willig must be
significantly reduced. Specifically, these royalty rate differences are
as follows: \272\
---------------------------------------------------------------------------
\272\ Professor Shapiro does not propose that the Judges utilize
the foregoing royalty rates he calculates as the statutory royalty
rates. See Shapiro WRT at 60.
------------------------------------------------------------------------
Ad supported Subscription
------------------------------------------------------------------------
Willig parameters....................... $0.00297 $0.00312
Shapiro Adjusted Inputs................. $[REDACTED] $[REDACTED]
------------------------------------------------------------------------
See Willig WDT ] 51, Fig.9; Shapiro WRT, Fig.15 at 64.\273\
---------------------------------------------------------------------------
\273\ As noted supra, note 247, Professor Willig also utilizes a
N-I-N Model as a sensitivity check to his Shapley Value results. The
Services assert, correctly, that the opportunity cost, profit margin
and ``Must Have'' inputs Professor Willig utilizes in his N-I-N
Model are identical to the inputs he utilizes in his Shapley Value
Model. Services RPFFCL ] 693 (incorporating by reference the
Services' critiques of Professor Willig's Shapley Value Model).
Similarly, the Judges' consideration of the inputs in Professor
Willig's Shapley Value, supra, are equally applicable to his N-I-N
Model, and reduce his proposed royalty rates to the same extent.
---------------------------------------------------------------------------
Additionally, because these adjusted rates are average rates over
the 2021-2025 rate period, like Professor Willig's proposed rates, they
need to be discounted back to 2021 to establish rates for that first
year of the rate period. Professor Willig deflated these rates by a
factor of 0.96117, applying the U.S. Federal Open Market Committee's
inflation rate forecast for 2021 of two percent. Willig WDT ] 55 &
n.43. (The Services have not objected to Professor Willig's application
of this inflation-adjustment process.). Applying Professor Willig's
adjustment factor of 0.96117, the Judges' calculate 2021 royalty rates,
based on their adoption of Professor Shapiro's input-adjusted version
of Professor Willig's Shapley Value Model parameters, to be $[REDACTED]
for ad-supported services and $[REDACTED] for subscription
services.\274\
---------------------------------------------------------------------------
\274\ For the ad-supported rate, $[REDACTED] x [REDACTED] =
$[REDACTED] (rounded to $[REDACTED]). For the subscription rate,
$[REDACTED] x [REDACTED] = $[REDACTED] (rounded to $[REDACTED]).
---------------------------------------------------------------------------
vii. The Impact of Shapley ``Arrival Orderings'' Given the Judges'
Finding That They Do Not Reflect ``Effective Competition''
The Judges must incorporate their prior finding that Professor
Willig's Shapley Value Model incorporates complementary oligopoly power
in the number of arrival orderings. There is no record evidence that
suggests how Shapley Values and resulting royalties would be computed
if the arrival orderings were changed to ameliorate the market power
generated by the number of arrival orderings created by the
fragmentation of copyright ownership of ``Must Have'' repertoires
across three Majors.
The Judges note that Professor Willig's Shapley Value Model does
not explicitly address the potential impact of steering by a
noninteractive service, i.e., one that promises to play more sound
recordings from a record company that agrees to a lower royalty or
threatens to play fewer sound recordings from a record company that
declines to agree to a lower royalty.\275\ Accord 8/18/20 Tr. 2638
(Shapiro) (``The primary focus of competition certainly . . . in
Professor Willig's model . . . is not steering'').
---------------------------------------------------------------------------
\275\ As explained in Web IV, such promises and threats can
result in the absence of actual steering, as all record companies
agree to reduce their rates in order to avoid being ``steered
against.'' Web IV, 81 FR at 26366.
---------------------------------------------------------------------------
Professor Willig maintains that his Shapley Value Model implicitly
incorporates the value of steering because the characteristic function
embodies ``the extreme form of steering,'' that is, ``a black-out, non-
license situation,'' which, as explained supra, would result in the
commercial demise of the noninteractive service because each Major is a
``Must-Have.'' 8/10/20 Tr. 1070-72 (Willig).
The Judges find Professor Willig's treatment of a Major blackout to
be a difference in kind rather than one of degree when compared with
steering. An essential aspect of steering is that it serves to
partially disaggregate a record company's repertoire by allowing the
noninteractive service to modify its song selection to marginally lower
its royalty costs, while increasing the royalty revenue paid to the
record company increasing plays via steering and decreasing royalty
revenue to the record company ``steered against'' by the service. See
Web IV, 81 FR at 26367. As also explained therein, the noninteractive
service would not go out of business as it would if it lacked a license
from a Major, but rather would see an improvement to its bottom line.
Id. Clearly, therefore, marginal steering is different in kind. The
characteristic function, on whose features Professor Willig relies,
does not contemplate this steering-based disaggregation.\276\
---------------------------------------------------------------------------
\276\ The record does not reflect whether any Shapley Value
Model even could address the impact of steering, but it is clear
that Professor Willig's modeling does not. As explained in Web IV,
supra, the function of steering is a redistribution of value to
adjust for complementary oligopoly power, whereas the characteristic
function establishes the maximum value of the coalition.
---------------------------------------------------------------------------
Thus, because the royalty rates derived from Professor Willig's
Shapley Value Model reflect complementary oligopoly power (even as
adjusted supra), they must be discounted to reflect effective
competition. However, the Judges find nothing in the record to estimate
the value of an effective competition adjustment to Professor Willig's
Shapley Model-derived royalty rates (as adjusted herein).\277\
[[Page 59540]]
Accordingly, the evidentiary record only allows the Judges to state
with regard to the royalty rates they have determined--by adjusting
Professor Willig's Shapley Model-derived rates--that those 2021 rates,
$[REDACTED] for ad-supported services and $[REDACTED] for subscription
services, exceed an effectively competitive rate by an indeterminate
amount. As such, these rates serve only as limited guideposts,\278\
indicating that effectively competitive rates generated via a Shapley
Value Model would be less than these levels.\279\
---------------------------------------------------------------------------
\277\ More particularly, the Judges do not find that the
effective competition adjustments applied to the benchmark and
ratio-equivalency rates discussed elsewhere in this Determination,
particularly those based on steering, can be logically applied to
Professor Willig's Shapley Value-derived rate. See 8/6/20 Tr. 777-
79, 8/10/20 Tr. 1077-78 (Willig) (acknowledging he did not conduct
an analysis based on steering because steering-based competition
among the Majors would be inconsistent with the maximization of the
``characteristic function,'' i.e., the maximization of the surplus
the bargaining parties can obtain within his Shapley Value Model);
see also 8/26/20 Tr. 3921 (Shapiro) (``none of our models have
steering . . . .'').
\278\ When ``the Judges are confronted with evidence that,
standing alone, is not itself wholly sufficient, they may rely on
that evidence ``to guide the determination,'' i.e., by using it as a
``guide post'' when considering the application of more compelling
evidence. SDARS II, 78 FR at 23063, 23066 (emphasis added).
\279\ As discussed supra, Professor Willig's estimated rates are
also too high because they do not reflect the ``opportunity
benefit'' of listeners who would substitute noninteractive listening
for non-royalty bearing activities, including listening to AM/FM
radio. And, given the legal infirmity of the ``fork in the road''
approach, also discussed supra, his proposed rates are further
improperly inflated.
---------------------------------------------------------------------------
2. Professor Shapiro's Nash-in-Nash Model
On behalf of Pandora, Professor Shapiro proffers two game theoretic
bargaining theories to support proposed benchmark rates. In his direct
testimony, he presents his ``Nash-in-Nash'' (N-I-N) model, and in his
rebuttal testimony, as a critique of Professor Willig's Shapley Value
Model, Professor Shapiro advances his ``Myerson Value'' model.
Professor Shapiro explains that the licensing of performances of
sound recordings needs to be analyzed with a ``bargaining model [that]
account[s] for the multiple bilateral negotiations that would take
place'' between noninteractive services and record companies. 8/18/20
Tr. 2654-55 (Shapiro). The dynamic in such a market, he explains, is
that ``although each record label would negotiate separately with each
webcaster (assuming no coordination), the outcome of negotiations
between one label-webcaster pair would be expected to affect the
outcomes between other pairs.'' Id.; Shapiro WDT at 27.\280\
---------------------------------------------------------------------------
\280\ In a two-player negotiation, the solution to the model is
based on assumptions by each party regarding the negotiating
strategy of the counterparty. In the N-I-N model, this concept is
expanded to account for the expected outcomes in multiple two-player
bargaining. Allan Collard-Wexler et al., ``Nash-in-Nash''
Bargaining: A Microfoundation for Applied Work, 127 J. Pol. Econ.
163, 165-166 (2019).
---------------------------------------------------------------------------
The game theoretic approach that best addresses this simultaneous
competition and bargaining context and is the ``dominant way'' of
modeling such a market, according to Professor Shapiro, is the N-I-N
model, a ``non-cooperative'' game theory model which utilizes ``a
consistent solution to simultaneous [bi-lateral] negotiations between
multiple pairs of actors.'' 8/18/20 Tr. 2655 (Shapiro).\281\ Using his
N-I-N model, Professor Shapiro generates an ad-supported royalty rate
of $[REDACTED] per play, and $[REDACTED] per play for subscription
services. Shapiro WDT at 28 tbl.4, 32 tbl.7.
---------------------------------------------------------------------------
\281\ For the difference between such a ``non-cooperative''
model and a ``cooperative'' model such as Professor Willig's Shapley
Value Model, see supra note 215. Professor Shapiro opines that a
``non-cooperative'' model better describes the bilateral
negotiations hypothesized by the willing buyer/willing seller
standard than the ``cooperative'' model invoked by Professor Willig,
which is better suited for examining the behavior of ``coalitions''
of participants. Id. 2817-18 (Shapiro).
---------------------------------------------------------------------------
Professor Shapiro applies his N-I-N bargaining model for both ad-
supported and subscription webcasting. For both forms of webcasting,
his N-I-N model includes eight record companies with the largest shares
of listening on Pandora \282\ plus two ``catch-all'' categories of
independent record companies. Shapiro WDT at 27-28 & tbl.4; id. at 75-
76; 8/19/20 Tr. 2742, 2747 (Shapiro).
---------------------------------------------------------------------------
\282\ The eight record companies are [REDACTED].
---------------------------------------------------------------------------
In Professor Shapiro's N-I-N modeling ``the first step'' in
identifying royalty rates ``is to examine the opportunity cost to an
individual record company of licensing its repertoire to a statutory
webcaster.'' Shapiro WDT at 4 (emphasis added). He defines record
company opportunity costs in the same general manner as Professor
Willig--the royalties foregone by a record company if it licenses its
repertoire to a noninteractive service rather than to another type of
service or offers its repertoire for sale as a physical or digital
product.\283\ However, in performing his opportunity cost analysis,
Professor Shapiro relies on a fundamental difference in the
hypothetical unregulated noninteractive market. Specifically, he
testifies:
---------------------------------------------------------------------------
\283\ Professor Shapiro describes opportunity cost in the
present context as follows:
The opportunity cost approach recognizes that, when a record
company licenses its repertoire to a music service, some customers
will devote additional listening time to that music service rather
than listening to music in other ways. Because of the decreased
listening to sound recordings through other media, the record
company in question will lose some of the royalties it would
otherwise have earned on performances or sales of recordings through
these other media, to the extent the record company would have
received incremental royalties from that listening.
Shapiro WDT at 3. In Professor Shapiro's N-I-N model, a record
company's opportunity cost for licensing a webcaster is the product
of four factors: (1) The total number of performances on the given
webcaster's service (referred to as ``N'' in his model); (2) the
percentage of those performances that would be lost to other forms
of listening in the absence of a license from the record company
(referred to as ``L'' in his model); (3) the average per-performance
royalty the record company would earn from other forms of listening
(referred to as ``R''); and (4) the record company's share of
performances on the webcaster and the alternative services (referred
to as ``S''). Shapiro WDT at 17; 8/18/20 Tr. 2663-65 (Shapiro).
[S]ome degree of competition among record companies would also
arise if a webcasting service can obtain significant bargaining
leverage by threatening to drop a given record company from its
service entirely if the royalty rate offered by that record company
is unreasonably high.
* * * * *
Importantly, my analysis here relies on new evidence that no
individual record company is even close to being ``must-have'' for
Pandora's advertising-supported webcasting service.
Shapiro WDT at 11-12.
Accordingly, Professor Shapiro's entire N-I-N Model relies upon
``new evidence'' that he asserts demonstrates that no single record
company in fact is a ``Must Have'' for a noninteractive service.
Because further application of his N-I-N Model turns on the sufficiency
of this new evidence, the Judges to turn now to an examination of that
evidence.
a. Pandora' ``Label Suppression Experiments''
To determine whether each of the Majors is a ``Must Have'' for
noninteractive services, Professor Shapiro asked Pandora to conduct
several ``Label Suppression Experiments'' (LSEs) pursuant to general
instructions he provided to Pandora. Shapiro WDT app. E. The LSEs were
conducted and supervised by an in-house Pandora economist employed as a
``Distinguished Scientist,'' Dr. David Reiley. Trial Ex. 4091 ]] 1-4,
6, 11-13 (WDT of David Reiley) (Reiley WDT). Dr. Reiley constructed
LSEs to answer the question: ``What effect, if any, there would be on
users' listening if Pandora stopped playing the entire catalog of a
particular record company on Pandora's ad-supported service?'' Reiley
WDT ]] 11, 13.
In an attempt to answer this question, Dr. Reiley and his
colleagues ran five experimental treatments among listeners
[[Page 59541]]
of Pandora's ad-supported tier.\284\ One group in each experiment
received the ``treatment'' (described below) and the other group in
each experiment was the ``control'' group, which did not received the
``treatment.''
---------------------------------------------------------------------------
\284\ To be included in either the LSE treatment or control
groups, users must have listened to Pandora's ad-supported radio
product during the experimental period, and were not included if
they did not satisfy that criterion. See 9/1/20 Tr. 4902-03
(Reiley).
---------------------------------------------------------------------------
Each treatment intentionally suppressed music from a different
record company--not totally--but as completely as possible. Two of the
treatments separately suppressed music from [REDACTED], and three
separately suppressed music from [REDACTED]. Id. ] 12; 9/1/20 Tr. 4899
(Reiley).
Dr. Reiley then compared the listening behavior of users in the
five treatment groups to the behavior of the control group, which did
not receive any suppression treatment. Reiley WDT ] 19. He ran these
LSEs over a roughly three-month period, from June 4 to August 31, 2019,
and again for another approximately three-month period concluding
December 4, 2019. Reiley WDT ] 16; Trial Ex. 4108 ]] 4 (WRT of David
Reiley) (Reiley WRT).
In analyzing the results, Dr. Reiley focused primarily on a
particular metric: The average hours listened per registered Pandora
ad-supported user, noting that ``average hours per listener was a
standard metric for in-house experiments at Pandora. Reiley WDT ] 19.
According to Dr. Reiley, the LSEs demonstrated that ``for the initial
three-month experimental period, a near-total suppression of spins of
any single record company [REDACTED].'' Id. ]] 21-24; 9/1/20 Tr. 4906-
07. (Reiley). He depicted the results of his three-month run of these
LSEs in the following figure:
[RESTRICTED]
[REDACTED]
Reiley WDT, Fig. 2.\285\
---------------------------------------------------------------------------
\285\ The figures are probabilistic, because they were derived
from a survey of Pandora ad-supported listeners, rather than from
the entire population of such listeners. Dr. Reiley testified that
the LSE survey size was sufficient to produce, for the listening
hour reported effects, 95% confidence intervals that would be no
wider than +/-5% for [REDACTED], and no wider than +/-0.5% for
[REDACTED]. Reiley WDT ] 18. Accordingly, in the results displayed
in Figure 2 in the accompanying text, the point estimates are shown
by the dots, and horizontal lines indicating the width of the 95%
confidence intervals.
---------------------------------------------------------------------------
As noted supra, Dr. Reiley also extended these LSEs for an
additional three months. He reported his cumulative six month totals,
which, he testified, confirmed his conclusion regarding the three
months of experiments, viz., that [REDACTED]. Reiley WRT ]] 12-16 &
Fig.1.\286\
---------------------------------------------------------------------------
\286\ In a pre-hearing Motion, the Judges disallowed Pandora
from using the cumulative results of the six month survey, because
Dr. Reiley's testimony regarding the final three months of the
survey should have been included in his direct testimony, or in
timely filed amended direct testimony, rather than in his written
rebuttal testimony. However, the Judges admitted Dr. Reiley's
rebuttal testimony for the narrower purpose of attempting to rebut
SoundExchange's position that the Judges should deem all three
Majors to be ``Must Haves'' for noninteractive services. To be
clear, the Judges do not consider the cumulative (six months) data
for any affirmative purpose.
---------------------------------------------------------------------------
b. SoundExchange's Criticism of Pandora's LSEs, Pandora's Responses,
and the Judges' Findings and Analysis
i. The LSEs Are Unreliable and Uninformative
According to SoundExchange, the LSEs are not a reliable source of
evidence, and thus cannot be utilized as an economic analysis to
calculate Professor Shapiro's input ``L'' in the opportunity cost
calculation necessary for his N-I-N- modeling. Willig WRT ]] 22-27; 8/
5/20 Tr. 351-53, 570-72, 574 (Willig). Even at this high conclusory
level, Pandora offers less than a full-throated defense of the LSEs,
asserting not that the LSEs are objectively sufficient and persuasive
evidence, but that, comparatively, they are ``the best, most reliable
evidence of the effects of a record label blackout on listening on
Pandora's ad-supported radio tier.'' Services RPFFCL ] 852 (citing 9/1/
20 Tr. 4927-28 (Reiley).
The first criticism levelled by SoundExchange is that the design of
the LSEs impeded detection by respondents who were exposed to a label
blackout (the treatment group) of the existence of the blackout. More
particularly, a SoundExchange economic expert witness, Professor
Catherine Tucker, criticized the LSEs for making the LSEs'
participants, ``blind'' to the experiments' nature (see Reiley WDT ]
7), in that they were not made aware that they had lost access to the
repertoire of the suppressed record company. Trial Ex. 5605 ] 18 (CWRT
of Catherine Tucker) (Tucker WRT); 8/17/20 Tr. 2280-81 (Tucker).
Pandora responds by pointing to Dr. Reiley's testimony, in which he
invokes the principal scientific reason for making the study ``blind''
to participants. Specifically, he identifies what is known in
experimental work as the ``Hawthorne effect,'' by which participants in
an experiment modify their behavior simply because they become aware of
the experiment. 9/1/20 Tr. 4927-28 (Reiley). Moreover, Pandora argues
that it would have no reason to notify ad-supported users of the
existence of a real-world label black-out, and that any communication
Pandora could have attempted to convey to the ``treatment groups''
would not even ``come close to replicating the sort of real-world
third-party communications'' disclosing the blackout (discussed below)
that Professor Tucker claims (wrongly in Pandora's opinion) would
occur. Services RPFFCL ] 858.
The Judges find significant merit in SoundExchange's criticism. The
failure of the LSEs to provide notice to participants in the
``treatment groups'' that they had lost access to the repertoire of a
given record company is an important omission. Its importance is based
on the fact that the value of a webcasting service lies not only in the
sound recordings a listener hears, but the listeners' understanding of
the repertoire to which the service has access and derivatively, which
the listener can expect to be included in the sound recordings he or
she may hear. To be sure, such access likely has more value to an
interactive (on demand) service than to a noninteractive service, but
that comparison is hardly dispositive. And the assertion by Pandora
that it could hardly have provided the same type of notice and
disclosure that third parties would have disseminated (discussed in
more detail below), while likely correct, only underscores the
incompleteness and lack of necessary ``real world'' elements in the
experiments. That is, the fact that the necessary disclosures of
information could not possibly have been included in the experiment--by
Pandora's own admission--indicates to the Judges that the error lies in
the fundaments of the LSEs, and that Pandora's unavoidable omission of
such notices is hardly an argument supportive of the use of the LSEs in
this proceeding.\287\
---------------------------------------------------------------------------
\287\ The absence of disclosure to the treatment group of the
loss of access to the repertoire of a record company is inconsistent
with if not antithetical to, the idea of modeling the hypothetical
market in a manner consistent with ``effective competition.'' As
Professor Shapiro concedes, if a Major is blacked-out on Pandora,
listeners have lost what economists describe as ``access value.'' 8/
19/20 Tr. 2709 (Shapiro). But without disclosure of that lost value,
the diminished access is not known to listeners (unless they learn
of the lost access from some other source, as posited by
SoundExchange). This informational deficiency is important. One of
the necessary conditions for a market to be effective is the absence
of asymmetric information. See Clifford Winston, Government Failure
versus Market Failure at 27 (2006) (``efficiency . . . requires that
buyers and sellers be fully informed . . . . If consumers are
uninformed or misinformed about the quality of a product, they may
derive less utility from it than they expected.''); Karl-Gustaf
Lofgren et al., Markets with Asymmetric Information: The
Contributions of George Akerlof, Michael Spence and Joseph Stiglitz,
104 Scandinavian J. Econ., no. 2, 195, 205 (2002) (Joseph Stiglitz,
winner of the Nobel Prize for his work on the economics of
information, and ``probably the most cited researcher within the
information economics literature . . . has time and again pointed
out that economic models may be quite misleading if they disregard
informational asymmetries [and] that many markets take on a
different guise in the perspective of asymmetric information . . .
.''); Diane Coyle, Markets, State, and People 73, 303 (2020) (``The
absence or presence of information asymmetries can make all the
difference to how a market functions . . . . The assessment of
efficiency . . . should account for . . . likely behavioral
responses.''). But the LSEs tacitly assume a market infected by such
informational asymmetry regarding the offerings of a noninteractive
service, and in so doing create an experimental market infused not
with effective competition, but rather with market failure. See
Joseph E. Stiglitz & Jay K. Rosengard, Economics of the Public
Sector 93 (4th ed. 2015) (identifying ``imperfect information'' as
one of ``six basic market failures''); Anne Steineman,
Microeconomics for Public Decisions 147 (3d. ed. 2018) (``Market
failures can also occur because of imperfect information. Efficiency
requires that all relevant information be available to consumers . .
. .'') (emphasis added). The irony of this point is not lost on the
Judges: Professor Shapiro endorses as evidence of a hypothetical
effectively competitive market an experiment (the LSEs) that
generate the absence of a condition--adequate information--whose
presence is necessary to avoid market failure.
---------------------------------------------------------------------------
[[Page 59542]]
The Judges also reject Dr. Reiley's reliance on the general
principle that participants in an experiment should not be made aware
of the nature of the experiment. Rather, the Judges concur with
Professor Tucker, who testifies that this principle is inapplicable
where, as here, ``we're interested in actually measuring what happens
when people receive and know about receiving a degraded service.'' 8/
17/20 Tr. 2281 (Tucker).
Several SoundExchange witnesses testify that services in
competition with Pandora (if it was the service blacking-out a label)
would have strong economic incentives to disseminate and exploit this
information by: (1) Publicizing Pandora's shrunken repertoire; (2)
emphasizing their own more complete repertoires; (3) targeting existing
Pandora users via advertising campaigns; (4) offering promotional
prices in conjunction with an emphasis on the new gap in repertoires,
to encourage switching away from Pandora; and (5) expanding their own
offerings or changing their prices in response to the change offering
environment. Tucker WRT ]] 48-49; Willig WRT ]] 23-24; Zauberman WRT ]]
23-25, 30-32; Simonson WRT ]] 21-27, 30; 8/5/20 Tr. 570-74 (Willig).
Moreover, SoundExchange notes that even Professor Shapiro concedes that
Pandora's competitors would engage in such messaging if Pandora
blacked-out a Major. 8/19/20 Tr. 2704-06 (Shapiro). Further, Professor
Shapiro also concedes that ``there would very likely be external
sources of information about this that users would receive.'' In an
attempt to address this likely reality, he simply used the high
statistical point estimate [REDACTED] as a proxy for the lost
listening, even though he [REDACTED]'' 8/19/20 Tr. 2703 (Shapiro)
(emphasis added). In fact, Professor Shapiro broadly acknowledges it is
``true'' that ``the experiments [are] imperfect in various respects . .
. .'' Id. at 2710.
Despite its expert making these concessions regarding its own
experiments, Pandora criticizes SoundExchange for not offering evidence
beyond its witnesses' testimony regarding the likely industry responses
to a Major's blackout. The Judges find this criticism is meritless and
only underscores the inherent deficiencies in the LSEs. Pandora's
argument is essentially that, although its model does not specify
necessary elements of reality, the adverse party, SoundExchange, bore
the burden of producing evidence of how that reality would affect
noninteractive services in the real world.
Quite the contrary, Pandora, as the proponent of the LSE evidence,
bears the burden of producing sufficient evidence to demonstrate the
necessary realism of its experimental modeling.\288\ Economic
experiments are models,\289\ and all economic models need to be
analyzed through a ``realism filter.'' Dani Rodrik, Economics Rules at
27 (2015) (noting that the ``critical assumptions'' of an economic
model must be evaluated through a ``realism filter'' to determine
whether more realistic assumptions ``would produce a substantive
difference in the conclusion produced by the model''). Pandora's LSEs
do not pass through such a ``realism filter.''
---------------------------------------------------------------------------
\288\ Pandora also casts doubt on whether any ``third party has
any reliable method for reaching the vast majority of Pandora
users.'' Services RPFFCL ] 860. Although this, too, is speculation,
it is noteworthy in that Pandora is specifically making the general
asymmetric information point the Judges made supra--arguing in
essence that it has superior information that prevents third parties
from providing customers of information regarding the service they
are accessing. This argument hardly supports a finding that the LSEs
reflect a real world market that would be effectively competitive.
\289\ See Uskali M[auml]ki, Models are Experiments, Experiments
are Models, 12 J. Econ. Methodology 303, 306 (2005) (``experimental
systems . . . are artificially designed and constructed substitute
systems, controlled mini-worlds that are directly examined in order
to indirectly generate information about the . . . world outside the
laboratory--such as economic systems and behavior . . . . [S]uch
experimental systems are . . . material models of aspects of the
rest of the world.'') (emphasis added).
---------------------------------------------------------------------------
SoundExchange further asserts that the disclosure of the black-out
would not be made only by Pandora's competitors. It notes that, in the
real-world, beyond the confines of the experimental world, consumers
would learn about a Major's blackout on a noninteractive service from a
number of additional sources, specifically, by artists and managers
whose sound recordings and musical works would be unavailable and by
the record company that had been subject to the blackout. SoundExchange
asserts that these persons and entities would have the economic
incentive to disseminate information regarding the blackout, and how
their sound recordings could otherwise be accessed. 8/5/20 Tr. 352-53,
570-71 (Willig); 8/17/20 Tr. 2285 (Tucker). Other witness testimony
explained that additional information channels--social media platforms,
news media and personal networks of friends and family--would also be
able to inform listeners to a noninteractive service that the
repertoire of songs to which they have access had been reduced. Tucker
WRT ]] 19-27; Willig WRT ] 24; Zauberman WRT ]] 25-33; Simonson WRT ]]
21-30.
In response, Pandora again chastises SoundExchange for offering
only speculation regarding the anticipated response by noninteractive
listeners upon learning of the blacking out of a Major record company
from economically motivated industry competitors and stakeholders.
Pandora further criticizes SoundExchange's witnesses for relying on
anecdotes pertaining to the reactions of listeners to on demand
services upon learning that they had lost access to identifiable music
from a particular Major. As noted above, the Judges agree with Pandora
that the reactions by noninteractive listeners could be less intense,
given that they have no expectation of hearing a particular song. But
again, the market for noninteractive music also involves the promotion
of access to a large repertoire of music that can be accessed by the
curators (algorithmic or human) of that repository. A shrinking of that
repertoire clearly would constitute important relevant information for
a listener in choosing to remain with, or begin listening to, a
noninteractive service. And once again, the burden of producing
evidence regarding the importance, vel non, of such information is
properly borne by Pandora, as the proponent of the experimental
evidence, so that its model is sufficiently realistic and useful when
proffered to set statutory rates with real world impact. Finally, as
noted supra
[[Page 59543]]
regarding the response by Pandora's competitors, Pandora's assertion
that its experiment could not model third-party dissemination of true
information and listener reaction thereto is actually a self-criticism
by Pandora of the usefulness of its experiment, rather than an
appropriate critique of the SoundExchange witnesses whose testimony
revealed the insufficiency of the experiment's design. That is, if the
LSEs could not possibly have been designed to demonstrate real-world
effects, that evidence is lacking in probative value, and Pandora
cannot escape that finding by attempting to lay off on its adversary a
burden of producing contrary evidence.\290\
---------------------------------------------------------------------------
\290\ Pandora also emphasizes that [REDACTED]. However, the
record reflects no basis for the Judges to apply the circumstances
surrounding the launching of a new form of music distribution to the
overall noninteractive market. Similarly, the Judges give little
weight to SoundExchange's reliance on the specific example of
[REDACTED]. See SX PFFCL ] 862; Services RPFFCL ] 862.
---------------------------------------------------------------------------
Another defect in the LSEs alleged by SoundExchange is that Pandora
did not prevent listeners in the treatment group from listening to
songs via Pandora's ``Premium Access'' feature, which allows ad-
supported users to access on-demand functionality for a limited time in
exchange for viewing additional video advertisements. Reiley WDT ] 15;
Phillips WDT ]] 25-26. Pandora entices ad-supported users with repeated
prompts and an offer to access bespoke songs if an ad-supported user
``opt[s] into a Premium Access Session.'' 8/31/30 Tr. 4645-46, 4632-33
(Phillips).
According to SoundExchange, Pandora's decision not to suppress
content when listeners in a treatment group were using ``Premium
Access'' had the effect of masking the label blackouts, logically
leading listeners in the treatment groups to believe that the
repertoire of the blacked-out label was still available to them. Reiley
WDT ] 15; Phillips WDT ]] 25-26; Tucker WRT ] 38; 8/17/20 Tr. 2319-20
(Tucker); 8/31/30 Tr. 4645-46 (Phillips). Moreover, SoundExchange
maintains that this disguise effect existed regardless of whether ad-
supported listeners ultimately opted into Premium Access sessions,
because the offer suggested the accessibility of all repertoires,
including those of the blacked-out record company. Tucker WRT ]] 37-38.
Pandora acknowledges that the non-suppression of the blacked-out
record company's repertoire on ``Premium Access'' was not an error or
oversight, but rather intentional. Services RPFFCL ]] 870, 872. It also
concedes that listeners in the treatment groups heard a ``small
number'' of tracks from the otherwise blacked-out record company. SX
PFFCL ] 874. Pandora further asserts that SoundExchange has proffered
no evidence that such Premium Access was intended to, or in fact did,
``disguise'' the absence of a blacked-out repertoire, because such
limited access would not be confused with access on Pandora's
noninteractive service. Services RPFFCL ] 873. In sum, Pandora, while
acknowledging that the LSEs therefore did not generate ``perfect
suppression,'' notes that [REDACTED]% of the blacked-out record
companies' recordings were in fact suppressed. Services RPFFCL ] 875
(and citations therein).
The Judges find SoundExchange's criticism of the LSEs in this
regard well-taken. If listeners heard otherwise blacked-out songs after
accessing Pandora's ad-supported service, there is no persuasive
evidence that they would recall, going forward, whether that the songs
or artists they heard--which included recordings that they selected--
had been accessed via the noninteractive curation process or via the
Premium Access feature on that otherwise noninteractive service.
Rather, Pandora asks the Judges simply to assume that listeners would
be so attentive as to parse and recall the specific Pandora services
through which they heard certain recordings. There is simply no reason
to make such a counterintuitive assumption. Further, because a
noninteractive service offers a listener the potential to hear music
from a large repertoire, when a listener hears a sound recording from a
particular favored artist, the listener has no reason to conclude that
such recordings are in fact unavailable via the noninteractive service.
That is, it seems at least equally reasonable to assume that a listener
would expect to be able to access songs it hears on a service,
regardless of the precise tier on which the service provided the song
to the listener--at least without some further sufficient evidence to
the contrary. Once again, Pandora bears the burden of producing
sufficient evidence in this regard, and no such evidence is in the
record.
Additionally, Pandora's own experience in conducting experiments
should have put it on notice that the periodic playing of songs that
are otherwise suppressed is sufficient to disguise the suppression. In
its steering experiments relied upon by the Judges in Web IV, Pandora
explained that by decreasing the frequency of the plays of songs from
high-royalty record companies, without completely eliminating plays of
those songs, Pandora could reduce its royalty costs without degrading
the listener's perception of the repertoire of the service. Here too,
the playing of otherwise blacked-out record company songs accessed via
the noninteractive service, in the Premium Access promotional space,
potentially allowed the listener to assume no such degradation. And
importantly, Pandora does not provide any reason why it did not turn
off the Premium Access feature for listeners selected for the LSEs,
which would have mooted this concern.\291\
---------------------------------------------------------------------------
\291\ Turning off the Premium Access feature apparently would
have represented a degrading of the ad-supported service that
listeners might notice, interfered with Pandora's attempt to market
its premium product to these ad-supported listeners and perhaps even
violated its agreements with its licensors (Pandora does not say).
But Pandora's desire to maintain the Premium Access feature for the
treatment groups underscores its inability (or unwillingness) to
construct a sufficiently probative experiment given the nature of
the ad-supported service.
---------------------------------------------------------------------------
SoundExchange notes that in light of the foregoing deficiencies in
the LSEs, even Dr. Reiley and Professor Shapiro make a consequential
admission: They simply do not know how ad-supported listeners would
have reacted if they were made aware of the label blackouts. See 9/1/20
Tr. 4928 (Reiley) (``[I]f we imagine that listeners were informed of
[the missing content], then I don't know what impact that would have on
listening.''); Shapiro WDT at 21 (``LSEs ``do not fully capture what
would happen in the real world in the event of a blackout resulting
from one of [the] record companies withholding its repertoire from
Pandora . . . . [L]isteners were presumably not aware of the blackout,
and they might react more strongly if they were aware.'').
SoundExchange further notes that, although Pandora's goal was to
achieve 100% label suppression in the treatment group (aside from
allowing Premium Access to plays of suppressed labels), it failed even
in that endeavor, for several reasons. First, SoundExchange identifies
what it describes as a ``technical error,'' whereby the suppression was
turned off for a period of time over several days--June 13-16 and 26--
during the treatment period because of various software and system
upgrades. Reiley WDT ] 31; Reiley 9/1/20 Tr. 4956-58 (Reiley). For
Pandora's 89-day experiment, this five-day period represents
approximately 6% of the entire experimental period during which the
suppression was partially interrupted. The Judges find that this
technical error in the experiment, standing alone, would not invalidate
the LSEs, but in combination with the other defects, serves to
eliminate further any
[[Page 59544]]
weight the Judges could place on the LSEs.
Next, SoundExchange points out that Pandora continued to provide a
number of ``miscellaneous provider tracks '' \292\ to the treatment
group, including recordings from the suppressed labels, again causing
the suppression level to be reduced. Reiley WDT ] 28; Reiley WRT ]] 21-
23; 8/17/20 Tr. 2321-2322 (Tucker). More particularly, Professor Tucker
testified that approximately [REDACTED]% of users in the major label
treatment groups were exposed to at least one ``miscellaneous
provider'' track during the LSEs. See Tucker WRT app. 1 (Rows 13-14);
8/17/20 Tr. 2322 (Tucker).
---------------------------------------------------------------------------
\292\ ``Miscellaneous provider tracks'' are recordings that have
not yet been identified as covered by Pandora's current direct
license agreements but are nonetheless played by Pandora ``because
of the long history of user data associated with those tracks''
(i.e., they are popular tracks). Reiley WDT ] 28.
---------------------------------------------------------------------------
[REDACTED] Dr. Reiley's understanding that few spins of these
``miscellaneous provider tracks'' constituted plays from the suppressed
labels. Reiley WDT ] 30; Reiley WRT ] 23 (noting that his team tested a
sample of miscellaneous provider tracks and determined that only 10-15%
of them (i.e., 10-15% of 6% of total plays) were from the suppressed
label); 9/1/20 Tr. 4921-24 (Reiley) (``Most of [the miscellaneous
provider tracks] are going to be tracks that belong to other owners,
since [REDACTED]).
With regard to Professor Tucker's testimony, Pandora notes that she
conceded that the fact that approximately [REDACTED]% of users heard a
miscellaneous provider track during the experimental period does not
mean that they heard a suppressed label track. See 8/18/20 Tr. 2403
(Tucker). Also, Pandora points out that the [REDACTED]% figure reported
here by SoundExchange ([REDACTED]% to be precise) includes
miscellaneous provider tracks played during Premium Access sessions.
See Tucker WRT app. 1 at lines 13-14. As explained supra, Premium
Access sessions had been intentionally excluded from the LSEs.
With regard to the number of potential miscellaneous provider
tracks to which a listener in the treatment group may have been
exposed, the Judges agree that it is likely that such exposure was
relatively low. However, even this likely small effect, when combined
with the other deficiencies in the LSEs, renders the experimental
results less than conclusive. Moreover, the fact that many of these
miscellaneous provider tracks may have been provided within the Premium
Access feature does not mitigate the imperfection. As stated supra,
Pandora has not offered a sufficient explanation as to why ad-supported
listeners would accurately parse the difference between songs played as
ad-supported or as Premium Access songs accessed via the ad-supported
service, in order to be cognizant of the loss of certain songs on the
ad-supported tier alone. Further, because these ``miscellaneous
provider tracks'' are apparently relatively popular,\293\ they may have
an outsized influence on a listener's satisfaction with the ad-
supported service compared to less popular songs, and thus a relatively
greater impact on the accuracy of the experiment.
---------------------------------------------------------------------------
\293\ See supra note 292.
---------------------------------------------------------------------------
Another issue raised by SoundExchange is the LSEs' handling of ad-
supported users who upgraded to Pandora Plus or Pandora Premium
subscription tiers during the experiment and thus did not receive the
suppression treatment during the entire experimental period. Despite
these upgradings, Pandora continued to analyze these upgraded listeners
as part of the treatment group. See Reiley WDT ] 32 (``[A]lthough
listeners who upgraded to Plus or Premium no longer received treatment
after subscribing, I have not excluded those listeners or their
listening metrics from the analysis . . . . .''); see also Reiley WRT ]
19. More particularly, the experimental data showed that [REDACTED]% of
ad-supported users in the [REDACTED] treatment group and [REDACTED]% in
the [REDACTED] treatment group upgraded to a subscription tier during
the LSEs. Tucker WRT app. 1; Reiley WDT ] 32. Professor Tucker
explained that this upgrading has the potential of masking the shift by
ad-supported users in the ad-supported service. 8/17/20 Tr. 2318
(Tucker).
Pandora does not dispute the accuracy of the data as presented by
Professor Tucker. Rather, Dr. Reiley states that he did not exclude
these listeners in part ``because they did receive at least partial
treatment prior to the upgrade . . . .'' Reiley WRT ] 19. Although that
is not inherently unreasonable, there is also merit in Professor
Tucker's assertion. The upgrading individuals may have abandoned the
ad-supported service (via their upgrading) because of the label
suppression, which would have justified either the elimination of those
upgraders from the experiment, or perhaps counting them as having
abandoned the ad-supported service because of the suppression.\294\
---------------------------------------------------------------------------
\294\ Professor Reiley responded to this criticism, but his
testimony in that regard is unclear. However, he did report on the
minimal level of exposure these participants received of the
suppressed labels after they had upgraded. Reiley WRT ] 19.
---------------------------------------------------------------------------
Next, SoundExchange avers that the LSEs cannot estimate how
consumers would react over a time period longer than the LSEs, such as
the five-year rate-setting period. See Tucker WRT] 77 (``Consumer
learning can lead to substantial difference in the measured effect of a
treatment over time''); 8/17/20 Tr. 2323-25 (Tucker) (``[C]ertainly the
substance of these critiques does not change when you look at a longer
time period.).
In response, Pandora relies on the testimony of Professor Shapiro
and Dr. Reiley, in which they extrapolate to the LSEs longer-term
effects from other experiments that had measured the longer-term impact
of ad-loads on listening and the impact of steering, respectively.
Reiley WDT ] 36; Reiley WRT ] 27. More particularly, Dr. Reiley and
Professor Shapiro found that, by this extrapolation, the three-month
LSEs should be adjusted by a factor of three, increasing the negative
impact associated with a label blackout (and finding that the
adjustment factor should equal two for the six-months of data). Shapiro
WDT at 21, 24-25, tbl.3; 8/19/20 Tr. 2701 (Shapiro).
SoundExchange challenges as ad hoc Pandora's reliance on these
unrelated experiments. It argues that neither Dr. Reiley nor Professor
Shapiro provides ``legitimate support for why this relationship, which
was obtained from a different experiment involving a different
treatment and a different experimental design, is applicable here.''
Tucker WRT ] 93; 8/5/20 Tr. 583-84 (Willig). Going more deeply,
Professor Willig opined that ``there is really no particular reason to
believe, from a logical basis or an economic basis, that the three
times or the two times is an accurate correction.'' 8/5/20 Tr. 583
(Willig). Multiple SoundExchange witnesses further explained that these
other two experiments are simply too unlike the LSEs to provide useful
information. Tucker WRT ]] 76-83; Zauberman WRT ]] 40-45, 53-56;
Simonson WRT ]] 41-45; Willig WRT ] 26.
Going even further, Professor Willig distinguished the ad-load
experiment from the LSEs:
[A]d load is a different sort of a degradation of the service
from the point of view of the listeners than a narrowing of the
repertoire of the music that's played, and the
[[Page 59545]]
ability of a listener to discern that the ad load has increased is
going to be relatively obvious. And whether or not that's the case
for the missing music is somewhat less certain . . . . And so the
applicability of the information from the ad loads study to the LSEs
is really questionable. It is really rather speculative.
8/5/20 Tr. 584 (Willig). Finally, with regard to the ad load experiment
comparison, SoundExchange notes that Dr. Reiley acknowledged the
absence of any record evidence to support what is essentially nothing
more than his assumption of a correlation between the effects of ad
load and label suppression. 9/1/20 Tr. 4970 (Reiley).
Regarding the other purportedly comparative experiment--the
steering experiments conducted by Pandora's Dr. Stephan McBride--
SoundExchange's witnesses identified an important dissimilarity with
the LSEs: The McBride steering experiments measured the effects of
steering only up to a 30% level. See 9/1/20 Tr. 4925, 4990 (Reiley).
Nonetheless, Dr. Reiley simply assumed that he could extrapolate from
the results of a steering experiment in order to generate long-term
effects from a [REDACTED]% suppression of a label. Id. at 4925
(Reiley).
Finally, SoundExchange again relies on the testimony of Professor
Reiley himself to demonstrate the arbitrariness of his decision to
multiply the three-month results by three, and the six-month results by
two. Specifically, Dr. Reiley acknowledged that ``it's impossible to
know exactly what would happen without running the experiment for a . .
. much longer period of time,'' and that his comparison to the ad-load
experiment was a ``best guess at what we think the long-run effects are
likely to be.'' 9/1/20 Tr. 4910-11 (Reiley).
In rebuttal to these criticisms, Pandora relies first on Dr.
Reiley's testimony that he had the benefit of having been involved in
Pandora's ad-load experiments, but he acknowledged that Pandora had
engaged in few other long-term experiments. Reiley WDT ]] 27-28; 9/1/20
Tr. 4915-16 (Reiley). Based on that experience, he observed a decline
in listening hours over approximately the first year of the ad-load
experiments that was linear in nature, which he testified could render
reasonable and justifiable Professor Shapiro's decision to double the
effects of the six-month LSE experiment. Reiley WDT ] 28; 8/19/20 Tr.
2701 (Shapiro).
Pandora nonetheless concedes that its ad-load experiment was not
perfectly correlated with the LSEs with regard to long-term effects.
Attempting to turn the tables on SoundExchange, Pandora and Dr. Reiley
chastise SoundExchange (yet again) for not presenting any contrary
evidence. 9/1/20 Tr. 4907-09 (Reiley).
In similar fashion, Pandora relies on Dr. Reiley's conclusion that
the LSEs were also consistent with longer-run extrapolations of Dr.
McBride's steering experiments. However, Dr. Reiley acknowledges the
wider confidence intervals in the LSEs' results compared to the
steering experiments. 9/1/20 Tr. 4925, 4990 (Reiley). And, as with the
alleged correlation between the LSEs and the ad-load experiments,
Pandora points to the absence of any contrary evidence from
SoundExchange to refute this alleged correlation. Services RPFFCL ]
961.
The Judges agree with SoundExchange that Pandora has failed to show
the long term effects of a sustained blackout of a Major or other label
by Pandora. There is insufficient evidence to support a finding that
the results of two unrelated experiments--testing the impact of
changing ad-loads and the steering of plays--can be mapped onto the
LSEs. The fact that these other experiments may be the only available
potential comparators does not mean that they are useful, or even that
they are the best comparators.\295\
---------------------------------------------------------------------------
\295\ Indeed, given Dr. Reiley's acknowledgement that Pandora
has engaged in few longer-term experiments, and did not identify any
other such experiments, it is equally true that the ad-load and
steering experiments may be the ``worst'' comparators available. In
any event, the concept of ``better' or ``worse'' comparators is
meaningless--the experiments are simply inapposite and cannot
support Pandora's attempt to establish credible long-term effects
arising from the LSEs.
---------------------------------------------------------------------------
SoundExchange also focuses on an aberrational statistical output
from the LSEs. The three-month results showed a [REDACTED]--i.e., this
aspect of the LSEs found that listening [REDACTED]. Reiley WDT ] 22.
Similarly, after six months, the [REDACTED] treatment group showed
[REDACTED]. Reiley WRT ]] 12-14 & Fig. 1. Considering these results,
Professor Willig found it implausible that ``users would listen to
Pandora more if it lost access to [REDACTED].'' Willig WRT ]] 28-29.
According to Dr. Reiley, these results are not statistically
significant from a zero effect, and therefore should not be considered
anomalous. Reiley WDT ] 22 & Fig. 2. Nonetheless, Professor Shapiro
discarded the [REDACTED] data, replacing it with the three-month
[REDACTED] loss rate, which he noted generated an even greater
opportunity cost result. 8/19/20 Tr. 2699 (Shapiro); Shapiro WDT at 22,
27; tbl.4 at 26.
Professor Willig explained why, in his opinion, Professor Shapiro's
substitution of [REDACTED] for [REDACTED] data is inappropriate:
[I]t is completely illogical to reject the results of an LSE
applied to one [REDACTED], while simultaneously claiming the results
from the same experiment applied to a [REDACTED] are not only
reliable, but can be extrapolated to the record company for which
the experiment was deemed to be unreliable. None of the LSEs produce
results that are statistically different from zero, and as such,
Professor Shapiro's approach amounts to drawing on the random
``noise'' from one LSE and asserting that such noise constitutes a
better estimate of blackout effects than the random noise from his
other LSEs. This is completely inappropriate and cannot form the
basis for reliable results.
Willig WRT ] 28.
The Judges agree with Professor Willig's criticism. Although it was
``conservative'' for Professor Shapiro to plug in the [REDACTED] data
for the [REDACTED]data, that act of purported ``fairness'' does not
make the LSEs reliable. Indeed, because the LSEs also did not include a
treatment group blacking-out [REDACTED]'s repertoire (for reasons that
Pandora did not explain), Pandora is left with the data generated from
the [REDACTED] results to serve as a proxy for the [REDACTED], when the
experiment was designed to include [REDACTED]. Although there can be
circumstances when information gleaned from only one Major is
sufficient, an expert witness cannot simply discard data sources that
he believed, ex ante, to be necessary, but which, ex post, cast doubt
on the usefulness of the experiment, in order to paper-over anomalous
results.\296\
---------------------------------------------------------------------------
\296\ Thus, the Judges disagree with Pandora that Professor
Shapiro's discarding of the [REDACTED] data--leaving the LSEs with
lost listening data from but one Major ([REDACTED]--is similar to
the Judge's reliance of industry data from fewer than all three
Majors. See Services RPFFCL ] 953. Here, Dr. Reiley and Professor
Shapiro constructed an experimental world and established its
parameters. When those parameters produced an anomalous result, they
discarded it, thereby revising their own experiment. That treatment
by a party of data in conflict with the position it advocates
resembles a cherry-picking of data, and is quite distinguishable
from the Judge's reliance on real world data from less than all
industry participants as probative of the workings of a market.
---------------------------------------------------------------------------
In fact, SoundExchange takes Professor Shapiro to task for making
other adjustments to the LSE results that it claims are equally ad hoc
in nature. First, it criticizes Professor Shapiro for attempting to
mitigate the real world fall-out (through third-party disclosure of the
blackout, discussed supra) that would likely ensue upon a blackout of a
Major by Pandora by simply relying on the upper end of the 95%
confidence interval from the LSEs. Professor Willig notes that the
upper end of these confidence intervals would be as tainted by the
experiments' inability to measure the impact of these real world
effects as
[[Page 59546]]
the point estimates that Professor Shapiro decided to ignore.
Alternately stated, the confidence intervals, like the point estimates,
are simply unrelated to the real world dissemination of information
regarding the blackouts, and thus cannot be invoked as a proxy for the
effect of such real world events. See 8/5/20 Tr. 581 (Willig); see also
8/17/20 Tr. 2335 (Tucker) (finding this adjustment to be ``incredibly
ad hoc and unreliable'' and ``anything but conservative''); Tucker WRT
] 92 (finding these adjustments ``untethered to any valid procedure to
produce reliable field experiment estimates''). Moreover, SoundExchange
asserts that Professor Shapiro did not present a logical, mathematical
or statistical justification for this adjustment. Rather, he instead
multiplied the effect of the treatment four times over, a multiple that
he testified--in decidedly imprecise language--``[REDACTED]'' 8/19/20
Tr. 2704-27 (Shapiro).
In response, Pandora claims that Professor Shapiro never claimed
there was a correlation between the impact of the non-disclosure of the
label suppression and the parameters of the confidence interval.
Services RPFFCL ] 955. But to the Judges, that response merely
underscores SoundExchange's broader criticism--no aspect of the data
arising from the LSEs addresses this non-disclosure problem.
Accordingly, the Judges are in agreement with the criticism
levelled by SoundExchange. The mere fact that Professor Shapiro moved
in the direction of greater listening loss by relying on the results at
the upper end of the 95% confidence interval is undeniably uncorrelated
with the real-world effects of third-party disclosure of the existence
of the blackout of a label. As the record testimony and evidence
discussed above demonstrates, Pandora proffered no evidence to counter
the argument that such a blackout would likely lead to the cratering of
Pandora's listener base, making even Professor Shapiro's quadruple
adjustment meaningless.\297\
---------------------------------------------------------------------------
\297\ And, as noted elsewhere in this Determination, for the
same reasons, the Judges find that the likely real-world
disclosures--from multiple interested sources--of an interactive
service's blacking-out of a Major would cause a rapid collapse of
the interactive service as well ([REDACTED]).
---------------------------------------------------------------------------
ii. Conclusion Regarding the LSEs and the Implication for Professor
Shapiro's N-I-N Model
For all of the foregoing reasons, the Judges cannot rely on the
LSEs to support Professor Shapiro's calculation of his input ``L'' in
his N-I-N model), i.e., the percentage of those performances that would
be lost to other forms of listening in the absence of a license from
the record company. The failure (or inability) of the LSEs to address
the effects of third-party motivated disclosure over the longer-term of
the existence of the blackouts on Pandora's listenership, is alone a
fatal defect in the LSEs. The other defects catalogued above constitute
a further metaphorical ``death by a thousand cuts,'' further supporting
the Judges' decision to put no weight on the results of the LSEs. The
Judges are in agreement with Professor Willig's testimony that, after
considering the foregoing issues, Professor Shapiro's parameter ``L''
is flawed because it is based on unreliable data from the LSEs. Willig
WRT ]] 22-27); 8/5/20 Tr. 351-53, 570-74 (Willig) (LSEs are
``absolutely not'' a reliable source of evidence for use in economic
analysis).
Because a useful input ``L'' is a sine qua non of Professor
Shapiro's opportunity cost calculation within his N-I-N Model, the
Judges' decision to reject the calculation of that value (which was
intended to show that any one Major is not a ``Must Have'') renders
Professor Shapiro's N-I-N Model unusable.\298\
---------------------------------------------------------------------------
\298\ Accordingly, the relative merits and criticisms of the
other aspects of Professor Shapiro's N-I-N Model are moot.
---------------------------------------------------------------------------
3. Professor Shapiro's Myerson Value Model
In his rebuttal testimony, Professor Shapiro utilizes what he
described as a ``Meyerson Value'' modeling, developed by the economist
Roger Myerson, which Professor Shapiro claims is a superior to
Professor Willig's ``Shapley Value'' approach as a form of analysis in
this proceeding. More particularly, Professor Shapiro testifies that
Myerson Value modeling is similar in nature to the Shapley Value, and
in fact can generate values equal to those produced by Shapley Value
modeling in certain circumstances. Here, however, Professor Shapiro
maintains that the two values depart from one another. The reason for
the different outcomes is that the Myerson Value is applicable when
there are ``contract externalities,'' a complication that is not
addressed in Shapley Value modeling. Shapiro WRT at 32. By ``contract
externalities,'' Professor Shapiro is referring to a situation where,
in the present context, any one notional licensing agreement reached by
a Major record company with a noninteractive service would affect the
agreements reached by that noninteractive service with the other two
Majors. Shapiro WRT at 59.
Professor Shapiro opines that these ``contract externalities''
would occur if the repertoire of each Major was not a ``Must Have'' for
a noninteractive service.\299\ In this regard, he acknowledges that,
for his Myerson Value approach to be relevant (as with his N-I-N model)
the Judges would need to find that the Majors are not ``Must Have''
licensors for noninteractive services. See 8/19/20 Tr. 2755-56
(Shapiro) (acknowledging that the differences between the Shapley Value
modeling results and the Myerson Value modeling results would be
relatively small if the Majors are indeed ``Must Haves'' for
noninteractive services). Applying this model, Professor Shapiro
generates an ad-supported rate of $0.00146 per play, and a subscription
rate of $0.00155 per play. Shapiro WRT at 63.
---------------------------------------------------------------------------
\299\ See Shapiro WRT at 63-64. The external effect is that
Major ``A'' must consider the possibility that agreements between
Major ``B'' and/or ``C,'' on the one hand, and the noninteractive
service, on the other, could result in Major ``A's'' inability to
enter into a license agreement with that noninteractive service
unless Major ``A'' reduced its royalty demand in order to avoid
being the ``odd man out.'' But, each Major would be in the same
position during negotiations, so each Major has the incentive to
avoid this ``contract externality'' by proposing a lower rate than
it would in the absence of this bargaining uncertainty.
---------------------------------------------------------------------------
The dispositive defect in Professor Shapiro's Myerson Value
modeling is that it too requires the application of the results from
the LSEs to demonstrate that no one Major is a ``Must Have,'' and that
bi-lateral negotiations within the model would account for this
situation. But, as noted above in the Judges' discussion of Professor
Shapiro's N-I-N model, an approach that is dependent upon a finding
that the Majors are not ``Must Haves'' for a noninteractive service is
in conflict with the Judges' finding that such a ``Must Have''
condition exists. Accordingly, the Judges decline to apply Professor
Shapiro's Myerson Value modeling and results.
D. Evaluation of NAB Proposal for a Separate Rate for Commercial
Simulcasters
The NAB participated in this proceeding on behalf of commercial
radio stations that simulcast their over-the-air broadcasts on the
internet. In this proceeding, the Judges focus on the internet
transmissions of these broadcasters.
The NAB argues that commercial simulcasting (simulcasting) is
distinct from other forms of commercial statutory webcasting. Given the
[[Page 59547]]
purported differences, the NAB advocates for a separate (lower) rate
for simulcasters than for other eligible nonsubscription transmissions
by webcasters. The NAB maintains that simulcasting constitutes a
distinct submarket in which buyers and sellers would be willing to
agree to lower royalty rates than their counterparts in the commercial
webcasting market. It proposes a statutory rate of $0.0008 per play for
simulcasts and $0.0016 for other eligible nonsubscription
transmissions. NAB PFFCL ] 10. The NAB's proposal defines a simulcast
transmission as ``a public performance of a sound recording by means of
the simultaneous or near-simultaneous retransmission, as part of an
eligible nonsubscription transmission, of the same sound recording
included in a `broadcast transmission,' as the term is defined in 17
U.S.C. 114.'' NAB Proposed Rates and Terms at 8.
The NAB broadly contrasts simulcasting with custom radio services,
which, it asserts, are standalone products, untethered to a
corresponding radio broadcast. Leonard WDT ] 33. It indicates that
custom radio provides a personalized experience that reflects a
specific user's preferences. Leonard WDT ] 33; 8/18/20 Tr. 2430-31
(Tucker); see also 8/13/20 Tr. 1819 (Orszag). The NAB adds that such
services also permit more interactivity than simulcasts, such as
seeding stations, skipping to another song, and thumbing up or down,
all of which curate the listening experience. 8/24/20 Tr. 3427
(Leonard); Leonard WDT ] 49; Leonard WRT ]] 41-47.
Dr. Leonard, whom the NAB engaged to analyze the appropriate
statutory royalty for public performance rights for sound recordings
for webcasting under the Section 114 license and to evaluate the NAB's
proposal regarding that statutory royalty, set out three types of
webcasting services subject to the Section 114 license: Simulcast,
Custom Radio, and internet Radio. Leonard WRT ]] 32-35. His stated
criteria for simulcasts tracks closely to the proposed regulatory
definition offered by the NAB. Dr. Leonard characterized custom radio
as a service that ``streams music to listeners over the internet
without any simultaneous terrestrial broadcast. Unlike simulcasts,
custom radio is a `one to one' stream, with a particular listener
receiving an individualized stream reflecting his or her expressed
preferences, subject to the limitations on `interactivity' imposed by
the Section 114 license, as interpreted by U.S. courts.'' Leonard WRT ]
33.
He characterized internet radio as ``a `native digital' service
[that] does not involve the retransmission of a terrestrial
broadcast.'' Leonard WRT ] 34. He went on to state that internet radio
is more similar to custom radio than to simulcast and that, while
internet radio stations do not vary the music played based on an
individual listener's preferences, such services nonetheless often
feature greater user functionality than simulcast, such as allowing
listeners to pause and skip songs. He also maintained that internet
radio services do not feature much non-music or localized content, nor
are they subject to FCC regulation or public interest requirements. He
also asserted that internet radio services are not a significant part
of the streaming market and noted that his report does not treat
internet radio services as distinct from custom radio services. Leonard
WRT ] 35.
As the proponent of a rate structure that treats simulcasters as a
separate class of webcasters, the NAB bears the burden of demonstrating
not only that simulcasting differs from other forms of commercial
webcasting, but also that it differs in ways that would cause willing
buyers and willing sellers to agree to a lower royalty rate in the
hypothetical market. Web IV, 81 FR at 26320. As discussed below, based
on the record in the current proceeding, the Judges find that the NAB
has not satisfied that burden. Therefore, the Judges do not adopt a
different rate structure for simulcasters than that which applies to
other commercial webcasters.
1. History
No prior rate determination has treated simulcasters differently
from other webcasters. In Web I, the Librarian, at the recommendation
of the Register, rejected a CARP report that set a separate rate for
retransmission of radio broadcasts by a third-party distributor and
adopted a single rate for commercial webcasters. 67 FR at 45252.\300\
---------------------------------------------------------------------------
\300\ The Librarian also rejected arguments that broadcasters
who stream their own radio broadcasts should be treated differently
from third parties who stream the same broadcasts. Id. at 45254.
---------------------------------------------------------------------------
In Web II, the Judges rejected broadcasters' arguments that rates
for simulcasting should be different from (and lower than) royalty
rates for other commercial webcasters. 72 FR 24084, 24095 (May 1,
2007), aff'd in relevant part sub nom. Intercollegiate Broad. Sys. v.
Copyright Royalty Bd., 571 F.3d 69 (D.C. Cir. 2009) (Web II).
The NAB reached a WSA settlement with SoundExchange prior to the
conclusion of Web III covering the remainder of the Web II rate period
and all of the Web III rate period. At the request of the NAB and
SoundExchange, the Judges adopted the settlement as statutory rates and
terms binding all simulcasting broadcasters. See 75 FR 16377 (April 1,
2010). Consequently, simulcasters did not participate in the Web III
proceeding, in which the Judges determined rates for ``all other
commercial webcasters.'' Although the Judges did not determine separate
rates for simulcasters in Web III, because the Judges adopted the NAB
settlement, simulcasting broadcasters paid different rates than
webcasters that operated under the rates determined by the Judges.
In Web IV, the Judges also rejected broadcasters' arguments that
rates for simulcasting should be different from (and lower than)
royalty rates for other commercial webcasters. 81 FR at 26323.
2. Proposed Benchmark Agreements
In the current proceeding, the NAB offered proposed benchmark
agreements in support of its rate proposal, supplemented by an
alternative economic analysis. The NAB offered different types of
voluntary agreements in support of its proposal: Direct license
agreements between sound recording rights owners and webcaster iHeart
and license agreements for musical compositions between performing
rights organizations and webcasters Pandora and iHeart.
a. The iHeart/Indie Agreements
The NAB sets forth as proposed benchmarks a set of 16 renewed
direct license agreements between iHeart and independent (``indie'')
record labels that include rights for simulcasting and other
webcasting. Exs. 2013-2026, 2081-2082 (the iHeart/Indie Agreements).
The NAB's economist, Dr. Leonard, accurately indicated that the terms
and conditions of iHeart's direct deals with indies are generally
consistent across all of these agreements. Leonard WDT ] 63. The NAB
argues that these agreements provide insight into how willing buyers
and willing sellers license simulcast and custom radio streams on
different terms. 8/24/20 Tr. 3355 (Leonard); Leonard WDT ] 65; Trial
Ex. 2154 ] 14 (WDT of James Russell Williams III (``Tres Williams''))
(Williams WDT).
The NAB maintains that the iHeart/Indie Agreements are the only
willing buyer/willing seller agreements offered by any participant that
are between statutory services and sound recording companies for the
same rights at issue under the section 114/112 licenses. 8/24/20 Tr.
3375-76 (Leonard); see also id. at 3355; Leonard WDT ] 65. Dr.
[[Page 59548]]
Leonard focused his analysis on the renewal agreements because he
concluded that these agreements indicate that the effective per-play
rates under those agreements were acceptable to both parties and that
the iHeart-Indie benchmarks are the best evidence of a willing buyer/
willing seller transaction at the effective per-play rates that
predated the renewal. Leonard WRT ] 50; Leonard WDT ] 65; 8/24/20 Tr.
3357-58.
The NAB argues that the iHeart/Indie Agreements reflect licensors'
views of the relative promotional and substitutional considerations
associated with licensing iHeart's simulcast and custom radio services
and generate average rates below the statutory rate. Leonard WDT ] 71,
75. In the NAB's view, the indie labels' willingness to accept below-
statutory rates was motivated by steering, including both the ability
to garner more plays of the indies' catalogs and special relationships
with top programmers at iHeart. 8/31/20 Tr. 4538-39; 4542-43
(Williams).
SoundExchange asserts that the iHeart/Indie Agreements are not a
reliable or appropriate benchmark. It points out Dr. Leonard's
acknowledgement that the iHeart/Indie Agreements account for only
[REDACTED]%, [REDACTED]%, and [REDACTED]% of iHeart's total simulcast,
custom radio, and webcast performances, respectively. Leonard WDT ] 72
& app. A4. SoundExchange maintains that the scope of these licenses
makes them insufficiently representative to serve as persuasive
benchmarks, citing the Judges' decision, in SDARS III, not to use as a
benchmark a far larger number of direct licenses with indie record
labels, 500 direct licenses representing 6.4% of the tracks on Sirius
XM playlists because they were not representative of the market. SDARS
III, 83 FR at 65249.
SoundExchange also criticizes the persuasiveness of the iHeart/
Indie Agreements because the agreements [REDACTED] 8/24/20 Tr. 3492
(Leonard). SoundExchange adds that all but two of the agreements
[REDACTED]. Orszag WRT ] 59. SoundExchange also maintains that under
the iHeart/Indie Agreements, iHeart had little incentive to steer plays
toward the contracting indie labels' content. It cites to Dr. Leonard's
acknowledgment that broadcasters' choice of content is driven not by
simulcasting but by terrestrial radio choices and the considerations
there. 8/24/10 Tr. 3503 (Leonard).\301\ SoundExchange adds that
[REDACTED]. SX PFFCL ]] 1181-1182; Orszag WRT ] 59.
---------------------------------------------------------------------------
\301\ 17 U.S.C. 114(g)(2) requires that SoundExchange distribute
50% of collected license fees to the copyright owner of a sound
recording, 45% to recording artist or artists featured on such sound
recording, and the remaining 5% to independent administrator that
represents non featured musicians and vocalists who have performed
on sound recordings.
---------------------------------------------------------------------------
SoundExchange asserts that the iHeart/Indie Agreements do not fully
account for the economic value of simulcasting to the parties. It
maintains that the indie labels that entered into the iHeart/Indie
Agreements received several other benefits not available under the
statutory license in exchange for accepting a lower royalty rate.
Orszag WRT ] 62. It asserts that these motivating factors serve as key
differentiators between direct license agreements and the statutory
environment and that taking royalty rates from direct licenses at face
value would distort the estimate of overall market rates. Orszag WRT ]
68.
SoundExchange indicates that the labels entering into the iHeart/
Indie Agreements were motivated by [REDACTED]. Orszag WRT ]] 65. The
agreements include payments that are characterized [REDACTED]. See,
e.g., Trial Ex. 2013 ]] 1(j), 1(g)(g), and 4(a)(i) The U.S. copyright
law confers no exclusive right of public performance by means of
terrestrial radio transmissions for sound recording copyright owners.
Mr. Orszag [REDACTED] Orszag WRT ]] 66. Mr. Orszag argued that a label
whose catalog performs better on terrestrial radio than it does on
simulcasting or custom webcasting might expect [REDACTED]. Id. He added
that several indie labels generally [REDACTED], or [REDACTED]. Orszag
WRT ]] 66 n.139. Mr. Orszag also indicated that in addition to the
financial benefits, this [REDACTED] served as an [REDACTED]. Id. ] 65;
8/31/20 Tr. 4606-07 (Williams) (acknowledging that ``[REDACTED]'').
SoundExchange also argues that the labels entering into the iHeart/
Indie Agreements direct license were motivated by royalties for pre-
1972 catalog, something the labels were not otherwise entitled to prior
to the passage of the Music Modernization Act in 2018. Orszag WRT ]]
67.
SoundExchange notes that the iHeart/Indie Agreements enabled indie
labels to both avoid deduction of SoundExchange's administrative fee
and capture the full amount of royalties owed by iHeart, without any
mandatory share of royalties under the iHeart/Indie Agreements going
directly through SoundExchange to featured or non-featured performing
artists, as would have been the case under the statutory license. 8/13/
20 Tr. 1852-53 (Orszag); Orszag WRT ] 63. The NAB elicited testimony
from Mr. Orszag indicating that he was aware of only one of the indie
labels that agreed to the iHeart/Indie Agreements, [REDACTED], which
primarily focuses on budget classical music, that [REDACTED]. 8/13/20
Tr. 1853 (Orszag). Mr. Orszag indicated that one of the indie labels
that agreed to the iHeart/Indie Agreements, [REDACTED], may still
employ splits with certain artists, equal to or proximate to the 50/50
split due to performing artists under the statutory license. However,
he did not represent that he knew know all of [REDACTED]'s deals with
its artists, or the share of royalties that artists may be due. 8/13/20
Tr. 1855-57 (Orszag).\302\
---------------------------------------------------------------------------
\302\ The iHeart/Indie Agreements include substantially similar
language indicating that the relevant label ``[REDACTED].''
All but one of the iHeart/Indie Agreements, the [REDACTED]
Agreement, Trial Ex. 2027, went on to clarify that ``[REDACTED]''
See, e.g., [REDACTED] Agreement, Trial Ex. 2013 ] 4b.
---------------------------------------------------------------------------
b. The PRO Agreements
The NAB offers agreements licensing public performance rights in
musical works to webcasters as a providing evidence to reinforce the
conclusion that simulcast should receive a lower royalty rate than
custom radio. Leonard WDT ] 83, 89. The NAB argues that agreements
between performance rights organizations and webcasters indicate that
simulcast and custom radio exist as distinct products subject to
different rates in voluntary agreements. 8/24/20 Tr. 3389-91 (Leonard);
Leonard WDT ] 81.
Dr. Leonard referenced a 2017 ASCAP Radio Station License Agreement
with iHeart. He represented that the license includes coverage for
simulcasts and certain non-simulcast webcasts but excludes coverage for
custom radio webcasts that offers music programming customized for any
specific user or enables a user to provide feedback to customize the
music programming made available to such specific user. Leonard WDT ]]
85-86. Dr. Leonard maintained that this ASCAP license is informative
because: The radio stations licensees offering simulcast services are
the same licensees at issue in this proceeding; the license covers
analogous rights, for performance of musical compositions as compared
to performance of sound recordings; the license covers simulcast and
non-simulcast (non-custom) internet radio, [REDACTED]; the agreement is
a transaction negotiated under the competitive protections of the ASCAP
antitrust consent decree; and it functions as an industrywide
agreement.
[[Page 59549]]
Leonard WDT ] 87. Dr. Leonard testified [REDACTED], so he compared the
ASCAP license's percentage of revenue rate for simulcasts with an
effective Pandora royalty, which he calculated as a percentage of
revenue. Leonard WDT ] 88; 8/24/20 Tr. 3390 (Leonard). His analysis
indicated that the ratio of the ASCAP royalty rate as a percentage of
revenue for simulcast to the ASCAP royalty rate as a percentage of
revenue for Pandora ranges from 38% to 48%. Leonard WDT ] 88.
Dr. Leonard represented that BMI has offered to the Radio Music
License Committee \303\ a percentage of revenue royalty rate for
terrestrial broadcasts simulcast and certain limited non-simulcast non-
custom streaming. He maintained this is an indication that BMI treats
simulcasting as equivalent to radio stations' terrestrial broadcasts.
Leonard WDT ] 89. He also acknowledges that the RMLC did not request
and BMI did not offer a rate for custom radio. Leonard WDT ] 90. Dr.
Leonard also indicated that a group of radio stations represented by
the RMLC entered into licenses with the PRO SESAC covering the period
from January 1, 2016 to December 31, 2018 that provided a percentage of
revenue royalty rate for terrestrial broadcasts and simulcast. Leonard
WDT ] 91.
---------------------------------------------------------------------------
\303\ The Radio Music License Committee represents the interests
of the commercial radio industry on music licensing matters.
---------------------------------------------------------------------------
The NAB also argues that litigation with ASCAP and BMI over the
royalty rates it was required to pay to those PROs for its custom radio
product indicates that custom radio services are not similarly situated
to radio stations' product, and that the two services are not
``similarly situated'' under the ASCAP consent decree but are
``different types of services.'' SX PFFCL ]] 90-91; see In re Pandora
Media, Inc., 6 F. Supp. at 320; BMI v. Pandora Media, Inc., 140 F.
Supp. 3d 267, 270 (S.D.N.Y. 2015).
SoundExchange counters the NAB's arguments regarding the PRO
agreements by asserting that it is not informative that custom
webcasting is generally licensed separately and at a higher rate
because licensees pay the PROs on a percentage of revenue basis. 8/24/
20 Tr. 3534-35 (Leonard). SoundExchange notes that Dr. Leonard
acknowledges that radio broadcasters typically play less music per hour
than custom webcasters, and the percentage-of-revenue rates paid to the
PROs by simulcasters would reasonably be lower than the rates paid to
the PROs by custom webcasters. See, e.g., Leonard WDT ] 39 & app. C2-
C18; see also 8/24/20 Tr. 3535-36 (Leonard); Orszag WRT ] 48.
SoundExchange maintains that the different intensities of music use
explain the different effective percentage of revenue rates in PRO
agreements for simulcast and custom radio. Orszag WRT ]] 50-51.
SoundExchange adds that the NAB did not actually submit into the
record any operative agreement between any PRO and any webcaster that
covers custom radio and that NAB's claimed evidence about what custom
radio pays is from unseen agreements between Pandora and two PROs is
inadequate. SX PFFCL ]] 1096-97; 8/24/20 Tr. 3541, 3542 (Leonard).
SoundExchange argues that Dr. Leonard does not know what the agreements
may actually say and he cannot say whether the rates for custom
webcasting reflect potential tradeoffs on other terms. SX PFFCL ]]
1097-99. SoundExchange adds that Dr. Leonard admitted that he did not
know if there were such tradeoffs or how they were negotiated because
he had not actually seen the agreements. 8/24/20 Tr. 3542, 3551
(Leonard).
SoundExchange then argues that the definitions regarding
``similarly situated'' licensees in the ASCAP and BMI consent decrees
include factors that are distinct from the provisions of 17 U.S.C.
114(f)(1)(B). SoundExchange maintains that the differences between the
consent decrees and the statute explain why PROs treat custom radio
differently from broadcast and simulcast. It notes that the ASCAP
consent decree expressly identifies, ``the nature and frequency of
musical performances'' as a factor to identify whether services are
similarly situated, and states that similarly situated services ``use
music in similar ways and with similar frequency.'' SX RPFFCL (to NAB)
] 102, citing United States v. ASCAP, No. 41-1395 (WCC), 2001 WL
1589999, at *3 (S.D.N.Y. June 11, 2001).
3. Conclusions Regarding Benchmark Evidence for Simulcasting as
Distinct From Other Forms of Statutory Webcasting
a. iHeart/Indie Agreements
Based on the entirety of the record, the Judges do not accept the
iHeart/Indie Agreements as sufficiently probative of the relevant
market to accept them as meaningful or persuasive benchmarks, or
therefore as adequately persuasive to establish a separate rate for
simulcasting. Importantly, these direct licenses cover only a small
portion of the sound recordings performed by iHeart, and an even
smaller portion of the entire market for simulcast, custom radio, and
internet radio performances. The Judges also find that the record is
insufficiently informative as to the effect of steering on the agreed
upon royalty rates because none of them contain [REDACTED]. In
addition, because U.S. copyright law confers no exclusive right of
public performance by means of terrestrial radio transmissions for
sound recording copyright owners, or prior to passage of the MMA a
right to royalties for pre-1972 sound recordings, the Judges have
misgivings regarding the extent to which the royalties under the
agreements accurately reflect the myriad of motivations, and value
received, for labels to enter into them. In sum, the characterization
of part of the compensation in these agreements [REDACTED] is suspect,
as it is not economically rational for a licensee to pay a royalty for
an activity for which no license is required. The NAB has not sustained
its burden to provide an adequate basis in evidence or economic theory
that would permit the Judges to allocate this compensation
accurately.\304\
---------------------------------------------------------------------------
\304\ While Dr. Leonard's analysis of the iHeart/Indie
Agreements offered adjustments that considered allocating various
levels of revenue [REDACTED]. The Judges would need further evidence
to determine whether and the extent to which, as an economic matter,
[REDACTED] should be treated as compensation for simulcasting, in
contrast to custom webcasting.
---------------------------------------------------------------------------
The Judges find that SoundExchange offered compelling indications
that the indie labels that entered into the iHeart/Indie Agreements
were motivated by non-monetary benefits that undermine the application
of the agreements as reliable benchmarks. The Judges find that the NAB
did not adequately counter or account for these concerns.
SoundExchange also raised legitimate concerns that several indie
labels generally [REDACTED], or [REDACTED], on the [REDACTED] of the
direct licenses across multiple monthly royalty statements, thus
skewing the motivations of the Indie labels, especially in the context
of payments for unrecognized rights under U.S. copyright law. The NAB
did not present the Judges with adequate evidence to address or account
for these legitimate concerns.
The Judges observe, and find concern with the fact that while the
NAB's proposal seeks to contrast simulcasting with all other statutory
webcasting, the NAB chose to more consistently draw a contrast between
simulcasting and custom radio services, by treating internet radio,
without adequate justification, as indistinct from custom radio. The
Judges find that this conflating of internet radio and custom
[[Page 59550]]
radio services was not adequately supported by the record evidence, and
that therefore the proper comparison between simulcasting and all other
statutory commercial webcasting was insufficiently established.\305\
---------------------------------------------------------------------------
\305\ The Judges also observe, but do not necessarily rely upon,
the apparent ability of the [REDACTED]. While there was an
indication that some labels and artists agreements, in particular a
notably successful recording artist group, may employ artist share
splits equal to or proximate to the 50% share due to performing
artists under the statutory license, the Judges have sparse
indication regarding the range or frequency of actual artists'
shares that may be equal to or proximate to the statutory 50/50
split. The Judges also note that the [REDACTED] Agreements
[REDACTED]. See e.g., [REDACTED] Agreement, Ex 2013, ] 4b. This is
in contrast to at least one other agreement in evidence covering
webcasting uses eligible for the 114 statutory license, the 2016
Pandora/UMG agreement, which indicates an obligation for UMG to
``[REDACTED],'' Ex 5013, SOUNDEX_W5_000010111.
---------------------------------------------------------------------------
b. PRO Agreements
Based on the entirety of the record, the Judges find that evidence
regarding agreements between performance rights organizations and
webcasters is insufficiently persuasive to establish that simulcast and
custom radio exist as distinct products subject to different rates in
voluntary agreements. As an initial matter, the Judges note that PRO
negotiations and agreements cover different rights, and involve
different parties from those at issue in this proceeding. It is also
relevant that the rights at issue are often subject to detailed on-
going government oversight via consent decrees. The Judges are in
agreement with SoundExchange that the definitions regarding ``similarly
situated'' licensees in the ASCAP and BMI consent decrees include
factors that are distinct from the provisions of 17 U.S.C.
114(f)(1)(B).
In addition, the Judges find it troubling that the NAB did not
actually submit into the record any operative agreement between any PRO
and any webcaster that covers custom radio. The Judges find the NAB's
claimed evidence about what custom radio pays, purportedly derived from
unseen agreements between Pandora and two PROs, to be inadequate and
unreliable. SoundExchange correctly points out that neither the NAB nor
the Judges can know what the agreements actually say, and whether the
agreements may reflect tradeoffs on other terms.
4. Qualitative Arguments Regarding a Separate Rate for Simulcasters
In addition to its proposed benchmarks, the NAB offers several
qualitative arguments why willing buyers and sellers would agree to
lower simulcasting rates. For the reasons set forth below, and based on
the entirety of the record, the Judges are not persuaded that the
offered qualitative arguments sufficiently establish that willing
buyers and sellers would agree to separate, lower simulcasting rates.
a. Degree of Interactivity
The NAB argues that simulcasters should pay a lower royalty because
simulcast transmissions are among the least interactive form of
webcasting. NAB PFFCL ]] 147-153. It asserts that in establishing a
digital performance right for sound recordings and the statutory
license at issue, Congress recognized that ``interactive services are
most likely to have a significant impact on traditional record sales''
while noninteractive services were more promotional and less
substitutional. NAB PFFCL ] 148 (citing H.R. Rep. No. 104-274, at 14).
The NAB suggests that this legislative history indicates Congress's
recognition that a service's interactivity is a good proxy for its
ability to substitute or interfere with other streams of revenue.
Leonard WDT ] 49. It points to the Copyright Office's recognition that
``it may be appropriate [for the Judges] to distinguish between custom
and noncustom radio, as the substitutional effect of personalized radio
on potentially competing interactive streaming services may be greater
than that of services offering a completely noncustomized experience.''
NAB PFFCL ] 149 (citing Copyright and the Music Marketplace, supra at
178). The NAB also offers the testimony of Aaron Harrison, Senior Vice
President, Business and Legal Affairs of UMG Recordings, who agreed
that typically ``[REDACTED]'' 9/3/20 Tr. 5691 (Harrison).
As a record company executive, Mr. Harrison's testimony provides
some evidence that record companies [REDACTED] because those services
are less likely to displace sales of sound recordings. However, the
value of his statements for determining whether a differential rate is
justified for simulcasters is limited. First, Mr. Harrison was not
addressing specific negotiations or transactions. Second, the series of
questions Mr. Harrison was responding to were focused on additional
functionality of directly licensed interactive services. 9/3/20 Tr.
5690-92 (Harrison). Mr. Harrison clarified this in his testimony
stating his understanding that UMG has only licensed ``[REDACTED].'' 9/
3/20 Tr. 5691 (Harrison).
While the NAB posits that simulcasting is less interactive than
custom webcasting, it has not established that simulcasting, as a rule,
is materially less interactive than the full scope of noninteractive
webcasting, all of which would be subject to the general commercial
webcasting rates. The statutory license is available to services that
offer a continuum of features, including various levels of
interactivity, which are offered in a manner consistent with the
license. While the Judges recognize, as have others, that a variety of
factors may support a separate rate, on the record before them, the
Judges find insufficient basis for parsing the interactivity across
statutory services as proposed, or to set a customized rate structure
among categories of commercial webcasters based on statutorily
permissible levels of interactivity.
b. Promotional Effect
The record includes numerous statements concerning the specific
promotional value to copyright owners of terrestrial radio plays for
stimulating revenue for sound recordings, thus leading to a licensee's
willingness to accept lower rates for such plays. See, e.g., 9/3/20 Tr.
5734 (Harrison); Trial Ex. 2153 at 7-19 (WDT of Tom Poleman) (Poleman
WDT); 9/9/20 Tr. 5944 (Sherwood); Leonard WRT ]] 97-101. The record
also indicates that characteristics that enhance promotional value
include tight playlists with limited recordings and repeated plays of
recordings on those playlists. Additionally, the record includes some
indication that labels may not distinguish the between terrestrial
radio versus simulcasting in terms of promotional benefit. Poleman WDT
]] 7; 8/27/20 Tr. 4418-19.
The bulk of the evidence is persuasive that labels perceive a
distinct promotional value in over the air radio play of their
recordings, including participation in certain promotional programs and
opportunities to enhance their ability to leverage promotional plays on
terrestrial radio, with some necessary tie-in to simulcast plays.
However, the record provides little persuasive indication that labels
similarly, affirmatively, seek plays over simulcasts for purposes of
promotion. The indications that labels may not distinguish the between
terrestrial radio versus simulcasting in terms of promotional benefit
is reasonably indicative that labels simply do not consider the
promotional value of simulcasts (which reaches a relatively small
number of listeners) in their pursuit of the promotional value of
terrestrial radio plays. The NAB fails to analyze adequately the degree
to which labels assign promotional value, or take actions motivated by
promotional value
[[Page 59551]]
of simulcasts in relation to the promotional value labels seek via
terrestrial plays.
c. The Value of Non-Music Content as a Differentiator
The NAB points to simulcasts' differentiated use of music versus
non-music content, compared to custom radio, which is geared more
toward music content. NAB PFFCL ]] 165-167. It sets forth that
terrestrial radio and simulcasters play relatively few songs compared
to custom radio services. NAB PFFCL ] 167; Leonard WDT ] 47; 8/24/20
Tr. 3427:3-8 (Leonard) (``[terrestrial broadcasters and simulcasters]
use forms of non-music content to compete in the marketplace . . . in
contrast, a custom radio station is basically 100 percent music.''). It
adds that terrestrial radio and simulcasters play relatively small
catalogs of songs compared to custom radio services and that as a
result any particular sound recording is not significantly important
for the transmitted programming. NAB PFFCL ] 167; 9/3/20 Tr. 5734
(Harrison); Leonard WDT ] 45. The NAB also offers that radio stations
receive the most ad revenue during parts of the day where they play the
least music, as an indication that terrestrial radio and simulcasters
value non-music content less. 8/24/20 Tr. 3429-31 (Leonard). It also
suggests that audience surveys and proposed benchmark agreements
(addressed above) indicate that listeners place a relatively high value
on non-music content. The NAB maintains that taken together this
``evidence suggests music content has less value per minute, and
therefore less value per-play, on simulcast than on custom radio.'' NAB
PFFCL ] 172.
Like the NAB's proposed analysis of promotional value, its
arguments regarding differentiated use of music versus non-music
content by terrestrial radio and simulcasters compared to custom radio
are insufficient. Both analyses fail adequately to address the relative
motivations behind programming choices as they may apply to terrestrial
radio versus simulcasting, and extent to which each transmission method
plays a role in programming choices. Additionally, the bulk of the
evidence and analysis regarding differentiated use of music versus non-
music content involves comparison of simulcasts and custom radio, the
latter of which is merely a subset of other eligible nonsubscription
transmissions. This type of evidentiary comparison does not match with
the proposal to differentiate rates between simulcast and all other
eligible nonsubscription transmissions. While the NAB posits that
simulcasts are able to differentiate by use of non-music content and
that simulcasters play relatively few songs compared to custom radio,
it has not adequately established that simulcasting, as a rule, is
materially less music intensive than the full scope of noninteractive
webcasting, all of which would be subject to the general commercial
webcasting rates.
d. Competition With Other Commercial Webcasters
SoundExchange argues that simulcasters and other commercial
webcasters compete for listeners and revenue in the same submarket and
therefore should be subject to the same rate. It cites to numerous
statements in government filings submitted by broadcasters and the NAB
in support of this position. See, e.g. NAB 2018 comments filed with the
FCC (Trial Ex. 5472) (acknowledging radio broadcasters have myriad
competitors for streaming audiences); Cumulus Media, Inc. December 31,
2019 SEC filing Form 10-K (Trial Ex. 3042) at 8 (discussing competition
with various digital platforms and services, including streaming music
and other entertainment services for both listeners and advertisers).
Additionally, SoundExchange points to internal NAB and iHeart documents
indicating that broadcasters view digital music services as
competitors. See, e.g. NAB Board Meeting Minutes from January 29, 2018
(Trial Ex. 5196) at 3 (discussing ``[REDACTED]''). SoundExchange also
offers evidence that certain webcasters affirmatively seek to compete
with simulcasters as well as terrestrial radio, including [REDACTED].
Trial Ex. 5056 at 73. The Judges find these indications of mutual
competition between simulcasters and other commercial webcasters to be
a compelling indication that simulcasters and other commercial
webcasters operate in the same, not separate submarkets.
5. Survey Evidence Regarding Separate Rate for Simulcasters
a. The Hauser Survey
The NAB engaged Professor John Hauser to determine the degree to
which listening to simulcasts substitutes for various alternative
activities, the importance of different types of content to simulcast
listeners, and how much consumers listen to simulcasts. See Trial Ex.
2151 ]] 6-7, app. E (WDT of John Hauser) (Hauser WDT); 8/27/20 Tr.
4333-35 (Hauser). Professor Hauser's survey results are expressed as a
series of ``diversion ratios'' reflecting the percentage of respondents
that, in the absence of simulcasts, would consume content from the
potential alternative activities presented in the survey. Hauser WDT
app. R.
Professor Hauser indicated that his survey employed standard
scientific methods to maximize reliability. The method included
Screening Questions to ensure an appropriate target audience and
attention checks to verify that respondents read the survey questions
carefully. He also used a double-blind methodology and included
question and response options unrelated to the study's objective and
used filters and randomization of response options (when appropriate)
to avoid certain biases. Hauser WDT ]] 14, 22-24, 39.
After screening for the appropriate target sample audience, 536
respondents moved to the main survey. Of that group of qualified
respondents, 532 completed the survey. Professor Hauser testified that
this sample size was adequate to enable him to provide statistically
significant results. Hauser WDT ] 76.
In an introduction to the survey, the respondents were instructed
that ``There are various ways in which you can listen to content, some
of which are defined below. Please read these definitions carefully,
and keep them in mind when responding to questions in this survey.''
The descriptions of the listening options were:
Live AM/FM radio broadcasts through a radio: Live AM/FM radio is
broadcast locally, thus allowing listeners to listen to local
stations that may offer news, sports, weather, talk, and/or music
through an AM/FM radio that is portable, in the home, or built into
a car. Stations may broadcast programming created locally (e.g.,
morning shows with local traffic and weather), or nationally. Radio
stations may be not-for-profit (e.g., NPR, college radio stations)
or commercially supported by ad sales (commercial radio).
Live AM/FM radio broadcasts over the internet: Live AM/FM radio
broadcasts over the internet allow listeners to listen to the same
content through their computers or other internet-capable devices
that is simultaneously transmitted to AM/FM radios. Live AM/FM radio
broadcasts over the internet may be accessed by going to the website
or app of a radio station, or to the website or app for a platform
such as iHeartRadio or TuneIn.
Satellite radio (SiriusXM): Satellite radio is broadcast
nationwide via satellite, thus allowing listeners to listen to the
same stations anywhere in the country through a receiver that is
portable, in the home, or built into a car. Satellite radio is
available by subscription and offers commercial-free music as well
as sports, news, talk, and other programming. Satellite radio may
offer different stations that are not available on live AM/FM radio
broadcasts through a radio or over the internet.
On-demand music streaming services: On-demand music streaming
services allow
[[Page 59552]]
listeners to choose the specific song, artist, or playlist they wish
to hear, in addition to playlists provided by the service. These
services may be available for free with ads, or through a paid
subscription without ads. On-demand music streaming services include
Apple Music, ad-supported Spotify, Spotify Premium, Google Play
Music, and others.
Not-on-demand music streaming services: Not-on-demand music
streaming services do not allow listeners to choose the specific
song or artist they wish to hear, but instead provide a pre-
programmed list of songs based on listener preferences. The specific
planned selection and order of songs remain unknown to the listener
(i.e., no prepublished playlist). These services may be available
for free with ads, or through a paid subscription without ads. Not-
on-demand music streaming services include adsupported Pandora,
Pandora Plus, and others.
Hauser WDT app. D-6-7. At various points in the survey, respondents
were informed may click a link to review these definitions. See, e.g.
Hauser WDT app. D-11.
The first question in the main survey, Q1, asked respondents to
approximate the total number of hours they spent listening to live AM/
FM broadcasts from commercial radio stations over the internet over the
prior three days. Hauser WDT ] 93.
On average, respondents estimated that they spent 5.3 hours
listening to internet simulcasts of terrestrial commercial radio during
the past three days (approximately 1 hour per day). The median
respondent estimated spending four hours listening to internet
simulcasts of terrestrial commercial radio during the past three days--
approximately 1.5 hours per day. A total of 91.6 percent of the
respondents spent less than twelve hours over three days (i.e., four
hours per day) and 96.7 percent spent less than eighteen hours over
three days (i.e., six hours per day). Three respondents spent more than
ten hours per day and no respondents spent more than forty-eight hours
over the three-day period. The average estimated number of hours spent
listening to internet simulcasts of terrestrial commercial radio by day
of week ranged from 1.7 to 1.8 hours. Hauser WDT ]] 94-95.
The next question, Q2, asked respondents about the types of content
to which they listened on internet simulcasts of terrestrial commercial
radio. Respondents were prompted to select all of the offered types of
content to which they listened on internet simulcasts of terrestrial
commercial radio in the last three days. Hauser WDT ] 96. The offered
types of content were as follows:
--Music (all genres, e.g., pop country rock children's music religious
music)
--Sports (e.g., game broadcasts commentary)
--News weather and traffic
--Religion (nonmusic content, e.g., preaching education)
--Talk (e.g., live DJ commentary politics personal finance
--Comedy (e.g., sketch comedy stand up)
--Kids and family nonmusic content (e.g., educational programs)
--Other content. Please specify [TEXT BOX DO NOT ALLOW BLANKANCHOR GO
TO Q4 IF ONLY OTHER IS SELECTED ANCHOR]
--Don't know/Unsure [EXCLUSIVE ANCHOR] [IF ``DON'T KNOW/UNSURE'' IS
SELECTED GO TO Q4 OTHERWISE GO TO Q3]
Hauser WDT app. D-10.
On average, respondents indicated that they listened to 2.6 types
of content on internet simulcasts of terrestrial commercial radio in
the last three days. The breakdown was as follows: 413 respondents
(82.4 percent) selected music; 277 respondents (55.3 percent) selected
news weather and traffic; 248 respondents (49.5 percent) selected talk;
182 respondents (36.3 percent) selected sports; 89 respondents (17.8
percent) selected comedy; 34 respondents (6.8 percent) selected
religion; 32 respondents (6.4 percent) selected kids and family; and 2
respondents (0.4 percent) selected other content types. Hauser WDT ]
97.
Appendix O, displays a table of the results.
If respondents indicated that they listened to one or more types of
content in the past three days, they were next asked, in Q3, to
indicate the level of importance each type of content had for them,
choosing between ``not important,'' ``somewhat important,'' and ``very
important'' for each type of content. Hauser WDT ] 99.
A total of 256 (51.1 percent) indicated music was very important,
185 (36.9 percent) indicated news, weather and traffic was very
important, 123 (24.6 percent) indicated talk content was very
important, 99 (19.8 percent) indicated sports content was very
important, 45 (9.0 percent) indicated comedy was very important, 22
(4.4 percent) indicated religious content was very important, and 18
(3.6 percent) indicated that kids and family content was very
important. Hauser WDT ] 100.
Appendix P, displays a table of the results.
The respondents were then asked, in Q4, about options they would
consider in place of internet simulcasts as follows:
Now suppose that live AM/FM radio broadcasts from commercial
radio stations over the internet were not available for the next
five years. Assume that everything else would be available for the
next five years as it is now. Which of the following if anything
would you consider doing in place of listening to such broadcasts
over the internet during the next five years? The prices below are
examples and do not include promotional discounts taxes or fees. If
you are unable to say whether you would do or would not do a
particular activity please indicate this by choosing the `Don't know
Unsure' option. It is important that you do not guess.
Hauser WDT ]] 101-104, app. E, Q4
Then, in Q5, respondents were asked, out of the selected
consideration set, which option they would choose, as follows:
Continue to suppose that live AM/FM radio broadcasts from
commercial radio stations over the internet were not available for
the next five years. Assume that everything else would be available
for the next five years as it is now. Now think about the most
recent time you listened to live AM/FM radio broadcasts from
commercial radio stations over the internet. Please consider
situations similar to that time and the content you listened to at
that time. Which one of the following would you do in place of
listening to such broadcasts over the internet in similar situations
during the next five years. The prices below are examples and do not
include promotional discounts taxes or fees. If you are unable to
say which particular activity you would do please indicate this by
choosing the `Don't know/Unsure' option. It is important that you do
not guess.
Hauser WDT ]] 101-105, app. E, Q5.
Professor Hauser indicated that the consider-then-choose question
formulation served two functions. First, the question serves a filter.
Respondents cannot select a medium if they would not at least consider
it. By using such a filter, the survey avoids asking respondents to
guess about which medium they would choose. Second, Professor Hauser
represented that there is strong scientific evidence that consumers use
a two-stage consider-then-choose decision process when they make a
consumption decision, and that this format is more realistic and
provides a better representation of the decision processes that
consumers use. Hauser WDT ]] 102.
The options in Q4 and Q5 were as follows: \306\
---------------------------------------------------------------------------
\306\ The question presentation included informing respondents
that they may click a link to review the definitions for ``Live AM/
FM radio broadcasts through a radio'' ``Live AM/FM radio broadcasts
over the internet'' ``Satellite radio (SiriusXM)'' ``On-demand music
streaming services'' ``Not-on-demand music streaming services''.
See, e.g. Hauser WDT app. D-11.
(A) On-demand music streaming services in place of live AM/FM radio
---------------------------------------------------------------------------
broadcasts from commercial radio stations over the internet
[[Page 59553]]
[1] I would listen to on-demand music streaming service(s)
through the paid subscription(s) I already have (e.g., Apple Music,
Spotify Premium, Google Play Music).
[2] I would purchase new paid subscription(s) to on-demand music
streaming service(s) that I don't currently subscribe to (e.g., an
individual subscription to Apple Music, Spotify Premium, or Google
Play Music at $9.99 per month or $119.88 per year).
[3] I would listen to on-demand music streaming service(s) that
have ads and that I do not need to pay for (e.g., ad-supported
Spotify).
[4] I would listen to music on video site(s) that have ads and
that I do not need to pay for (e.g., ad-supported YouTube).
(B) Not-on-demand music streaming services in place of live AM/FM
radio broadcasts from commercial radio stations over the internet
[5] I would listen to not-on-demand music streaming service(s)
through the paid subscription(s) I already have (e.g., Pandora
Plus).
[6] I would purchase new paid subscription(s) to not-on-demand
music streaming service(s) that I don't currently subscribe to
(e.g., an individual subscription to Pandora Plus at $4.99 per month
or $59.88 per year).
[7] I would listen to not-on-demand music streaming service(s)
that have ads and that I do not need to pay for (e.g., ad-supported
Pandora).
(C) Satellite radio (Sirius XM) in place of live AM/FM radio
broadcasts from commercial radio stations over the internet
[8] I would listen to satellite radio through the paid
subscription I already have (Sirius XM).
[9] I would purchase a new paid subscription to satellite radio
that I don't currently subscribe to (e.g., a Sirius XM subscription
at $10.99 per month or $131.88 per year for ad-free music, $15.99
per month or $191.88 per year for ad-free music, news, traffic,
weather, and other content).
(D) Other ways of listening to live AM/FM radio broadcasts in place
of such broadcasts from commercial radio stations over the internet
[10] I would listen to live AM/FM radio broadcasts from
commercial radio stations through a radio.
[11] I would listen to live AM/FM radio broadcasts from not-for-
profit radio stations (e.g., NPR, college radio stations) through a
radio.
[12] I would listen to live AM/FM radio broadcasts from not-for-
profit radio stations (e.g., NPR, college radio stations) over the
internet.
(E) Owned or purchased audio in place of live AM/FM radio broadcasts
from commercial radio stations over the internet
[13] I would listen to digital music files or CDs that I already
purchased.
[14] I would purchase and listen to digital music files or CDs
that I don't currently own.
[15] I would listen to music obtained through peer-to-peer file
sharing or free download sites.
[16] I would listen to non-music digital content that I already
purchased or downloaded (e.g., podcasts, audiobooks).
[17] I would purchase or download and listen to non-music
digital content that I don't currently own (e.g., podcasts,
audiobooks).
(F) Television and video options in place of live AM/FM radio
broadcasts from commercial radio stations over the internet
[18] I would watch video content that I already purchased,
subscribe to, or have access to (e.g., movies, cable television,
Hulu, Netflix).
[19] I would purchase or subscribe to video content that I don't
currently own or subscribe to (e.g., movies, cable television, a
Hulu subscription at $5.99 per month or $71.88 per year, a Netflix
subscription at $8.99 per month or $107.88 per year).
[20] I would listen to music channels through my existing cable
or satellite television subscription (e.g., Music Choice).
(G) Print options in place of live AM/FM radio broadcasts from
commercial radio stations over the internet
[21] I would read print or online content that I already
purchased, subscribe to, or have access to (e.g., books, newspapers,
magazines).
[22] I would purchase or subscribe to print or online content
that I don't currently own or subscribe to (e.g., books, newspapers,
magazines).
Others
[23] Other [PIPE IN RESPONSE TEXT FROM Q4]
[24] Don't know/Unsure
Hauser WDT app. D-15-17
[[Page 59554]]
Appendix Q, displays a table of the results to Q4 regarding
consider options, and is reproduced below.
BILLING CODE 1410-72-P
[GRAPHIC] [TIFF OMITTED] TR27OC21.009
[[Page 59555]]
[GRAPHIC] [TIFF OMITTED] TR27OC21.010
[[Page 59556]]
Hauser WDT app. Q.
Appendix R, displays a table of the results to Q5 regarding which
option they would choose, and is reproduced below.
[GRAPHIC] [TIFF OMITTED] TR27OC21.011
[[Page 59557]]
[GRAPHIC] [TIFF OMITTED] TR27OC21.012
[[Page 59558]]
Hauser WDT app. R.
Professor Hauser developed a table to summarize the alternatives
that were selected by more than 3.0 percent of survey respondents,
which is reproduced below.
[GRAPHIC] [TIFF OMITTED] TR27OC21.013
Hauser WDT ]] 108, table 3.
As reflected in the table, ``I would listen to live AM/FM radio
broadcasts from commercial radio stations through a radio'' was
selected by 127 respondents (25.3 percent), and was the most commonly
selected alternative. Other commonly-selected alternatives included ``I
would listen to on-demand music streaming service(s) through the paid
subscription(s) I already have (e.g., Apple Music, Spotify Premium,
Google Play Music),'' which was selected by 37 respondents (7.4
percent), and ``I would watch video content that I already purchased,
subscribe to, or have access to (e.g., movies, cable television, Hulu,
Netflix),'' which was selected by 37 respondents (7.4 percent).
Fourteen respondents (2.8 percent) selected ``don't know/unsure'' in
response to this question. Hauser WDT ]] 109.
Professor Hauser weighted the results of Q5 by the total number of
hours each respondent reported listening to internet simulcasts of
terrestrial commercial radio in Q1 in to evaluate whether the
alternatives respondents consider as substitutes for internet
simulcasts of terrestrial radio varied based on the total amount of
time respondents spend listening to such simulcasts. He explained that
if a respondent listened to only one hour of such simulcasts over the
prior three days, his or her response to Q5 would count as one, while
if a respondent listened to four hours of such simulcasts over the
prior three days, his or her response to Q5 would count as four. Hauser
WDT ]] 110.
[[Page 59559]]
Appendix S, displays a table of the weighted results to Q5, and is
reproduced below.
[GRAPHIC] [TIFF OMITTED] TR27OC21.014
[[Page 59560]]
[GRAPHIC] [TIFF OMITTED] TR27OC21.015
BILLING CODE 1410-72-C
Hauser WDT app. S.
b. Criticisms of the Hauser Survey
SoundExchange offers several critiques of the Hauser surveys,
including those noted below. SX PFFCL ]] 1208-1269.
[[Page 59561]]
i. Hypothetical Scenario
SoundExchange notes that Professor Hauser's hypothetical scenario
requires respondents to predict what they would do if ``live AM/FM
radio broadcasts from commercial radio stations over the internet were
not available for the next five years.'' Hauser WDT, app. D at D-11. It
maintains that the hypothetical, which does not mention music content,
may cause respondents to answer the replacement questions in terms of
how they would replace non-music content, rather than how they would
replace music content. Zauberman WRT ] 64. SoundExchange also argues
that the long, five year, period toward which respondents are directed
to forecast their behavior can be cognitively taxing and confusing for
individuals. Zauberman WDT ] 62; see also Simonson WRT ]] 111-112.
SoundExchange notes expert testimony from Professor Zauberman who
maintained that the ambiguity of Professor Hauser's hypothetical does
not adequately follow best practice, which dictates that hypotheticals
be posed in a way that ensures the maximum relatability so that
respondents are not confused about the scenario they are asked to
consider. Zauberman WRT ] 65, See, e.g., Floyd Jackson Fowler, Jr., How
Unclear Terms Affect Survey Data, 56 Pub. Opinion Q. 218-231 (1992);
see also, Norbert Schwartz & Daphna Oyserman, Asking Questions About
Behavior: Cognition, Communication, and Questionnaire Construction, 22
Am. J. Evaluation, no.2, 127-160 (2001).
ii. Response Options
SoundExchange argues that Professor Hauser did not customize his
list of Q4 replacement options to match respondents' individual
circumstances. Instead, SoundExchange notes, all respondents received
the same list of replacement options, regardless of whether or not all
of these options were applicable to them. Professor Zauberman noted
that eight of the 22 specific options that Professor Hauser poses for
all respondents to consider in Q4 refer to services or content that
they are told they already own, have access to, or have purchased,
regardless of whether that is true or not. Professor Zauberman asserted
that providing such response options to respondents, which do not apply
to them, is confusing. Zauberman WRT ] 66-67. Professor Zauberman added
that providing respondents with options regardless of the service/
content they already own, have access to, or have purchased is poor
survey design. Zauberman WRT ] 66-67, See, e.g. Questionnaire Design,
Pew Res. Center, https://www.pewresearch.org/methods/u-s-survey-research/questionnaire-design/(last visited Jan. 8, 2020); see also,
Don A. Dillman et al., The Fundamentals of Writing Questions, in
internet, Phone, Mail, and Mixed-Mode Surveys: The Tailored Design
Method 94, 114-116 (4th ed. 2014).
Professor Zauberman explained the potentially troubling impact of
this question design by considering how a respondent who does not
already subscribe to a paid on-demand streaming service may react to
option 1, in Q4 (``I would listen to on-demand music streaming
service(s) through the paid subscription(s) I already have''), given
the choices: ``Would consider'' ``Would not consider'' and ``Don't
know/Unsure?''. Professor Zauberman opined that, in such a scenario,
none of the available options makes sense. He maintained that the only
logical answer regarding a service that the respondent does not already
have would be ``N/A'' or ``I do not have such a subscription'' and
these choices were not present in the survey. Instead, he suggested
that respondents may be forced to answer as if they have the service.
Zauberman WRT ] 68.
Professor Zauberman identified another alleged flaw in that
Professor Hauser's response options are designed in a way that confuses
respondents. He argued that the Hauser survey presented respondents
with too many response options, and cited scholarship indicating that
such choice options may causes cognitive overload and thus unreliable
responses. Zauberman WRT ] 68; see, e.g., Sheena S. Iyengar & Mark R.
Lepper, When Choice is Demotivating: Can One Desire Too Much of a Good
Thing?, 79 J. Personality & Soc. Psychol., no.6, 995-1006 (2000); Elena
Reutskaja et al., Choice Overload Reduces Neural Signatures of Choice
Set Value in Dorsal Striatum and Anterior Cingulate Cortex, 2 Nature
Hum. Behav., 925-935 (2018).
Professor Zauberman explained that Q4 presented respondents with a
list of 22 specific response options, plus an open response ``Other.''
And, in Q5, respondents are presented with a list of 22 options, plus a
``Don't know/Unsure'' option, and a potential ``Other'' option,
depending on their answers Q4. Professor Zauberman offered his view
that this is indicative of choice overload. Zauberman WRT ] 70; see,
e.g., Alexander Chernev et al., Choice overload: A conceptual review
and meta[hyphen]analysis, 25 J. Consumer Psychol., no.2, 333-358
(2015).
Professor Zauberman argued that Professor Hauser's survey design
nudges respondents toward choosing free music services and other non-
royalty-bearing options, over paid music options, and nudges them to
select low or non-royalty-bearing switching options. He asserted that
15 out of the 22 specific options in Q4 and Q5 lead to zero new
royalties for record labels, and that this is disproportionally biased
towards zero royalties options. Zauberman WRT ] 71. Professor Zauberman
also opined that the options may confuse respondents by mixing types of
content (e.g. ``non-music digital content'' or ``music on video
sites''). He added that providing options that are not mutually
exclusive (e.g. ``streaming service(s)'' or ``AM/FM radio broadcasts'')
is troubling. Zauberman WRT ] 71. Professor Zauberman maintained that
Professor Hauser's descriptions within the response options suffer from
inconsistent framing and definitions, which he found to privilege free
options. In Professor Zauberman's view the survey fails to emphasize
``free vs. paid'' music listening options in a consistent manner in Q4
and Q5, namely that the non-monetary cost of the free options is less
clear or emphasized than the clear indication of the ``paid''
characteristics. Professor Zauberman pointed out that in Option 3,
Professor Hauser chose to use the phrase ``have ads and that I do not
need to pay for'' rather than simply saying ``free'' to contrast
``paid'' in Option 2. In Professor Zauberman's view, this wording in
Option 3, rather than simply saying ``free on-demand music streaming
service(s),'' makes the cost (or lack thereof) of the option less
salient than the cost (or lack thereof) of its paid counterpart.
Zauberman WRT ] 71.
Professor Zauberman also found fault with the Hauser survey for
excluding options to which respondents might reasonably switch. He
noted that the survey does not, for example, describe or offer
listening to Sirius XM online as a response option. He argued that if
legitimate options had been offered as potential choices, respondents
might have been more likely to select other existing paid
subscriptions. And, he added, limiting the number of royalty-bearing
response options available is likely to depress the number of
respondents who select royalty-bearing options. Zauberman WRT ] 71.
Professor Zauberman concluded that the cumulative effect of the
criticized survey response options is to privilege certain response
options (e.g., AM/FM radio) over others. He maintained that Professor
Hauser's survey failed to ensure that the survey hypothetical was as
clear and well-defined as possible. Zauberman WRT ] 71.
[[Page 59562]]
Professor Simonson also criticized the Hauser survey response
options, characterizing the survey as burying music within a wide range
of content alternatives, such as traffic, religion, and sports. He
pointed out that in the Hauser survey Q2 and Q3, ``music'' represented
just one out of eight response options, and that all types and genres
of music were reduced to just one item, listed alongside a wide range
of equally prominent, unrelated categories. Simonson WRT ] 102-105.
Mr. Simonson asserted that respondents tend to choose among the
options presented to them, citing scholarship on that conclusion:
[R]espondents tend to confine their answers to the choices
offered, even if the researcher does not wish them to do so (Bishop
et al. 1988, Presser 1990). That is, people generally ignore the
opportunity to volunteer a response and simply select among those
listed, even if the best answer is not included.
Zauberman WRT ] 106 (citing Jon A. Krosnick, Survey Research, 50 Ann.
Rev. Psychol. 537, 544 (1999)). Mr. Simonson argued that in the context
of a proceeding about music, including numerous non-music response
options biases survey results, including through diversification bias,
order effects, and demand artifacts. Simonson WRT ] 106 (citing Fritz
Strack, ``Order Effects'' in Survey Research: Activation and
Information Functions of Preceding Questions, in Context Effects in
Social and Psychological Research 23-34 (Norbert Schwarz & Seymour
Sudman eds., 1992), https://doi.org/10.1007/978-1-4612-2848-6_3.
He referred to additional research, indicating that the mere fact
that respondents are presented simultaneously with multiple options
causes them to spread their choices among the options instead of
choosing only the option they like most. He argued that a survey
designer can decrease the percentage of respondents who indicate they
will switch from one music service to another by presenting respondents
with a wide range of options, and that the Hauser Survey does that by
leading respondents to consider a wide set of switching options,
including options that are unrelated to music. Simonson WRT ]] 106, 67-
74 (citing Itamar Simonson, The Effect of Purchase Quantity and Timing
on Variety Seeking Behavior, 27 J. Marketing Res. 150 (1990); Daniel
Read & George Loewenstein, Diversification Bias: Explaining the
Discrepancy in Variety Seeking Between Combined and Separated Choices,
1 J. Experimental Psychol.: Applied 34 (1995); and Schlomo Benartzi &
Richard H. Thaler, Naive Diversification Strategies in Defined
Contribution Saving Plans, 91 Am. Econ. Rev. 79 (2001); and Craig R.
Fox, David Bardolet & Daniel Lieb, How Subjective Grouping of Options
Influences Choice and Allocation: Diversification Bias and the
Phenomenon of Partition Dependence, 134 J. Experimental Psychol.: Gen.
538 (2005); Craig R. Fox, David Bardolet & Daniel Lieb, Partition
Dependence in Decision Analysis, Resource Allocation, and Consumer
Choice, 3 Experimental Bus. Res. 229 (2005)). Professor Simonson
concluded that by offering ``irrelevant options'' the Hauser survey
misrepresents people's real-world experience, in which other content
does not generally satisfy a desire for music, and the result is likely
to lower the likelihood that respondents choose music options. Simonson
WRT ] 107.
iii. Two-Stage Decision Making Process
SoundExchange argues that Professor Hauser's two-stage decision-
making structure compounds the alleged errors identified above and
further depresses diversion to royalty-bearing options.
SoundExchange notes that the Hauser survey first asks respondents,
in Q4, to identify from a list of 22 identified music and non-music
options all of the alternatives they would ``consider'' switching to in
place of simulcasts. Then, in Q5, the survey forces respondents to pick
just one option from this consideration set that they would use if
``live AM/FM radio broadcasts from commercial radio stations over the
internet were not available for the next five years.'' SoundExchange
alleges that it was inappropriate for Professor Hauser to present his
replacement questions using this ``consider-then-choose'' structure.
SoundExchange argues that this two-stage process, in which respondents
must consider a large set of options before making a final choice, does
not match the decision-making processes that consumers actually would
engage in if they were replacing their simulcast listening. Zauberman
WRT ]] 10-14, 73; Simonson WRT ]] 108-109.
SoundExchange also argues that the Hauser survey is flawed because
Professor Hauser provides no justification for forcing respondents, in
Q5, to choose only one option to replace their simulcasting over the
course of the next five years. SoundExchange asserts that in the real
world consumers can replace music options with multiple substitutes,
and takes issue with what it characterizes as an unrealistic notion
that, for the next five years, respondents must limit themselves to
only one alternative option. Zauberman WRT ] 73; Simonson WRT ]] 112.
SoundExchange notes that Professor Hauser acknowledges that it is ``not
uncommon for individuals to have subscriptions to multiple services,
even within the same service type'' and that some listeners employ
multiple services ``because different services within the same service
type may offer different features for listeners and different libraries
of content.'' Hauser WDT ] 85. SoundExchange also posits that the
requirement that respondents to the Hauser survey choose only one of
the offered currently available options stands in contrast to the
reality of a fast changing market. SX PFFCL ] 1245 (citing Tucker WDT
]] 10-15).
SoundExchange observes that Professor Hauser attempts to ameliorate
this concern by focusing respondents on the last three days, and asking
what one alternative they would choose in situations similar to their
most recent listening session. Hauser WDT ] 13 & n.8, app. D; 8/27/20
Tr. 4344 (Hauser). However, SoundExchange asserts that this approach
fails because, although the survey does mention the last three days,
the replacement questions themselves do not contain this language. SX
PFFCL ] 1251 (citing Zauberman WRT ] 74-75 & n.92 (Professor Hauser's
``replacement question is for the next five years, not a single
use'')). SoundExchange also argues that Professor Hauser's replacement
questions create a winner-take-all problem, which biases his results.
It offers the example scenario in which Netflix is the primary
streaming video service for consumers, but that many consumers also use
Amazon Prime Video to a lesser degree. If asked to name only one
streaming video service that they use, consumers would choose Netflix.
SoundExchange maintains that such responses would mask the extent to
which the secondary choice, Amazon Prime Video, is used. Zauberman WRT
] 75. Professor Zauberman testified that this type of the winner takes
all structure of the replacement questions ``is highly confusing,'' and
``tremendously underplays [the] secondary players''. 8/27/20 Tr. 4210-
11 (Zauberman).
iv. Time Estimation Question
SoundExchange argues that Professor Hauser's time estimation
question highlights the unreliability of his survey and biases the key
questions that follow it. SX PFFCL ] 1262. It notes Professor Hauser's
finding that, on average, respondents estimated that they spent 5.3
hours listening to AM/FM radio broadcasts from commercial radio
stations over the internet in the past
[[Page 59563]]
three days (or approximately 1.75 hours per day). SX PFFCL ] 1263
(citing Hauser WDT ] 94). SoundExchange asserts that time estimate does
not at all match reality, and that this mismatch highlights a bias in
Professor Hauser's survey population. SX PFFCL ] 1264. It points to
Professor Zauberman's testimony that, according to The Infinite Dial
2019, Digital AM/FM (i.e., streaming AM/FM radio) accounts for only 3%
of time spent listening to music, and the average online audio listener
spends approximately 16.72 hours per week (or 2.39 hours per day)
listening to all online audio sources. Professor Zauberman noted that,
by contrast, Professor Hauser's time estimates, if accurate, would mean
that AM/FM streamed over the internet accounts for more than 70% of all
online audio listening time, on average. Zauberman WRT ] 76 (citing
Edison Research & Triton Digital, The Infinite Dial 2019 at 26; and
Edison Research, Share of Ear Q2 2019 at 16). Professor Zauberman added
that Professor Hauser provides no empirical evidence, such as industry
data, to suggest that respondents are able to provide reliable
estimates, and that available industry data calls the accuracy of the
time estimates derived from Professor Hauser's survey into question.
Zauberman WRT ] 77. Professor Zauberman also argued that qualitative
pretests in surveys cannot assure that this type of timing question is
reliable or that the right timeframe is being used. Zauberman WRT ] 77;
8/27/20 Tr. 4181-82 (Zauberman) (a pretest is ``where you test for
confusion,'' not an instrument for ``parameteriz[ing] your elements of
your survey,'' like time); id. at 4291-92, 4293-94 (Simonson) (same).
Professor Zauberman argued that because the timing question is the
first question in the main questionnaire, it has the potential to
influence responses to all subsequent questions. He cites to
scholarship indicating that starting with a difficult-to-estimate
question can influence the way that respondents answer the rest of the
questions, especially when the rest of the survey is complex and
difficult to understand. Zauberman WRT ] 78 (citing Shari Seidman
Diamond, Reference Guide on Survey Research, in Reference Manual on
Scientific Evidence 359, 395-96 (2011); Seymour Sudman & Norbert
Schwartz, Contributions of Cognitive Psychology to Advertising
Research, 29 J. Advertising Res., no.3, 43-53 (1989); Jon A. Krosnick &
Stanley Presser, Question and Questionnaire Design, in Handbook of
Survey Research 263, 291-94 (2nd. ed. 2010)).
Professor Zauberman also faulted the Hauser surveys for not asking
respondents to estimate listening time in the future. He maintained
that absent responses about future use, any inferences made based on
the offered results must rely on an assumption about the extent to
which a hypothetical change in the marketplace (i.e., the
unavailability of AM/FM streaming) would in fact alter both the amount
of time respondents spend listening to music in total, as well as for
each of the options they would replace it with. Professor Zauberman
argues that such an assumption would be problematic without empirical
support. Zauberman WRT ] 79.
c. Responses to Criticism of the Hauser Survey
The NAB responded to criticism regarding the number and type of
alternatives offered in the switching questions, by noting that
Professor Hauser crafted the switching options based on his experience
from prior rate-setting proceedings in which his surveys were accepted
(including SDARS III, where the survey had 19 switching options),
research into the different ways respondents access different types of
content, industry studies, and the feedback he received in the course
of conducting qualitative interviews and pretests. 8/27/20 Tr. 4340-44
(Hauser); Hauser WDT ]] 19-20, 25, 31-33. Professor Hauser testified
that his pretests confirmed that respondents found the options to be
comprehensive but not too numerous, and to reflect the full scope of
options they would consider instead of listening to simulcasts. 8/27/20
Tr. 4340-43 (Hauser). The NAB adds that SoundExchange has advanced
arguments and evidence in this proceeding to establish that a wide
variety of services, including on-demand video services, broadcast
television, video games, and other forms of media, are in competition
with each other, and that therefore it was not unreasonable for
Professor Hauser to include a variety of services as switching options
in his survey. See, e.g., Trial Ex. 5387 at 28; Trial Exs. 5521, 5353,
5472; Orszag WRT ] 46 n.96 (citing public financial documents,
including iHeart 10-Ks).
The NAB addresses SoundExchange's criticism of the Hauser survey
for directing respondents to choose one switching option, when
consumers in the real world might replace simulcast with more than one
alternative, by noting that the survey was ``fielded over ten days,
invitations were released at different times of the day to ensure
representative by day of week.'' The NAB argues that this approach
ensures a random draw in time from the distribution of all instances of
listening to simulcast. 8/27/20 Tr. 4352-53, 4356-57 (Hauser).
Professor Hauser maintained that under the approach he used, even if
some respondents would listen to terrestrial radio for 60% of their
time, but on-demand for the remaining 40%, and listening is reasonably
randomly distributed, respondents would pick terrestrial radio 60% of
the time and on-demand 40% of the time when asked about the most recent
time they listened. 8/26/20 Tr. 4354 (Hauser); Hauser WDT ] 37.
The NAB addressed Professor Simonson's concern that the Hauser
survey asked respondents to pick just one option that they would do for
the next five years, by maintaining that Professor Hauser question was
never meant to say that respondents will do the same thing in every
similar situation. Professor Hauser indicated that the qualitative
interviews and pretests confirmed that is not how respondents
interpreted the question. 8/27/20 Tr. 4355-56 (Hauser); see also Hauser
WDT app. G at 8. He testified that because respondents were primed to
think of ``situations similar to'' the ``most recent time'' they
listened to simulcast, their responses reflect what they would do in a
similar circumstance, not what they would do ``repetitively each day
over the next five years.'' 8/27/20 Tr. 4356-58 (Hauser).
The NAB argues that Professor Hauser's time estimation question is
not unreliable and does not conflict with results in the Infinite Dial
2019 and Share of Ear surveys. It asserts that the critique is based on
an ``apples-to-oranges mistake.'' See, e.g., Zauberman WRT ] 76.
Professor Hauser posits that his survey was focused on simulcast
listeners, whereas the Infinite Dial and Share of Ear targeted
listeners to all online audio. 8/27/20 Tr. 4361 (Hauser). He points out
that Professor Zauberman's comparison does not take into account
respondents who listened to zero hours of simulcasts. Professor Hauser
offered that ``if you put those zeros in, that zero listening, my study
lines up pretty well with the [I]nfinite [D]ial.'' Id. at 4361.
d. Judges' Conclusions Regarding the Hauser Survey
The Judges accept that there are a variety of choices to be made
when designing a reliable survey. The selected design choices will
often be subject to second-guessing. While the Judges are wary of
unreasonably demanding ideal survey design, many critiques will
[[Page 59564]]
inevitably merit consideration, to varying degrees.
In this instance, the Judges find that the main hypothetical
scenario set forth requiring respondents to predict what they would do
if live AM/FM radio broadcasts from commercial radio stations over the
internet were not available for the next five years is reasonable.
While the record reflects some reason to caution against the long, five
year, prediction timeframe as potentially confusing respondents, the
Judges do not find that this to be unduly concerning in this instance.
However, as discussed further below, the Judges find that the critique
regarding the main hypothetical scenario not honing in on music content
(thus skewing the results) is worthy of concern.
The Judges find that the Hauser survey approach to the time
estimation question was unduly biased toward simulcast listeners in a
manner that biased the overall results. The fact that the results of
the time estimate question diverge so widely from what may be
considered reasonable in light of available industry data exacerbates
the Judges' concerns of bias. These concerns ultimately weigh against
the overall reliability of the survey.\307\
---------------------------------------------------------------------------
\307\ The Judges are less troubled that the time estimate
questions in the Hauser survey may be unduly confusing or that any
confusion caused would unduly skew the overall results of the
survey.
---------------------------------------------------------------------------
The Judges find that the ``consider-then-choose'' structure is an
acceptable design choice in this instance. A case could be made that
certain consumer choices on specific products or services are ill-
suited to such a format. However, SoundExchange has not established
convincingly that the design is inappropriate in this case. The
decision to offer only one option is more concerning, given that it is
widely accepted that consumers often choose more than one music (or
non-music) option, especially over a five year period. The NAB's
argument that this concern is addressed by the survey being fielded
over multiple days does little to ameliorate the Judges concern that,
in this particular switching survey addressing music options, limiting
respondents' choice to one option may confuse respondents and bias
results. The NAB's reference to qualitative interviews does not
establish to the Judges' satisfaction that respondents understood the
question clearly, or that bias is not likely present in the results.
The actual response options provided are the most troubling aspect
of the survey. Based on the expert testimony of Professors Zauberman
and Simonson the Judges find that the number of choices, in the format
provided, can reasonably be expected to produce biased and unreliable
results. Professor Hauser indicates that he crafted the switching
options based on his experience from prior rate-setting proceedings in
which his surveys were accepted (including SDARS III, where the survey
had 19 switching options). However, the SDARS III survey was offered in
a different format in which the 19 choices were set forth in two
stages. Additionally, the offered choices were far more oriented toward
music options, which the Judges find more appropriate in the current
proceeding to set rates for transmissions of recorded music.
The Judges also note that the defined parameters of not-on-demand
music streaming services are limited in a troubling--and ultimately
unreasonable--fashion. As SoundExchange noted, the category excludes
Sirius XM online as a response option. Additionally, the category
excludes a wider array of webcast transmissions that do not vary the
music played based on an individual listener's preferences, which Dr.
Leonard characterizes as ``internet radio.'' The 22 specific options in
Q4 and Q5, on their face, and in reference to the definition of ``Not-
on-demand music streaming services'' exclude ``internet radio.''
Professor Hauser did not explain or justify these exclusions
adequately.
Professor Hauser testified that his pretests confirmed that
respondents found the options to be comprehensive but not too numerous,
and to reflect the full scope of options they would consider instead of
listening to simulcasts. But, the offered options are not
comprehensive. Professor Hauser stated that he generated the options
from qualitative interviews, which explored what listeners of internet
simulcasts of terrestrial commercial radio considered as substitutes
for listening to internet simulcasts. However, it is not apparent that
the pretests or interview clearly referenced the ensuing survey's
hypothetical loss of simulcasting in the marketplace.
Professor Hauser testified that these interviewees described a
number of different activities they would do if they could not listen
to internet simulcasts of terrestrial commercial radio, including
listening to music through paid and ad-supported streaming services,
listening to podcasts, watching television or movies, and reading news
on their computers or smartphones. He indicated that the qualitative
interviews revealed that respondents were not familiar with the terms
``simulcast'' or ``simulcasting,'' nor were many of them familiar with
the term ``terrestrial radio.'' Respondents understood the phrase
``live radio broadcasts over the internet'' to describe internet
simulcasts of terrestrial radio. He used the responses to inform the
list of alternatives for Q4 of the survey. However, Professor Hauser
does not adequately explain why he only offered a subset of
personalized ad-supported streaming services in the alternatives for
Q4.
He also states that he augmented these option choices with
additional background research into the different ways in which
respondents may access different types of content, including Edison
Research & Triton Digital, ``The Infinite Dial--The Heavy Radio
Listeners Report,'' April 2018, available at https://www.edisonresearch.com/heavy-radio-listeners-new-insights-from-the-infinite-dial, p. 8; Edison Research & Triton Digital, ``The Infinite
Dial 2019,'' 2019, available at https://www.edisonresearch.com/infinite-dial-2019/, p. 30. However, these two pieces of industry data
do not exclude ``internet radio.''
Another of the NAB's witnesses, Dr. Leonard, who relied on
Professor Hauser's survey and testimony for purposes of his opportunity
cost analysis, addresses a related issue of his own treatment of
internet radio as a product category. Dr. Leonard opined that internet
radio is more similar to custom radio than to simulcast. He
acknowledged that internet radio stations do not vary the music played
based on an individual listener's preferences, which the Judges note is
a characteristic that is shared with simulcasters. However, Dr. Leonard
maintained that internet radio stations nonetheless often feature
greater user functionality than is possible with a linear simulcast
stream. He asserted many internet radio services (including AccuRadio)
allow listeners to pause and skip songs on an internet radio station,
which is not available with a simulcast. Dr. Leonard also offered that
internet radio services do not feature much if any non-music content.
He added that internet radio services are not localized services, they
are not broadcasters subject to FCC regulation, and they have no public
interest requirement nor any obligation to serve any local community.
Finally, Dr. Leonard stated his own understanding that internet radio
services are not a significant part of the streaming market. Therefore,
he stated, his report did not treat internet radio services as distinct
from custom radio services.
The Judges find that these observations do not explain or cure the
absence of internet radio options in the
[[Page 59565]]
Hauser Survey. It is notable that for Dr. Leonard's analysis he
proposed to treat internet radio services as undistinguished from (or
part of) custom radio services, while Professor Hauser excluded it from
the scope of any of the options he provided in his survey. Among the
most compelling of possible reasons to exclude internet radio from the
scope of the provided options might be that internet radio may offer
distinct features such as allowing listeners to pause and skip songs,
making it more closely similar to custom radio. However, the Judges do
not have persuasive evidence of how widely-available such features are
on internet radio. Furthermore, even if internet radio services are not
a significant part of the current streaming market, that does not
establish a compelling reason to exclude it from the scope of provided
options in Professor Hauser's survey, because the survey was about a
hypothetical marketplace over the next five years during which
simulcasts are not available. Even if the NAB had offered the Judges
compelling evidence of low market usage of internet radio in the
contemporary world, that does not provide adequate reason to exclude an
option that shares key characteristics with simulcasts. For instance,
the Judges note that both internet radio and simulcasts may be amongst
the most ``lean back'' offerings that do not vary the music played
based on an individual listener's preferences, which is a reasonable
basis for including internet radio as a potential switching option.
While the Judges do not fault the Hauser survey for including too
many non-music options, that decision does tend to undermine any
reasonable rationale for excluding relevant and readily apparent music
options, like internet radio and Sirius XM online, that are not
excluded in relied-upon industry studies.
For the above-stated reasons, the Judges do not rely on the Hauser
survey to support the NAB's petition for a separate rate for
simulcasters.
6. Judges' Conclusion Regarding Separate Rate for Simulcasters
Based on the entirety of the record in this proceeding and for the
foregoing reasons, the Judges do not find that a separate rate category
for simulcasters is warranted. Additionally, significant evidence in
the record persuades the Judges that simulcasters and other commercial
webcasters compete in the same submarket and therefore should be
subject to the same rate. Granting simulcasters differential royalty
treatment would distort competition in this submarket, promoting one
business model at the expense of others.
The Judges' conclusion regarding the unreliability of the Hauser
Survey also renders Dr. Leonard's opportunity cost modeling unreliable
to the extent it depends on the survey results. Additionally, given the
Judges' overall conclusion that the NAB has not sustained its case for
a separate rate for simulcasters, we do not proceed through an
unnecessary analysis of the NAB's requested royalty rates.
V. Noncommercial Webcasting Rates
Five entities representing noncommercial broadcasters filed
petitions to participate in this proceeding. Three of them--College
Broadcasters, Inc. (CBI), the Corporation for Public Broadcasting
(CPB), and National Public Radio, Inc. (NPR)--entered into settlements
and withdrew from further participation. See 85 FR 11857 (Feb. 28,
2020) (public broadcasters' (NPR/CPB) settlement); 85 FR 12745 (Mar. 2,
2020) (noncommercial educational webcasters' (CBI) settlement). Of the
remaining two noncommercial participants, only one--the National
Religious Broadcasters Noncommercial Music Licensing Committee
(NRBNMLC)--participated actively. Educational Media Foundation, while
technically a participant, participated only through its membership in
the NRBNMLC. See Educational Media Foundation's Notice Re Joining in
Direct Case of NRBNMLC (Sep. 23, 2019).
In the current rate period, noncommercial webcasters other than
public broadcasters pay a minimum fee of $500 per station or channel,
which entitles them to make up to 159,140 aggregate tuning hours (ATH)
\308\ per month of digital audio transmissions.\309\ Digital audio
transmissions in excess of that ATH threshold incur fees at the
applicable commercial rate. 37 CFR 380.10(a)(2). The current rate
structure for noncommercial webcasters (including the 159,140 ATH
threshold and $500 minimum fee) has been in force since the Judges
first adopted it nearly 14 years ago in Web II. See Web II, 72 FR at
24100.
---------------------------------------------------------------------------
\308\ ``Aggregate Tuning Hours'' (ATH) are defined as the total
hours of programming that the Licensee has transmitted during the
relevant period to all listeners within the United States from all
channels and stations that provide audio programming consisting, in
whole or in part, of eligible nonsubscription transmissions or
noninteractive digital audio transmissions as part of a new
subscription service, less the actual running time of any sound
recordings for which the Licensee has obtained direct licenses apart
from 17 U.S.C. 114(d)(2) or which do not require a license under
United States copyright law. 37 CFR 380.7 (2019). Or, more
succinctly, the number of hours of programming on all channels and
stations multiplied by the number of listeners.
\309\ Noncommercial educational webcasters (NEWs) also pay a
$500 minimum fee per channel or station that allows them to transmit
up to 159,140 ATH per month. 37 CFR 380.22(a). NEWs that exceed that
threshold in any month must pay the rates established for all other
noncommercial webcasters. 37 CFR 380.22(b). NEWs that do not
transmit more than 80,000 ATH on any channel or station for more
than one month in the preceding year may also pay a ``proxy fee'' of
$100 per year that entitles them to a waiver of the requirement to
file reports of use. 37 CFR 380.23(g)(1). Other NEWs may elect to
provide reports of use on a sample basis. 37 CFR 380.23(g)(2).
---------------------------------------------------------------------------
A. Parties' Proposals
1. SoundExchange's Rate Proposal
a. Proposed Rates
SoundExchange proposes a continuation of the current rate structure
for noncommercial webcasters but with the same across-the-board
increases to the minimum fee and commercial rates that SoundExchange
also proposes.\310\ See SoundExchange's Proposed Rates and Terms at 3
(Written Direct Statement of SoundExchange vol. 1 sec. B) (Sep. 23,
2019) (SoundExchange Rate Proposal). Under SoundExchange's proposal,
noncommercial webcasters would pay an annual minimum fee of $1000 per
channel or station. This minimum fee would cover up to 159,140 ATH per
month of digital audio transmissions. Noncommercial webcasters would be
obligated to pay the applicable commercial rate for usage in excess of
159,140 ATH per month. See id.
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\310\ SoundExchange's minimum fee proposals are discussed infra,
section VI. SoundExchange's proposed rates for commercial webcasters
are discussed supra, section IV.
---------------------------------------------------------------------------
b. Rationale and Justification
In proposing to continue the existing rate structure, SoundExchange
endorses and adopts the rationale for the existing rate structure that
the Judges articulated in Web II, when they originally put that rate
structure in place. See SX PFFCL ]] 1346-1354. SoundExchange asserts
that there is no adequate marketplace benchmark for licenses to
noncommercial webcasters. SoundExchange's expert, Mr. Orszag, testified
that, to his knowledge, ``there is no market for licensing
noncommercial services, and therefore no voluntary agreements
negotiated in unregulated markets that could serve as potential
benchmarks specific to such services.'' Orszag WDT ] 184.
Rather than basing its proposal on a benchmark analysis, therefore,
SoundExchange's proposal rests on the economic insight articulated in
Web II that larger noncommercial webcasters
[[Page 59566]]
have the same or similar competitive impact in the marketplace as
similarly sized commercial webcasters. See Web II, 72 FR at 24097; see
also Web IV, 81 FR at 26395 (``the Judges apply commercial rates to
noncommercial webcasters above the ATH threshold because economic logic
dictates that outcome, not because it was observed in benchmark
agreements''). In Web II, the Judges recognized that noncommercial
webcasters ``may constitute a distinct segment of the noninteractive
webcasting market that in a willing buyer/willing seller hypothetical
marketplace would produce different, lower rates'' than those for
commercial webcasters but only ``up to a point'', i.e., the point at
which a noncommercial webcaster poses a ``threat of making serious
inroads into the business of those services paying the commercial
rate.'' Web II, 72 FR at 24097. The Judges employed the noncommercial
webcaster's size, as measured by its listenership, as a ``proxy'' for
determining when a noncommercial webcaster poses a competitive threat
to commercial webcasters. See id. at 24098-99. Based on the then-
average online listenership to NPR stations of 218 simultaneous users,
the Judges set a threshold of 159,140 ATH per month for applying
commercial webcasting rates.\311\ See id. at 24099.
---------------------------------------------------------------------------
\311\ (24 hrs. x 365 days 218 users) / 12 mos. = 159,140 ATH/mo.
---------------------------------------------------------------------------
Although Mr. Orszag opined that he saw ``no reason why commercial
and noncommercial services would be treated differently with respect to
the rates they pay'' in an unregulated market, id. ] 185, he
nevertheless supported the existing rate structure based on a history
of settlements in rate proceedings. Mr. Orszag acknowledged that
SoundExchange had reached settlements in the past with smaller
noncommercial webcasters for a ``nominal per-channel rate.'' Id. ] 186.
For larger noncommercial webcasters, ``there has long existed a
demarcation at 159,140 aggregate tuning hours . . . per month'' under
the compulsory license, ``with services that exceed that threshold
paying commercial rates on the incremental usage.'' Id. ] 187. He
contended ``[t]here is no empirical evidence to suggest, and no reason
based in economic theory to think, that record companies would license
large noncommercial services that compete meaningfully with commercial
services at a fraction of the commercial rate.'' Id. He noted,
moreover, ``this structure is supported by precedent and settlements of
prior proceedings before the Judges.'' Id.
SoundExchange also presented expert testimony from Professor
Catherine Tucker concerning the impact of the current rate structure on
noncommercial webcasters. She testified that under the current
noncommercial rates the vast majority of noncommercial webcasters pay
only the minimum fee. See Trial Ex. 5604 ] 165 (Tucker WDT). In 2018
(the most recent year for which Professor Tucker had data), [REDACTED]
out of a total of [REDACTED] noncommercial webcasters ([REDACTED]%)
paid only the minimum fee per station. See id. Professor Tucker also
testified that, among those noncommercial webcasters that exceed the
music ATH threshold and must pay per-performance royalties,
``[REDACTED].'' Id. ] 166. Across the five noncommercial webcasters
paying the most for excess usage, ``[REDACTED] [REDACTED].'' \312\ Id.
Professor Tucker also opined that these noncommercial webcasters would
be ``well positioned'' to pay royalties under this rate structure even
with the increases in the minimum fee and per-performance rates that
SoundExchange proposes: [REDACTED].'' Id. ] 167.
---------------------------------------------------------------------------
\312\ The five noncommercial webcasters paying the most
royalties for excess usage were [REDACTED]. Tucker WDT ] 166.
---------------------------------------------------------------------------
c. NRBNMLC Response
NRBNMLC controverts nearly every element of SoundExchange's
proffered rationale for its rate proposal (and, by extension, the
Judges' rationale in Web II, Web III, and Web IV for the existing rate
structure). See Services RPFFCL ]] 1343-1348. Specifically, NRBNMLC
rejects SoundExchange's assertions that no adequate marketplace
benchmark exists for licenses to noncommercial webcasters, that there
is no difference between commercial and noncommercial webcasters from
the standpoint of the consumer, and that ``there has long been
acceptance of the current royalty rate structure for noncommercial
webcasters.'' Id. ]] 1344, 1345, 1346.
Regarding Mr. Orszag's assertion concerning the lack of appropriate
benchmarks, NRBNMLC economic expert Professor Richard Steinberg
testified that the settlement agreement SoundExchange reached on behalf
of record companies with NPR/CPB and, to a lesser extent,
SoundExchange's settlement with CBI, constitute suitable benchmarks.
See Trial Ex. 3060 ]] 30-39 (AWDT of Richard Steinberg) (Steinberg
WDT). NRBNMLC asserts that ``[t]he entities negotiating these
agreements are precisely the type of entities who negotiated past
agreements that the Judges and their predecessors have relied on as
benchmarks in past webcasting proceedings.'' Services RPFFCL ] 1344. As
examples, NRBNMLC refers to the agreement the Recording Industry
Association of America (RIAA) negotiated with Yahoo! on behalf of
record companies that ``the Web I CARP chose as its key benchmark;''
settlement agreements between SoundExchange and CBI, the National
Association of Broadcasters (NAB), and Sirius XM, respectively, that
the Judges cited in Web III; and a direct license between Merlin (an
entity representing independent record companies) and Pandora that the
Judges relied on in Web IV.\313\ Id.
---------------------------------------------------------------------------
\313\ NRBNMLC does not cite any economic testimony for this
analysis of the suitability of SoundExchange's settlement agreements
with NPR/CPB and CBI as benchmarks, or their comparability to
benchmarks that the Judges used in past proceedings. The discussion
is, rather, arguments of counsel.
---------------------------------------------------------------------------
NRBNMLC argues that, contrary to Mr. Orszag's assertion, ``there
are very real differences to consumers between noncommercial and
commercial webcasters.'' The National Religious Broadcasters
Noncommercial Music License Committee's Corrected Proposed Findings of
Fact and Conclusions of Law ] 1345 (NRBNMLC PFFCL). For example,
Jennifer Burkhiser, Director of Broadcast Regulatory Compliance and
Issues Programming at Family Radio, Inc. (a large noncommercial
religious broadcaster), testified that ``[t]hose who really listen to
Christian music and . . . radio stations can tell the difference
between commercial and non-commercial pretty easily. . . . [T]here's a
big difference in motivation and just the programming content based on
the two different drivers, profit or mission.'' 8/31/20 Tr. 4764
(Burkhiser); see also Steinberg WDT ] 19 (contrasting profit
maximization and mission maximization); Trial Ex. 3061 ] 29 (CWDT of
Joseph Cordes) (Cordes WDT) (stating that programming on noncommercial
service, including music, ``is chosen for mission-driven reasons rather
than commercial popularity''). Professor Steinberg also emphasized the
absence of advertising from noncommercial programming. See 8/26/20 Tr.
3997 (Steinberg). Moreover, Professor Steinberg asserts as a matter of
economic logic that, ``[e]ven if the webcasters play identical songs in
an identical context, whether they are commercial or non-commercial, as
long as there is different willingness to pay, there's a different
market segment, and we would naturally expect different prices in each
segment.'' 8/26/20 Tr. 4002 (Steinberg).
[[Page 59567]]
NRBNMLC rejects SoundExchange's assertion that the existing rate
structure for noncommercial webcasters has long been accepted, stating,
``there has never been noncommercial buyer acceptance of a structure
incorporating above-threshold commercial-level per-performance fees.''
Services RPFFCL ] 1346. Counsel for NRBNMLC supports that statement
with the observation that NRBNMLC has ``never proposed such a
structure'' in past webcasting proceedings, and, up until Web IV rates
went into effect, most noncommercial webcasters paid lower Webcaster
Settlement Act (WSA) rates, instead of the rates set by the Judges. See
id.
NRBNMLC also disputes a key underpinning of the current rate
structure: That larger noncommercial webcasters pose a greater
competitive threat to commercial webcasters. NRBNMLC economics expert
Professor Joseph Cordes testified that there is ``no particular
economic reason to believe'' that as noncommercial webcasters grow in
size ``their attributes will converge to those of commercial
broadcasters.'' 8/20/20 Tr. 3271-72 (Cordes). A noncommercial
broadcaster's ``commitment to mission will, in fact, act as a restraint
on their proclivity to simply want to go into a market and compete with
commercial broadcasters. . . . So long as a nonprofit, indeed, has a
strong commitment to mission, that is going to actually have an
aversion to competing with its commercial counterparts, because that
simply means it's going to have to devote scarce, time, energy and
resources to competition rather than achieving its mission.'' Id. at
3273. In addition, Professor Steinberg testified that even larger
noncommercial webcasters are unlikely to cannibalize markets for
commercial webcasters. See Steinberg WDT ]] 25, 42-53.
NRBNMLC argues that Professor Tucker's testimony concerning the
largest noncommercial webcasters being ``well positioned'' to pay
increased fees under SoundExchange's proposal is irrelevant and
unsupported. NRBNMLC PFFCL ] 259. NRBNMLC cites the Register of
Copyrights' recommendation to the Librarian of Congress in Web I for
the proposition that an analysis of a licensee's ability to pay is not
relevant to the willing buyer/willing seller standard applied under
section 114. See id. ] 260 (citing Web I, 67 FR at 45254). NRBNMLC
notes, moreover, that the five entities that Professor Tucker examined
were all ``broadcasters whose primary focus is not simulcasting, which
is only a small part of their overall operations'' and that, as
broadcasters, they ``would incur numerous expenses in connection with
their broadcast operations, including `maintaining and operating their
stations and translators' and `applying for and maintaining FCC
licenses'.'' Id. ] 262 (quoting 8/18/20 Tr. 2484-86).
2. NRBNMLC's Rate Proposal
a. Proposed Rates
Four days before the beginning of the evidentiary hearing in this
proceeding, NRBNMLC submitted two proposed rate structures, which it
refers to as ``Alternative 1'' and ``Alternative 2.'' \314\ See
generally NRBNMLC Amended Proposed Rates and Terms (Jul. 31, 2020)
(NRBNMLC Rate Proposal). Since NRBNMLC does not refer to its original
rate proposal in its proposed findings and conclusions, the Judges deem
the original rate proposal to be superseded by the amended rate
proposal, and consider only the latter.
---------------------------------------------------------------------------
\314\ The Judges' procedural rules permit filing of an amended
rate proposal at any time up to, and including, the filing of
proposed findings and conclusions. See 37 CFR 351.4(b)(3). The
NRBNMLC's revised rate proposal was thus timely under the rules.
---------------------------------------------------------------------------
Under NRBNMLC's Alternative 1, noncommercial webcasters would pay
an annual minimum fee of $500 that would entitle them to make up to
1,909,680 ATH of digital audio transmissions in a year.\315\ For
transmissions in excess of that threshold, noncommercial webcasters
would pay one third of the applicable per performance rate for the same
type of transmissions by commercial webcasters.\316\ See id. ex. A at
9.
---------------------------------------------------------------------------
\315\ 1,909,680 ATH is an annualized version of the existing
159,140 monthly ATH threshold (159,140 12).
\316\ Alternative 1 provides for separate above-threshold per-
performance rates for noncommercial simulcasting, noncommercial
nonsubscription webcasting, and noncommercial subscription
webcasting. See NRBNMLC Amended Proposed Rates and Terms at 9. This
structure parallels the rate structure that the Services propose for
commercial webcasting.
---------------------------------------------------------------------------
NRBNMLC modelled its Alternative 2 on SoundExchange's settlement
with NPR/CPB. See id. ex. B at 11-15 (redline showing changes from NPR/
CPB settlement); NRBNMLC PFFCL ] 152. Under Alternative 2, NRBNMLC
would pay a flat annual fee of $1,200,000 to SoundExchange on behalf of
its members for usage by up to 795 noncommercial religious radio
stations that NRBNMLC would name. See id. ex. A at 10-11. The proposal
would permit NRBNMLC to add additional noncommercial radio stations by
paying the minimum fees applicable to other noncommercial webcasters.
See id. ex. A at 12. The religious radio stations that NRBNMLC names
would be subject to an aggregate usage cap of 540,000,000 ATH in the
first year, increasing by 15,000,000 ATH each year of the rate term.
See id. ex. A at 11. The proposal does not establish any consequence
for exceeding those thresholds.
Like the CBI and NPR/CPB settlement rates, Alternative 2 only
applies to a subset of noncommercial webcasters--those noncommercial
religious radio stations named by NRBNMLC. NRBNMLC proposes that all
other noncommercial webcasters would be subject to Alternative 1. See
id., ex. A at 10.
b. Rationale and Justification
NRBNMLC argues that noncommercial webcasters occupy a separate
market segment, in which noncommercial webcasters and record companies
would agree to royalty rates well below rates in the commercial
webcasting market. See, e.g., 8/20/20 Tr. 3256 (Cordes); 8/26/20 Tr.
3998 (Steinberg); Cordes WDT ] 16. On the buyers' side of that
submarket, noncommercial webcasters of all sizes are characterized by a
lower willingness to pay as a result of the legal constraints placed on
nonprofit entities. See, e.g., 8/20/20 Tr. 3255-56, 3259-65 (Cordes).
On the sellers' side of the submarket, record companies would agree to
lower prices as a form of seller-side price discrimination in order to
maximize their overall profits. See, e.g., 8/26/20 Tr. 4001-02
(Steinberg); Steinberg WDT ] 45 n.14; Cordes WDT ] 21.
NRBNMLC advocates a benchmark approach to setting a noncommercial
rate, contending that a benchmark approach is superior to using
theoretical models to support a rate proposal. NRBNMLC PFFCL ] 125.
``[A] benchmark is, I think, always superior to a bunch of theorizing
if one is available. . . .'' 8/26/20 Tr. 4028 (Steinberg).
Specifically, NRBNMLC offers the 2019 NPR/CPB settlement with
SoundExchange (2019 NPR/CPB Agreement) as a benchmark that supports its
rate proposal.\317\ See, e.g.,
[[Page 59568]]
NRBNMLC PFFCL ]] 120-121. NRBNMLC contends that employing the 2019 NPR/
CPB Agreement as a benchmark ``is far superior to using agreements with
commercial webcasters to set all or any part of those rates.'' NRBNMLC
PFFCL ] 122. According to Professor Steinberg, ``there are no
appropriate benchmarks from the commercial submarket because . . . the
non-commercial sector has a different willingness to pay.'' 8/26/20 Tr.
4028 (Steinberg). Notwithstanding NRBNMLC's submission of the 2019 NPR/
CPB settlement with SoundExchange as a benchmark, NRBNMLC did not
present a comprehensive analysis of that settlement by its expert
witnesses. This is likely because NRBNMLC did not offer its rate
proposal until after it had already submitted the written direct and
rebuttal testimony of its witnesses.
---------------------------------------------------------------------------
\317\ In his WDT, Professor Steinberg cites RIAA's offer in Web
I to set a noncommercial rate at one-third the commercial rate as
evidence to support a per-play rate at that level for performances
in excess of an ATH threshold--a structure that corresponds with
NRBNMLC's Alternative 1 rate proposal. See Steinberg WDT ] 61.
NRBNMLC does not refer to this element of Professor Steinberg's
written testimony in its proposed findings, nor did Professor
Steinberg refer to it in his oral testimony. The Judges deem this
argument to have been abandoned in favor of Professor Steinberg's
use of the 2019 NPR/CPB Agreement to support NRBNMLC's rate
proposal. To the extent that NRBNMLC does maintain that argument,
the Judges find Professor Steinberg's reliance on a rejected
proposal made in the course of litigation two decades ago to be
unpersuasive.
Professor Cordes, in his WDT, offers the SoundExchange-CBI
settlement for the Web IV rate period as a benchmark. Again, the
Judges deem this argument to have been abandoned by NRBNMLC in favor
of reliance on Professor Steinberg's use of the more recent 2019
NPR/CPB agreement as a benchmark. To the extent that NRBNMLC does
maintain the CBI Web IV settlement as a benchmark, the Judges note
that the practical effect of the Web IV CBI settlement was to
replicate the rate structure generally applicable to noncommercial
webcasters under the Web IV determination. As the Judges noted in
Web IV, although the parties to the settlement left the royalty rate
for noncommercial educational webcasters (NEWs) undefined (NEWs that
exceed the 159,140 ATH threshold are simply no longer eligible for
the settlement rate), both parties were aware of SoundExchange's
rate proposal for noncommercial webcasters that the Judges
ultimately adopted. See Web IV, 81 FR at 26394. The Judges find
Professor Cordes' assertion that both parties could have considered
the agreement as effectively being a flat rate to be unreasonable
and not credible. See Cordes WDT ] 36.
---------------------------------------------------------------------------
As discussed supra, counsel for NRBNMLC argues that ``[t]he NPR
benchmarks are by far the most comparable agreements to the agreements
that noncommercial buyers would negotiate with sellers in the target
market in this case.'' NRBNMLC PFFCL ] 121.\318\ Counsel contends that
the 2019 NPR/CPB Agreement involves the same types of buyers, the same
sellers, the same works, the same rights, and the same license term as
the target noncommercial compulsory license rate. See id. The Judges
have used similar factors to assess the comparability of proffered
benchmarks in past determinations. See, e.g., Web III Remand, 79 FR at
23115.
---------------------------------------------------------------------------
\318\ See supra note 313 and accompanying text.
---------------------------------------------------------------------------
As to the specifics of NRBNMLC's Alternative 1 rate proposal,
Professor Steinberg testified that, based on his review of
SoundExchange's Web IV and Web V settlements with NPR/CPB, he concluded
``it's reasonable to have a minimum fee of $500 and a one-third the
commercial broadcaster rate for additional usage.'' \319\ 8/26/20 Tr.
4039-40 (Steinberg).
---------------------------------------------------------------------------
\319\ Professor Steinberg views that rate as an upper bound of
reasonable rates, arguing the rate ``may be a little high; that is,
higher rates than we would see in a . . . willing buyer/willing
seller framework with the religious non-commercial stations because
they don't have access to government money.'' Id. at 4040
(Steinberg).
---------------------------------------------------------------------------
To reach that conclusion, Professor Steinberg relied on a statement
in SoundExchange's 2015 settlement agreement with NPR and CPB (2015
NPR/CPB Agreement) that breaks down the components of value included in
the agreement's flat fee, and on an Excel workbook entitled
``[REDACTED] Analysis.'' \320\ According to Professor Steinberg,
SoundExchange prepared the [REDACTED] Analysis ``[REDACTED]'' for
purposes of [REDACTED] to be included in the 2015 NPR/CPB Agreement.
Trial Ex. 3064 ] 3 (WRT of Richard Steinberg) (Steinberg WRT); see 8/
26/20 Tr. 4030 (Steinberg). He contended that the [REDACTED] Analysis
[REDACTED].\321\ See Steinberg WRT ] 8; 8/26/20 Tr. 4029-30
(Steinberg).
---------------------------------------------------------------------------
\320\ The [REDACTED] Analysis was admitted into evidence as
Trial Ex. 3022.
\321\ Professor Steinberg analyzed the [REDACTED] Analysis in
his written rebuttal testimony because NRBNMLC received the document
in discovery after the submission of his written direct testimony.
See Steinberg WRT ]] 1, 3.
---------------------------------------------------------------------------
The 2015 NPR/CPB agreement states:
It is understood that the License Fee includes:
(1) An annual minimum fee of $500 for each Covered Entity for
each year during the Term;
(2) Additional usage fees for certain Covered Entities; and
(3) A discount that reflects the administrative convenience to
the Collective of receiving annual lump sum payments that cover a
large number of separate entities, as well as the protection from
bad debt that arises from being paid in advance.
37 CFR 380.32(b); see also Steinberg WRT ] 8.
According to Professor Steinberg, the [REDACTED] Analysis provides,
inter alia, [REDACTED]. See id. ] 5. [REDACTED] \322\ Id. ] 5; see id.
] 6. Professor Steinberg equated the [REDACTED] from the [REDACTED]
Analysis with the first element of value cited in the 2019 NPR/CPB
agreement and equated the [REDACTED] with the second element of value
cited in that agreement. See id. ] 8; 8/26/20 Tr. 4031, 4034-35
(Steinberg).
---------------------------------------------------------------------------
\322\ The [REDACTED] Analysis used [REDACTED] of $[REDACTED] for
2014 and $[REDACTED] for 2015, while the commercial broadcaster
rates for those years were $0.0023 and $0.0025. See Trial Ex. 3022;
37 CFR 380.12(a)(4)-(5) (2011). The [REDACTED] Analysis does not
actually refer to the commercial broadcaster rates or the 3:1 ratio
posited by Professor Steinberg. Instead, it labels the rates as
``[REDACTED].'' Trial Ex. 3022. The Judges, like SoundExchange,
infer that ``[REDACTED]'' denotes the noncommercial webcaster
settlement agreement under the Webcaster Settlement Act, which is a
nonprecedential agreement. See SX RPFFCL (to NRBNMLC) ] 140. The
Judges discuss this infra, at section V.B.1.c.iv.
---------------------------------------------------------------------------
Professor Steinberg noted that the [REDACTED] rates employed in the
[REDACTED] Analysis are approximately [REDACTED] the then-prevailing
per performance rates for commercial broadcasters. See Steinberg WRT ]]
3, 6 & n.6. He thus concluded that the [REDACTED] used in the
[REDACTED] analysis support a rate for noncommercial webcasters
consisting of a $500 minimum fee and a per-performance fee for
performances over the ATH threshold of one-third the prevailing rate
for commercial broadcasters. See 8/26/20 Tr. 4039-40 (Steinberg).
As for the third element of value listed in the agreement (the
discount for administrative convenience and protection against bad
debt), Professor Steinberg stated:
The most plausible explanation to account for the administrative
convenience value component is that [SoundExchange] recognizes that
its [REDACTED]. . . . We do not know what SX believed [REDACTED],
but if it believed [REDACTED].
Steinberg WRT ] 9.
Professor Steinberg acknowledged that he lacked the data to conduct
a similar analysis with respect to the 2019 NPR/CPB Agreement that
NRBNMLC offers as a benchmark but contended ``the numbers in that
agreement are consistent with this interpretation.'' Id. ] 10. He based
this contention on what he described as a ``check to see whether the
calculations were done in the same way . . . .'' 8/26/20 Tr. 4039
(Steinberg). He compared the average cost per music ATH under the 2015
NPR/CPB Agreement ($0.0020) with the corresponding metric for the 2019
NPR/CPB Agreement ($0.0021) and concluded that the calculation
underlying the 2019 NPR/CPB Agreement ``does replicate the
calculation'' underlying the 2016 NPR/CPB Agreement. Id.; see also
Steinberg WRT ] 10. ``It would be better if l [REDACTED]'' Id.
With respect to Alternative 2, Professor Steinberg stated ``we can
design a flat-fee structure the same way NPR did it'' with adjustments
to scale up the fees and ATH caps to reflect a larger number of covered
entities than in the 2019 NPR/CPB Agreement. 8/26/20 Tr. 4041
(Steinberg).
[[Page 59569]]
You'd want to adjust the 800,000 [dollar annual fee] of [the]
NPR [settlement] for the difference in the music ATH cap and the
number of covered stations between the . . . religious non-
commercials and the NPR non-commercials. But other than that, you'd
structure for a--an additional minimum fee, you can add stations,
and you could structure into a flat-fee structure all of the factors
listed for administrative convenience as well.
Id. In essence, Professor Steinberg described the arithmetic process of
scaling up the terms of the NPR/CPB settlement by 150% to cover a
larger number of radio stations and a greater amount of music. See SX
PFFCL ] 1615.
c. SoundExchange's Response
SoundExchange rejects NRBNMLC's use of the 2019 NPR/CPB agreement
for multiple reasons. Moreover, SoundExchange contends that the 2019
NPR/CPB agreement fails to support NRBNMLC's rate proposals. Finally,
SoundExchange questions the Judges' authority to adopt one of NRBNMLC's
proposed alternatives.\323\
---------------------------------------------------------------------------
\323\ In its reply to NRBNMLC's proposed findings, SoundExchange
also argues that NRBNMLC's presentation of an [REDACTED] as part of
its rebuttal case was procedurally improper and deprived
SoundExchange of a reasonable opportunity to rebut that analysis.
See SX RPFFCL (to NRBNMLC) ]] 121, 241. However, SoundExchange did
not seek to exclude Professor Steinberg's written rebuttal testimony
in its pre-hearing motions. Nor did SoundExchange challenge any of
the discussion of the [REDACTED] Analysis in the Steinberg WRT in
its line-by-line objections. Nor did counsel for SoundExchange
object when NRBNMLC offered the Steinberg WRT for admission at the
hearing. See 8/26/20 Tr. 3993 (Steinberg). The Judges do not
consider an objection first expressed in a party's proposed reply
findings to be properly raised. Even if SoundExchange had raised its
objection at the proper time, the Judges need not address this
procedural argument in light of the Judges' rejection of the 2019
NPR/CPB Agreement as a benchmark on substantive grounds. See infra
section V.B.1.
---------------------------------------------------------------------------
According to SoundExchange, Professor Steinberg ``utterly failed to
do a proper benchmarking analysis.'' SX PFFCL ] 1497. Mr. Orszag
described benchmarking as ``a process that uses rates freely negotiated
in unregulated markets as a benchmark to set rates in a similar,
regulated market.'' Orszag WDT ] 43 (emphasis added). SoundExchange
notes that the parties to the 2019 NPR/CPB Agreement did not set a
freely negotiated rate in an unregulated market, but the agreement was
instead ``a settlement of a regulatory proceeding'' and thus ``not a
proper benchmark.'' SX PFFCL ] 1497 (citing SDARS III, 83 FR at 65220
(acknowledging that a proffered settlement rate was ``not a marketplace
benchmark'' but ``instead a regulated rate'')). SoundExchange notes
that, as a settlement of a statutory rate, the 2019 NPR/CPB Agreement
(and its predecessors) ``reflect not only their negotiating history and
the parties' valuations of the elements of the deal, but also
considerations such as the parties' predictions of litigation outcomes
and potential savings of litigation costs, and the potential for a
party dissatisfied with a litigation outcome to seek redress from
Congress.'' SX RPFFCL (to NRBNMLC) ] 149 (citations omitted).
Even if the Judges were to find a settlement agreement informative,
SoundExchange argues that NRBNMLC has not established that the 2019
NPR/CPB agreement is sufficiently comparable to serve as a benchmark.
SoundExchange and NRBNMLC both acknowledge the critical importance of
comparability in assessing the value of a proffered benchmark. See
NRBNMLC PFFCL ]] 120-121; SX RPFFCL (to NRBNMLC) ] 120 (citing SDARS I,
73 FR at 4088). According to SoundExchange, NRBNMLC bears the burden of
establishing the comparability of its proposed benchmark to the target
market, and has failed to do so. See SX RPFFCL (to NRBNMLC) ] 130
(citing Web IV, 81 FR at 26320).
SoundExchange asserts that neither of NRBNMLC's economic experts
``conducted a meaningful analysis of the comparability of
SoundExchange's settlement with CPB/NPR to the hypothetical market for
which the Judges must set rates in this proceeding.'' SX RPFFCL (to
NRBNMLC) ] 121. According to SoundExchange, the only assessment of
comparability put forward by NRBNMLC ``is solely the work of counsel
for NRBNMLC.'' Id.
SoundExchange argues that the NPR/CPB agreements are not comparable
benchmarks and that the Judges should reject them as they have in
previous webcasting determinations. See SX PFFCL ] 1363 (citing Web IV,
84 FR at 26394). SoundExchange enumerates a number of differences
between the NPR/CPB agreement and the hypothetical target market that
it contends render that agreement valueless as a benchmark.\324\ See SX
RPFFCL (to NRBNMLC) ] 121.
---------------------------------------------------------------------------
\324\ As with NRBNMLC's contrary assertions, see supra note 313
and accompanying text, these contentions are in the form of
arguments of counsel, rather than expert testimony.
---------------------------------------------------------------------------
SoundExchange also contends that the 2019 NPR/CBP agreement
supports neither of NRBNMLC's alternative rate proposals. In addition
to the other alleged infirmities of the agreement as a benchmark,
SoundExchange notes that each of the alternative proposals lacks
material elements of the proffered benchmark and/or includes elements
that are not part of the proffered benchmark. Alternative 1 lacks the
advance payment of royalties on an annual basis and the requirement of
consolidated reporting as in the 2019 NPR/CPB agreement. See SX RPFFCL
(to NRBNMLC) ] 154. It does, however, annualize the ATH threshold,
which was not part of the [REDACTED] Analysis that Professor Steinberg
reviewed. See id. Moreover, according to SoundExchange, the one-third
of commercial rates for excess performances does not appear in the 2019
NPR/CPB agreement and is instead drawn from the [REDACTED] Analysis--an
analysis of non-precedential WSA agreements that the Judges are not
permitted to consider. See id.
With regard to NRBNMLC's Alternative 2, SoundExchange points out it
also does not include consolidated reporting but does include a much
larger number of covered entities and music ATH. See id. ] 159.
According to SoundExchange, the requirement for consolidated reporting,
in particular, is a ``major benefit'' of the NPR/CPB agreement for
SoundExchange. Id. (quoting 8/17/20 Tr. 2232 (Tucker)).
In addition, SoundExchange argues that the Judges lack statutory
authority to adopt Alternative 2 through a determination (as
distinguished from a settlement). See SX PFFCL ] 1518. According to
SoundExchange, 17 U.S.C. 114(f)(1) directs the Judges to determine
rates binding on copyright owners and ``entities performing sound
recordings.'' Id. (quoting 17 U.S.C. 114(f)(1)(B)). ``[T]here is no
obvious statutory basis for adopting in a litigated proceeding a
royalty to be paid by a committee of a trade association'' like
NRBNMLC, as opposed to an entity performing sound recordings. Id. ]
1520. SoundExchange distinguishes NRBNMLC's Alternative 2 from its own
settlement agreement with CPB and NPR, because 17 U.S.C. 801(b)(7)
``has special provisions that permit adoption of the CPB/NPR agreement
as a settlement.'' Id.
B. Judges' Findings and Conclusions
1. Rejection of NPR/CPB Agreement as a Benchmark
NRBNMLC, as the participant offering the 2019 NPR/CPB Agreement as
a benchmark in this proceeding, bears the burden of demonstrating that
the agreement is sufficiently comparable to the target market to serve
as a benchmark. To the extent that the benchmark market differs the
target market, NRBNMLC bears the burden of adjusting the benchmark to
account for
[[Page 59570]]
those differences. NRBNMLC has failed to meet either burden. The
Judges, therefore, reject the use of the 2019 NPR/CPB Agreement as a
benchmark for setting noncommercial webcaster rates in this proceeding.
a. NRBNMLC Presented Insufficient Analysis of the Effect of Ongoing
Litigation on the Benchmark Rate
The 2019 NPR/CPB Agreement is a settlement of ongoing rate
litigation before the Judges. SoundExchange argues that that fact alone
renders the agreement ``not a proper benchmark.'' SX PFFCL ] 1497. The
Judges do not agree that a settlement of a rate proceeding is
categorically barred from use in a benchmarking exercise. Section
114(f)(1)(B)(ii) permits the Judges to consider rates and terms from
comparable voluntary license agreements, and it does not create an
exception for voluntary agreements reached as a settlement of
litigation. Cf. Phonorecords III, 84 FR at 1932-33 (finding ``it is
beyond dispute that Congress has authorized the Judges, in their
discretion, to consider such agreements as evidence'' under then-
effective provisions of 17 U.S.C. 115(c)(3)(D)). Nevertheless,
settlement agreements, unlike voluntary agreements reached outside the
context of litigation, are not ``free from trade-offs motivated by
avoiding litigation cost, as distinguished from the underlying
economics of the transaction.'' Phonorecords III, 84 FR at 1935. To be
informative on the question of willing buyer/willing seller rates, the
proffered settlement must take into account trade-offs motivated by
avoiding litigation cost.
NRBNMLC's economic experts did not perform any analysis to
disaggregate trade-offs motivated by avoiding litigation cost from the
underlying economics of the deal. Neither of NRBNMLC's economic experts
even acknowledged the existence of the issue. Professor Cordes did not
analyze the 2019 NPR/CPB Agreement at all and Professor Steinberg's
analysis of the 2015 NPR/CPB Agreement sought to derive from the flat
annual fee a rate for performances in excess of the ATH threshold
without any attempt to make adjustments to account for considerations
relating to litigation costs (or any justification for not doing so).
The Judges find that, in the absence of evidence concerning the
effect of avoidance of litigation costs on the royalty rate agreed to
by SoundExchange and NPR/CPB in their settlement agreement, NRBNMLC's
analysis of the 2015 NPR/CPB Agreement is not adequately informative of
a willing buyer/willing seller rate in the target market.
b. NRBNMLC Did Not Demonstrate That the Benchmark Was Comparable
Section 114 states that the Judges ``may consider the rates and
terms for comparable types of audio transmission services and
comparable circumstances under voluntary license agreements.'' 17
U.S.C. 114(f)(1)(B)(ii) (emphasis added). Congress thus directed the
Judges to inquire into the comparability of a proffered voluntary
license agreement. The Judges have long acknowledged that comparability
is a key consideration in determining the usefulness of a proffered
benchmark. See, e.g., Determination of Rates and Terms for Preexisting
Subscription Services and Satellite Digital Audio Radio Services, 73 FR
4080, 4088 (Jan. 24, 2008) (SDARS I).
NRBNMLC presented no economic analysis concerning the comparability
of its proffered benchmark. Instead, counsel for NRBNMLC prepared its
own analysis as part of NRBNMLC's proposed findings. See NRBNMLC PFFCL
] 121. Drawing on factors that the Judges found relevant in past
cases,\325\ NRBNMLC contended that the proposed benchmark and target
hypothetical market have the same types of buyers, same sellers, same
works, same rights, and the same license term. See NRBNMLC PFFCL ] 121.
Counsel for SoundExchange--also without the benefit of economic
testimony--argues that the 2019 NPR/CPB Agreement is insufficiently
comparable to the target hypothetical market. SX RPFFCL (to NRBNMLC) ]
121. SoundExchange contends that there are different buyers (CPB as
opposed to individual webcasters), different sellers (SoundExchange as
opposed to individual record companies), different sets of works (all
commercial sound recordings as opposed to an individual record
company's repertoire), and different rights and obligations. See id.
---------------------------------------------------------------------------
\325\ See, e.g., Determination of Rates and Terms for
Preexisting Subscription Services and Satellite Digital Audio Radio
Services, 78 FR 23054, 23058 (Apr. 17, 2013) (``a benchmark market
should involve the same buyers and sellers for the same rights'')
(SDARS II).
---------------------------------------------------------------------------
The 2019 NPR/CPB Agreement (and its predecessor agreements)
licenses the use of sound recordings by noncommercial entities for
noninteractive transmissions. The agreement is between SoundExchange--a
collective operating on behalf of record companies and recording
artists--and CPB--a private entity, created by the government, that
provides funding for public broadcasting entities, including NPR
stations. Under the agreement, CPB pays SoundExchange funds
appropriated by Congress to cover use of commercial sound recordings by
NPR stations. The Judges find that, as a general matter the NPR/CPB
agreements share common elements with the target market but, as
enumerated by SoundExchange, differ in their particulars.
There is insufficient expert testimony to determine the extent to
which the similarities between the 2019 NPR/CPB Agreement and the
target market support its use as a benchmark or the degree to which the
differences between the agreement and the target market detract from
that use (or require adjustments to the benchmark rates). As the party
proffering the agreement as a benchmark, it was incumbent on NRBNMLC to
adduce sufficient evidence to demonstrate that the agreement is
sufficiently comparable to the target market. NRBNMLC failed to do so.
c. Professor Steinberg's Analysis of the 2019 NPR/CPB Agreement Is
Based on Outdated Information That Applies Rates From a Non-
Precedential WSA Settlement Agreement
i. The Contents of the [REDACTED] Analysis
NRBNMLC relies almost exclusively on Professor Steinberg's analysis
of the [REDACTED] Analysis to derive rates from the 2019 NPR/CPB
Agreement. See Steinberg WRT ]] 4-10. The [REDACTED] Analysis is an
Excel Workbook prepared by SoundExchange in ``[REDACTED],'' id. ] 3,
that consists of [REDACTED] spreadsheets, labelled ``[REDACTED],'' and
``[REDACTED].'' Trial Ex. 3022. Professor Steinberg confined his
analysis to the ``Estimations'' spreadsheet. See Steinberg WRT ]] 4-10.
The heading for the ``[REDACTED]'' spreadsheet is ``[REDACTED]
Analysis.'' The spreadsheet is divided into [REDACTED] sections
labelled ``[REDACTED],'' and ``[REDACTED].'' Trial Ex. 3022, [REDACTED]
sheet. Each section contains several lines of data and calculations.
See id.
The ``[REDACTED]'' section of the ``[REDACTED]'' spreadsheet (rows
[REDACTED]) seeks to estimate the [REDACTED] [REDACTED]. See id.;
Steinberg WRT ] 4. That estimate is used in the sections that follow.
The ``[REDACTED]'' section (rows [REDACTED]) calculates the
[REDACTED]. See Steinberg WRT ] 4 n.7. The spreadsheet calculates
[REDACTED] by multiplying the
[[Page 59571]]
[REDACTED] from the previous portion of the spreadsheet by [REDACTED],
then multiplying that product by the ``[REDACTED]'' of [REDACTED].
Trial Ex. 3022, Estimations sheet, rows 19-22.
The ``[REDACTED]'' section (rows [REDACTED]) estimates [REDACTED]by
multiplying the[REDACTED] by the ``[REDACTED].'' Id. rows [REDACTED];
see Steinberg WRT ] 5. Unlike the previous sections that calculate
[REDACTED], this section includes an [REDACTED] as well. See Trial Ex.
3022, Estimations sheet, rows 26-28.
The ``[REDACTED]'' section (rows [REDACTED]) [REDACTED] Trial Ex.
3022, [REDACTED]sheet, rows [REDACTED]; see Steinberg WRT ] 6. The
spreadsheet computes the [REDACTED]. See id.
To summarize, the ``[REDACTED]'' spreadsheet examines [REDACTED]
scenarios: one in which [REDACTED]. SoundExchange computed [REDACTED].
See Steinberg WRT ]] 4, 6 n.11; Trial Ex. 3022, [REDACTED] sheet, rows
[REDACTED], [REDACTED], [REDACTED].
ii. The Purpose of the [REDACTED] Analysis
Professor Steinberg testified that SoundExchange prepared the
[REDACTED] Analysis ``for the Web IV license agreement,'' i.e., for
purposes of computing the [REDACTED]. Steinberg WRT ] 3; see 8/26/20
Tr. 4030 (Steinberg). Professor Steinberg apparently infers that it was
``done for the Web IV license agreement,'' 8/26/20 Tr. 4030
(Steinberg), based on when it was performed and the fact that the
annual flat fee in the agreement--$560,000--is ``at most, [REDACTED]''
of $[REDACTED]. Steinberg WRT ] 7. He attributes the [REDACTED] to
[REDACTED]. See id.
By contrast, SoundExchange argues that the [REDACTED] analysis
``does not purport to address the Web IV CPB/NPR settlement.'' SX
RPFFCL (to NRBNMLC) ] 140. SoundExchange describes it as ``an old and
backward-looking document'' that ``[REDACTED]'' SX PFFCL ]] 1507-1508.
The purpose for which SoundExchange performed the [REDACTED]
Analysis is not apparent from the document itself. Neither scenario
examined on the ``[REDACTED]'' spreadsheet is identified in a way that
suggests that the purpose of the analysis is to derive a flat annual
fee for a settlement in Web IV. As counsel for SoundExchange asserts in
proposed findings, the document primarily looks backward at the
experience under the Web III-era agreement.\326\
---------------------------------------------------------------------------
\326\ The ``[REDACTED]'' spreadsheet in the [REDACTED] Analysis
workbook does not shed any additional light on the question. The
``[REDACTED]'' are cryptic at best and appear to consist primarily
of a [REDACTED]. The Judges draw no inferences one way or the other
from the [REDACTED] spreadsheet.
---------------------------------------------------------------------------
Extrinsic evidence of the purpose for the [REDACTED] Analysis is
also lacking. There is no testimony or documentary evidence in the
record that identifies who requested the [REDACTED] Analysis and for
what purpose, who prepared it, and to whom it was circulated.
Nevertheless, the timing of the analysis ([REDACTED]) and the rough
proximity of the value derived in the [REDACTED] scenario to the
royalty rate adopted in the settlement agreement lend some support for
the inference that the analysis was prepared for purposes of
[REDACTED]. However, while a plausible inference, it is by no means a
certainty--or even a strong probability.
Because there is a plausible basis to infer that the [REDACTED]
Analysis was prepared for the 2015 NPR/CPB Agreement, the Judges will
not discount the analysis entirely as a tool for deriving an implicit
per-performance royalty rate from that agreement. However, given the
exceedingly thin record on which that inference is based, the Judges
give little weight to the [REDACTED] Analysis and the conclusions
Professor Steinberg draws from it.
iii. Reliance on an Analysis Based on Ten-Year-Old Data
As described supra, SoundExchange prepared its estimations for the
[REDACTED] scenarios in the [REDACTED] Analysis using usage data
submitted by [REDACTED] between [REDACTED] and [REDACTED]. See
Steinberg WRT ]] 4, 6 n.11. SoundExchange used the data together with
``[REDACTED]'' rates to determine values for the [REDACTED] under
[REDACTED] scenarios.\327\
---------------------------------------------------------------------------
\327\ See supra section V.B.1.c.i.
---------------------------------------------------------------------------
The utilization of usage data that is as much as a decade old to
interpret the 2019 NPR/CPB Agreement is not necessarily improper.
However, the Judges require some explanation why the use of data from
another era and another settlement agreement nevertheless yields
reliable results. The Judges find Professor Steinberg's analysis
unconvincing on this point. To apply the [REDACTED] Analysis to the
2019 NPR/CPB Agreement, Professor Steinberg relies on at least three
inferences or assumptions that may be plausible individually but are
unconvincing in aggregate.
First, as discussed supra, Professor Steinberg infers that
SoundExchange prepared the [REDACTED] Analysis of the Web III-era data
to [REDACTED] under the Web IV-era settlement. The Judges find that
inference plausible but weakly supported by the evidence.
Second, Professor Steinberg infers that the annual royalty payments
in the Web V-era settlement reflect the same underlying per-performance
rate as the Web IV-era settlement. Professor Steinberg acknowledged
that he lacked the information to perform an analysis similar to the
[REDACTED] Analysis on the 2019 NPR/CPB Agreement. See Steinberg WRT ]
10. The best he could do under the circumstances was to assert that the
numbers in the 2019 NPR/CPB Agreement are ``consistent with'' his
interpretation of the [REDACTED] Analysis, based on a comparison of the
average royalty per music ATH under each agreement. The Judges find
this a weak basis for applying to the 2019 NPR/CPB Agreement an
analysis that [REDACTED]. Professor Steinberg's own awareness of the
weakness of this inference is reflected in his statement that ``[i]t
would be better if I had the data to replicate the whole analysis
[REDACTED].'' Steinberg WRT ] 10. In his written testimony, Professor
Steinberg did not hold out his analysis as a basis for quantifying a
per-performance rate, but only as an indication that the rate would be
``[REDACTED].'' Id.
Third, Professor Steinberg's analysis assumes that the discount for
administrative convenience that is mentioned in the NPR/CPB agreements
is separate from the minimum fee and the usage fee that the agreement
recites. Professor Steinberg did not consider the possibility that the
discount is reflected in either or both of the minimum fee and usage
fee that are included in the flat annual payment. Instead, Professor
Steinberg speculated that the discount resulted from SoundExchange's
underestimation of excess usage by NPR stations that do not provide
census reports of usage. The Judges reject that attempt to identify the
discount included in the agreement as unsupported by the evidence.
In sum, the Judges find Professor Steinberg's application of the
[REDACTED] Analysis to the 2019 NPR/CPB Agreement to be questionable,
and they accord it little weight.
[[Page 59572]]
iv. Reliance on Valuations Based on a Non-Precedential WSA Settlement
SoundExchange based the valuations it performed in the [REDACTED]
Analysis on ``[REDACTED]'' per-performance rates. See Trial Ex. 3022
rows [REDACTED], [REDACTED]; Steinberg WRT ] 6 n.10. ``NCW'' is an
abbreviation that SoundExchange uses for ``Non-Commercial Webcasters.''
See 9/9/20 Tr. 5829 (Ploeger). ``WSA'' is the commonly used
abbreviation for ``Webcaster Settlement Act.'' \328\ See, e.g., Web IV,
81 FR at 26318. Based on the context and timing of the [REDACTED]
Analysis, the Judges conclude that ``[REDACTED]'' refers to the
Webcaster Settlement Act settlement agreement setting rates and terms
for noncommercial webcasters that the Copyright Office published in the
Federal Register on August 12, 2009. See Notification of Agreements
under the Webcaster Settlement Act of 2009, 74 FR 40614, 40624-28 (Aug.
12, 2009). That settlement agreement set rates and terms that
noncommercial webcasters could elect to pay in lieu of rates and terms
set by the Judges for the period from 2006-2015.
---------------------------------------------------------------------------
\328\ Congress enacted three Webcaster Settlement Acts: the
Small Webcaster Settlement Act of 2002, Public Law 107-321, 116
Stat. 2780 (Dec. 4, 2002); the Webcaster Settlement Act of 2008,
Public Law 110-435, 122 Stat. 4974 (Oct. 16, 2008); and the
Webcaster Settlement Act of 2009, Public Law 111-36, 123 Stat. 1926
(Jun. 30, 2009).
---------------------------------------------------------------------------
The Webcaster Settlement Act of 2009 (2009 WSA) states that the
provisions of a settlement agreement reached under the 2009 WSA are
inadmissible as evidence and may not be taken into account by the
Judges in any rate proceeding under section 114 or 112:
Neither [the provisions of the WSA] nor any provisions of any
agreement entered into pursuant to [the WSA], including any rate
structure, fees, terms, conditions, or notice and recordkeeping
requirements set forth therein, shall be admissible as evidence or
otherwise taken into account in any administrative, judicial, or
other government proceeding involving the setting or adjustment of
the royalties payable for the public performance or reproduction in
ephemeral phonorecords or copies of sound recordings, the
determination of terms or conditions related thereto, or the
establishment of notice or recordkeeping requirements by the
Copyright Royalty Judges . . . . It is the intent of Congress that
any royalty rates, rate structure, definitions, terms, conditions,
or notice and recordkeeping requirements, included in such
agreements shall be considered as a compromise motivated by the
unique business, economic and political circumstances of webcasters,
copyright owners, and performers rather than as matters that would
have been negotiated in the marketplace between a willing buyer and
a willing seller . . . . This subparagraph shall not apply to the
extent that [SoundExchange] and a webcaster that is party to [a WSA
agreement] expressly authorize the submission of the agreement in a
proceeding under this subsection.
17 U.S.C. 114(f)(4)(C). Section 6.3 of the NCW-WSA agreement contains
similar language, making it clear that SoundExchange and the
noncommercial webcasters did not ``expressly authorize'' use of the
agreement in rate proceedings. See 74 FR at 40627.
On its face, it is apparent that the per-performance royalty rates
that SoundExchange used in the [REDACTED] Analysis are rates derived
from a non-precedential WSA agreement that the Judges are not permitted
to consider in a rate proceeding. NRBNMLC does little to address this
issue. Professor Steinberg's written rebuttal testimony, in which he
analyzes the [REDACTED] Analysis, scarcely acknowledges that the rates
he describes (imprecisely) as being [REDACTED] commercial per-
performance rates were taken from the non-precedential NCW-WSA
agreement.\329\ In a proposed reply finding, counsel for NRBNMLC
acknowledges that the rate comes from a non-precedential WSA agreement,
and quotes from a memorandum opinion by the Register of Copyrights
(Register) responding to questions referred by the Judges in Web IV--
presumably to justify use of a nonprecedential rate in this context.
See Services RPFFCL ] 1509 (quoting Memorandum Opinion on Novel
Material Questions of Law, Docket No. 14-CRB-0001-WR, at 14-15 (Sep.
18, 2015) (Memorandum Opinion)). The reference is inapt. The Register
opined that the WSA does not prevent the Judges from considering a
direct license concluded outside of the WSA that incorporates terms
``that are copied from, are substantively identical to, have been
influenced by, or refer to, the provisions of a WSA agreement.''
Memorandum Opinion at 10. The [REDACTED] Analysis does not examine a
non-WSA agreement. It seeks to determine what [REDACTED] (parties to a
separate non-precedential WSA Agreement) \330\ would have paid under
the NCW-WSA settlement agreement during the period when that settlement
was in force.
---------------------------------------------------------------------------
\329\ Professor Steinberg refers to labels in the CPB/NPR
Analysis that mention ``NCW-WSA,'' but does not explain what the
acronym means. See Steinberg WRT ] 6 n.10.
\330\ See Notification of Agreements under the Webcaster
Settlement Act of 2009, 74 FR 40614, 40620-24 (Aug. 12, 2009).
---------------------------------------------------------------------------
The Judges conclude that they may not consider the [REDACTED]
Analysis in accordance with the provisions of the Webcaster Settlement
Act of 2009 as codified in 17 U.S.C. 114(f)(4)(C).
d. The 2019 NPR/CPB Agreement Does Not Support NRBNMLC's Rate Proposals
NRBNMLC relies on the 2019 NPR/CPB Agreement to support its rate
proposal. As previously discussed, the Judges find inadequate
evidentiary and analytical support for reliance on that agreement as a
benchmark. Even if the Judges found the 2019 NPR/CPB Agreement to be a
sound benchmark, the Judges find that it does not adequately support
NRBNMLC's rate proposal.
SoundExchange has identified several elements from the 2019 NPR/CPB
Agreement that are not present in NRBNMLC's two alternative rate
proposals. To the extent these differences result in material
differences between the benchmark and the proposed rates, the benchmark
does not support the proposed rates without appropriate adjustment (or
adequate explanation from a competent witness why an adjustment is
unnecessary).
i. Absence of Up-Front Payment
Under NRBNMLC's proposed Alternative 1, each noncommercial
webcaster would pay an annual $500 per station or channel minimum
payment plus monthly payments of per-performance royalties at one-third
the rate for commercial webcasters for transmissions in excess of
1,909,680 ATH per year. See NRBNMLC Rate Proposal ex. A at 2, 9. By
contrast, the 2019 NPR/CPB Agreement requires up-front annual payments
covering up to 530 NPR stations. See 85 FR 11857, 11857-58 (Feb. 28,
2020).
The 2019 NPR/CPB Agreement recites that the rate reflects
(1) An annual minimum fee for each Public Broadcaster for each
year during the Term;
(2) Additional usage fees for certain Public Broadcasters; and
(3) A discount that reflects the administrative convenience to
[SoundExchange] of receiving annual lump sum payments that cover a
large number of separate entities, as well as the protection from
bad debt that arises from being paid in advance.
Id. at 11858. The parties to the 2019 NPR/CPB Agreement prominently
highlight the ``administrative convenience'' and ``protection from bad
debt'' that result from the advance payment structure as being
economically significant elements of the agreement that justify a
discount in the royalty rate. NRBNMLC does not adjust the per-
performance rate that it
[[Page 59573]]
purportedly derives from the 2019 NPR/CPB Agreement to reflect the
discount for advance payments. In the absence of any adjustment, the
2019 NPR/CPB Agreement does not support NRBNMLC's Alternative 1 rate
proposal.
While NRBNMLC's Alternative 2 rate includes advance payments, the
issue would persist even if the Judges adopted Alternative 2.
Alternative 2 is not a stand-alone rate proposal, since it only covers
a subset of noncommercial webcasters (religious broadcasters selected
by NRBNMLC). NRBNMLC proposes that all other noncommercial webcasters
(not otherwise covered by a settlement) would fall into Alternative 1.
In effect, Alternative 1 is part of the Alternative 2 rate proposal.
ii. Absence of Consolidated Reporting
As part of their settlement, SoundExchange and CPB/NPR agreed to
continue the practice of consolidating reports of use through CPB. See
Joint Motion to Adopt Partial Settlement, Trial Ex. 3020 at 3 (Sep. 23,
2019) (2019 Settlement Motion). The parties aver that they did not
include the details of that part of their agreement in the settlement
submitted with their motion because the Judges had stated previously
that they ``do not wish to codify in the Code of Federal Regulations
[reporting] arrangements pertinent only to specific licensees.'' Id. at
3 n.2 (citing Notice and Recordkeeping for Use of Sound Recordings
under Statutory License, Final Rule, 74 FR 52418, 52419 (Oct. 13, 2009)
(``We have no intention of codifying these negotiated variances [from
the Judges' regulations] in the future unless and until they come into
such standardized use as to effectively supersede the existing
regulations.'')).
By contrast, NRBNMLC's rate proposal does not require consolidated
reporting of usage data. See 8/26/20 Tr. 4068-69 (Steinberg). NRBNMLC's
Alternative 2 rate proposal includes a provision stating ``NRBNMLC and
Noncommercial Religious Broadcasters shall submit reports of use and
other information concerning website Performances as agreed upon with
[SoundExchange]. In the absence of such an agreement, Noncommercial
Religious Radio Stations shall submit reports of use in accordance with
then-applicable regulations . . . .'' NRBNMLC Rate Proposal ex. A at
14. Unlike the settlement with NPR/CPB, there is no advance commitment
to provide consolidated reporting. Compare id. with 2019 Settlement
Motion at 3. NRBNMLC merely states that SoundExchange and the religious
broadcasters are free to adopt an arrangement concerning reports of use
that departs from the Judges' regulations. SoundExchange and religious
broadcasters would have that ability without NRBNMLC's proposed
language. See Notice and Recordkeeping for Use of Sound Recordings
Under Statutory License, Final Rule, 74 FR at 52419 (``digital audio
services are free to negotiate other formats and technical standards
for data maintenance and delivery and may use those in lieu of
regulations adopted by the Judges, upon agreement with
[SoundExchange]'').
The record reflects that consolidated reporting has value to
SoundExchange. Travis Ploeger, Director of License Management for
SoundExchange, testified that CPB (through an entity called NPR Digital
Services), collects usage information from NPR stations and provides
quality assurance before providing the information to SoundExchange,
thus making the information more efficient to process. See 9/9/20 Tr.
5803, 5822 (Ploeger); see also 8/17/20 Tr. 2232 (Tucker) (``one of the
things that NPR does is it collects together the messy data of the
individual stations and reports it as part of the agreement'').
Professor Steinberg also recognized that consolidated reporting by CPB
represents a cost savings to SoundExchange. See 8/26/20 Tr. 4068
(Steinberg).
NRBNMLC's proposed Alternative 2 thus differs materially from the
proposed benchmark. NRBNMLC makes no attempt to adjust its proposed
rate to compensate for this material difference, and provides no
justification for not making an adjustment. See 8/26/20 Tr. 4068-69
(Steinberg). Rather, counsel for NRBNMLC faults SoundExchange for
failing to quantify the value of consolidated reporting. See Services
RPFFCL ] 1523. It is not SoundExchange's (or the Judges')
responsibility to rescue NRBNMLC's faulty benchmark by proposing an
appropriate adjustment. In the absence of an appropriate adjustment,
the 2019 NPR/CPB Agreement does not support NRBNMLC's Alternative 2
rate proposal.
e. Conclusion Regarding NRBNMLC's Proposed NPR/CPB Benchmark
Each of the foregoing critiques counsels for limited or no reliance
on the proffered benchmark. In aggregate, the critiques constitute an
overwhelming argument for rejecting entirely the 2019 NPR/CPB Agreement
as a benchmark. The Judges, therefore, reject NRBNMLC's use of the 2019
NPR/CPB Agreement as a benchmark.
2. Acceptance of Reasoning Underlying SoundExchange Rate Proposal
SoundExchange relies on the same reasoning adopted by the Judges in
webcasting proceedings going back to Web II to support its proposed
rate structure.\331\ Absent persuasive counterarguments, the Judges
will accept that reasoning.
---------------------------------------------------------------------------
\331\ See supra, section V.A.1.b.
---------------------------------------------------------------------------
a. Evaluation of NRBNMLC Counterarguments
NRBNMLC puts forward six principal counterarguments against the
rationale that has supported the existing noncommercial rate structure
since Web II. The Judges examine each of them in turn.
i. Noncommercial Webcasters Have a Lower Willingness To Pay Than
Commercial Webcasters
A common theme throughout the testimony presented by NRBNMLC is
that noncommercial webcasters occupy a distinct market segment from
commercial webcasters and have a lower willingness to pay license fees.
See, e.g., 8/20/20 Tr. 3255-56 (Cordes); Cordes WDT ] 16; Steinberg WDT
] 15. NRBNMLC argues that the reason noncommercial webcasters (and
nonprofit entities in general) have a lower willingness to pay than
their commercial counterparts is the ``nondistribution constraint,''
i.e., the prohibition under state and federal law on distribution of
profits by nonprofit entities. See 8/26/20 Tr. 3996 (Steinberg);
Steinberg WDT ] 14. ``[B]ecause profits can't be distributed, there are
no shareholders. The Board of Directors has no financial interest in
what the nonprofit does.'' 8/26/20 Tr. 3996 (Steinberg). Consequently,
``nonprofit organizations are free to pursue charitable missions that
are not rewarded in the marketplace.'' Id.
The nondistribution constraint also limits the financing available
to nonprofit entities. ``[B]ecause they can't distribute profits,
there's no access to traditional equity capital. They can't issue
shares of stock that pay dividends.'' Id. at 3997. The nondistribution
constraint ``also may pose some challenges to [nonprofits] raising debt
capital, because . . . it may limit the amount of collateral that they
may be able to pledge in exchange for . . . debt financing.'' 8/20/20
Tr. 3265 (Cordes). Nonprofits are able to receive donations, ``[b]ut
donations are limited because donations benefit a group of people. It's
a classical public goods problem.'' Because of free ridership, ``each
donor gives less than their
[[Page 59574]]
willingness to pay in equilibrium.'' 8/26/20 Tr. 3998 (Steinberg). For
noncommercial broadcasters specifically, FCC rules also limit their
ability to raise funds by prohibiting the sale of advertising. See
Steinberg WDT ] 28; Web IV, 81 FR at 26319-20. In sum, ``the limited
access to capital and the fact that . . . there are no owners that can
. . . capture the surplus, those two factors together from an economic
perspective would lower the willingness to pay for--on the part of non-
commercial broadcasters for license fees.'' 8/20/20 Tr. 3265 (Cordes).
On this basis, NRBNMLC repeatedly criticizes the existing rate
structure for requiring noncommercial webcasters to pay commercial per-
performance royalties. See, e.g., NRBNMLC PFFCL ] 31.
The Judges have recognized that noncommercial webcasters occupy a
distinct submarket within the webcasting market. See, e.g., Web IV, 81
FR at 26319-20. For that reason, the Judges adopted the existing rate
structure, which provides a substantial discount to noncommercial
webcasters. Unlike commercial webcasters, noncommercial webcasters pay
no per-performance royalties for any transmissions up to the 159,140
monthly ATH threshold. See 37 CFR 380.10(a)(2); see also SoundExchange
Rate Proposal at 3, attach. at 21. A large majority of noncommercial
webcasters pay only the annual minimum fee (currently $500) and pay no
per-performance royalties at all. See Trial Ex. 5625 ]] 9, 33 (WRT of
Travis Ploeger) (Ploeger WRT) (``in 2018, approximately 97% of
noncommercial webcasters at the statement of account level (96% at the
parent company level) paid only the minimum fee.''). All noncommercial
webcasters, regardless of size, benefit from this allowance. See id. ]]
35, 37 (in 2018 Family Radio, [REDACTED] religious noncommercial
webcasters, received an effective [REDACTED]% discount from commercial
webcasting rates and EMF, the noncommercial webcaster [REDACTED],
received an effective [REDACTED]% discount). SoundExchange's proposal
would increase noncommercial rates (as well as commercial rates), but
the discount for noncommercial webcasters would remain at a similar
level on a percentage basis. See id. ]] 36, 38.
NRBNMLC is not correct in stating that the current rate structure
(and SoundExchange's proposal) requires noncommercial webcasters to pay
commercial rates. A more accurate statement would be that the current
rate structure (and SoundExchange's proposal) requires noncommercial
webcasters to pay per-performance royalties on performances over the
159,140 ATH threshold at the same marginal rate as commercial
webcasters.
NRBNMLC did not examine the question whether noncommercial
webcasters' lower willingness to pay requires lower marginal rates as
distinguished from lower average rates. The only passing reference to
the question was in a colloquy between SoundExchange's expert,
Professor Tucker, and the Judges:
Q: As an economist, do you think the more important way to look
at this or the more important data point is the marginal rate that's
paid per-play or the average rate as you have depicted it?
A: So as an economist, as I was thinking about incentives where,
for programming, the marginal rate is going to be hugely important.
. . . But when I think about the arguments which were proposed by
the non-commercial broadcasters about the idea that non-profits
deserve a discount, I think this is the right way of looking at it
when thinking about the way that they were framing a discount.
* * *
Q: And so do you see that the non-commercial broadcasters would
have a marginal decision to make as to whether or not it was worth
it to pay the .0028, or whatever the rate would be, per-play based
on how much revenue they can anticipate receiving through
contributions or whatever donations they could receive as non-
commercial broadcasters?
A: You know, so I think as an economist one would have to
acknowledge that that would play into their decision-making.
8/17/20 Tr. 2206-07 (Tucker). Professor Tucker's acknowledgement that
marginal rates would have an impact on a noncommercial webcaster's
decision-making does not persuade the Judges that average rates are
unimportant.\332\ Nor does it mean that the effective discount for
noncommercial webcasters under the current rate structure is
meaningless. More importantly, this testimony does not address the
question of the appropriate role of marginal rates versus average rates
in determining whether a given rate structure exceeds noncommercial
webcasters' willingness to pay. NRBNMLC has not adequately developed
this argument.
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\332\ The Judges note, in this regard, that NRBNMLC's
Alternative 1 rate proposal also includes a tranche of performances
up to an ATH threshold that do not require payment of per-
performance royalties, thus lowering the effective average rate for
all noncommercial webcasters. Presumably, the NRBNMLC proposal would
not include this effective discount if it were meaningless to
noncommercial webcasters.
---------------------------------------------------------------------------
The Judges find, as they have in past proceedings, that
noncommercial webcasters constitute a distinct submarket in which they
have a lower willingness to pay for licenses than commercial
webcasters. However, the Judges are not persuaded that a rate structure
in which noncommercial webcasters pay no per-performance fees up to a
threshold and commercial per-performance fees above that threshold is
inconsistent with that finding.
ii. In an Unregulated Market Copyright Owners Would Be Willing To
Accept Lower Royalties From Noncommercial Webcasters as a Form of Price
Discrimination
NRBNMLC argues that the existence of separate submarkets for
licensing sound recording performance rights to commercial and
noncommercial webcasters fosters seller-side price discrimination that
would result in lower royalty rates for noncommercial webcasters.\333\
See NRBNMLC PFFCL ]] 91-102. Professor Cordes testified that four
conditions must be present for price discrimination to occur:
---------------------------------------------------------------------------
\333\ As relevant here, Professor Cordes defines price
discrimination as ``the case in which sellers of a good or service
are able to segment the market so that they are able to offer the
same good or service at different prices to different groups of
buyers.'' Cordes WDT ] 21.
(a) buyers need to have different price elasticities of demand
(sensitivity to higher and lower prices); (b) sellers need to be
able to identify which groups of buyers have higher and lower price
elasticities of demand; (c) sellers need to have an incentive to
differentiate between the price charged to buyers with lower price
elasticities and the price charged to buyers with higher price
elasticities; and (d) buyers benefiting from the lower prices must
---------------------------------------------------------------------------
not be able to re-sell the good to other buyers.
Cordes WDT ] 22. According to Professor Cordes, the hypothetical market
for webcasting services would be ``conducive for price discrimination
to occur . . . .'' 8/20/20 Tr. 3266 (Cordes).
Well, first of all, it would be quite easy, obviously, for
sellers to be able to identify different segments of the market. You
know who the commercial broadcasters are. You know who the non-
commercial broadcasters are. So it's not hard to figure out, you
know, which--which group is which. Secondly, because of the
distinctive traits of nonprofit broadcasters, they would have a
higher price elasticity of demand. They would be more likely to buy
the good when they otherwise might not, if, in fact, the price were
lowered to them. And, finally, non-commercial broadcasters would be
prohibited by regulations from reselling the product.
Id. at 3267.
Even if the Judges were to accept the proposition that record
companies would engage in seller-side price discrimination in the
hypothetical unregulated market,\334\ that does not
[[Page 59575]]
advance NRBNMLC's attack on the current rate structure and
SoundExchange's proposed rate structure. As discussed supra, both the
existing rate structure and that proposed by SoundExchange provide
noncommercial webcasters a substantial discount from the fees charged
to commercial webcasters. Professor Cordes' testimony does not address
whether price discrimination in the hypothetical market would result in
discounts for noncommercial webcasters that would be greater than, less
than, or the same as the discount under the current or proposed rates.
Nor does it address the particular structure those discounts would
take. Nothing in Professor Cordes' testimony concerning price
discrimination invalidates or undermines SoundExchange's proposed rate
structure.
---------------------------------------------------------------------------
\334\ Professor Cordes acknowledged in his written testimony
that he did not perform any empirical analysis of the relative price
elasticities of commercial and noncommercial webcasters. See Cordes
WDT ] 24. Nor did he address in his oral testimony the incentives
(or disincentives) for record companies to differentiate their
prices (the third of his four conditions necessary for price
discrimination to occur). For example, the risk of cannibalization,
discussed infra, section V.B.2.a.iii, could affect record companies'
incentives to engage in price discrimination. These would be
relevant considerations in evaluating the strength of Professor
Cordes' proposition concerning price discrimination in the
hypothetical market.
---------------------------------------------------------------------------
iii. Concerns About Cannibalization of Commercial Markets by Larger
Noncommercial Webcasters Are Unfounded
In Web IV, the Judges identified the risk of cannibalization as an
important consideration in adopting a rate structure that imposes
commercial rates for performances by noncommercial webcasters above the
159,140 ATH threshold. See Web IV, 81 FR 26392 (``there must be limits
to the differential treatment for noncommercials to avoid `the chance
that small noncommercial stations will cannibalize the webcasting
market more generally and thereby adversely affect the value of the
digital performance right in sound recordings''') (quoting Web II, 72
FR at 24097). NRBNMLC contends ``the cannibalization argument is
unsupported by the record and unlikely to occur.'' Steinberg WDT ] 25.
NRBNMLC argues that there are a number of differences between
commercial and noncommercial entities that make it unlikely listeners
will be attracted away from commercial to noncommercial webcasting.
(A) Noncommercial Broadcasters Do Not Seek To Compete With Commercial
Broadcasters
NRBNMLC contends that, due to the constraints on, and mission-focus
of, noncommercial broadcasters, they are averse to competing with
commercial entities and are motivated instead to seek out ``unserved
markets with respect to their mission.'' 8/26/20 Tr. 4008 (Steinberg);
see Cordes WDT ] 16.
The concerns about cannibalization that the Judges articulated in
past webcasting proceedings focus on potential displacement in
listenership from commercial to noncommercial webcasters and is
independent of noncommercial webcasters' motivations. The record shows
that at least some noncommercial broadcasters seek to expand their
audiences. See Emert WDT (Web IV) ] 38 (``It is obviously not ideal for
a noncommercial religious broadcaster to turn listeners away from their
programming, as it works against our mission of reaching as many people
as we can with our message of hope and inspiration . . . .'') (emphasis
added). Whatever the motivation to increase its listenership--whether
it be to ``compete'' or to ``advance their mission''--it is the
increase in listenership itself that poses a risk of cannibalization if
that increase results from diverting listeners who otherwise would be
listening to a commercial service. See 8/20/20 Tr. 3275-76 (Cordes)
(acknowledging that even if a noncommercial webcaster did not set out
to compete with commercial webcasters, the noncommercial webcaster
could compete with commercial webcasters ``simply by growing large
because of its popularity.''); see also Steinberg WDT ] 49
(acknowledging that ``it is possible that the cross-price elasticity
between the submarkets is negative (indicating some degree of
substitutability among listeners),'' though opining it is likely to be
small due to differences in programming).
Moreover, SoundExchange provided examples of noncommercial
webcasters that are in direct competition with commercial webcasters
for listeners. Mr. Orszag offered the example of Prazor, a large
internet-only noncommercial webcaster with multiple channels of
Christian-themed music, and Sirius XM, a commercial service that
carries multiple Christian-themed music channels on its internet
service. See Orszag WRT ] 159. ``It is reasonable that a record company
negotiating voluntary licenses with Prazor and Sirius XM in an
unregulated marketplace would be mindful of the potential for
competition between them and limit any discount it might be prepared to
provide Prazor accordingly.'' \335\ Id. (footnote omitted). In
addition, Mr. Orszag testified concerning Salem Media, a large
commercial Christian broadcaster, and EMF, a large noncommercial
Christian broadcaster, which both have stations in Atlanta that
broadcast in the Christian Adult Contemporary (Christian AC) format.
See Orszag WRT ]] 160-161.
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\335\ NRBNMLC disputes Mr. Orszag's conclusion, arguing that
Prazor's listenership is too small to constitute a competitive
threat to Sirius XM. See NRBNLC PFFCL ] 211. The Judges agree that,
while Mr. Orszag's example shows that competition between Prazor and
Sirius XM is possible, it is de minimis at present.
There is clear evidence of competition between Salem and EMF.
WFSH is a Salem Christian music station in Atlanta, Georgia
broadcasting as 104.7 The Fish and webcasting at http://thefishatlanta.com/. WAKL is EMF's K-Love affiliate in Atlanta. EMF
acquired the station from for-profit Cumulus in mid-2019, changed
its format from talk to Christian contemporary music, and rebranded
it as WAKL. In connection with that acquisition, the press has noted
that with those two stations and a third broadcasting in the same
format, ``Atlanta has suddenly become a hotbed of Christian radio
competition,'' and the competition included ``[a]ll three stations .
---------------------------------------------------------------------------
. . simultaneously running aggressive billboard campaigns.''
Id. ] 161 (footnote omitted). The Judges find this evidence, albeit
anecdotal, casts doubt on ``[t]he generalities concerning alleged
programming differences that Dr. Steinberg and Dr. Cordes offer . . .
.'' Id.
(B) Noncommercial Broadcasters Are Unlikely To Attract Listeners Away
From Commercial Broadcasters
NRBNMLC argues that noncommercial broadcasters' commitment to
mission results in important differences between their on-air
programming and that of commercial webcasters. See Cordes WDT ] 19; 8/
20/20 Tr. 3278 (Cordes); 8/31/20 Tr. 4763-64 (Burkhiser). Noncommercial
broadcasts include mission-driven nonmusic content, and the music
content is selected for its congruency with the mission rather than for
its popularity with listeners. See Cordes WDT ] 29; 8/31/20 Tr. 4752-53
(Burkhiser). In addition, NRBNMLC asserts that noncommercial
broadcasters pursue different types of listeners than commercial
services. Unlike commercial broadcasters, who seek listeners who will
increase advertising revenues, noncommercial broadcasters ``seek
listeners who will best advance their mission.'' 8/26/20 Tr. 4007
(Steinberg).
[[Page 59576]]
To rebut NRBNMLC's argument that the programming and audiences for
those entities are so different that cannibalization is unlikely,
SoundExchange introduced a study prepared by Massarsky Consulting that
compared playlist information on commercial and noncommercial radio
stations downloaded from Mediabase, a commercial database service that
monitors airplay. See Ploeger WRT ]] 25-26 app. C. This overlap study
compared playlist information from 10 randomly selected commercial
Christian AC radio stations with 10 randomly selected noncommercial
Christian AC stations during the third quarter of 2019:
[T]he resulting summaries showed that there was an overlapping
repertoire of 961 recordings by 259 artists used by both one or more
commercial stations and one or more noncommercial stations during
the quarter. Those artists represented on both commercial and
noncommercial playlists constituted just 49.0% of the artists played
on the commercial stations and 74.4% of the artists played on the
noncommercial stations, but their recordings were used
disproportionately. Thus, plays of recordings by those artists made
up 99.0% of the total plays on the commercial stations and 99.4% of
the total plays on the noncommercial stations. Similarly, the
recordings used on both commercial and noncommercial stations were
52.4% of the recordings played on the commercial stations and 70.5%
of the recordings played on the noncommercial stations, but
constituted 97.4% of the total plays on the commercial stations and
97.7% of the total plays on the noncommercial stations.
Id. ] 25 (footnote omitted).
NRBNMLC argues that this study ``suffer[s] from so many flaws as to
be meaningless.'' NRBNMLC PFFCL ] 229. NRBNMLC enumerates several of
what it views as flaws:
(1) SoundExchange Did Not Present Any Witnesses Who Were Familiar With
the Design and Execution of the Study
NRBNMLC contends that Mr. Orszag and Mr. Ploeger were unaware of
basic information concerning study design, including whether
SoundExchange considered including genres other than Christian AC in
the study.\336\ See NRBNMLC PFFCL ]] 230-231; 9/9/20 Tr. 5845-49
(Ploeger); 8/13/20 Tr. 2019 (Orszag). Nobody from Massarsky Consultant
testified.
---------------------------------------------------------------------------
\336\ Prior to the evidentiary hearing, NRBNMLC sought to
exclude the overlap study, together with references to the study in
Mr. Ploeger's and Mr. Orszag's testimony, on grounds that Mr.
Ploeger, ``lacks both (a) the expertise necessary to determine and
direct how the study should have been conducted and (b) basic
factual knowledge regarding Mediabase, Massarsky Consulting, and the
study's design and implementation.'' NRBNMLC Motion to Strike
Written Rebuttal Testimony (WRT) of Travis Ploeger and Jonathan
Orszag relating to Mediabase Study, at 3-4 (Mar. 11, 2020). The
Judges denied the motion, concluding ``the Mediabase playlist
database is the type of third-party commercial data source that
industry participants rely on and that the Judges have relied upon
in past proceedings when presented by lay witnesses.'' Order Denying
NRBNMLC Motion to Strike, at 3 (Apr. 2, 2020). The Judges noted,
however, that NRBNMLC raised legitimate questions concerning alleged
deficiencies in Massarsky Consulting's methodology for selecting the
subset of data presented in the study and Mr. Ploeger's alleged lack
of knowledge about that methodology. Id. The Judges found those
alleged deficiencies go to the weight rather than the admissibility
of the study. Id.
---------------------------------------------------------------------------
The Judges find the testimony of Mr. Ploeger and Mr. Orszag,
including their testimony on cross-examination, provides a sufficient
basis to assess the overlap study and its limitations. As discussed
further, infra, the overlap study stands for a simple, and fairly
limited, proposition: Commercial and noncommercial stations
broadcasting in the Christian AC format play many of the same songs.
Greater detail on the specific decisions that went into the design of
the study are unnecessary to evaluate the study's support for that
narrow proposition.
(2) The Study Did Not Replicate Real-World Behavior of Consumers
NRBNMLC faults the overlap study because it ``did not purport `to
replicate the real world in behavior of consumers.''' NRBNMLC PFFCL ]
232 (quoting 8/13/20 Tr. 2039 (Orszag)). NRBNMLC argues, therefore,
that the study ``cannot be used to infer anything about listener
behavior.'' NRBNMLC PFFCL ] 232.
In the quoted passage from Mr. Orszag's testimony, he argues
against the premise of counsel's question on cross-examination,
explaining the difference between a ``study'' and an ``experiment'':
Q. So I will just ask you--I will ask you a more general
question of do you agree with the proposition that litigation
experiments need to replicate the marketplace to have external
validity in measuring what market participants, you know, might do
in that marketplace?
* * * * *
A. Thank you. So embedded in the words that you asked me in your
question are lots of terms that are important for consideration
here.
The word ``experiment'' is very different than the concept of
study and different from the concept of analysis . . . . An
experiment, which is trying to replicate the real world in behavior
of consumers, is a different question. It's not something I tackle
in this matter . . . . But nothing that I do here is an experiment .
. . . And nothing in my written direct or written rebuttal testimony
in this case involves an experiment.
So your question, thus, becomes difficult for me to answer in
any kind of reliable way.
8/13/21 Tr. 2038-39 (Orszag). NRBNMLC has not identified a flaw in the
overlap study. The study was not, and never was intended to be, an
experiment. The Judges disagree that the study ``cannot be used to
infer anything about listener behavior,'' however. The study provides
information about the songs that commercial and noncommercial religious
radio stations transmit in common. That is relevant information from
which the Judges can draw inferences about whether listeners to
commercial religious stations might listen to noncommercial religious
stations, and vice versa.
(3) The Study Only Looked at Commercial AC Stations
NRBNMLC criticizes the overlap study for examining playlists only
for stations broadcasting in the Christian AC format. See NRBNMLC PFFCL
] 233. ``As such,'' according to NRBNMLC, ``the study shows nothing
about overlap in any other genre.'' Id.
SoundExchange has explained that it directed Massarsky Consulting
to focus on the Christian AC format because that format is responsible
for the majority of webcasting royalties from noncommercial stations.
See Trial Ex. Ploeger WRT ] 22 ; 9/9/20 Tr. 5806, 5846 (Ploeger).
Because the focus of the inquiry concerning cannibalization is on
displacement of listenership, it is logical to examine the portion of
the noncommercial webcasting market with the greatest listenership.
NRBNMLC does identify a limitation of the overlap study: That it
focuses exclusively on Christian AC stations. That limitation, however,
is not accidental--it is by design. Moreover, it is a reasonable design
choice and was apparent from Mr. Ploeger's description of the study.
See Ploeger WRT ] 25.
(4) The Sample of Stations Is Not Representative
NRBNMLC argues that the pool of Christian AC stations monitored by
Mediabase is not representative of the universe of commercial and
noncommercial religious stations, see NRBMNLC PFFCL ] 233 (citing 8/13/
20 Tr. 2026 (Orszag)), or even of the universe of Christian AC
stations. See NRBMNLC PFFCL ] 234 (citing Ploeger WRT ] 25; 8/13/20 Tr.
2025 (Orszag)). In addition, NRBNMLC contends that the ten commercial
and ten noncommercial stations drawn from that pool is also
unrepresentative. See NRBNMLC PFFCL ] 235 (citing 8/13/20 Tr. 2026-28
(Orszag)).
[[Page 59577]]
By definition, a pool of stations in a single format is not
representative of radio stations as a whole. Mr. Orszag readily agreed
to this proposition. See 8/13/20 Tr. 2026 (Orszag). As discussed in the
previous section, the overlap study's focus on the format that is
responsible for the majority of webcasting royalties from noncommercial
stations was a reasonable design choice.
Mr. Orszag testified that Mediabase monitors only larger stations
and, in that sense, the pool of stations in its database is not
representative of the broader universe of religious radio stations. See
id. at 2025 (Orszag). However, Mr. Orszag stated that it was
unnecessary to consider the small ``mom-and-pop stations'' because they
do not pay royalties above the minimum fee. Id. at 2025-27. Again, the
focus on stations with significant listenership that generate
significant webcasting royalties is appropriate for the present
inquiry.
Regarding NRBNMLC's contention that the sample of stations selected
from the Mediabase database is unrepresentative, Mr. Orszag
acknowledged that they are not representative of the larger universe of
stations. ``By definition, they are going to be larger adult
contemporary stations, so basically that means they are not going to be
representative of all by definition, they represent the larger ones
that qualify to be within the Mediabase data.'' 8/13/20 Tr. 2027-28
(Orszag).
The Judges find that the samples drawn from the nonrepresentative
collection of Christian AC stations in the Mediabase database are,
perforce, not representative of the overall universe of radio stations
(or religious radio stations). That limits the extent to which the data
derived from that sample can be projected to the broader radio
universe. However, the purpose of the present exercise is not to
project results to the entire universe of radio stations, but to the
much narrower universe of radio stations likely to be subject to per-
performance royalties under the current rate structure. The Judges also
note that the sample was selected randomly, which diminishes the
possibility of intentional bias.\337\
---------------------------------------------------------------------------
\337\ NRBNMLC is critical of the fact that Mr. Ploeger, in his
deposition, was unable to describe the technical process by which
Massarsky Consulting carried out the random selection of stations.
See NRBNMLC PFFCL ] 236. NRBNMLC does not controvert SoundExchange's
assertion that the selection was random, and the Judges accept that
assertion. The particular method by which the random selection took
place is unimportant.
---------------------------------------------------------------------------
In sum, the Judges find the sample sufficiently representative of
the segment of the radio market that is of interest here for the Judges
to draw inferences about that market.
(5) Five of the Ten Commercial Stations Examined in the Study are Owned
by the Same Company
NRBNMLC notes that Salem Media Group owns five of the ten
commercial stations covered in the study. NRBNMLC PFFCL ] 237. Salem is
the leading U.S. commercial Christian broadcaster. See Ploeger WRT ]
22. NRBNMLC stresses that ``Mr. Orszag did `nothing to test empirically
whether the effect of a single owner owning a big chunk of those
stations would bias the analysis.' '' Id. (quoting 8/13/20 Tr. 2029
(Orszag). NRBNMLC also points out that only 12 of Salem's 100 stations
broadcast in the Christian AC format. NRBNMLC PFFCL ] 237 (citing Trial
Ex. 3049).
The fact that a large number of the stations that Massarsky
Consulting randomly selected were owned by Salem is unsurprising and
reflects Salem's position as one of the larger players in this market.
Moreover, while owned by Salem, Mediabase data reflects that the five
stations have distinct (albeit similar) playlists. See Ploeger WRT at
app. C; Trial Ex. 3040.
The fact that a large majority of Salem stations broadcast in other
formats is immaterial. By design, the overlap study is limited to
Christian AC stations.\338\
---------------------------------------------------------------------------
\338\ See infra, section V.B.2.a.iii(B)(3).
---------------------------------------------------------------------------
(6) No Two Stations Used in the Study Operate in the Same Market
NRBNMLC argues that, because no two stations used in the study
operate in the same market, ``listeners to the stations largely would
not overlap or pose risk of cannibalization . . . .'' NRBNMLC PFFCL ]
238. The overlap study seeks to demonstrate that commercial and
noncommercial stations broadcasting in the Christian AC format play
many of the same songs. It does not purport to show the extent of
geographic overlap. NRBNMLC's observation is not relevant. Moreover, it
is factually incorrect as applied to webcasting, since any streamed
station can be accessed from anywhere in the world regardless of where
the broadcast station is located.
(7) The Study Measured the Existence, not the Extent, of Overlap
NRBNMLC observes that ``the study counts all plays of a recording
as overlapping, as long as a recording is played just one time in one
group and at least one time in the other group . . . .'' 8/13/20 Tr.
2032 (Orszag). NRBNMLC's suggestion is that the overlap study
significantly overstates the degree of playlist overlap between
commercial and noncommercial stations.
NRBNMLC's suggestion is not borne out by the underlying data. Trial
Ex.3040 shows the number of ``spins'' of songs on each station. Some
songs that are played frequently on some commercial stations are also
played frequently on noncommercial stations. For example, [REDACTED]
was played in excess of [REDACTED] times on [REDACTED] of the
commercial stations and on [REDACTED] noncommercial stations
[REDACTED]. See Trial Ex. 3040. Mr. Ploeger testified that ``the
recordings used on both commercial and noncommercial stations were
52.4% of the recordings played on the commercial stations and 70.5% of
the recordings played on the noncommercial stations, but constituted
97.4% of the total plays on the commercial stations and 97.7% of the
total plays on the noncommercial stations.'' Ploeger WRT ] 25. In light
of these statistics and a review of the underlying data, the Judges
conclude that the scenario described in NRBNMLC's observation is very
unlikely.
(8) The Study Did Not Measure Similarities or Differences in Nonmusic
Programming
NRBNMLC observes that the overlap study did not examine any of the
differences or similarities of nonmusic content between commercial and
noncommercial stations and argues that it thus ignores important
context. See NRBNMLC PFFCL ] 240. NRBNMLC contends ``[t]his is the very
`context that offers listeners quite different listening experiences
and thereby removes the chance that they would be indifferent between
the two listening experiences.' '' Id. (quoting Cordes WDT ] 29).
Again, the overlap study seeks to demonstrate that commercial and
noncommercial stations broadcasting in the Christian AC format play
many of the same songs. It does not purport to show that the listening
experience on commercial and noncommercial stations is the same. While
information about nonmusic content would have been helpful to the
Judges in assessing the risk of cannibalization, its absence does not
render the overlap study uninformative.
[[Page 59578]]
(9) SoundExchange Did Not Conduct a Similar Study To Test Commercial/
Noncommercial Overlap in Music Played on NPR Stations
NRBNMLC asserts that ``an equally fatal deficiency in the overlap
study is that SoundExchange did not conduct a study to test commercial/
noncommercial overlap of any musical genre played on NPR stations.''
NRBNMLC PFFCL ] 240. NRBNMLC argues that the absence of such a study
renders the overlap study ``wholly uninformative'' as to how NRBNMLC's
benchmark should be adjusted to account for any promotional or
substitutional effect. Id. ] 243.
Once again, NRBNMLC criticizes the overlap study for not doing
something it was not designed to do. Moreover, it is NRBNMLC's burden
to show that its benchmark is comparable and to propose adjustments to
the extent that it is not. Arguing that the overlap study does not
carry that burden for NRBNMLC is not a valid criticism. Finally,
NRBNMLC did not advance its benchmark analysis of the NPR agreement
until Professor Steinberg's written rebuttal testimony, by which time
it was too late for SoundExchange to design and conduct a study. The
Judges will not hold SoundExchange's lack of prescience against it.
(10) The Judges' Conclusions Regarding the Overlap Study
The Judges find the overlap study to be informative on the question
whether commercial and noncommercial stations play many of the same
songs. Specifically, the Judges find that the overlap study
demonstrates that there is substantial overlap in the music played by
commercial and noncommercial stations broadcasting in the format that
accounts for most noncommercial royalties. Due to the limitations in
the overlap study, the Judges find that it does not support any
conclusion as to the specific degree of overlap or whether the overlap
actually results in audience diversion. Rather, it supports a
conclusion that there is sufficient similarity in the music content of
these stations to make diversion a realistic possibility.
(C) Listener Diversion Will Increase, Not Decrease, Record Company
Royalties
NRBNMLC argues that a decrease in the cost of webcasting by
noncommercial broadcasters will most likely cause listener diversion
from those broadcasters' over-the-air broadcasts to their webcasts. See
NRBNMLC PFFCL ] 212. Professor Steinberg testified that ``if we make
webcasting less costly to stations, they are less likely to limit their
webcasting,'' permitting more listeners to switch from the broadcast to
the webcast. 8/26/20 Tr. 4011-12 (Steinberg). Because webcast plays
bear royalties while terrestrial radio plays do not, Professor
Steinberg argues that this form of diversion will enhance record
company revenue. See id. at 4012.
NRBNMLC's hypothesis concerning the sources and destinations of
listener diversion are speculative and unsupported by evidence. Since
there is some internal logic to NRBNMLC's hypothesis, the Judges do not
reject it outright, but they accord it little weight.
iv. Lower License Fees for Noncommercial Broadcasters Will Result in a
Net Increase in Record Company Revenue
NRBNMLC argues that ``even with identical products, SoundExchange
still would collect--and sound recording copyright owners would
receive--the same or greater royalties if the noncommercial market
segment were charged a lower per-performance rate due to the additional
noncommercial buying activity that would occur.'' NRBNMLC PFFCL ] 217;
see Steinberg WDT ] 46 (``[W]hen two statutory prices are set, one for
each submarket, the price set for commercial webcasters can be the same
as the single price, while the [noncommercial webcasters] are charged a
lower price and hence buy more licenses. When more licenses are sold,
the value of digital performance rights increases.''). This a reprise
of the argument concerning price discrimination discussed supra,
section V.B.2.a.ii.
The Judges find NRBMNLC's price discrimination argument
unpersuasive. NRBNMLC's economic testimony establishes that one of the
conditions necessary for price discrimination to take place in a market
is ``sellers need to have an incentive to differentiate between the
price charged to buyers with lower price elasticities and the price
charged to buyers with higher price elasticities . . . .'' Cordes WDT ]
22. But the NRBNMLC has not demonstrated that such an incentive is
present.
The NRBNMLC merely speculates that increased listenership on
noncommercial internet stations will generate more royalties via a
diversion of listeners from terrestrial broadcasts than are lost by the
diversion of listeners away from commercial internet radio (i.e.,
cannibalization). The NRBMNLC proffers no evidentiary support for this
speculation, precluding any reliance by the Judges on this argument.
v. SoundExchange Failed To Provide Empirical Evidence of
Cannibalization
Ironically, NRBMNLC contends that the record lacks empirical
evidence of substantial cannibalization. See NRBNMLC PFFCL ] 219;
Steinberg WDT ] 48 (``[T]here is no scientific study in the record
demonstrating that cannibalization has ever occurred in this
market.''). NRBNMLC notes that several record company witnesses
testified that they were unaware of their companies ever having
performed such an analysis. See, e.g., 9/3/20 Tr. 5599 (Adadevoh). But
there is no reason why SoundExchange should be required to provide
evidence regarding cannibalization to support NRBMNLC's price
discrimination argument.
The current rate structure for noncommercial webcasters, which has
been in place since 2006, was designed to limit cannibalization of
commercial webcasting by noncommercial webcasters. It is unsurprising
that no participant has sought to measure the amount of cannibalization
in the marketplace. If the rate structure has worked as intended, such
a study would be expected to show little if any actual cannibalization.
The Judges do not find the absence of empirical evidence of widespread
cannibalization to undermine the argument that the risk of
cannibalization under a different rate structure exists.
vi. The 2019 NPR/CPB Agreement Demonstrates That Copyright Owners Will
License Noncommercial Broadcasters at a Lower Rate in Spite of Fears of
Cannibalization
NRBNMLC argues that SoundExchange's repeated settlements with NPR/
CPB show that record companies are willing to reach agreements with
large noncommercial broadcasters ``at rates that are significantly
lower on average than the current noncommercial rates.'' NRBNMLC PFFCL
] 244. ``If willing record company sellers were genuinely concerned
about alleged cannibalization above the threshold from larger
noncommercial broadcasters, they would not have agreed to accept lower
rates from NPR stations.'' Id. ] 247.
The Judges concluded that NRBNMLC has failed to demonstrate that
the 2019 NPR/CPB Agreement is a comparable benchmark. See infra,
section V.B.1.b. In the absence of a demonstration of comparability,
the Judges reject NRBNMLC's use of that agreement and its predecessors
to demonstrate that
[[Page 59579]]
concerns about cannibalization are unfounded.
b. Judges' Conclusions Regarding Reasoning Underlying SoundExchange
Proposed Rate Structure
NRBNMLC's counterarguments do not persuade the Judges to reject the
rationale for setting rates for above-threshold transmissions equal to
commercial rates. The Judges find that there is a risk that large
noncommercial webcasters may draw listeners from commercial webcasters
and that adopting a rate structure that applies commercial per-
performance rates to above-threshold plays by those larger
noncommercial webcasters is appropriate.
3. Adoption of Rate Structure
NRBNMLC relies entirely on the 2019 NPR/CPB Agreement as a
benchmark to support its rate proposal.\339\ Having rejected use of the
2019 NPR/CPB Agreement as a benchmark,\340\ the Judges find NRBNMLC's
rate proposal unsupported by the evidence and must reject it.\341\
---------------------------------------------------------------------------
\339\ See supra note 317 and accompanying text.
\340\ See supra, section V.B.1.
\341\ In light of the Judges' rejection of the NRBNMLC rate
proposal, they need not address SoundExchange's contention that they
lack authority to adopt NRBNMLC's Alternative 2. See SX PFFCL ]]
1518-1520; supra, section V.A.2.c.
---------------------------------------------------------------------------
By contrast, the Judges find that the rationale for a continuation
of the noncommercial rate structure in place since 2006 remains valid.
The Judges, therefore, adopt SoundExchange's proposal for a two-part
rate structure under which noncommercial webcasters pay a minimum fee
that entitles them to transmit performances of sound recordings up to
an ATH threshold and pay commercial, nonsubscription per-performance
rates \342\ for transmissions in excess of that threshold.
---------------------------------------------------------------------------
\342\ See infra, section IX.C.2.
---------------------------------------------------------------------------
Neither SoundExchange nor NRBNMLC proposed that the minimum fee for
noncommercial webcasters should differ from the minimum fee for
commercial webcasters. The Judges find that noncommercial webcasters
should continue to pay the same per station or channel minimum fee as
commercial webcasters.\343\
---------------------------------------------------------------------------
\343\ The Judges set the minimum fee infra, section VI.
---------------------------------------------------------------------------
While both SoundExchange and NRBNMLC propose the same average ATH
threshold, SoundExchange proposes retaining the current structure in
which the ATH threshold is measured on a monthly basis (159,140 ATH per
month), while NRBNMLC proposes (in its Alternative 1) that the ATH
threshold be measured on an annual basis (1,909,680 ATH per year).\344\
---------------------------------------------------------------------------
\344\ See supra, sections V.A.1.a and V.A.2.a.
---------------------------------------------------------------------------
NRBNMLC contends that annualizing the ATH threshold will ``account
for seasonal listener peaks and valleys'' and ``lower transaction costs
for both parties . . . .'' NRBNMLC PFFCL ] 158. Professor Steinberg
testified that ``by doing it on an annual basis, you have lower
transactions costs for both parties, and I didn't see any real reason .
. . not to do it. I didn't see any real reason why we shouldn't save
that money.'' 8/26/20 Tr. 4040 (Steinberg). NRBNMLC also argues that
the NPR agreements support an annualized threshold since they include
annual music ATH allotments. See NRBNMLC PFFCL ] 158.
NRBNMLC offered no evidence--apart from Professor Steinberg's
unsubstantiated assertion--that an annualized ATH threshold would
reduce transactions costs. NRBNMLC also offered no explanation why the
NPR/CPB settlement agreements--agreements that include both an annual
payment and an annual ATH allotment--supports a proposal that
annualizes only the ATH allotment but retains monthly payments. The
Judges find neither argument persuasive.
With regard to levelling out ``seasonal peaks and valleys,''
NRBNMLC made no case why that is an appropriate or desirable outcome.
To be sure, it may well result in lower royalty payments for certain
noncommercial webcasters--particularly those that perform large amounts
of music with seasonal appeal, such as Christmas music. However, many
commercial webcasters also perform large amounts of music with seasonal
appeal, increasing the likelihood that noncommercial webcasters will
divert listeners from commercial webcasts. Without a more developed
argument, supported by evidence, the Judges will not make such a
significant change to the method of applying the ATH threshold to
noncommercial webcasters. The ATH threshold shall apply on a monthly
basis. Noncommercial webcasters will be subject to per-performance
royalties for transmissions in excess of 159,140 ATH in a month.
VI. Minimum Fee
Section 114 of the Copyright Act requires the Judges to determine a
minimum fee for each type of service covered by the statutory license.
See 17 U.S.C. 114(f)(1)(B). Section 112 contains a similar requirement
for the statutory license for ephemeral recordings. See 17 U.S.C.
112(e)(3)-(4). For the current rate period, the minimum fee for all
services is $500 annually for each station or channel, with an
aggregate cap for each commercial webcaster of $50,000 (i.e., 100
stations or channels).\345\ See 37 CFR 380.10(b). For commercial
webcasters, the minimum fee is credited toward per-performance usage
fees. See id. For noncommercial webcasters, payment of the minimum fee
covers usage up to 159,140 Aggregate Tuning Hours (ATH) of audio
transmissions. See id. Sec. 380.10(a)(1), (b).
---------------------------------------------------------------------------
\345\ Five percent of the minimum fee is allocated to ephemeral
recordings. See 37 CFR 380.10(d).
---------------------------------------------------------------------------
For the forthcoming rate period, SoundExchange proposes to increase
the minimum fee to $1,000 annually for each station or channel. See
SoundExchange's Proposed Rates and Terms at 2 (Sep. 23, 2019)
(SoundExchange Rate Proposal). SoundExchange also proposes to increase
the aggregate cap for commercial webcasters to $100,000. See id. The
Services each propose no change to the current $500 minimum fee and
$50,000 cap. See Google LLC's Proposed Rates and Terms at 2 (Sep. 23,
2019) (Google Rate Proposal); NAB's Proposed Rates and Terms at 8 (Sep.
23, 2019) (NAB Rate Proposal); The NRBNMLC's Amended Proposed
Noncommercial Webcaster Rates and Terms, ex. A at 9 (Jul. 31, 2020)
(NRBNMLC Rate Proposal); \346\ and Amended Proposed Rate and Terms of
Sirius XM Radio Inc. and Pandora Media, LLC at 1 (Jan. 10, 2020)
(Sirius XM Rate Proposal).
---------------------------------------------------------------------------
\346\ The $500 minimum fee applies only to NRBNMLC's
``Alternative 1'' rate proposal. NRBNMLC's ``Alternative 2'' employs
a flat annual payment that includes minimum fees and usage payments
for multiple stations. See NRBNMLC Rate Proposal ex. A at 12.
---------------------------------------------------------------------------
A. SoundExchange's Justification for Increasing the Minimum Fee
SoundExchange argues that it is ``reasonable and appropriate for
the minimum fee at least to cover SoundExchange's administrative
cost.'' SX RPFFCL (to Services) ] 358 (quoting Digital Performance
Right in Sound Recordings and Ephemeral Recordings, 79 FR 64669, 64672
(Oct. 31, 2014) (Web II Second Remand)); see 8/13/20 Tr. 2055 (Orszag)
(``it's important that that minimum fee be set at such a level that is
consistent with the cost of processing and dealing with these royalty
statements''). SoundExchange contends that its average per station or
channel administrative cost more than doubled between 2013 and 2018,
increasing from approximately $1,900 to approximately $4,448. See
Ploeger WRT ]] 13-14; id. app. A. ] 50 (WDT of Jon Bender) (Bender
WDT). According to
[[Page 59580]]
SoundExchange, increasing the minimum fee from $500 to $1000 would
ensure that every webcaster contributes reasonably to SoundExchange's
average administrative costs, even if it does not cover them entirely.
See Ploeger WRT ] 13; Bender WDT ] 51.
SoundExchange offers its settlement with CBI as confirmation of the
need for an increase in the minimum fee. See SX PFFCL ]] 1554-1556. In
that settlement the parties agreed to an increase in the minimum fee,
starting at $550 in 2021 and increasing annually in $50 increments to
$750 in 2025. See Determination of Rates and Terms for Digital
Performance of Sound Recordings and Making of Ephemeral Copies to
Facilitate Those Performances (Web V), 85 FR 12745, 12746 (Mar. 4,
2020) (CBI Settlement). SoundExchange put forward two reasons why the
increase in the CBI Settlement falls short of the 100% increase that it
seeks in its rate proposal. ``First, it avoided the complexities and
incremental costs of litigating with a group of webcasters that
collectively paid only $336,800 in statutory royalties (including
reporting waiver fees) in 2018.'' Ploeger WRT ] 15. ``Second, as a
group, the noncommercial educational webcasters covered by the
settlement impose lower costs on SoundExchange than other webcasters''
because 98% of them pay a $100 proxy fee that allows them not to file
reports of use (thus alleviating SoundExchange of the cost of
processing those reports or, if necessary, chasing down delinquent
reports). Id. ] 16.
SoundExchange also contends that the $500 annual minimum fee has
remained the same for more than twenty years, in spite of general
increases in the cost of goods and services. See Bender WDT ] 42; 8/11/
20 Tr. 1467 (Orszag). Mr. Orszag testified that using the Consumer
Price Index (CPI-U) would be an appropriate, if imperfect, means of
measuring the declining purchasing power of the minimum fee compared to
the general cost of goods and services. See 8/11/20 Tr. 1469-71, 1473-
74 (Orszag). Jonathan Bender, SoundExchange's former CEO, testified
that ``[a]ccording to the Bureau of Labor Statistics' CPI inflation
calculator, $500 in October 1998 was equivalent to $782.19 in August
2019. By the beginning of the next rate period in January 2021, that
can reasonably be expected to exceed $800, and of course it will
continue growing during the coming rate period.'' Bender WDT ] 43.
Since prices for services have increased more rapidly than overall
prices, SoundExchange contends it is reasonable to expect that its
costs of administering the statutory license have increased more
rapidly than the CPI-U. See 8/11/20 Tr. 1467-68 (Orszag).
SoundExchange notes that the minimum fee has not kept pace with
per-performance royalty rates for webcasting. Mr. Bender testified that
the total royalty rate for nonsubscription commercial webcasters
increased 2.36 times between 1998 and 2019.\347\ ``If the minimum fee
today were set to cover the same number of performances as contemplated
by the Librarian in Web I, it would be over $1180.'' Bender WDT ] 44.
Performing the same calculation using 2006 rates under Web II as a
starting point would yield a minimum fee of over $1437 for subscription
services. See id. ] 45.
---------------------------------------------------------------------------
\347\ Under the Web I rate structure, nonsubscription commercial
webcasters paid $0.0007 per performance, plus an additional 8.8% for
ephemeral recordings. Mr. Bender used the combined royalty of
$0.0007616 (i.e., 0.0007 x 1.088) in his calculations. See Bender
WDT ] 44.
---------------------------------------------------------------------------
SoundExchange also seeks to justify an increase in the minimum fee
by the generally increasing level of usage.
SoundExchange has observed a marked increase in the average
number of performances across all webcasters whose royalties are
administered by SoundExchange. We are not aware of a corresponding
increase in the average number of channels per webcaster, implying
an increase in per channel or station usage. Growth in per channel
or station usage means that if minimum fees are to both cover usage
and ensure a contribution to the costs of administering the
statutory license, minimum fees should go up.
Bender WDT ] 52.
In addition, SoundExchange notes that its proposed minimum fees are
roughly in line with minimum fees charged for performing musical works
by the performing rights organizations (PROs) that represent
songwriters and music publishers. SoundExchange asserts that the
Judges, and the Librarian before them, used musical works rates ``as a
check on the reasonableness of the minimum fee under the statutory
license.'' Bender WDT ] 53.
Pursuant to the Judges' regulations under Section 118 of the
Copyright Act, in 2021, the smallest college broadcasting stations
will pay $746 just for use of ASCAP and BMI musical works, plus more
if they license musical works through SESAC and Global Music Rights.
College broadcasting stations affiliated with large schools will pay
$1,928 for use of ASCAP and BMI musical works. In the case of public
broadcasting entities, music format stations in even the smallest
markets will pay $1,639 for use of ASCAP, BMI and SESAC musical
works. In large markets the number is $14,532. As the Judges are
well aware, ``sound recording rights are paid multiple times the
amounts paid for musical works rights'' in unregulated markets.
Id. (citations and footnotes omitted).
Finally, SoundExchange contends that its proposed $100,000 cap on
minimum fees for commercial webcasters with more than 100 stations or
channels (up from $50,000 in the current rate period) ``is consistent
with the minimum fees paid by PSS and SDARS and by new subscription
services transmitted through cable and satellite television networks .
. . .'' Id. ] 54 (citations omitted). SoundExchange avers the change
will have a limited impact on commercial webcasters: ``In 2018, only 20
webcasters paid the $50,000 minimum fee and so would presumably pay a
$100,000 minimum fee under SoundExchange's proposal. Of them, 18
ultimately paid total royalties in excess of $100,000.'' Id.
B. The Services' Response
The Services reject SoundExchange's effort to justify an increase
in minimum fees based on increases in its average administrative cost,
arguing that that measure is irrelevant. ``The purpose of the minimum
fee is to cover SoundExchange's incremental administrative costs, not
its overall administrative costs.'' Services RPFFCL ] 1536. The
Services cite the CARP report and the Librarian's decision in Web I as
concurring with this position. See id. (citing Report of the Copyright
Arbitration Royalty Panel, Docket No. 2000-9 CARP DTRA 1&2, at 32, 95
(Feb. 20, 2002) (Web I CARP Report); Determination of Reasonable Rates
and Terms for the Digital Performance of Sound Recordings and Ephemeral
Recordings, Final rule and order, Docket No. 2000-9 CARP DTRA 1&2, 67
FR 45240, 45263 (Jul. 8, 2002) (Web I Determination)).
The Services draw a contrast between the mechanism for funding
SoundExchange's administration of the section 114 license and the
Mechanical Licensing Collective's (MLC) administration of the section
115 license: Unlike the MLC, which is funded by an assessment on
licensees (separate from, and in addition to, usage fees),
SoundExchange's costs are deducted from the royalties it collects.
Compare 17 U.S.C. 115(d)(7)(A) with 17 U.S.C. 114(g)(3). Based on this
contrast, the Services conclude that ``using the minimum fee to help
fund the overall administrative costs of SoundExchange would run afoul
of the Act.'' Services RPFFCL ] 1536.
The Services also argue that SoundExchange's average cost
calculation is flawed. The Services contend that SoundExchange began
its
[[Page 59581]]
calculation with ``Total Operating Administrative Expenses'' rather
than the cost of processing and distributing royalties. See Steinberg
WRT ] 19. The Services argue that ``Total Operating Administrative
Expenses'' covers administration of licenses other than webcasting, and
improperly includes ``Property and Equipment Depreciation,'' ``Rate-
Setting Proceedings Amortization,'' ``Interest expense,'' and ``Tax
expense.'' See id.; 9/9/20 Tr. 5863, 5867-74 (Ploeger); Trial Ex. 3023
at 43 (SoundExchange Consolidated Financial Statements, Years Ended
December 31, 2018 and 2017). NRBNMLC's expert, Professor Steinberg,
opined that SoundExchange's estimate of administrative costs is
``grossly inflated.'' Steinberg WRT ] 19. The Services also fault
SoundExchange for attributing 100 channels to services that actually
had more than 100 channels or stations, which the Services contend also
inflated SoundExchange's computation of administrative costs on a per-
channel basis. Services RPFFCL ] 1545; see 9/9/20 Tr. 5857-58
(Ploeger); Bender WDT ] 49.
The Services dispute SoundExchange's assertion that its settlement
with CBI confirms the need for an increase in the minimum fee, pointing
out that the minimum fee increase in that settlement falls short of the
increase that SoundExchange has proposed. See Services RPFFCL ] 1554.
The Services argue that the minimum fee in the CBI agreement is, ``if
anything, too high for broader application'' because CBI had more to
gain by settling than SoundExchange. Steinberg WDT ] 31. While the
Services acknowledge SoundExchange's explanation that a lower minimum
fee is justified for CBI members because they impose lower costs on
SoundExchange than do other services, the Services point out that the
same rationale could apply to all commercial and noncommercial
webcasters that pay only the minimum fee. See Services RPFFCL ] 1554.
The Services opine that ``SoundExchange could decrease those costs
further by deciding to waive reports of use for . . . noncommercial
webcasters also webcasting at or below 80,000 monthly ATH.'' Id.
The Services dispute SoundExchange's argument that inflation over
the past twenty years justifies a minimum fee increase. First, the
Services deny that the current minimum fee has been in place that long,
since the minimum fee under Web I was applied per licensee, not per
station or channel. See id. ] 1557; 8/13/20 Tr. 2015 (Orszag). Second,
the Services contend that ``SoundExchange agreed to $500 for 2020,'' in
Web IV, ``so that year, not 1998, is the year from which to consider
changes.'' Services RPFFCL ] 1558. Moreover, notwithstanding the
general rate of inflation, the Services suggest that SoundExchange's
processing costs have decreased over time due to increasing use of
automation. See id. ] 1559; see also Bender WDT ]] 9-10; 8/11/20 Tr.
1470 (Orszag).
Regarding SoundExchange's argument that the minimum fee has not
kept pace with per-performance rates, the Services point out that the
Judges have stated that the minimum fee ``is meant to cover
administrative costs'' and ``does not address actual usage.'' Web II,
72 FR at 24099.
The Services describe SoundExchange's arguments based on rates for
use of musical works as ``improper.'' Services RPFFCL ] 1564-1565. The
Services note that SoundExchange has long opposed, and the Judges have
long rejected, use of musical works fees for setting sound recording
rates. See, e.g., Web II, 72 FR at 24092-95; see also Bender WDT ] 53 &
n.16 (``the use of musical work rates to set sound recording rates has
otherwise been thoroughly rejected, which SoundExchange believes is
proper''). In addition, the Services argue that the rates cited by
SoundExchange are not comparable because they are flat fees covering
unlimited broadcasting rather than minimum fees. See Services RPFFCL ]
1564-1565 (citing 37 CFR 381.5(c)). The Services also note differences
in the structure of the market for licensing musical works (i.e.,
multiple collecting societies with mutually exclusive repertoires
versus a single collective covering the entire industry), as well as
differing administrative costs at the level of each individual
collecting society. See Steinberg WRT ] 20.
Finally, the Services reject SoundExchange's reference to minimum
fees for PSS and SDARS to justify increasing the cap on minimum fees
for commercial webcasters, stating that the other statutory licenses
are ``not applicable here.'' Services RPFFCL ] 1566.
C. The Judges' Findings and Conclusions Regarding the Minimum Fee
SoundExchange offers six measures by which it argues that the
current $500 minimum fee should increase: SoundExchange's average
administrative cost, the minimum fee agreed to by SoundExchange and
CBI, inflation, per-performance sound recording royalty rates, usage,
and minimum fees charged for broadcasting of musical works. The
Services' reject each of these measures (or SoundExchange's application
of them) for various reasons. Instead, they offer two possible measures
for adjusting the minimum fee: SoundExchange's incremental
administrative costs and anticipated inflation between 2020 and 2025.
1. Increased Average Administrative Cost Since 2013 Supports Increasing
the Minimum Fee
a. Use of Incremental Versus Average Administrative Costs
The Judges and their predecessors have never determined that the
minimum fee under section 114 exists solely to cover SoundExchange's
incremental administrative costs. To be sure, the Services have made
that argument consistently since Web I. However, the Judges and their
predecessors have never embraced it.
In Web I, for example, the CARP concurred with the Services that
one purpose of the minimum fee is to protect against a situation in
which the licensee's performances are such that it costs the license
administrator more to administer the license than it would receive
in royalties. Another arguable purpose is to capture the intrinsic
value of a service's access to the full blanket license,
irrespective of whether the service actually transmits any
performances.
Web I CARP Report at 95. The CARP did not find that the minimum fee
existed solely to cover incremental costs, access value, or both.
In his review of the Web I CARP Report, the Librarian stated ``the
Panel could propose any rate consistent with the agreements so long as
the proposed rate would cover costs for administering the license and
access to the works. '' \348\ Web I Determination, 67 FR at 45263
(emphasis added). Whether the CARP and the Librarian were referring to
average or incremental costs of administering the license, it is clear
that both agreed that covering those costs was only one purpose for the
minimum fee.
---------------------------------------------------------------------------
\348\ The minimum fee selected by the CARP was the lowest
minimum fee found in the benchmarks put before the panel. See id.
The CARP reasoned that a ``sophisticated and experienced negotiator
. . . would not negotiate a minimum fee that would expose it to a
loss.'' Id.
The Services point out, correctly, that the Librarian referred
to ``the incremental cost of licensing'' in a separate passage. See
Services RPFFCL ] 1536. Elsewhere, including the passage quoted in
the text, the Librarian refers merely to ``costs for administering
the license.''
---------------------------------------------------------------------------
As the Services acknowledge, in later decisions the Judges
routinely referred to the minimum fee as covering SoundExchange's
``administrative cost''
[[Page 59582]]
or ``average administrative cost,'' rather than SoundExchange's
incremental cost of administering the license. See, e.g., Web II, 72 FR
at 24096; Web III, 79 FR at 23124; and Web IV, 81 FR at. 26396-97.
The Services are unable to point to relevant statutory language or
legislative history that supports their position. While the Copyright
Act itself is silent as to the purpose of the minimum fee, legislative
history instructs that ``[a] minimum fee should ensure that copyright
owners are fairly compensated in the event that other methodologies for
setting rates might deny copyright owners an adequate royalty.'' H.R.
Rep. No. 105-796, at 85 (1998) (DMCA Conference Report). The DMCA
Conference Report plainly does not limit a minimum fee merely to
covering incremental costs of administering the license. Covering
incremental costs is one element of ensuring that copyright owners are
``fairly compensated,'' but it is not the only element. Covering
incremental costs is the bare minimum that a minimum fee must
accomplish.
The Judges find the Service's argument contrasting the funding
mechanism for SoundExchange with the funding mechanism for the
Mechanical Licensing Collective to be inapt. The minimum fee is not an
assessment, over and above royalties, that funds SoundExchange's
operations. For commercial webcasters, the minimum fee is credited
against usage. For noncommercial webcasters, the minimum fee includes a
substantial quantity of usage. While there are webcasters whose usage
falls below the amount that is covered by the minimum fee, that is
simply inherent in the nature of any minimum fee. The fact that some
webcasters do not recoup the entire value of the minimum fee does not
convert it into an administrative assessment.
There is little testimony in the record on the subject of whether,
from an economic standpoint, it is preferable to refer to incremental
or average costs in setting the minimum fee. The following colloquy
between Mr. Orszag and the Judges is on point:
Q: Mr. Orszag, you mentioned a couple of times that you look at
average cost, not incremental . . .. I'm equating that with marginal
cost. But doesn't economics, basic economic principles [counsel] . .
. that pricing should equal marginal cost if it's otherwise
competitive?
A: But pricing in those discussions also say that we need to
ensure that the pricing covers costs as well, because if everyone
got marginal cost pricing, then it could be the situation where
everyone is getting a low price but they're not actually covering
the cost to administer the service.
* * * * *
Q: Are you saying--are you saying this is a declining cost of
business for SoundExchange so the marginal cost is below average
cost at the--at the level of production?
A: I--I would assume that to be the case here. If [you] add one
new licensee, the cost of adding that one licensee is far below the
cost of the first licensee. And so we need to--one would need to
ensure that the--the total costs are covered so that the service can
actually be provided in that circumstance.
8/12/20 Tr. 1760-61 (Orszag). Mr. Orszag's unrebutted testimony
supports setting the minimum fee with reference to SoundExchange's
average administrative cost.
The Judges, consistent with prior determinations, conclude that
they may consider SoundExchange's average administrative cost in
setting the minimum fee.
b. Computation of Average Administrative Cost
Professor Steinberg testified that SoundExchange's computation of
administrative costs was flawed because it ``does not distinguish
between administrative costs attributable to licensing and processing
fees from other administrative costs associated with running any modern
corporation.'' Steinberg WRT ] 19. The Services contend that
SoundExchange improperly included in its calculation of average
administrative costs a number of items unrelated to license
administration, such as property and equipment depreciation, interest
and tax expenses, and amortization of the cost of participating in
rate-setting proceedings. See id.; Services RPFFCL ] 1545.
This aspect of Professor Steinberg's testimony follows from the
Service's position that the function of the minimum fee is to cover
SoundExchange's incremental cost of licensing. Given the Judges'
conclusion that they may consider SoundExchange's average
administrative cost in establishing a minimum fee, the Judges accord it
no weight.
Similarly, the Judges do not find SoundExchange's inclusion of
costs related to the administration of licenses other than the
webcasting license to be improper given that the Judges will consider
SoundExchange's average administrative cost. SoundExchange has computed
that average by dividing its total administrative costs by its total
number of licensees (webcasting and non-webcasting), then dividing that
quotient by the estimated number of channels or stations per licensee.
See Bender WDT ]] 48-50; 9/9/20 Tr. 5893 (Ploeger). That is an
appropriate means of determining SoundExchange's average administrative
cost per channel or station.
Finally, the Judges do not find SoundExchange's estimation of the
number of channels or stations per licensee to be improper. In deriving
that estimate, SoundExchange attributed 100 channels or stations to
licensees that had more than 100 channels or stations. The existing and
proposed minimum fee structure caps minimum fees for commercial
webcasters at 100 times the per-channel or station minimum fee.
SoundExchange's methodology thus divides per-licensee administrative
costs over the average number of channels or stations for which
licensees pay the minimum fee.\349\ See Bender WDT ] 49. The Judges
find that it is appropriate to limit consideration to channels or
stations for which licensees pay the minimum fee, given that the
purpose of the calculation is to find a basis for setting that minimum
fee.
---------------------------------------------------------------------------
\349\ While the regulations do not cap minimum fees for
noncommercial licensees, no noncommercial licensee has more than 100
channels or stations. See Ploeger WRT ] 9 n.2.
---------------------------------------------------------------------------
The Judges find SoundExchange's calculation of its average
administrative cost on a per-channel or station basis to be acceptable.
The Judges are mindful that, because it is based on an estimation of
the number of channels or stations per licensee, it is itself an
estimate rather than a precise quantification.
c. Judges' Conclusions Concerning Increased Average Administrative Cost
as a Basis for Increasing the Minimum Fee
The record reflects that SoundExchange's estimate of its average
administrative cost on a per-channel or station basis increased from
approximately $1,900 to approximately $4,448 between 2013 and 2018, an
increase of 2.34 times. See Ploeger WRT ]] 13-14; Bender WDT ] 50.
While both are estimates, SoundExchange calculated both using the same
methodology.
The absolute amount of SoundExchange's estimated average
administrative cost exceeds SoundExchange's proposed minimum fee by a
significant amount. The relative increase in average administrative
costs (134%, which would yield a minimum fee of $1170) also exceeds the
relative increase in the minimum fee that SoundExchange is seeking
(100%, yielding a minimum fee of $1000). The
[[Page 59583]]
Judges conclude that the evidence relating to SoundExchange's average
administrative cost supports the increased minimum fee that
SoundExchange has proposed.
2. SoundExchange's Settlement With CBI Supports Increasing the Minimum
Fee
SoundExchange and CBI agreed to a gradual increase in the minimum
fee to $750 by 2025. This increase is materially different from that
proposed by SoundExchange, both in its magnitude and its gradual
implementation. Nevertheless, SoundExchange offers it as confirmation
of the need for an increase in the minimum fee and offers two
explanations for the difference between the agreement and the proposed
minimum fee: Litigation savings and a lower cost for processing usage
statements from CBI members. See SX PFFCL ]] 1554-1556 (and record
citations therein).
On the existing record, the Judges cannot accept SoundExchange's
first explanation. As the Services point out, both parties saved
litigation costs by settling, and it is entirely possible that the
litigation savings were of equal or greater value to CBI than
SoundExchange.
SoundExchange's second explanation is a stronger justification for
the lower increase. The Judges reject the Services' counterargument
that other low usage webcasters would have similarly low processing
costs if they, like the noncommercial educational webcasters covered by
the CBI agreement, were permitted to pay a proxy fee and thus avoid
submitting reports of use. See Services RPFFCL ] 1554. They are not
permitted to do that. The Judges will not assume away a cost that
SoundExchange bears, based on the Services' counterfactual.
The Judges conclude that the CBI agreement is evidence that willing
buyers and willing sellers would agree to a minimum fee that exceeds
the existing minimum fee. The unique circumstances of the CBI agreement
may indicate that the increase agreed to in that settlement may be
toward the low end of reasonable minimum fees. However, given the
indeterminacy of the effect of litigation costs on the parties'
relative bargaining positions, the Judges find that they cannot derive
a specific minimum fee amount from that settlement.
3. General Inflation Since 2006 Supports an Increased Minimum Fee
SoundExchange argues that increases in the general level of prices
while the $500 minimum fee has been in effect, as measured by the CPI-
U, is another justification for increasing the minimum fee. The
Services appear to acknowledge inflation as a justification for
increasing the minimum fee, although they would have the Judges look
only to prospective inflation from 2020 to 2025 because ``SoundExchange
agreed to $500 for 2020'' in its Web IV rate proposal. Services RPFFCL
] 1558.
The Judges reject the Services' argument that the current $500
minimum fee is a willing buyer/willing seller rate because
SoundExchange and the Services both proposed that amount in Web IV. The
current minimum fee was determined by the Judges and imposed as part of
the regulatory scheme. SoundExchange's rate proposal was a position
taken in a regulatory proceeding, not the action of a willing seller in
a market unconstrained by a statutory license.
The Judges also reject SoundExchange's contention that the
appropriate starting point for calculating inflation is 1998. The Web I
minimum fee was calculated per licensee, not per channel or station.
See 8/13/20 Tr. 2015 (Orszag). It was not the same fee that the Judges
adopted for the Web II rate period, beginning in 2006, that was
assessed on a per-channel or station basis. The current $500 annual
per-channel or station minimum fee has been in place since 2006; 2006
is the appropriate base year for any inflation calculation.
According to the Bureau for Labor Statistics, the CPI-U for January
2006 was 198.3, and the CPI-U for December 2020 was 260.474.\350\ That
represents a 31.35% increase. Consequently, to have the equivalent
purchasing power of the minimum fee in 2006, the current minimum fee
would need to increase to $656.77.
---------------------------------------------------------------------------
\350\ See Historical Consumer Price Index for All Urban
Consumers (CPI-U): U.S. city average, all items, by month, https://www.bls.gov/cpi/tables/supplemental-files/historical-cpi-u-202101.pdf (last visited May 24, 2021). The Judges take official
notice of these publicly available government data.
---------------------------------------------------------------------------
The Judges recognize that general inflationary data are an
imperfect substitute in this context for data concerning changes to
SoundExchange's actual costs. Nevertheless, the Judges find that the
increase in inflation over the period from 2006 to the end of 2020
reflects an erosion in the purchasing power of the minimum fee that
supports an increase, though not necessarily the doubling that
SoundExchange seeks.
4. Other Justifications for Increasing the Minimum Fee
The Judges reject SoundExchange's additional justifications for
increasing the minimum fee: Increased royalty rates, increased usage,
and failure to keep pace with minimum fees for public performance of
musical works. While the minimum fee is recoupable against charges for
usage, it is not a usage fee as such. SoundExchange has provided no
reasoned explanation why the minimum fee should be tied to the royalty
rates or the amount of usage, and the Judges see no reason, a priori,
that it should be.
Regarding the minimum fees charged by PROs for public performance
of musical works, the Judges (at SoundExchange's urging) have long
rejected use of musical works rates in setting sound recording rates.
See, e.g., Web II, 72 FR at 24092-95; Bender WDT ] 53 & n.16. The
Judges see no reason to make an exception for the minimum fee.
5. Conclusion
The three justifications offered by SoundExchange and accepted by
the Judges suggest a range of minimum fees from $656.77 at the low end
to $1,170 at the high end. The Judges find this range to represent the
zone of reasonable minimum fees supported by the record in this
proceeding.
Of the three accepted justifications, the Judges find the increase
in SoundExchange's average administrative cost to be the most
compelling. Unlike the inflation approach, average administrative cost
relates directly to actual costs incurred by SoundExchange. Unlike the
minimum fee agreed to by SoundExchange and CBI, the average
administrative cost does not suffer from the indeterminacy of the
relative savings in litigation costs achieved by the parties to the
settlement. The Judges recognize that the average administrative cost
put forward by SoundExchange is an estimate since it incorporates
SoundExchange's estimate of the average number of channels or stations
per licensee. Consequently, the Judges regard the 134% increase in
average administrative costs, and the $1,170 minimum fee it implies, as
an upper limit on a reasonable minimum fee. Nevertheless, since the
Judges find the average administrative cost approach to be the most
compelling, the Judges find that the minimum fee should be set closer
to this upper limit than to the lower limit (set using the rate of
inflation).
[[Page 59584]]
SoundExchange's proposed $1,000 minimum fee falls comfortably
within the zone of reasonable minimum fees determined by the Judges and
falls closer to the high end of that range. The Judges, therefore,
adopt SoundExchange's proposed $1,000 per-channel or station minimum
fee for the forthcoming rate period. The Judges also adopt
SoundExchange's proposal to increase the cap on minimum fees for
commercial webcasters to $100,000, in effect retaining the existing 100
channel or station cap for each commercial licensee. The Judges deem
this adjustment to be arithmetically necessary because failure to
increase the cap would negate the increase in the minimum fee for the
largest webcasters (who would effectively pay the same amount on half
as many channels).
VII. Ephemeral License Rate and Terms
Section 112 of the Copyright Act creates a statutory license to
make phonorecords to facilitate the transmission of sound recordings
under the section 114(f) statutory license and requires the Judges to
determine reasonable rates and terms of royalty payments for making
those so-called ``ephemeral recordings.'' 17 U.S.C. 112(e). During the
current rate period, the royalty for ephemeral recordings is part of
the total royalty for webcasting and constitutes 5% of that amount. 37
CFR 380.10(d).
SoundExchange proposes that the Judges retain the current royalty
rate and rate structure for ephemeral recordings in the forthcoming
rate period with some ``clarifying editorial changes'' to the relevant
regulatory terms. SX PFFCL ] 1568; see SoundExchange's Proposed Rates
and Terms at 3, 22 (Sep. 23, 2019) (SoundExchange Rate Proposal). Most
of the Services propose to retain the existing provision on ephemeral
recordings. See Sirius XM and Pandora First Amended Proposed Rates and
Terms at 1 (proposing that the current terms continue except as
otherwise indicated); Google Proposed Rates and Terms at 1; NAB
Proposed Rates and Terms at 9; NRBNMLC Amended Proposed Rates and Terms
ex. A at 9 (Alternative 1). In its Alternative 2 rate proposal, NRBNMLC
includes the same editorial changes that SoundExchange proposes. See
NRBNMLC Amended Proposed Rates and Terms ex. A at 12 (Alternative 2).
The Services do not dispute SoundExchange's proposal to adopt 37 CFR
380.10(d) with the editorial changes SoundExchange and NRBNMLC
propose.\351\ See Services RPFFCL ]] 1576-1577.
---------------------------------------------------------------------------
\351\ SoundExchange and the Services are generally on the same
page regarding ephemeral recordings, except as to the question
whether the right to make ephemeral recordings has independent
economic value. Compare SX PFFCL ] 1570 (and sources cited therein)
(``ephemeral copies have economic value to services that publicly
perform sound recordings because these services cannot, as a
practical matter, properly function without those copies'') with
Services RPFFCL ] 1570 (and sources cited therein) (``While the
Services do not dispute that ephemeral recording right is frequently
needed, it does not have independent economic value.''). The Judges
need not (and do not) resolve this largely academic question to
determine an ephemeral recordings rate.
---------------------------------------------------------------------------
As in Web IV, SoundExchange relies on the designated testimony of
economist Dr. George Ford from Web III. See Trial Ex. 5616 (Designated
WDT of George Ford) (Ford Des. WDT); Web IV, 81 FR at 26397-98. Dr.
Ford testified that ``it is typical for ephemeral copy rights to be
expressly included among the grant of rights provided'' in marketplace
agreements between record companies and music services. Ford Des. WDT
at 11. ``Most of these agreements do not set a distinct rate for those
ephemeral copies, incorporating them instead into the overall rate that
the [music services] pay[] for the combined ephemeral copy rights and
performance rights.'' Id. at 11-12. Dr. Ford also testified that to the
extent marketplace agreements do set a royalty rate for ephemeral
recordings they generally express that rate as a percentage of an
overall bundled rate for both performances and ephemerals. See Ford
Des. WDT at 12-14.
SoundExchange also offers several direct licenses in the record of
this proceeding as evidence that marketplace agreements do not set
distinct rates (as distinguished from bundled rates) for ephemeral
recordings. See, e.g., Trial Ex. 4035 at 11-12, 16-19 (2015 agreement
between [REDACTED] and [REDACTED] granting [REDACTED]); Trial Ex. 5037
at 3-4, 5-9 (2017 agreement between [REDACTED] and [REDACTED] granting
[REDACTED]).
As to the specific allocation of royalties between the performance
and ephemeral recording rights, SoundExchange notes that this
allocation has no effect on the Services. See SX PFFCL ] 1574. Rather,
the real interested parties in determining the allocation are record
companies and performing artists because payments under section 114 are
subject to a mandatory division between artists and record companies
and payments under section 112 are not. See id.; Ford Des. WDT at 13-
14; 17 U.S.C. 114(g)(2). ``Because the willing buyer'' (i.e., the music
service) ``is disinterested with respect to that allocation, the
agreement between the record companies and the artists thereby becomes
the best indication of the proper allocation of royalties.'' Ford Des.
WDT at 14. Dr. Ford testified to the existence of an agreement between
artists and record companies that 5% of royalties should be allocated
to the ephemeral recordings right and 95% should be allocated to the
performance right. See id. at 15. Mr. Bender testified that the
SoundExchange board of directors, which is comprised of record company
and performing artist representatives, ``adopted a resolution
reflecting agreement that 5% of the royalties for the bundle of rights
should be attributable to the Section 112(e) ephemeral royalties, with
the rest being allocated to the Section 114 performance royalties.''
Bender WDT ] 56. SoundExchange avers that ``[a]s a result, a 95%-5%
split `credibly represents the result that would in fact obtain in a
hypothetical marketplace negotiation between a willing buyer and the
interested willing sellers under the relevant constraints.' '' SX PFFCL
] 1575 (quoting Ford Des. WDT at 15).\352\
---------------------------------------------------------------------------
\352\ The SoundExchange Board resolution reflecting the
agreement between artists and copyright owners is not in the record.
Dr. Ford's and Mr. Bender's testimony concerning the agreement,
therefore, is hearsay. The Judges exercise their discretion under 37
CFR 351.10(a) to admit and consider this hearsay testimony.
---------------------------------------------------------------------------
SoundExchange states that the editorial changes it seeks to 37 CFR
380.10(d) more ``clearly state[ ] the effect of the 95%-5% split,'' and
opines that ``[t]his change will not have any effect other than making
the current rule clearer.'' SX PFFCL ] 1576. SoundExchange notes that
the change is consistent with NRBNMLC's Alternative 2 proposal and with
SoundExchange's settlements with CBI and NPR/CPB. See id. ]] 1568,
1577.
The Judges find the testimony and agreements that SoundExchange
cites in its proposed findings to be persuasive as to both the
inclusion of ephemeral recordings royalties within a bundled rate for
performances and ephemerals and the specific allocation of 5% of the
bundled royalty to the section 112(e) license. The Judges also find
SoundExchange's proposed editorial changes to be appropriate and
supported by the record. The Judges, therefore, adopt SoundExchange's
proposals regarding ephemeral recordings in their entirety.
VIII. Terms
One of the purposes of this proceeding is to establish terms for
the administration of the rates the Judges
[[Page 59585]]
determine for the rate period 2021 to 2025. The parties proposed
adoption of certain terms to be included in Subchapter E of Chapter
III, title 37 CFR The Judges have weighed the proposals and the
arguments of the parties in support of or opposed to various regulatory
provisions and adopt the Terms as detailed in ``Exhibit A'' to this
determination. The parties' proposals, and the Judges' rulings, include
the following.\353\
---------------------------------------------------------------------------
\353\ The Judges also adopt several of the proposed changes that
are merely technical, structural, or conforming amendments to the
regulations.
---------------------------------------------------------------------------
A. Standards for the Adoption of Terms and Other Regulatory Language
The Judges' employ the willing buyer/willing seller standard to
establish terms for the administration of royalty rates. 17 U.S.C.
114(f)(1)(B); Web II, 72 FR at 24102. SoundExchange offers that the
Judges have an obligation to adopt terms that will facilitate an
efficient collection, distribution, and administration of the statutory
royalties. SX PFFCL ] 1578 (citing Web II, 72 FR at 24102); see also
SDARS II, 78 FR at 23073. The Judges clarify that decisions to adopt
terms, while informed by policy considerations, such as those suggested
by SoundExchange, are ultimately guided by record evidence. Rulemaking
proceedings are the proper avenue for consideration of several of the
terms requested in this proceeding. As is addressed below, the Judges
have a pending rulemaking proceeding in which they may address several
such proposals.
SoundExchange also argues for consistency of terms with those
applicable to satellite radio and preexisting services. SX PFFCL ]]
1579-1583. The Services counter that the standard the Judges must apply
regarding proposed terms is the willing buyer/willing seller standard.
Services RPFFCL ]] 1579-1583. As stated above, the Judges' decision
regarding terms is informed by such considerations but is guided
ultimately by the willing buyer/willing seller standard. As
SoundExchange acknowledges, the market for webcasting is different from
other services, and different rates and terms apply. In addition,
evidence differs across proceedings. As a general matter, the Judges
seek consistency across the regulatory provisions administering rates,
to the extent consistency is warranted or permitted by the specific
facts of individual rate proceedings.
B. Designating SoundExchange as the Collective
The Judges designate SoundExchange as the Collective under this
Determination. SoundExchange participated in this proceeding as the
existing and presumed Collective. SoundExchange proposed to continue as
the Collective. See SoundExchange Proposed Rates and Terms at 12. No
party objected to SoundExchange continuing in the role of Collective.
The Judges acknowledge the administrative and technological knowledge
base developed by SoundExchange over its years of service as the
Collective. Finding sufficient basis, in the entirety of the record,
for SoundExchange to serve, the Judges re-designate SoundExchange to
serve as the Collective for purposes of collecting, monitoring,
managing, and distributing sound recording royalties established by
part 380 of the Judges' regulations.
C. Audit Terms
There are several issues presented in this proceeding regarding the
audit provisions. The more persuasive evidence points to resolution of
most of the issues in favor of continuing to apply the existing terms.
The record contains evidence of a number of contracts that have
substantially similar audit provisions to such regulations. The audit
provisions are addressed below.
1. Late Fee for Late Payments Discovered in Audits
The Services propose a separate interest rate for late payments
resulting from underpayments discovered in audits. The Services propose
a fee for audit-discovered late payments that is lower than the
prevailing 1.5% late fee. Specifically, the Services propose the
interest rate for preexisting subscription services and satellite radio
services,\354\ which looks to the federal post-judgment rate in 28
U.S.C. 1961. Services PFFCL ]] 328-330; Second Amended Proposed Rates
and Terms of Sirius XM Radio Inc. and Pandora Media at 2; NAB Proposed
Rates and Terms at 6; Google Proposed Rates and Terms at 3; NRBNMLC's
Amended Proposed Rates and Terms ex. A at 6. SoundExchange counters, in
part, that the current context differs from PSS/SDARS. SX PFFCL ]]
1593-1601. The Judges agree that the context differs, but that is not
the determining factor. As addressed below, the contract terms
negotiated by willing buyers and willing sellers, in evidence from
similar markets, are persuasive.
---------------------------------------------------------------------------
\354\ See 37 CFR 382.7(g).
---------------------------------------------------------------------------
Both the Services and SoundExchange make arguments about good faith
and bad faith on the part of stakeholders in the context of audit-
discovered late payments. SX PFFCL ]] 1605-1609; Services PFFCL ] 329.
The Judges find insufficient evidence in the record to suggest that any
actor, in this context, is or has been significantly motived by, or
acted in, bad faith. Such matters, if confronted, may be adequately
addressed by the re-adoption of other requirements in the existing
audit provision, such as those requiring reasonableness, the use of a
Qualified Auditor, and actions being in accordance with generally
accepted auditing standards. As for the arguments over whether the late
fee, applied to all late payments, is a hardship, the Judges make no
judgment either way. Such late fees in exemplary contracts demonstrate
that willing parties have agreed to such terms, even if they may at
times function as a hardship. See, e.g., Trial Ex. 4035 at 20, 28;
Trial Ex. 5111 at 24, 34. Relatedly, the Services put forth an argument
that applying a general late fee rate to audit-discovered late payments
is unnecessarily ``punitive.'' Services RPFFCL ]] 1617-1618. The Judges
find that differences between a reasonable late fee being viewed as
alternatively punitive or motivating are largely semantics. Indeed, the
Services recognize that in its original context, the general late fee
of 1.5% monthly interest rate plainly serves as a short-term penalty to
incentivize timely payment. Services PFFCL ] 330. Based on the entirety
of the record, the Judges find a late fee, applicable across all late
payments, motivates compliance, as it should.
Specifically, several contract terms negotiated by willing buyers
and willing sellers on matters such as this one serve as reliable
evidence. See, e.g., Trial Ex. 5013 at 80; Trial Ex. 5037 at 69
(regarding ``late payments discovered in audit''). The Judges find that
the contracts in evidence indicate sufficient and persuasive instances
in which willing buyers and willing sellers negotiated that the same
late fee rate exists for any late payments, without separate treatment
of underpayments discovered in an audit. Id. The Judges therefore
conclude that the designated late fees will apply to any late payments,
[REDACTED] the underpayments are discovered in audits.
The Judges re-adopt the monthly late fee of 1.5 percent. The Judges
observe that in admitted contracts, there is a range from [REDACTED] up
to
[[Page 59586]]
[REDACTED]%. See, e.g., Trial Ex. 2013 ([REDACTED]); Trial Ex. 4035 at
20, 28 ([REDACTED]%); Trial Ex. 5013 at 38, 80 ([REDACTED]%); Trial Ex.
5074 at 2 ([REDACTED]%), 5037 at 68-69 ([REDACTED]%). The 1.5% rate is
an accepted rate in the market. For this reason, the Judges adopt it as
the generally applicable late fee, and reject the Services' proposed
change.
2. Frequency of Audits
SoundExchange proposes adoption of a provision regarding frequency
of audits that would allow it to conduct multiple audits of a licensee
in parallel, with each audit covering a different period of time.
Specifically, SoundExchange proposes a change to reflect that the
payor's payments for a particular year may be audited only once, rather
than that a licensee may be audited only once a year. SoundExchange
suggests a need for such a provision by offering evidence of various
delays in recent audits. It also notes that its proposal is similar in
effect to the statutory provision concerning audits of services
licensed under the section 115 blanket license. SX PFFCL ]] 1619-1622.
The Services dispute that delays in audit processing are attributable
to licensees or that licensees may benefit from prolonging the audit
process. Services RPFFCL ]] 1620-1621. The Services indicate that
several of the Services' benchmark agreements limit the frequency of
audits. Services RPFFCL ] 1622; see, e.g., Trial Ex. 5013 at 79; Trial
Ex. 5037 at 69 (regarding ``audit'' no more than once per calendar
year). The Judges are informed by the terms in negotiated contracts
addressing the frequency of audits, cited by the Services and
otherwise--namely, those that limit audits of a payor's or licensee's
payments to once per year. The Judges find that such evidence, and the
record as a whole, does not support SoundExchange's proposal to allow
an audit of a payor or licensee more than once in any year. The Judges,
therefore, reject SoundExchange's proposal.
3. Audit Deadlines and Audit Fee Shifting
SoundExchange proposes response deadlines within audits, alleging
various delays in past audit processes. SX PFFCL ]] 1623-1630.
SoundExchange also proposes that the costs of an audit be shifted to
the licensee if the auditor is not provided requested information that
is in the possession of the licensee or its contractor within 60 days
after a written request therefor, again, referring to various alleged
delays in past audit processes. SX PFFCL ]] 1631-1642. The Services
dispute the causes and nature of the alleged delays and offer that
there is a lack of record evidence to support the SoundExchange
proposals. Services PFFCL ]] 1623-1642. Sirius XM, Pandora, and NAB
propose what they characterize as a much more effective solution than
the SoundExchange proposal, which is to require that audits be
completed within one year of being noticed. Services PFFCL ]] 341-346.
The Judges find that the record does not provide persuasive evidence
that either side's proposals would be negotiated by willing buyers and
willing sellers. The Judges do not adopt the proposed deadlines or fee
shifting. The Judges are persuaded that the existing, and broadly re-
proposed, provisions requiring reasonableness, the use of a Qualified
Auditor, and actions being in accordance with generally accepted
auditing standards, adequately address the concerns regarding delays.
At the same time, these existing provisions are persuasively supported
by record evidence, such as relevant contracts negotiated by willing
buyers and willing sellers. See, e.g., Trial Ex. 5013 at 70-80. Trial
Ex. 5037 at 69 (regarding [REDACTED]).
4. Auditor's Right To Consult Its Client
SoundExchange requests terms clarifying that an auditor may consult
with its client throughout the audit process, including to advise the
client concerning the status of the audit, request information from the
client relevant to the audit, and request the client's views concerning
tentative findings and other issues. In support of this proposal,
SoundExchange points to alleged impediments to efficient completion of
audits that may be alleviated by its request. SX PFFCL ]] 1643-1655.
The Services oppose this requested provision, alleging that it would
disrupt the proper independence of an auditor. Services PFFCL ]] 353-
356; Services RPFFCL ]] 1623-1642. The Judges find that the record does
not provide persuasive evidence that SoundExchange's proposals would be
negotiated by willing buyers and willing sellers. The Judges do not
adopt the proposed provisions allowing auditors broad consultation with
its client. The Judges are persuaded that the existing, and re-
proposed, provisions requiring the use of a Qualified Auditor and
actions being in accordance with generally accepted auditing standards
appropriately address the scope of client and third-party-auditor
consultations. At the same time, these existing provisions are
persuasively supported by record evidence, such as relevant contracts
negotiated by willing buyers and willing sellers. See, e.g., Trial Ex.
5013 at 79; Trial Ex. 5037 at 69 (regarding [REDACTED]).
5. Credit for Overpayment
Sirius XM/Pandora and NAB propose that the Judges specify that the
amount of any overpayment discovered in an audit may be deducted from
the next payment(s) due. Services PFFCL ]] 333-334; Sirius XM and
Pandora First Amended Proposed Rates and Terms at 2; NAB Proposed Rates
and Terms at 6. Sirius XM, Pandora, NAB, and the NRBNMLC suggest that
the proposal is a matter of basic fairness and is in line with
regulations issued by the Copyright Office related to the audit of
statements of account under the statutory licenses in secs. 111 and
115. Services PFFCL ]] 335-338. SoundExchange, in its opposition to
this proposal, submits that it is unnecessary, as isolated overpayments
in an audit are rare, and such overpayments have been offset by larger
underpayments. SoundExchange adds that the proposal is administratively
burdensome, noting that the money may not be recoupable once it is paid
to artists. SX PFFCL ]] 1656-1660. On the balance of the record, the
Judges are in agreement with SoundExchange. In addition, in this
context, the burden of submitting accurate payments is on the licensee,
and the licensee bears the risk of overpayment. Therefore, the Judges
do not adopt this proposal.
6. ``Net'' Underpayments
Under existing regulations, SoundExchange must bear the costs of
audits that it requests unless the auditor determines that there was an
underpayment of 10% or more, in which case the service being audited
pays the reasonable cost of the audit. 37 CFR 380.6(h). NAB and the
NRBNMLC seek to clarify that the costs of an audit shifted to a service
only in the case of a net underpayment (i.e. underpayments less any
overpayments) of 10% or more. NAB, through its witness, Tres Williams,
offered the view that the clarification better reflects practices in
the marketplace. Services PFFCL ] 339 (citing Williams WDT ] 42). The
Judges are persuaded by the entirety of the record, including the
testimony of Mr. Williams and relevant marketplace contracts in the
record, that the proposal is representative of practices negotiated by
willing buyers and willing sellers in the marketplace. See, e.g., Trial
Ex. 5013 at 80; Trial Ex. 5037 at 69 (regarding [REDACTED]). The
Judges, therefore, adopt the proposal.
[[Page 59587]]
D. Statements of Account Showing Recoupment of Minimum Fees
SoundExchange proposes that even services that pay the minimum fee
be required to file statements of account and reports of use. It urges
that such reporting would pose a minimal burden on licensees and would
promote timely and accurate calculation of minimum fee recoupment.
SoundExchange avers that, in the absence of statements of account
showing recoupment of minimum fees, SoundExchange frequently finds
itself inquiring of licensees concerning missing statements of account,
only to be told that the licensee's usage to date is covered by a
minimum fee payment. SX PFFCL ]] 1664-1666. The Services oppose any
requirement to report usage when royalties are not due, noting that
licensees already are required to certify their statements of account
on an annual basis. The Services also indicate that the proposed change
would be unnecessary and burdensome. Services RPFFCL ]] 1664-1666. The
Judges appreciate the desire to ensure the accuracy of payments,
including minimum payments. However, the Judges note that the record
contains little useful evidence regarding how licensees in this
category would address such reports in a willing buyer/willing seller
context. Additionally the Judges observe that goals of the requested
provision may be addressed through revisions to the Reports of Use
provisions in 37 CFR 370. A related rulemaking is pending, and the
Judges intend to refresh the record on the subjects of that rulemaking.
See Docket No. 14-CRB-0005 RM.
E. Account Numbers and Reporting of ISRCs
SoundExchange proposes requirements for the use of account numbers
on payments, statements of accounts, and reports of use. SXPFFCL ]]
1667-1670. The Services do not oppose SoundExchange on this matter.
Services RPFFCL ]] 1667-1670. The Judges find the proposal a reasonable
and appropriate means of improving the efficiency of processing
payments, statements of account, and reports of use and, therefore,
adopt the proposal.
SoundExchange proposes a provision requiring licensees to use
International Standard Recording Codes (ISRCs) in their reports of use,
where available and feasible, notwithstanding 37 CFR 370.4(d)(2)(v).
SoundExchange expresses concern that the current regulations addressing
reports of use are not sufficient to identify unambiguously which
recordings a service used. SX PFFCL ]] 1671-1678. The Services point to
the rulemaking that may address the use of ISRCs and suggest that it
would be inappropriate to shift onto the Services the effort of
gathering such information, which the Services often do not have
complete access to and which originates with SoundExchange's own
members in the first instance. Services RPFFCL ]] 1671-1678. The Judges
note that the record contains little useful evidence regarding how
licensees would address such a requirement in a willing buyer/willing
seller context. Additionally the Judges observe that goals of the
requested provision may be addressed through the Reports of Use
provisions in 37 CFR 370. A related rulemaking is pending, and the
Judges intend to refresh the record on the subjects of that rulemaking.
See Docket No. 14-CRB-0005 RM.
F. Reporting Usage of Directly Licensed Tracks
SoundExchange proposes adopting a provision requiring reporting of
directly-licensed sound recordings excluded from royalty calculations.
It offers that similar provisions have proven helpful for identifying
potential payment errors and disputes relating to the classification of
recordings as directly licensed. SX PFFCL ]] 1679-1684. The Services
submit that SoundExchange has not pointed to evidence of any instance
of significant errors in categorizing directly-licensed tracks, nor has
it indicated that its ability to audit a webcaster would not be
sufficient to allow it to address any such errors. They add that
SoundExchange does not require this information to distribute royalties
that are paid to it under the statutory license and that, in some
instances, licensees are bound by confidentiality provisions preventing
such disclosure. Services RPFFCL ]] 1679-1684. The Judges find that the
record, including the instances of negotiated agreements regarding
holding such direct license information confidential, is persuasive
evidence for not adopting the requested provision. The Judges,
therefore, do not adopt the proposal.
G. Unclaimed Funds
SoundExchange proposes that if it is unable, for a period of three
years, to identify or locate a copyright owner or performer who is
entitled to receive a royalty distribution, it may apply such
``unclaimed funds'' to offset any costs deductible under 17 U.S.C.
114(g)(3), as it was permitted to do prior to Web IV. It points to the
Music Modernization Act (MMA) and the new provisions in
sections115(d)(3)(J)(i)-(ii) and 114(g)(7) as a signal from Congress
that the Judges are authorized to preempt state property law claims to
unclaimed funds. It urges that the Judges need not, and should not,
direct SoundExchange to act in accordance with applicable federal,
state, or common law with regard to such funds. SX PFFCL ]] 1685-1694.
The Services oppose SoundExchange's request, pointing out that it would
allow SoundExchange to spend the unclaimed funds on legislative and
litigation expenses and potentially profit from the use of such funds.
They further note that if SoundExchange is authorized to use unclaimed
funds to offset its administrative costs, it may undermine the
Collective's case regarding minimum fees. Services RPFFCL ]] 1692-1693.
Sirius XM and Pandora oppose the requested provision for similar
reasons and go on to dispute the application of section
115(d)(3)(J)(i)-(ii) to the request. Sirius XM and Pandora request that
the Judges require that any unclaimed funds be distributed among
copyright owners based on usage data, instead of providing a windfall
to SoundExchange. Pandora/Sirius XM PFFCL ]] 250-252.
The Judges agree with Sirius XM and Pandora that the provisions of
sec. 115 are not applicable to the current proposal. The Judges also
accept SoundExchange's arguments that the new section 114(g)(7)
authorizes regulations that preempt state law and are persuaded that
the MMA provision expresses a policy choice favoring such preemption.
On the entirety of current record, the Judges are not convinced that
the unclaimed funds should be distributed among copyright owners based
on usage data. The Judges are persuaded that the more appropriate path
(and the path that is consistent with intent of Congress) is to allow
the Collective (i.e., SoundExchange), after three years,\355\ to apply
unclaimed funds against administrative expenses, thus reducing the
burden of administrative expenses that must be borne by copyright
owners and performing artists.
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\355\ The proposed three-year period is not in dispute. See 17
U.S.C. 507(b). The three-year period for the unclaimed funds term
(in then Sec. 260.7) was adopted on June 18, 2003, and remains
based in the statute, 17 U.S.C. 507(b). See 68 FR 36469.
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H. Proxy Distribution for Missing Reports of Use
SoundExchange proposes a provision to allow the use of proxy data
to distribute royalties in certain circumstances in which adequate
reports of use are not available. SX PFFCL ]] 1695-1705. The Judges are
[[Page 59588]]
not persuaded by SoundExchange's arguments or evidence in favor of the
particular proposal to allow proxy distribution. The Judges observe
that SoundExchange points to prior authorizations allowing proxy
distributions which were granted through rulemaking authority as
opposed to determinations of rates and terms. The Judges also observe
SoundExchange's citations to the new provisions of section 114(g)(7).
The Judges again note the pending rulemaking and the Judges' intent to
refresh the record on the subjects of that rulemaking. See Docket No.
14-CRB-0005 RM.
I. Definition of Performance
Google proposes that the Judges delete text from definition of
Performance setting out that an example of a performance is ``the
delivery of any portion of a single track from a compact disc to one
listener.'' Google Proposed Rates and Terms at 3. SoundExchange opposes
deletion of the text, urging that the entirety of the definition is
necessary to know what the sound recording unit is that must be
counted, especially for particular types of recordings such as
Classical music tracks. SX PFFCL ]] 1706-1709. The entirety of the
record is persuasive to the Judges that the entirety of the definition
should be maintained. The Judges, therefore, reject Google's proposal.
IX. Royalty Rates Determined by the Judges
A. Annual Price Level Adjustments to Statutory Royalty Rates
In Web IV, the Judges set statutory rates for the first year of the
rate term (2016) and specified that the rates would be adjusted
annually for the reminder of the rate term to reflect cumulative
changes in the CPI-U from a base level set in November 2015. See Web
IV, 81 FR at 26404; 37 CFR 380.10(c). The Judges effectively broke with
their practice in Web II and Web III of specifying annual increases,
relying on Professor Shapiro's Web IV testimony that ``a regulatory
provision requiring an annual price level adjustment is preferable to
an implicit or explicit prediction of future inflation (or
deflation).'' Web IV, 81 FR at 26404. With the exception of the NAB,
all of the participants' rate proposals would continue the practice
established in Web IV of making annual price level adjustments based on
the CPI-U. See SoundExchange Rate Proposal at 2-3; Sirius XM and
Pandora Second Amended Proposed Rates and Terms at 1; Google Proposed
Rates and Terms at 4; NRBNMLC Amended Proposed Rates and Terms ex. A at
9 (Alternative 1).
The NAB opposes price level increases to the statutory rates. See
NAB PFFCL ]] 207-208. The NAB bases its proposal to eliminate price
level increases on a discussion in Dr. Leonard's written testimony:
[A]s an economic matter, any yearly increase in the statutory
rate should be tied to the increase in prices in a narrower
industry--e.g., music services and the royalties paid by such
services. Prices in other industries reflected in the CPI may be
driven by economic factors that play no role in the music industry.
Conversely music prices may be driven by economic factors that play
no role in other industries. For either reason the general CPI may
have low correlation with prices in the music industry.
Leonard WDT ] 119 (emphasis added). Dr. Leonard then argues that a
review of prices in the music industry ``suggests little, if any,
change in recent years.'' Id. ] 120. Dr. Leonard notes that the retail
price for subscription streaming services has remained the same or
declined over the past several years, implying that per subscriber
royalties (which are generally calculated as a percentage of the
subscription price) have also stayed constant or declined. See id. He
also states that ``the per-play royalty for sound recording rights for
ad-supported Spotify was lower in the first quarter of 2019 as compared
to 2018.'' Id.
The NAB states that SoundExchange's proposal is based on testimony
from Mr. Orszag that assumes ``that revenue can be expected to increase
over time at least at the rate of inflation.'' NAB PFFCL ] 208 (quoting
Orszag WDT ] 82 n.118). The NAB argues that Mr. Orszag ``did not
distinguish between subscription and advertising revenues, did not
analyze whether services' revenues per-play have actually increased at
the rate of inflation, and did not analyze whether simulcasters
revenues per simulcast play have actually increased at the rate of
inflation.'' Id.
In support of inflation-based price level increases, SoundExchange
cites testimony from Professor Shapiro and Mr. Orszag supporting
inflation-indexed rates. See SX RPFFCL (to NAB) ] 208 (citing Shapiro
WDT at 4; Orszag WRT ] 138; Peterson WDT ] 14 (``The recommended per-
play rate could be escalated for inflation as measured by the consumer
price index (CPI).''); Willig WDT ] 55 (deriving average rates for
five-year period, then using discount rate equal to rate of inflation
to compute 2021 rate)).
SoundExchange argues that Professor Leonard's analysis of pricing
is inadequate because of its reliance on subscription pricing in a
market that is dominated by ad-supported services, and because his
perception of the trend for effective per-play royalty rates for ad
supported services is based on inadequate data. See SX RPFFCL (to NAB)
] 207. As to the latter point, SoundExchange also refers to Mr.
Orszag's testimony that advertising prices are a more relevant metric
and have increased faster than the CPI. See id. (citing Orszag WRT ]
137).
Finally, SoundExchange argues that ``there is no basis for singling
out simulcasters for a special analysis of inflationary trends,''
noting that the NAB bears the burden of demonstrating that simulcasters
are entitled to a differentiated rate.
The Judges find Dr. Leonard's testimony concerning price level
adjustments unpersuasive. Dr. Leonard's statements concerning the
difference between general inflation and inflation in the music
industry (e.g., ``the general CPI may have low correlation with prices
in the music industry'') is both tentative and poorly supported by the
market evidence he analyzes. In this regard, the Judges agree with the
critique lodged by SoundExchange and Mr. Orszag. See SX RPFFCL (to NAB)
] 207; Orszag WRT ] 137.
More critically, the NAB fails to provide persuasive evidence to
support its proposal that statutory royalty rates should remain at the
same level throughout the rate term for all types of services. That
proposal contains an implicit assumption that price levels will remain
the same across the music industry over the next five years. That is
hardly self-evident. In the absence of persuasive evidence that prices
will remain static across the entire music industry for the next five
years, the Judges will not presume that to be the case. The NAB has not
presented such persuasive evidence.\356\
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\356\ If the NAB had presented evidence of some other index that
it demonstrated was more closely aligned with price changes in the
music services, the Judges could have considered such an index as an
alternative to the CPI-U. However, the NAB did not present such
evidence, leaving the Judges with a choice between a five-year
freeze on the statutory rates or an extension tied to a reasonable
index. The Judges find that rates adjusted based on the CPI-U are
clearly preferable to rates that are frozen arbitrarily for the
duration of the five-year rate term.
---------------------------------------------------------------------------
The Judges find a price level adjustment based on changes to the
CPI-U to be supported by the testimony of economists who testified on
behalf of SoundExchange and the Services. Moreover, the Judges find
changes in the CPI-U to be a reasonable proxy for
[[Page 59589]]
measuring changes in price levels in the relevant industries.\357\
---------------------------------------------------------------------------
\357\ The Judges note that when rates in a voluntary settlement
must be extended beyond the term of a settlement to cover the period
of a statutory rate term, Congress has instructed the Judges to
adjust those rates ``to reflect national monetary inflation during
the additional period the rates remain in effect.'' 17 U.S.C. 805.
The Judges view this as support for the proposition that national
inflation rates are a reasonable proxy for price changes in the
relevant industries.
---------------------------------------------------------------------------
Consequently, the Judges will set statutory rates for the year 2021
and index those rates for inflation over the remainder of the rate term
using 2020 as the base year. Specifically, for the years 2022 through
2025, the rates shall be adjusted to reflect any inflation or
deflation, as measured by changes in the Consumer Price Index for All
Urban Consumers (U.S. City Average, all items) (CPI-U) announced by BLS
in November of the immediately preceding year, as described in the
regulations set forth in this Determination.
B. Minimum Fee
In accordance with the Judges' analysis, supra, section VI.C, the
annual minimum fee applicable to commercial webcasters shall be $1,000
per channel or station, subject to an annual cap of $100,000 per
licensee. The minimum fee shall be non-refundable, but shall be
credited against usage fees.
The annual minimum fee applicable to noncommercial webcasters
(other than those covered by SoundExchange's settlements with CBI and
NPR/CPB), shall be $1,000 per channel or station. The minimum fee shall
be non-refundable, and shall cover usage up to 159,140 ATH per month.
C. Commercial Rates
1. Commercial Subscription Rates
In accordance with the Judges' analysis supra, section IV, the
royalty rate for noninteractive subscription services is $0.0026 per
play. In computing this rate, the Judges take note that Professor
Shapiro and Mr. Orszag agree that the benchmark rate needs to be
adjusted to reflect the actual increase in the CPI-U for 2020 because
the economic data on which they rely is current only into 2019. See
Shapiro WDT at 2 (recommending 2019 as the applicable base year to
measure price level changes in 2020); Orszag WDT ] 82 n.118.
(requesting that the Judges follow their procedure in the prior
webcasting rate proceeding, see Web IV, 81 FR at 26405, where the
Judges adjusted a steering-based benchmark rate to reflect actual
inflation in the year prior to the first year of the new rate period
(i.e., 2015 for the 2016-2020 rate period)). Applying this approach,
the Judges note that in 2020, the CPI-U increased by 1.4%. https://www.bls.gov/opub/ted/2021/consumer-price-index-2020-in-review.htm
(accessed June 10, 2021). Applying a 1.4% adjustment to the $0.0026
rate increases the rate to $0.0026364 which, when rounded, remains at
$0.0026 for 2021.\358\
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\358\ The $0.0026 rate is also supported by the Judges' finding
that Professor Willig's Shapley Model-derived rates serve only as
limited guideposts, indicating that effectively competitive rates
generated via a Shapley Value Model would be less than $0.0028 per
play for subscription services. When ``the Judges are confronted
with evidence that, standing alone, is not itself wholly sufficient,
they may rely on that evidence ``to guide the determination,'' i.e.,
by using it as a ``guide post'' when considering the application of
more compelling evidence. SDARS II, 78 FR at 23063, 23066 (emphasis
added).
---------------------------------------------------------------------------
2. Commercial Nonsubscription Rates
Having found the weighted consideration of Mr. Orszag's and
Professor Shapiro's benchmark model analyses for the ad-supported
market yielded a rate of $0.0023 per play, and Dr. Peterson's benchmark
model analysis for the ad-supported market yielded a rate of $0.0021
per play, the Judges conclude that the more granular, label-specific,
analysis and application of adjustments to account for funneling/
conversion in Dr. Peterson's benchmark analysis lends greater weight to
the $0.0021 per-play rate. The Judges apply the same methodology for
adjusting this ad-supported rate as they applied in the immediately
preceding paragraph for the subscription rate, and for the same
reasons. Here too, the 1.4% increase in the CPI-U does not increase the
statutory rate set by the Judges, i.e., it increases the rate to
$0.0021294 which, when rounded, remains at $0.0021.\359\ The Judges
note that this conclusion is also supported by the limited guideposts
yielded by Professor Willig's Shapley Model-derived rates, as adjusted
by the Judges, which indicate that effectively competitive rates would
be less than $0.0023 for ad-supported services. For these reasons, and
in accordance with the Judges' analysis supra, section IV, the royalty
rate for ad-supported, or commercial nonsubscription, services is
$0.0021 per play.
---------------------------------------------------------------------------
\359\ No other party that addressed the ad-supported rate issue
objected to the Judges making the same CPI-U adjustment, to bring
older economic data more current, as the Judges did in Web IV.
---------------------------------------------------------------------------
3. Ephemeral Recording Rate
In accordance with the Judges' analysis supra, section VII, the
royalty rate for ephemeral recordings under 17 U.S.C. 112(e) applicable
to commercial webcasters shall be included within, and constitute 5%
of, the royalties such webcasters pay for performances of sound
recordings under section 114 of the Act.
D. Noncommercial Rates
1. NPR-CPB/SoundExchange Settlement
The Judges have previously adopted the settlement agreement between
SoundExchange, on one hand, and National Public Radio and the
Corporation for Public Broadcasting, on the other, for simulcast
transmissions by public radio stations. See Digital Performance Right
in Sound Recordings and Ephemeral Recordings, Final Rule, 85 FR 11857
(Feb. 28, 2020). The rates and terms governing transmissions and
ephemeral recordings by the entities that are covered by that
settlement agreement for the period 2021-2025 shall be as set forth in
the agreement and codified at 37 CFR 380.30-380.32 (subpart D).
2. CBI/SoundExchange Settlement
The Judges have previously adopted the settlement agreement between
SoundExchange, and College Broadcasters, Inc., for transmissions by
Noncommercial Educational Webcasters (NEWs). See Digital Performance
Right in Sound Recordings and Ephemeral Recordings, Final Rule, 85 FR
12745 (Mar. 4, 2020). The rates and terms governing transmissions and
ephemeral recordings by NEWs for the period 2021-2025 shall be as set
forth in the agreement and codified at 37 CFR 380.20-380.22 (subpart
C).
3. All Other Noncommercial Webcasters
In accordance with the Judges' analysis supra, section V.B, the
royalty rate for webcast transmissions by all other noncommercial
webcasters during the 2021-2025 rate period shall be $1000 annually for
each station or channel for all webcast transmissions totaling not more
than 159,140 Aggregate Tuning Hours (ATH) in a month, for each year in
the rate term. In addition, if, in any month, a noncommercial webcaster
makes total transmissions in excess of 159,140 ATH on any individual
channel or station, the noncommercial webcaster shall pay per-
performance royalty fees for the transmissions it makes on that channel
or station in excess of 159,140 ATH at the rate of $0.0021 per
performance, as adjusted annually upward or downward to reflect changes
in the CPI-U from the CPI-U published by BLS in November 2020.
[[Page 59590]]
4. Ephemeral Recording Rate
The royalty rate for ephemeral recordings under 17 U.S.C. 112(e)
applicable to noncommercial webcasters shall be the same as the rate
applicable to commercial webcasters; that is, royalties for ephemeral
recordings shall be included within, and constitute 5% of, the
royalties such webcasters pay for performances of sound recordings
under section 114 of the Act.
X. Conclusion
On the basis of the foregoing, the Judges propound the rates and
terms described in this Determination. No participant having filed a
timely petition for rehearing, the Judges have made no substantive
alterations to the body of the Initial Determination. However, in
accordance with the Judges' Order Granting Motion to Conform
Regulations to Determination (Jun. 30, 2021), the Judges have modified
the regulatory provisions in Exhibit A to add provisions concerning the
use of account numbers that had been omitted from the provisions
attached to the Initial Determination as the result of a clerical
error. In addition, the Judges have corrected a clerical error in the
heading to section VIII.E, supra, and various typographical,
grammatical, citation, and punctuation errors throughout the
Determination. The Register of Copyrights may review the Judges'
Determination for legal error in resolving a material issue of
substantive law under title 17, United States Code. The Librarian shall
cause the Judges' Determination, and any correction thereto by the
Register, to be published in the Federal Register no later than the
conclusion of the 60-day review period.
Dated: July 22, 2021.
Jesse M. Feder,
Chief Copyright Royalty Judge.
Steve Ruwe,
Copyright Royalty Judge.
David R. Strickler,
Copyright Royalty Judge.
List of Subjects in 37 CFR Part 380
Copyright, Sound recordings.
Final Regulations
In consideration of the foregoing, the Copyright Royalty Judges
amend part 380 of title 37 of the Code of Federal Regulations as
follows:
PART 380--RATES AND TERMS FOR TRANSMISSIONS BY ELIGIBLE
NONSUBSCRIPTION SERVICES AND NEW SUBSCRIPTION SERVICES AND FOR THE
MAKING OF EPHEMERAL REPRODUCTIONS TO FACILITATE THOSE TRANSMISSIONS
0
1. The authority citation for part 380 continues to read as follows:
Authority: 17 U.S.C. 112(e), 114(f), 804(b)(3).
0
2. Revise subpart A to read as follows:
Subpart A--Regulations of General Application
Sec.
380.1 Scope and compliance.
380.2 Making payment of royalty fees.
380.3 Delivering statements of account.
380.4 Distributing royalty fees.
380.5 Handling Confidential Information.
380.6 Auditing payments and distributions.
380.7 Definitions.
Sec. 380.1 Scope and compliance.
(a) Scope. Subparts A and B of this part codify rates and terms of
royalty payments for the public performance of sound recordings in
certain digital transmissions by certain Licensees in accordance with
the applicable provisions of 17 U.S.C. 114 and for the making of
Ephemeral Recordings by those Licensees in accordance with the
provisions of 17 U.S.C. 112(e), during the period January 1, 2021,
through December 31, 2025.
(b) Limited application of terms and definitions. The terms and
definitions in subpart A of this part apply only to subpart B of this
part, except as expressly adopted and applied in subpart C or subpart D
of this part.
(c) Legal compliance. Licensees relying upon the statutory licenses
set forth in 17 U.S.C. 112(e) and 114 must comply with the requirements
of this part and any other applicable regulations.
(d) Voluntary agreements. Notwithstanding the royalty rates and
terms established in any subparts of this part, the rates and terms of
any license agreements entered into by Copyright Owners and Licensees
may apply in lieu of these rates and terms.
Sec. 380.2 Making payment of royalty fees.
(a) Payment to the Collective. A Licensee must make the royalty
payments due under this part to SoundExchange, Inc., which is the
Collective designated by the Copyright Royalty Board to collect and
distribute royalties under this part.
(b) Monthly payments. A Licensee must make royalty payments on a
monthly basis. Payments are due on or before the 45th day after the end
of the month in which the Licensee made Eligible Transmissions.
(c) Minimum payments. A Licensee must make any minimum annual
payments due under subpart B of this part by January 31 of the
applicable license year. A Licensee that as of January 31 of any year
has not made any eligible nonsubscription transmissions, noninteractive
digital audio transmissions as part of a new subscription service, or
Ephemeral Recordings pursuant to the licenses in 17 U.S.C. 114 and/or
17 U.S.C. 112(e), but that begins making such transmissions after that
date must make any payment due by the 45th day after the end of the
month in which the Licensee commences making such transmissions.
(d) Late fees. A Licensee must pay a late fee for each payment and
each Statement of Account that the Collective receives after the due
date. The late fee is 1.5% (or the highest lawful rate, whichever is
lower) of the late payment amount per month. The late fee for a late
Statement of Account is 1.5% of the payment amount associated with the
Statement of Account. Late fees accrue from the due date until the date
that the Collective receives the late payment or late Statement of
Account.
(1) Waiver of late fees. The Collective may waive or lower late
fees for immaterial or inadvertent failures of a Licensee to make a
timely payment or submit a timely Statement of Account.
(2) Notice regarding noncompliant Statements of Account. If it is
reasonably evident to the Collective that a timely-provided Statement
of Account is materially noncompliant, the Collective must notify the
Licensee within 90 days of discovery of the noncompliance.
(e) Use of account numbers. If the Collective notifies a Licensee
of an account number to be used to identify its royalty payments for a
particular service offering, the Licensee must include that account
number on its check or check stub for any payment for that service
offering made by check, in the identifying information for any payment
for that service offering made by electronic transfer, in its
statements of account for that service offering under Sec. 380.4, and
in the transmittal of its Reports of Use for that service offering
under Sec. 370.4 of this chapter.
Sec. 380.3 Delivering statements of account.
(a) Statements of Account. Any payment due under this part must be
accompanied by a corresponding Statement of Account that must contain
the following information:
[[Page 59591]]
(1) Such information as is necessary to calculate the accompanying
royalty payment;
(2) The name, address, business title, telephone number, facsimile
number (if any), electronic mail address (if any) and other contact
information of the person to be contacted for information or questions
concerning the content of the Statement of Account;
(3) The account number assigned to the Licensee by the Collective
for the relevant service offering (if the Licensee has been notified of
such account number by the Collective);
(4) The signature of:
(i) The Licensee or a duly authorized agent of Licensee;
(ii) A partner or delegate if the Licensee is a partnership; or
(iii) An officer of the corporation if the Licensee is a
corporation.
(5) The printed or typewritten name of the person signing the
Statement of Account;
(6) If the Licensee is a partnership or corporation, the title or
official position held in the partnership or corporation by the person
signing the Statement of Account;
(7) A certification of the capacity of the person signing;
(8) The date of signature; and
(9) An attestation to the following effect: I, the undersigned
owner/officer/partner/agent of the Licensee have examined this
Statement of Account and hereby state that it is true, accurate, and
complete to my knowledge after reasonable due diligence and that it
fairly presents, in all material respects, the liabilities of the
Licensee pursuant to 17 U.S.C. 112(e) and 114 and applicable
regulations adopted under those sections.
(b) Certification. Licensee's Chief Financial Officer or, if
Licensee does not have a Chief Financial Officer, a person authorized
to sign Statements of Account for the Licensee must submit a signed
certification on an annual basis attesting that Licensee's royalty
statements for the prior year represent a true and accurate
determination of the royalties due and that any method of allocation
employed by Licensee was applied in good faith and in accordance with
U.S. GAAP.
Sec. 380.4 Distributing royalty fees.
(a) Distribution of royalties. (1) The Collective must promptly
distribute royalties received from Licensees to Copyright Owners and
Performers that are entitled thereto, or to their designated agents.
The Collective shall only be responsible for making distributions to
those who provide the Collective with information as is necessary to
identify and pay the correct recipient. The Collective must distribute
royalties on a basis that values all performances by a Licensee equally
based upon the information provided under the Reports of Use
requirements for Licensees pursuant to Sec. 370.4 of this chapter and
this subpart.
(2) The Collective must use its best efforts to identify and locate
copyright owners and featured artists in order to distribute royalties
payable to them under sec. 112(e) or 114(d)(2) of title 17, United
States Code, or both. Such efforts must include, but not be limited to,
searches in Copyright Office public records and published directories
of sound recording copyright owners.
(b) Unclaimed funds. If the Collective is unable to identify or
locate a Copyright Owner or Performer who is entitled to receive a
royalty distribution under this part, the Collective must retain the
required payment in a segregated trust account for a period of three
years from the date of the first distribution of royalties from the
relevant payment by a Licensee. No claim to distribution shall be valid
after the expiration of the three-year period. After expiration of this
period, the Collective may apply the unclaimed funds to offset any
costs deductible under 17 U.S.C. 114(g)(3).
(c) Retention of records. Licensees and the Collective shall keep
books and records relating to payments and distributions of royalties
for a period of not less than the prior three calendar years.
(d) Designation of the Collective. (1) The Judges designate
SoundExchange, Inc., as the Collective to receive Statements of Account
and royalty payments from Licensees and to distribute royalty payments
to each Copyright Owner and Performer (or their respective designated
agents) entitled to receive royalties under 17 U.S.C. 112(e) or 114(g).
(2) If SoundExchange, Inc. should dissolve or cease to be governed
by a board consisting of equal numbers of representatives of Copyright
Owners and Performers, then it shall be replaced for the applicable
royalty term by a successor Collective according to the following
procedure:
(i) The nine Copyright Owner representatives and the nine Performer
representatives on the SoundExchange board as of the last day preceding
SoundExchange's cessation or dissolution shall vote by a majority to
recommend that the Copyright Royalty Judges designate a successor and
must file a petition with the Copyright Royalty Judges requesting that
the Judges designate the named successor and setting forth the reasons
therefor.
(ii) Within 30 days of receiving the petition, the Copyright
Royalty Judges must issue an order designating the recommended
Collective, unless the Judges find good cause not to make and publish
the designation in the Federal Register.
Sec. 380.5 Handling Confidential Information.
(a) Definition. For purposes of this part, ``Confidential
Information'' means the Statements of Account and any information
contained therein, including the amount of royalty payments and the
number of Performances, and any information pertaining to the
Statements of Account reasonably designated as confidential by the
party submitting the statement. Confidential Information does not
include documents or information that at the time of delivery to the
Collective is public knowledge. The party seeking information from the
Collective based on a claim that the information sought is a matter of
public knowledge shall have the burden of proving to the Collective
that the requested information is in the public domain.
(b) Use of Confidential Information. The Collective may not use any
Confidential Information for any purpose other than royalty collection
and distribution and activities related directly thereto.
(c) Disclosure of Confidential Information. The Collective shall
limit access to Confidential Information to:
(1) Those employees, agents, consultants, and independent
contractors of the Collective, subject to an appropriate written
confidentiality agreement, who are engaged in the collection and
distribution of royalty payments hereunder and activities related
directly thereto who require access to the Confidential Information for
the purpose of performing their duties during the ordinary course of
their work;
(2) A Qualified Auditor or outside counsel who is authorized to act
on behalf of:
(i) The Collective with respect to verification of a Licensee's
statement of account pursuant to this part; or
(ii) A Copyright Owner or Performer with respect to the
verification of royalty distributions pursuant to this part;
(3) Copyright Owners and Performers, including their designated
agents, whose works a Licensee used under the statutory licenses set
forth in 17 U.S.C. 112(e) and 114 by the Licensee whose Confidential
Information is being supplied, subject to an appropriate
[[Page 59592]]
written confidentiality agreement, and including those employees,
agents, consultants, and independent contractors of such Copyright
Owners and Performers and their designated agents, subject to an
appropriate written confidentiality agreement, who require access to
the Confidential Information to perform their duties during the
ordinary course of their work;
(4) Attorneys and other authorized agents of parties to proceedings
under 17 U.S.C. 8, 112, 114, acting under an appropriate protective
order.
(d) Safeguarding Confidential Information. The Collective and any
person authorized to receive Confidential Information from the
Collective must implement procedures to safeguard against unauthorized
access to or dissemination of Confidential Information using a
reasonable standard of care, but no less than the same degree of
security that the recipient uses to protect its own Confidential
Information or similarly sensitive information.
Sec. 380.6 Auditing payments and distributions.
(a) General. This section prescribes procedures by which any entity
entitled to receive payment or distribution of royalties may verify
payments or distributions by auditing the payor or distributor. The
Collective may audit a Licensee's payments of royalties to the
Collective, and a Copyright Owner or Performer may audit the
Collective's distributions of royalties to the owner or performer.
Nothing in this section shall preclude a verifying entity and the payor
or distributor from agreeing to verification methods in addition to or
different from those set forth in this section.
(b) Frequency of auditing. The verifying entity may conduct an
audit of each licensee only once a year for any or all of the prior
three calendar years. A verifying entity may not audit records for any
calendar year more than once.
(c) Notice of intent to audit. The verifying entity must file with
the Copyright Royalty Judges a notice of intent to audit the payor or
distributor, which notice the Judges must publish in the Federal
Register within 30 days of the filing of the notice. Simultaneously
with the filing of the notice, the verifying entity must deliver a copy
to the payor or distributor.
(d) The audit. The audit must be conducted during regular business
hours by a Qualified Auditor who is not retained on a contingency fee
basis and is identified in the notice. The auditor shall determine the
accuracy of royalty payments or distributions, including whether an
underpayment or overpayment of royalties was made. An audit of books
and records, including underlying paperwork, performed in the ordinary
course of business according to generally accepted auditing standards
by a Qualified Auditor, shall serve as an acceptable verification
procedure for all parties with respect to the information that is
within the scope of the audit.
(e) Access to third-party records for audit purposes. The payor or
distributor must use commercially reasonable efforts to obtain or to
provide access to any relevant books and records maintained by third
parties for the purpose of the audit.
(f) Duty of auditor to consult. The auditor must produce a written
report to the verifying entity. Before rendering the report, unless the
auditor has a reasonable basis to suspect fraud on the part of the
payor or distributor, the disclosure of which would, in the reasonable
opinion of the auditor, prejudice any investigation of the suspected
fraud, the auditor must review tentative written findings of the audit
with the appropriate agent or employee of the payor or distributor in
order to remedy any factual errors and clarify any issues relating to
the audit; Provided that an appropriate agent or employee of the payor
or distributor reasonably cooperates with the auditor to remedy
promptly any factual errors or clarify any issues raised by the audit.
The auditor must include in the written report information concerning
the cooperation or the lack thereof of the employee or agent.
(g) Audit results; underpayment or overpayment of royalties. If the
auditor determines the payor or distributor underpaid royalties, the
payor or distributor shall remit the amount of any underpayment
determined by the auditor to the verifying entity, together with
interest at the rate specified in Sec. 380.2(d). In the absence of
mutually-agreed payment terms, which may, but need not, include
installment payments, the payor or distributor shall remit promptly to
the verifying entity the entire amount of the underpayment determined
by the auditor. If the auditor determines the payor or distributor
overpaid royalties, however, the verifying entity shall not be required
to remit the amount of any overpayment to the payor or distributor, and
the payor or distributor shall not seek by any means to recoup, offset,
or take a credit for the overpayment, unless the payor or distributor
and the verifying entity have agreed otherwise.
(h) Paying the costs of the audit. The verifying entity must pay
the cost of the verification procedure, unless the auditor determines
that there was a net underpayment (i.e., underpayments less any
overpayments) of 10% or more, in which case the payor or distributor
must bear the reasonable costs of the verification procedure, in
addition to paying or distributing the amount of any underpayment.
(i) Retention of audit report. The verifying party must retain the
report of the audit for a period of not less than three years from the
date of issuance.
Sec. 380.7 Definitions.
For purposes of this part, the following definitions apply:
Aggregate Tuning Hours (ATH) means the total hours of programming
that the Licensee has transmitted during the relevant period to all
listeners within the United States from all channels and stations that
provide audio programming consisting, in whole or in part, of eligible
nonsubscription transmissions or noninteractive digital audio
transmissions as part of a new subscription service, less the actual
running time of any sound recordings for which the Licensee has
obtained direct licenses apart from 17 U.S.C. 114(d)(2) or which do not
require a license under title 17, United States Code. By way of
example, if a service transmitted one hour of programming containing
Performances to 10 listeners, the service's ATH would equal 10 hours.
If three minutes of that hour consisted of transmission of a directly-
licensed recording, the service's ATH would equal nine hours and 30
minutes (three minutes times 10 listeners creates a deduction of 30
minutes). As an additional example, if one listener listened to a
service for 10 hours (and none of the recordings transmitted during
that time was directly licensed), the service's ATH would equal 10
hours.
Collective means the collection and distribution organization that
is designated by the Copyright Royalty Judges, and which, for the
current rate period, is SoundExchange, Inc.
Commercial Webcaster means a Licensee, other than a Noncommercial
Webcaster, Noncommercial Educational Webcaster, or Public Broadcaster,
that makes Ephemeral Recordings and eligible digital audio
transmissions of sound recordings pursuant to the statutory licenses
under 17 U.S.C. 112(e) and 114(d)(2).
Copyright Owners means sound recording copyright owners, and rights
owners under 17 U.S.C. 1401(l)(2), who are entitled to royalty payments
made under this part pursuant to the statutory licenses under 17 U.S.C.
112(e) and 114.
Digital audio transmission has the same meaning as in 17 U.S.C.
114(j).
[[Page 59593]]
Eligible nonsubscription transmission has the same meaning as in 17
U.S.C. 114(j).
Eligible Transmission means a subscription or nonsubscription
transmission made by a Licensee that is subject to licensing under 17
U.S.C. 114(d)(2) and the payment of royalties under this part.
Ephemeral recording has the same meaning as in 17 U.S.C. 112.
Licensee means a Commercial Webcaster, a Noncommercial Webcaster, a
Noncommercial Educational Webcaster, a Public Broadcaster, or any
entity operating a noninteractive internet streaming service that has
obtained a license under 17 U.S.C. 114 to make Eligible Transmissions
and a license under 17 U.S.C. 112(e) to make Ephemeral Recordings to
facilitate those Eligible Transmissions.
New subscription service has the same meaning as in 17 U.S.C.
114(j).
Noncommercial Educational Webcaster means a Noncommercial
Educational Webcaster under subpart C of this part.
Noncommercial Webcaster has the same meaning as in 17 U.S.C.
114(f)(4)(E), but excludes a Noncommercial Educational Webcaster or
Public Broadcaster.
Nonsubscription transmission has the same meaning as in 17 U.S.C.
114(j).
Payor means the entity required to make royalty payments to the
Collective or the entity required to distribute royalty fees collected,
depending on context. The Payor is:
(1) A Licensee, in relation to the Collective; and
(2) The Collective in relation to a Copyright Owner or Performer.
Performance means each instance in which any portion of a sound
recording is publicly performed to a listener by means of a digital
audio transmission (e.g., the delivery of any portion of a single track
from a compact disc to one listener), but excludes the following:
(1) A performance of a sound recording that does not require a
license (e.g., a sound recording that is not subject to protection
under title 17, United States Code);
(2) A performance of a sound recording for which the service has
previously obtained a license from the Copyright Owner of such sound
recording; and
(3) An incidental performance that both:
(i) Makes no more than incidental use of sound recordings
including, but not limited to, brief musical transitions in and out of
commercials or program segments, brief performances during news, talk
and sports programming, brief background performances during disk
jockey announcements, brief performances during commercials of sixty
seconds or less in duration, or brief performances during sporting or
other public events; and
(ii) Does not contain an entire sound recording, other than ambient
music that is background at a public event, and does not feature a
particular sound recording of more than thirty seconds (as in the case
of a sound recording used as a theme song).
Performers means the independent administrators identified in 17
U.S.C. 114(g)(2)(B) and (C) and the parties identified in 17 U.S.C.
114(g)(2)(D).
Public broadcaster means a Public Broadcaster under subpart D of
this part.
Qualified auditor means an independent Certified Public Accountant
licensed in the jurisdiction where it seeks to conduct a verification.
Subscription transmission has the same meaning as in 17 U.S.C.
114(j).
Transmission has the same meaning as in 17 U.S.C. 114(j)(15).
0
3. Revise subpart B to read as follows:
Subpart B--Commercial Webcasters and Noncommercial Webcasters
Sec. 380.10 Royalty fees for the public performance of sound
recordings and the making of ephemeral recordings.
(a) Royalty fees. For the year 2021, Licensees must pay royalty
fees for all Eligible Transmissions of sound recordings at the
following rates:
(1) Commercial webcasters. $0.0026 per Performance for subscription
services and $0.0021 per Performance for nonsubscription services.
(2) Noncommercial webcasters. $1000 per year for each channel or
station and $0.0021 per Performance for all digital audio transmissions
in excess of 159,140 ATH in a month on a channel or station.
(b) Minimum fee. Licensees must pay the Collective a minimum fee of
$1,000 each year for each channel or station. The Collective must apply
the fee to the Licensee's account as credit towards any additional
royalty fees that Licensees may incur in the same year. The fee is
payable for each individual channel and each individual station
maintained or operated by the Licensee and making Eligible
Transmissions during each calendar year or part of a calendar year
during which it is a Licensee. The maximum aggregate minimum fee in any
calendar year that a Commercial Webcaster must pay is $100,000. The
minimum fee is nonrefundable.
(c) Annual royalty fee adjustment. The Copyright Royalty Judges
shall adjust the royalty fees each year to reflect any changes
occurring in the cost of living as determined by the most recent
Consumer Price Index for All Urban Consumers (U.S. City Average, all
items) (CPI-U) published by the Secretary of Labor before December 1 of
the preceding year. The calculation of the rate for each year shall be
cumulative based on a calculation of the percentage increase in the
CPI-U from the CPI-U published in November, 2020 (260.229) and shall be
made according to the following formulas: For subscription
performances, (1 + (Cy-260.229)/260.229) x $0.0026; for
nonsubscription performances, (1 + (Cy-260.229)/260.229) x
$0.0021; for performances by a noncommercial webcaster in excess of
159,140 ATH per month, (1 + (Cy-260.229)/260.229) x $0.0021;
where Cy is the CPI-U published by the Secretary of Labor
before December 1 of the preceding year. The adjusted rate shall be
rounded to the nearest fourth decimal place. The Judges shall publish
notice of the adjusted fees in the Federal Register at least 25 days
before January 1. The adjusted fees shall be effective on January 1.
(d) Ephemeral recordings royalty fees; allocation between ephemeral
recordings and performance royalty fees. The Collective must credit 5%
of all royalty payments as payment for Ephemeral Recordings and credit
the remaining 95% to section 114 royalties. All Ephemeral Recordings
that a Licensee makes which are necessary and commercially reasonable
for making noninteractive digital transmissions are included in the 5%.
Dated: September 20, 2021.
Jesse M. Feder,
Chief Copyright Royalty Judge.
Approved by:
Carla D. Hayden,
Librarian of Congress.
[FR Doc. 2021-20621 Filed 10-26-21; 8:45 am]
BILLING CODE 1410-72-P
