Determination of Royalty Rates and Terms for Transmission of Sound Recordings by Satellite Radio and “Preexisting” Subscription Services (SDARS III)

Cited as:83 FR 65210
Court:Copyright Royalty Board, Library Of Congress
Publication Date:19 Dec 2018
Record Number:2018-26922
Federal Register, Volume 83 Issue 243 (Wednesday, December 19, 2018)
[Federal Register Volume 83, Number 243 (Wednesday, December 19, 2018)]
                [Rules and Regulations]
                [Pages 65210-65270]
                From the Federal Register Online via the Government Publishing Office []
                [FR Doc No: 2018-26922]
                [[Page 65209]]
                Vol. 83
                No. 243
                December 19, 2018
                Part IILibrary of Congress-----------------------------------------------------------------------Copyright Royalty Board-----------------------------------------------------------------------37 CFR Part 382Determination of Royalty Rates and Terms for Transmission of Sound
                Recordings by Satellite Radio and ``Preexisting'' Subscription Services
                (SDARS III); Final Rule
                Federal Register / Vol. 83 , No. 243 / Wednesday, December 19, 2018 /
                Rules and Regulations
                [[Page 65210]]
                LIBRARY OF CONGRESS
                Copyright Royalty Board
                37 CFR Part 382
                [Docket No. 16-CRB-0001 SR/PSSR (2018-2022)]
                Determination of Royalty Rates and Terms for Transmission of
                Sound Recordings by Satellite Radio and ``Preexisting'' Subscription
                Services (SDARS III)
                AGENCY: Copyright Royalty Board, Library of Congress.
                ACTION: Final rule and order.
                SUMMARY: The Copyright Royalty Judges announce their final
                determination of the rates and terms for the digital transmission of
                sound recordings and the reproduction of ephemeral recordings by
                preexisting subscription services and preexisting satellite digital
                audio radio services for the period beginning January 1, 2018, and
                ending on December 31, 2027.
                 Effective Date: December 19, 2018.
                 Applicability Date: The regulations apply to the license period
                beginning January 1, 2018, and ending December 31, 2027.
                ADDRESSES: The final determination is posted in eCRB at For access to the docket to read the final determination
                and submitted background documents, go to eCRB and search for docket
                number 16-CRB-0001 SR/PSSR (2018-2022).
                FOR FURTHER INFORMATION CONTACT: Anita Blaine, CRB Program Assistant,
                by telephone at (202) 707-7658 or by email at
                I. Introduction
                 The purpose of the Copyright Royalty Judges (Judges) in the present
                proceeding is to determine the royalty rates and terms applicable to
                Preexisting Subscription Services (PSS) and Satellite Digital Audio
                Radio Services (SDARS) for licenses established by the Copyright Act
                (Act) to utilize copyrighted sound recordings. See 17 U.S.C. 112, 114.
                The Act requires the Judges to determine applicable rates and terms
                every five years. See 17 U.S.C. 801(b)(1), 804(b)(3)(B).
                 In determining the PSS rates, the Judges considered proposals from
                both Music Choice and SoundExchange as guideposts rather than as
                benchmarks and determined a rate based upon the current statutory rate
                as adjusted to meet statutory requirements. In determining the SDARS
                rates, the Judges relied most heavily on the opportunity cost approach
                proffered by SoundExchange, but the Judges utilized opportunity cost
                survey data that they found more appropriate than the data relied on by
                 After the Judges issued the Initial Determination in this
                proceeding on December 14, 2017, both Sirius XM Radio, Inc., (Sirius
                XM), the lone SDARS, and Music Choice filed timely motions for
                rehearing. SoundExchange filed responses opposing each rehearing
                motion, and Sirius XM and Music Choice filed replies. On April 17,
                2018, the Judges ruled on the rehearing motions. See Order Granting In
                Part and Denying In Part . . . Motion[s] for Rehearing (Apr. 17, 2018).
                By this order, the Judges denied the Music Choice motion and asked for
                additional briefing on the primary issue Sirius XM raised, viz.,
                whether the Judges should reduce the royalty rate for SDARS set in the
                Initial Determination to a rate not lower than 14.7% of Gross Revenues.
                Id. at 9. The parties filed briefs and responses and the Judges took
                the issue under advisement.
                 On October 11, 2018, the President signed into law the Orrin G.
                Hatch-Bob Goodlatte Music Modernization Act, Public Law 115-264, 132
                Stat. 3676 (Oct. 11, 2018) (MMA). That law includes a provision
                amending section 804(b)(3)(B) of the Copyright Act (Act) to state that
                ``with respect to pre-existing satellite digital audio radio services,
                the terms and rates set forth by the Copyright Royalty Judges on
                December 14, 2017, in their initial determination for the rate period
                ending on December 31, 2022, shall be in effect through December 31,
                2027, without any change based on a rehearing under section 803(c)(2) .
                . . .'' Id. sec. 103. As a consequence of this statutory provision, the
                Judges dismissed the pending rehearing as moot. See Order Dismissing
                Rehearing Proceeding (Oct. 11, 2018).
                 Based upon the totality of the record, and in accordance with the
                following reasoning and analysis, the Judges determine that the
                applicable rates and terms for the period beginning January 1, 2018,\1\
                shall be:
                 \1\ In the Judges' Initial Determination in this proceeding,
                they established rates for the period January 1, 2018 through
                December 31, 2022. Under the MMA, these rates shall remain in effect
                until December 31, 2027. See 17 U.S.C. 804(b)(3)(B) (as amended by
                the MMA). Note that all redactions in this publication were made by
                the Copyright Royalty Judges and not by the Federal Register.
                 For PSS: 7.5% of Gross Revenues, as that term is defined for PSS.
                 For SDARS: 15.5% of Gross Revenues, as that term is defined for
                II. Background
                A. Statutory Licenses
                 In 1995, Congress granted to sound recording copyright owners the
                exclusive right ``to perform the copyrighted [sound recording] publicly
                by means of a digital audio transmission.'' \2\ 17 U.S.C. 106(6).
                Concurrently, Congress limited that exclusive right by creating two
                statutory licenses that would enable certain users, including SDARS and
                PSS, to transmit digitally sound recordings without obtaining a
                voluntary license from each copyright owner. See 17 U.S.C. 112(e),
                114(d). The section 112 license (ephemeral license) allows an entity
                that transmits a sound recording digitally to make ephemeral
                phonorecords of the sound recording to facilitate the transmission.
                Section 112(e) describes conditions under which an entity may license
                the ephemeral sound recording.\3\ Section 114 describes limits that
                apply to the digital transmission license.\4\
                 \2\ See Digital Performance Right in Sound Recording Act of
                1995, Public Law 104-39, 109 Stat. 336 (1995).
                 \3\ Section 112 provides that a sound recording transmitter may
                make no more than one ephemeral phonorecord, ``unless the terms and
                conditions of the statutory license allow for more.'' 17 U.S.C.
                 \4\ Specifically, section 114 excludes from the statutory
                license transmissions by interactive services. See 17 U.S.C.
                B. The Standards for Determining Royalty Rates
                 Section 801(b)(1) of the Act provides that the Judges shall ``make
                determinations and adjustments of reasonable terms and rates of royalty
                payments'' for the statutory licenses set forth in, inter alia, section
                114(f)(1) (``digital performance license'').\5\ The digital performance
                license requires that the Judges set rates and terms that are
                ``reasonable.'' Id. In addition, section 801(b)(1) provides that these
                ``reasonable'' rates shall be calculated to achieve four specific
                 \5\ Sirius XM and SoundExchange agree in substance that the
                Judges should conform the SDARS regulations regarding ephemeral
                licenses to the language adopted by the Judges in Web IV. See SEPFF
                ] 2371; SXMPFF ] 492. The Judges approve this agreement and adopt it
                in the regulations for the forthcoming rate period. See infra,
                section III.
                 (A) To maximize the availability of creative works to the
                 (B) To afford the copyright owner a fair return for his or her
                creative work and the copyright user a fair income under existing
                economic conditions.
                 (C) To reflect the relative roles of the copyright owner and the
                copyright user in the product made available to the public with
                [[Page 65211]]
                respect to relative creative contribution, technological
                contribution, capital investment, cost, risk, and contribution to
                the opening of new markets for creative expression and media for
                their communication.
                 (D) To minimize any disruptive impact on the structure of the
                industries involved and on generally prevailing industry practices.
                17 U.S.C. 801(b)(1).
                 In SDARS 1, the Judges detailed the historical treatment of these
                section 801(b)(1) standards. See Determination of Rates and Terms . . .
                73 FR 4080, 4082-84 (Jan. 24, 2008) (SDARS I). There, the Judges noted
                that the section 801(b)(1) factors originated in the protracted
                legislative process that ultimately produced the Copyright Act of 1976.
                The SDARS I Judges examined the legislative history of the 1976 Act and
                noted that the motivation for adopting the four itemized 801(b)(1)
                factors arose from an exchange between two law professors, Professor
                Ernest Gellhorn, on behalf of certain copyright users, and Professor
                Louis H. Pollack, on behalf of certain copyright owners. The issue
                between the professors was the constitutionality of the Copyright
                Royalty Tribunal (CRT), a predecessor of the Copyright Royalty Board.
                As recounted in SDARS I: ``Professor Gellhorn had recommended that, in
                order to bolster the constitutionality of the Tribunal, the Congress
                should, inter alia, adopt statutory standards beyond the vague
                criterion of `reasonableness.' '' SDARS I, 73 FR at 4082 (citing
                Hearings on H.R. 2223 before the Subcomm. on Courts, Civil Liberties,
                and the Administration of Justice of the House Comm. on the Judiciary,
                94th Cong., 1922 (1975).\6\ After consideration of alternative
                potential statutory language, Congress adopted the four-part itemized
                factors included in section 801(b)(1) to supplement the ``reasonable''
                rate requirement. Id.
                 \6\ The SDARS I Judges also noted that, in like fashion, the
                Register of Copyrights concluded that it would be ``wise to
                establish, in the statute, certain criteria beyond `reasonableness'
                that each Panel is to apply to its decision-making.'' Id. (citing
                Second Supplementary Report of the Register of Copyrights on the
                General Revision of the U.S. Copyright Law, Chapter XV, at 31
                 There is additional legislative history regarding the itemized four
                factors in section 801(b)(1) that aids in understanding how those
                factors should be applied and informs economic analysis under these
                statutory provisions. This legislative history is highlighted by
                dueling positions taken in Congressional testimony in 1967 by the
                licensors, through the National Music Publishers Association (NMPA) and
                its economic witness, Robert R. Nathan, and by the licensees, the
                Recording Industry Association of America (RIAA), through their
                counsel, Thurman Arnold, Esq., a well-known advocate of strong
                antitrust enforcement. See Hearing on S. 597, Subcomm. on Patents,
                Trademarks and Copyrights of the S. Committee on the Judiciary, (Mar.
                20-21, 1967) (Senate Hearing).
                 Mr. Nathan criticized any proposed legislation that would subject
                the songwriting industry to a statutory mechanical licensing scheme.
                Id. at 382. He did not agree that licenses in the music industry should
                be treated differently than how ``we generally function under
                competitive marketplace bargaining arrangements whereby most entities
                in our economy bargain for that which goes into the creation of goods
                and services and also bargain the price for which those goods and
                services are sold.'' Id. He further noted that the statutory mechanical
                royalty rate was in part a reaction to an early 20th century concern
                regarding a Supreme Court decision allowing a player-piano manufacturer
                to play songs through the use of perforated paper rolls fed into the
                new devices (player pianos), without a license and without a duty to
                pay royalties to the songwriters and publishers. White-Smith Music
                Publishing Company v. Apollo Company, 209 U.S. 1 (1908). As Mr. Nathan
                explained: ``[T]he Aeolian Co.[,] had gained control of some 80 percent
                of the musical compositions and Congress . . . fear[ed] the threat of
                monopoly in the mechanical reproduction of music.'' Senate Hearing at
                382-83. The Copyright Act of 1909 superseded the effect of White-Smith
                by creating a statutory license and imposing a fixed statutory rate for
                mechanical reproduction of musical compositions.
                 In his 1967 testimony, Mr. Nathan advocated that Congress eliminate
                the compulsory license and the statutory rate, and he specifically
                urged Congress to resist replacing the fixed statutory fee with a
                regulatory standard to be implemented by a quasi-adjudicatory body. As
                to the latter point he explained to Congress: ``[O]ne might ask . . .
                whether the music publishing industry has any characteristics of a
                public utility? I submit . . . that there is nothing in the music
                publishing industry which gives [it] the characteristics or the
                elements of a public utility . . . .'' Id. at 383. Mr. Nathan noted
                what he felt was a key distinction: Unlike traditional public utilities
                such as ``railroad systems'' or ``streetcar lines,'' the songwriting
                and publishing industry is ``a creative and nonstandardized area,'' and
                ``[m]onopoly and public utility aspects are just not prevalent in this
                industry.'' Id.
                 The licensees' opposing position, expressed by Mr. Arnold on behalf
                of the RIAA, contained the seeds of the standard ultimately adopted in
                section 801(b)(1). As Mr. Arnold testified, the statute should include,
                inter alia, ``accepted standards of statutory ratemaking,'' including a
                rate ``that insures the party against whom it is imposed a reasonable
                return on . . . investment'' and ``that divides the rewards for the
                respective creative contributions of the record producers [the
                licensees] and the copyright owners . . . equitably between them.'' Id.
                at 469.
                 Mr. Nathan criticized this approach on two fronts. First, he argued
                that the ``personal service'' nature of the songwriting and publishing
                industry precluded application of a ``reasonable rate of return''
                requirement for establishing the compulsory royalty rate. Second, with
                regard to the division of the ``rewards'' proposal, Mr. Nathan stated
                that ``I have never in all my experience encountered this novel concept
                of dividing rewards for creative contributions as a meaningful and
                relevant standard of ratemaking.'' Id. at 1093-94.\7\
                 \7\ As the present record (and the record in Phonorecords III)
                demonstrates, subsequent to Mr. Nathan's 1967 testimony, the
                economic concept of ``dividing rewards for creative contributions as
                a meaningful and relevant standard of ratemaking'' has blossomed,
                with the application of Opportunity Cost/Efficient Component Pricing
                approaches, Nash Bargaining Solutions, and Shapley Value analyses.
                 Resolution of this 1967 dispute languished until 1976, when
                Professor Gellhorn successfully convinced Congress to adopt an itemized
                standard in the final statute. See F. Greenman & A. Deutsch, The
                Copyright Royalty Tribunal and the Statutory Mechanical Royalty:
                History and Prospect, 1 Cardozo Arts & Ent. L.J. 1, 53, 59 (1982). In
                so doing, Congress did not explicitly address the economic dispute
                between Mr. Arnold and Mr. Nathan regarding the relative merits of a
                market-based rate versus a rate established in some other manner.
                 Under the itemized section 801(b)(1) standard, the Judges have the
                discretion to choose a market rate, a market-based rate, or a rate
                unrelated to market evidence. Music Choice v. Copyright Royalty Bd.,
                774 F.3d 1000, 1010 (D.C. Cir. 2014) (and citations therein). Any such
                rate would be legally appropriate provided it was not ``arbitrary,
                capricious, an abuse of discretion, or otherwise not in accordance with
                law, or if the facts relied upon by the [Judges]
                [[Page 65212]]
                have no basis in the record.'' Id. at 1007. Indeed, in Music Choice,
                the D.C. Circuit reaffirmed that ``the Copyright Act gives the Judges
                of the Copyright Royalty Board broad discretion to set rates and terms
                for compulsory licenses of the digital performance of sound
                recordings.'' Id. at 1016 (emphasis added).
                C. Prior Proceedings
                 This proceeding is not the first in which the Judges or their
                predecessors have applied the section 801(b) factors to determine
                royalty rates.\8\ In SDARS I, the Judges detailed the historical
                treatment of these factors by their predecessors, the Copyright Royalty
                Tribunal and the Librarian in his administration of the Copyright
                Arbitration Royalty Panel (CARP) system. See Determination of Rates and
                Terms . . . , 73 FR 4080, 4082-84 (Jan. 24, 2008) (SDARS I). In SDARS
                I, the Judges chose to ``begin with a consideration and analysis of the
                [market] benchmarks and testimony submitted by the parties, and then
                measure the rate or rates yielded by that process against the [section
                801(b)] statutory objectives'' to reach a decision. Id. at 4084.
                 \8\ The Copyright Royalty Tribunal (CRT) applied the 801(b)
                factors in a section 116 (Jukebox) rate adjustment and a section 115
                (Phonorecords) rate adjustment. The Librarian of Congress, as
                administrator of a Copyright Arbitration Royalty Panel (CARP) issued
                a determination for the section 114 satellite radio license (SDARS
                I). In 2017, the Judges presided over a contested Phonorecords rate
                hearing, the determination of which will issue after the present
                determination and will involve application of the 801(b) policy
                factors to the Phonorecords license.
                 The precedent guiding the present panel of Judges signals an
                analysis in which the Judges may weigh the evidence presented to
                support the rate proposals, including marketplace benchmarks, apply the
                section 801(b) policy factors to assure the final rates are consonant
                with those factors and, if the evidence permits, also establish a zone
                of reasonableness within which the rate shall be set.\9\
                 \9\ The U.S. Court of Appeals for the D.C. Circuit has also
                concluded that the Judges may apply the ``[section 801(b)] . . .
                objectives [to] determine a range of reasonable royalty rates that
                would serve all these objectives adequately but to differing
                degrees, [and] the [Judges are] free to choose among those rates,
                and courts are without authority to set aside the particular rate
                chosen . . . if it lies within a ``zone of reasonableness.'' See
                Recording Indus. Ass'n of America v. Copyright Royalty Tribunal, 662
                F.2d 1, 9 (D.C. Cir. 1981) (footnotes omitted). Thus, the Judges may
                establish such a zone of reasonableness, but are not required to do
                D. The Present Proceeding
                 The Judges commenced the present proceeding with publication of
                notice seeking petitions to participate. See 81 FR 255 (Jan. 5, 2016).
                Seven entities filed petitions to participate.\10\ The Judges dismissed
                the petitions of Music Reports, Inc. and David Powell. Muzak LLC
                withdrew its petition to participate. The parties participating in the
                hearing were George Johnson d/b/a GEO Music Group (GEO), Music Choice,
                Sirius XM Radio, Inc. (Sirius XM), and SoundExchange, Inc.
                 \10\ Original petitioners included George Johnson d/b/a GEO
                Music Group; Music Choice; Music Reports, Inc.; Muzak LLC; Sirius XM
                Radio, Inc.; SoundExchange, Inc. (SoundExchange); and David Powell.
                SoundExchange appeared on behalf of itself and its members, the
                American Association of Independent Music; the American Federation
                of Musicians of the United States and Canada; the Recording Industry
                Association of America; the Screen Actors Guild and the American
                Federation of Television and Radio Artists; Sony Music
                Entertainment; Universal Music Group; and Warner Music Group.
                 The Judges presided over an evidentiary hearing that commenced on
                April 12, 2017, and ended on May 18, 2017. Parties to the hearing
                presented oral closing argument on July 18. The parties called 35
                witnesses,\11\ including 15 experts.\12\ Of the 856 exhibits marked for
                identification for the hearing (not including illustrative
                presentations by various witnesses) the Judges admitted 511 (including
                those admitted for limited purpose) into evidence during the
                hearing.\13\ On June 14, the parties filed their respective Proposed
                Findings of Fact (PFF) and Proposed Conclusions of Law (PCL). Parties
                filed Reply PFF and PCL on June 29.
                 \11\ In addition to live witnesses, participants also designated
                prior testimony of witnesses in prior proceedings. See 37 CFR
                 \12\ GEO Music Group (GEO) presented the testimony of George
                Johnson. Mr. Johnson asked to be qualified as an expert in the music
                sound recording business. There being no objection, the Judges
                acknowledged his experience as a songwriter, singer, and independent
                record producer for approximately 30 years and qualified him for
                purposes of the present proceeding as an expert in the music
                 \13\ Immediately prior to and during the hearing in this
                proceeding, participants filed motions seeking to limit or exclude
                opposing parties' evidence. The Judges' conclusions on those motions
                are issued by separate order or orders. References to evidence in
                this Determination are to evidence admitted to the record.
                III. The Section 112 Ephemeral License
                 The ephemeral license rates that the Judges are to determine in
                this proceeding shall ``most clearly represent the fees that would have
                been negotiated in the marketplace between a willing buyer and a
                willing seller.'' 17 U.S.C. 112(e)(4). All parties to the present
                proceeding agree that the value of the section 112 ephemeral license is
                linked to the value of the section 114 performance license.\14\ Music
                Choice asked that the Judges include the section 112 rate in the
                overall rate. Sirius and SoundExchange asked the Judges to determine
                that the value of the licenses be allocated 5% to the ephemeral license
                and 95% to the performance license, consistent with the current
                regulations applicable to SDARS, webcasters, and new subscription
                (CABSAT) services. See, e.g., Sirius XM . . . Proposed Findings . . .
                and Conclusions at 234 (SXM PFFCL); Proposed Findings . . . and
                Conclusions of SoundExchange . . . at 938 (SX PFFCL); see 37 CFR
                382.3(c), 382.12(b) (2016).
                 \14\ See Music Choice Written Direct Statement at 6;
                Introductory Memorandum to the Written Statement of Sirius Radio
                Inc. at 1; Proposed Rates and Terms of SoundExchange, Inc. and
                Copyright Owner and Artist Participants at 5.
                 The parties' positions and the Judges' decisions concerning the
                ephemeral license regulations are detailed in section XI.C of this
                Determination; the regulatory language adopted by the Judges is
                attached as Appendix A.
                IV. PSS Performance License
                A. Background
                 The Act defines a PSS as ``a service that performs sound recordings
                by means of noninteractive audio-only subscription digital audio
                transmissions, which was in existence and was making such transmissions
                to the public for a fee on or before July 31, 1998 . . . .'' 17 U.S.C.
                114(j)(11). When Congress enacted that definition, there were three PSS
                entities in existence. See H.R. Rep. No. 105-796, at 81, 85, 89 (Oct.
                8, 1998). Only two remain, and Music Choice was the only PSS that
                participated in this proceeding.\15\ SoundExchange represented
                Copyright Owners in the PSS portion of the proceeding. George Johnson,
                an individual licensor, also proposed a PSS rate.
                 \15\ The other remaining PSS entity, Muzak LLC, filed a Petition
                to Participate, but withdrew it before the deadline for filing
                Written Direct Statements.
                 Music Choice operates a residential audio service that consists of
                50 channels of audio programming delivered to subscribers' televisions.
                Written Direct Testimony of David J. Del Beccaro, Trial Ex. 55, at 4
                (Del Beccaro WDT). Music Choice's services are delivered to customers
                by cable operators and other multichannel video programming
                distributors (MVPDs) as part of customers' digital basic cable service.
                 In addition to its cable TV-based service, Music Choice makes its
                50 cable channels, plus an additional 25 channels of audio programming,
                available to authenticated television subscribers through its website
                and a
                [[Page 65213]]
                mobile app. Id. Music Choice describes these internet transmissions as
                ``an ancillary part of its residential music business . . . .'' Written
                Rebuttal Testimony of David J. Del Beccaro, Trial Ex. 57, at 25 (Del
                Beccaro WRT).
                1. PSS Rates From SDARS II
                 The parties in the prior proceeding (SDARS II) reached agreement on
                the rates and terms of the section 112 license prior to the hearing.
                See 78 FR at 23054-56.\16\ Therefore, the Judges' focus in that
                proceeding was limited to determining the appropriate rates and terms
                for the section 114 license. The Judges began with a consideration and
                analysis of the market benchmarks and testimony submitted by the
                parties and then measured the rate or rates yielded by that process
                against the Section 801(b) statutory objectives to reach a decision. 78
                FR at 23055. The Judges repeat that approach in the current proceeding.
                 \16\ In the SDARS II proceeding, SoundExchange and Music Choice
                submitted a joint stipulation with respect to the Section 112(e)
                ephemeral license, and the Judges adopted the proposal based on the
                stipulation. 78 FR at 23055-56. The provision addressing the Section
                112(e) license appears in current CRB Rule 382.3(c). It states that
                ``[t]he royalty payable under 17 U.S.C. 112(e) for the making of
                phonorecords used by the Licensee solely to facilitate transmissions
                for which it pays royalties as and when provided in this subpart
                shall be included within, and constitute 5% of, the total royalties
                payable under 17 U.S.C. 112(e) and 114.''
                 In SDARS II, Music Choice advocated adoption of the annual
                royalties it pays to performing rights societies (PROs) (i.e., ASCAP,
                BMI, and SESAC) for the right to perform musical works to subscribers
                of its residential audio service as a precedential benchmark. Indeed,
                Music Choice asserted that the Judges were required to rely on that
                musical works rate. The Judges rejected that contention but analyzed
                whether the rates that Music Choice paid the PROs were a useful
                benchmark. 78 FR at 23056. Music Choice contended that two pieces of
                evidence corroborated use of the musical works rates as a benchmark:
                (1) Decisions from Canada and the United Kingdom concluding that
                royalty rates for sound recordings and musical compositions have
                equivalent value \17\ and (2) results of an economic model called the
                Asymmetric Nash Bargaining Framework (Nash Framework) \18\ offered by
                Music Choice's expert, Professor Gregory Crawford.\19\ Based on his
                analysis, Professor Crawford concluded the PRO rates were an
                appropriate benchmark for the sound recording license at issue.
                 \17\ The Judges dismissed Music Choice's reliance on foreign
                jurisdictions because of a lack of proof of comparability between
                foreign markets and U.S. markets. Further, Music Choice failed to
                convince the Judges that the governing laws were sufficiently
                similar to U.S. law to offer even analogous reasoning. See 78 FR at
                 \18\ The Nash Framework, as presented in the instant proceeding,
                is discussed in greater detail infra, section IV.C.1.a.
                 \19\ Professor Crawford's Nash Framework from SDARS II (as well
                as the Judges' reasons for rejecting it) is described at length in
                the determination and need not be repeated here. See SDARS II, 78 FR
                at 23056-57, 23058. As discussed below, in the current proceeding
                Music Choice does not premise its Nash-based model (or any other
                model) on an asserted equivalency between the value of sound
                recordings and musical works, in light of the Judges' rejection of
                that argument on the record presented in SDARS II. Nonetheless,
                Professor Crawford's Nash Framework in the instant proceeding is
                strikingly similar to his Nash Framework in SDARS II.
                 The Judges disagreed and found that the musical works benchmark
                lacked comparability to the hypothetical PSS market. Id. at 23058. The
                Judges found that the musical works market involved different sellers
                (PROs versus record companies) selling different rights (musical works
                performance rights versus sound recording performance rights) than
                those at issue in this proceeding.\20\
                 \20\ The Judges acknowledged that musical works performance
                rights and sound recording performance rights are likely perfect
                complements, but concluded that, based on the record, such
                complementarity had not been shown to inform the decision regarding
                relative value of the rights.
                 With regard to the Nash Framework, the Judges noted:
                 The Nash Framework is a theoretical concept whose goal is to
                evaluate how the surplus from a hypothetical transaction might be
                divided between negotiating parties. Even assuming that the Nash
                Framework has predictive value in some real-world contexts, Music
                Choice provided no data to support the theoretical approximations in
                the market for any intellectual property rights, much less those
                that the Judges are charged with evaluating. Therefore, the Judges
                find that the Nash Framework is not useful corroborating evidence.
                78 FR at 23058.\21\
                 \21\ The Judge who dissented from the majority decision offered
                what the majority characterized as a ``more spirited rejection of
                the probative value of the Nash Framework as proffered in this
                context.'' The majority concurred with this assessment but concluded
                that ``as a threshold matter, [the] Nash Framework, without real-
                world data to support its predictive capacity, is unworthy of
                further consideration. 78 FR at 23058, n.17.
                 For its part, SoundExchange offered certain marketplace agreements
                executed by interactive music streaming services as a benchmark. The
                Judges also rejected this proposed benchmark on comparability grounds.
                78 FR at 23058.\22\
                 \22\ The markets that the proffered agreements covered were
                subscription interactive webcasting, ringtones/ringbacks, and
                digital downloads. The Judges concluded that these markets involve
                the licensing of products and rights separate and apart from the
                right to publicly perform sound recordings in the context of the PSS
                proceeding. The Judges noted that the buyers are different from the
                target PSS market. Thus, the key characteristic of a good
                benchmark--comparability--was not present. 78 FR at 23058. The
                Judges noted that the bundling of Music Choice's services with
                multiple channels of video and other non-music programming
                significantly dim the possibility of market comparators. The Judges
                concluded that ``in the absence of some rational, reasoned
                adjustment to make the music agreements data more comparable to the
                PSS market, the Judges find its probative value in this proceeding
                of only marginal value.'' Id.
                 The Judges concluded that the evidence presented by Music Choice
                framed the lower end of a range of reasonable rates and that presented
                by SoundExchange framed the upper end. 78 FR at 23059. Having rejected
                the parties' respective proffered benchmarks (and proposed
                corroborating evidence) for any purpose other than to frame a range of
                potential rates, the Judges were left with a consideration of the then-
                prevailing royalty rate of 7.5% of gross revenues, which fell within
                that range. The Judges started with the then-prevailing rate and
                applied the Section 801(b) factors. Consideration of the section 801(b)
                factors persuaded the Judges that they should adopt that rate, but
                adjust it up to 8.5% based on Music Choice's planned expansion of its
                service from 46 channels to up to 300. The Judges concluded that the
                planned expansion would result in a substantial increase in the number
                of plays of recorded music without any corresponding increase in
                compensation. 78 FR at 23059-60. Nevertheless, the Judges acknowledged
                that the upward adjustment of the benchmark rate was based on projected
                usage that was likely to occur during the rate period. The Judges noted
                that ``[s]hould Music Choice alter its anticipated usage under the
                statutory license in the future, such evidence can be taken into
                account in a future rate proceeding. . . .'' Id. at 23061.
                2. Standard for PSS Royalty Rates
                 When the Judges determine a section 114 rate for PSS, they
                generally begin with an appropriate rate (or range of rates) and adjust
                it, as appropriate, in accordance with the section 801(b)(1) statutory
                factors. By contrast, the section 112 ephemeral license requires the
                Judges, among other things, to ``establish rates that most clearly
                represent the fees that would have been negotiated between a willing
                buyer and a willing seller.'' 17 U.S.C. 112(e)(4).\23\
                [[Page 65214]]
                The ephemeral license also requires a minimum fee for each type of
                service offered by a transmitting organization.\24\
                 \23\ Section 112(e)(4) also directs the Judges to base their
                decision on such factors as (1) whether use of the service may
                substitute for or promote the sale of phonorecords or otherwise
                interferes with or enhances the copyright owner's traditional
                streams of revenue and (2) the relative roles of the copyright owner
                and the transmitting organization in the copyrighted work and the
                service made available to the public with respect to relative
                creative contribution, technological contribution, capital
                investment, cost, and risk. 17 U.S.C. 112(e)(4).
                 \24\ The ephemeral license for both PSS and SDARS is addressed
                in section XI.C.
                 Consistent with this process, in determining the appropriate rate
                for the PSS market for the upcoming rate period, the Judges must first
                identify a starting point for applying the Section 801(b) policy
                factors. A marketplace benchmark, if available, can be a useful
                starting point for applying the Section 801(b) factors. See SDARS II,
                78 FR at 23056. A key component of a marketplace benchmark is that the
                market it purports to represent is comparable to the hypothetical
                target market in the proceeding. See SDARS I, 73 FR at 4088 (``
                `comparability' is a key issue in gauging the relevance of any
                proffered benchmarks.''). In determining whether a benchmark market is
                comparable, the Judges consider such factors as whether it has the same
                buyers and sellers as the target market and whether they are
                negotiating for the same rights. 78 FR at 23058. ``Although the
                applicable Section 114 statutory standard provides a broader scope for
                analyzing relevant `benchmark' rates than the `willing buyer/willing
                seller standard' . . . , nevertheless potential benchmarks are confined
                to a zone of reasonableness that excludes clearly noncomparable
                marketplace situations.'' 73 FR at 4088.
                 In the hypothetical PSS market the buyers are the PSS services, and
                the sellers are the copyright owners of the sound recordings that are
                being transmitted (which most often means record companies). The buyers
                and sellers are negotiating for the same bundle of rights as those
                granted to a PSS under section 114(f)(1)(A) of the Copyright Act to
                make digital subscription transmissions of the copyrighted works.
                 When the parties (or the Judges) identify variances in the
                comparability of the hypothetical target market and the proffered
                benchmark market, the Judges will consider reasoned adjustments that
                might more closely align the two markets.\25\ Even when a proffered
                benchmark is not comparable to the target market, however, the Judges
                may use the rates derived from the proffered benchmark as a reference
                point (or guidepost) to help frame a zone of reasonableness within
                which to set an appropriate rate for the upcoming rate period (as they
                did in SDARS II).\26\
                 \25\ When the Judges are faced with proposed benchmarks that are
                not comparable and cannot be made so with reasoned adjustments, the
                Judges reject the proffered benchmarks. See, e.g., SDARS II, 78 FR
                at 23058; SDARS I, 73 FR at 4089-90.
                 \26\ See supra, section IV.A.1.
                B. The Parties' Rate Proposals
                1. Music Choice's Proposal
                 Since 1998, the PSS have paid a fee based on a percentage of gross
                revenues, as that term is defined by regulation.\27\ See SDARS II, 78
                FR 23054, 23056; 63 FR 25394, 25413 (May 8, 1998). Music Choice has
                proposed continuing that rate structure but seeks at least a 34%
                reduction in the current rate of 8.5% of gross revenues, to a rate no
                higher than 5.6% of gross revenues. MC PFF ] 30.
                 \27\ Music Choice also does not propose an alternative per-
                subscriber rate should the Judges adopt such a rate structure rather
                than a percent-of-revenue structure. Neither party has proposed to
                combine both rate structures (e.g., in a greater-of structure).
                Given that neither party has advocated a hybrid rate structure nor
                provided sufficient evidence to support such a rate structure in the
                current proceeding, the Judges weigh the arguments and evidence in
                the record to determine the applicable rate structure from the two
                structures that the parties proposed.
                2. SoundExchange's Proposal
                 SoundExchange requests that the Judges change the PSS rate
                structure. Rather than the percentage-of-revenue formula, SoundExchange
                proposes that PSS pay a per-subscriber fee that would begin at $0.0190
                in 2018, the first year of the new rate period, and rise to $0.0214 in
                2022, the last year of the rate period. Amended Proposed Rates and
                Terms of SoundExchange, Inc. and Copyright Owner and Artist
                Participants at 7. Although SoundExchange does not offer a percent-of-
                revenue alternative to its proposed per-subscriber rates, it
                acknowledges that converting its proposed rates to a percentage-of-
                revenue rate would plausibly yield a rate of [REDACTED] % for 2018, the
                first year of the upcoming rate period. SX PFFCL ] 1949; see Written
                Rebuttal Testimony of Gregory Crawford, Trial Ex. 59, ] 113 (Crawford
                WRT).\28\ The evidence in the record supports that this conversion
                estimate is correct; thus the lowest rate that SoundExchange proposes
                ([REDACTED] %) exceeds the highest rate that Music Choice proposes
                (5.6%) by [REDACTED] %; it exceeds the current rate by [REDACTED] %,
                assuming no increase in subscribers.\29\
                 \28\ Music Choice's expert, Professor Gregory Crawford,
                estimates that Music Choice would pay [REDACTED] % of its unadjusted
                residential service revenue in sound recording performance royalties
                in 2018 under the CABSAT rates, the basis for SoundExchange's rate
                proposal, compared to the 8.5% it currently pays. Crawford WRT at ]
                113, Table 6. This estimate appears consistent with the effective
                rate that Stingray, a Music Choice competitor, paid in 2015 under
                the CABSAT rates. SX PFFCL ] 1949; Trial Ex. 1017 at SoundX
                 \29\ Assuming that the number of subscribers that carried Music
                Choice's service remained flat over the upcoming rate period, the
                annual 3% increases SoundExchange proposes would bring the rates to
                [REDACTED] % for 2019, [REDACTED] % for 2020, [REDACTED] % for 2021,
                and [REDACTED] % for 2022, or [REDACTED] % over the current rate.
                This estimate is consistent with SoundExchange's estimate that a
                CABSAT service pays almost [REDACTED] times as much on a per-
                subscriber basis as a PSS. SX PFFCL ] 1940 and evidence cited
                therein. See id. ]] 1934-35 (estimating that Music Choice's PSS
                statutory royalty payment amounts to [REDACTED] cents per listener
                per year whereas for a CABSAT service, the annual per-subscriber
                royalty for 2017 is 22.2 cents).
                 SoundExchange also proposed a separate rate for internet
                transmissions by a PSS, leading to a dispute between the parties over
                whether a PSS's internet transmissions are included in the PSS license
                and subject to the PSS rate standard. The Judges referred the question
                of categorization of Music Choice's streaming service to the Register
                of Copyrights (Register) for a legal opinion. Analysis of the
                Register's opinion follows in Section IV.D.2.
                3. GEO's Rate Proposal
                 George Johnson, d/b/a GEO Music Group (GEO) proposed that PSS pay a
                per-subscriber rate of $0.10 in 2018 rising to $0.20 in 2022. Johnson
                WDT at 14. He also proposed a percentage-of-revenue rate of 45% of
                gross revenues. It is unclear whether he proposed that PSS pay both
                components or that they pay them as a greater-of or lesser-of
                structure. Mr. Johnson did not proffer a benchmark or any other
                evidence to support his rate proposals for PSS. He merely stated that
                ``[t]hese are estimates from public data and actual royalty statements.
                If the Sirius XM and Music Choice would provide number of listeners per
                station and on a per-play basis, that would help GEO to better
                establish a more reasonable rate.'' Id. The Judges find that there is
                no evidence in the record to support the PSS rates that Mr. Johnson
                proposed and therefore decline to adopt them.\30\
                 \30\ Mr. Johnson also proposed requiring the PSS to install a
                ``buy button'' on their services to promote sales of music
                downloads. 5/3/17 Tr. 2232, 2238 (Johnson). Such proposal is beyond
                the scope of the Section 114 and 112 licenses and therefore beyond
                the Judges' authority in the current proceeding.
                C. Rates for Music Choice's Cable Radio Service
                1. Analysis of the Parties' Proffered Benchmarks
                a. Music Choice's Proffered Nash Model
                 Music Choice, through its expert, Professor Crawford, contended
                that in the absence of an appropriate marketplace benchmark, the best
                way to
                [[Page 65215]]
                estimate the royalties that would arise in a hypothetical effectively
                competitive market for the PSS sound recording rights is to use an
                economic model. Professor Crawford chose as that model one based upon
                the Nash Bargaining Solution, developed by Nobel-prize-winning
                economist John Nash. Crawford WDT ]] 62, 64. Professor Crawford offered
                a variation of the Nash Framework that the Judges rejected in SDARS II
                as a means of corroborating the proffered musical works benchmark.
                Crawford WDT ] 65.\31\
                 \31\ Music Choice acknowledged that the Judges rejected its
                proposed musical works benchmark as a marketplace benchmark in SDARS
                II. Rather than proffer a marketplace benchmark from another market,
                however, Music Choice proffered Professor Crawford's Nash Framework,
                not to corroborate the musical works benchmark rejected in SDARS II,
                but as a stand-alone benchmark.
                 In his Nash Framework proposal, Professor Crawford modeled a single
                record label as the ``upstream'' firm in the negotiation of sound
                recording performance rights to be licensed to a single PSS, the
                ``downstream'' firm in the negotiation. Id. ] 67. The Nash Framework is
                based on the assumption that the record label and PSS provider each
                have a certain degree of market power. Id. ] 71. Professor Crawford
                asserted that this assumption is applicable with respect to Music
                Choice given its current product offerings and established
                relationships with MVPDs. Id. ] 73. According to Professor Crawford,
                Music Choice has negotiated long-term contracts with the MVPDs and
                possesses a unique bundle of technology that would be costly and time
                consuming for other firms to duplicate. Id. ] 73. Professor Crawford
                concluded that because both PSS providers and record labels have some
                market power, a non-cooperative bargaining model such as the Nash
                Framework is an appropriate framework for analyzing market outcomes for
                the PSS sound recording performance rights in the absence of a
                compulsory license. Id. ] 75.
                 In the Nash Framework three fundamental factors determine how two
                firms would ``split a pie'' in a hypothetical negotiation. These ``Nash
                Factors'' are: (1) The Joint Agreement Profits; (2) each firm's Threat
                Point; and (3) each firm's bargaining power. Id. ] 81.\32\ To determine
                the royalty that would arise in the hypothetical market for sound
                recording performance rights for the PSS over the 2018-2022 rate
                period, Professor Crawford quantified the Nash Factors based on Music
                Choice's costs and revenues of its residential audio service as a
                standalone business. Id. ] 110.
                 \32\ Joint Agreement Profits are the combined profits to both
                the upstream and downstream firms in the market under study from
                reaching an agreement. For the PSS this means the revenue the PSS
                earns for the PSS less all non-PSS royalty costs that they incur.
                Crawford WDT ] 81. The Threat Point for each firm is the profit it
                would receive when no agreement is reached. Id. The difference
                between the Joint Agreement Profits and the sum of the firms' Threat
                Points is called the ``Incremental Profits'' which are the profits
                the firms could earn by reaching an agreement above and beyond the
                profits they could earn in the absence of an agreement. Id. The
                profits each firm receives in a bargain equals its Threat Point plus
                its Bargaining Power times the Incremental Profits. Id. ] 82. Dr.
                Crawford communicated this formula in mathematical terms as Royalty
                = Threat Point + Bargaining Power * Incremental Surplus. Id. at
                i. Joint Agreement Profits
                 Because Music Choice keeps its books on a consolidated basis,
                Professor Crawford analyzed Music Choice's costs and revenues to
                determine how they would have been allocated if Music Choice operated
                its residential audio service as a standalone business. Id. ]] 122-149;
                4/24/17 Tr. 733-38 (Crawford); 5/18/17 Tr. 4549-52 (Del Beccaro).\33\
                This process was conducted not in the ordinary course of business but
                to isolate Music Choice's residential audio business for use in the
                Nash Framework and in response to the Judges' observation in SDARS II
                that the residential audio service is the applicable Music Choice
                business line in analyzing the section 114 license. Crawford WDT ] 110.
                Professor Crawford also asserted that isolating the residential audio
                service is necessary to ensure that Music Choice does not subsidize
                this business line with profits from other business lines, which
                Professor Crawford believes would be inconsistent with economic policy
                and the statutory objectives of the PSS license as he understands them
                to be. Id. ] 176; 4/24/17 Tr. 787 (Crawford).
                 \33\ Music Choice has three business lines: A residential audio
                service, a residential video service, and a commercial audio
                service. Some of Music Choice's subscription fee revenue bundles
                residential audio and video services. Many of Music Choice's costs
                are used in the production of both the residential audio and video
                business lines. Crawford WDT ] 110. According to Professor Crawford,
                the residential audio service remains the most important in terms of
                revenues and company strategy. Professor Crawford asserted that if
                the residential audio service were to cease, Music Choice would
                cease providing any services and would close altogether. Crawford
                WDT ] 129.
                 It would not be fruitful to detail the multistep process Professor
                Crawford conducted to disaggregate costs and revenues to derive inputs
                for the Nash Framework analysis. Nonetheless, it is worth noting that
                many of the steps required judgment calls on Professor Crawford's part
                that undoubtedly affected the inputs he later plugged into the Nash
                Framework.\34\ The Judges do not suggest that Professor Crawford's
                adjustments were erroneous or inappropriate under the circumstances but
                only mention them to highlight the level of discretion and subjectivity
                that Professor Crawford employed in developing the inputs that he fed
                into the Nash Framework. Given the extreme complexity of the process
                that Professor Crawford developed, it would be impracticable if not
                impossible for the Judges to ``back out'' one or more of the
                adjustments Professor Crawford made in developing the model if the
                Judges found they were unwarranted. The discretion that Professor
                Crawford exhibited in disaggregating Music Choice's costs and revenues
                pales, however, in comparison to that he exercised in choosing other
                Nash Factors, such as bargaining power and Threat Point. The great
                degree of discretion in quantifying the inputs in the Nash Framework as
                proposed by Professor Crawford underscores the inherent weakness in the
                Crawford model. The Judges concerns about the model are more applicable
                in the current proceeding than they were in SDARS II because Music
                Choice seeks to elevate the model to benchmark status rather than as
                information to corroborate a proffered rate as was the case in SDARS
                 \34\ For example, Dr. Crawford chose to exclude certain legal
                costs that Music Choice incurred or expected to incur related to the
                PSS III proceeding in 2016 and 2017 because those costs relate to
                litigating the 2018-2022 rate proceeding. Instead he substituted
                costs that Music Choice purportedly incurred during the PSS II rate
                period (2013-2017). He also chose to average certain patent
                litigation costs over an eight-year period that Music Choice
                incurred during 2016-2017 because, based on his discussions with
                Music Choice executives, Music Choice historically has incurred such
                patent costs every eight years. Crawford WDT ] 148. Of course, as a
                practical matter, no individual company can know with any reasonable
                degree of certainty when, in the future, it may be sued for patent
                infringement or sue another that allegedly violates one of its
                 Professor Crawford used the disaggregated costs and revenues to
                begin the Nash Framework calculations. The first step in that process
                is to create the first Nash Factor--Joint Agreement Profits--the joint
                economic profits to be shared between a record label and PSS provider
                in the PSS market if an agreement is reached. It is the total economic
                profits that the PSS provider earns before payment of a sound recording
                performance royalty. Crawford WDT ] 92.
                 Based on his analysis of Music Choice's financial information as
                discussed above, Professor Crawford estimated the Joint Agreement
                Profits in the hypothetical market for PSS sound
                [[Page 65216]]
                recording performance rights would range from [REDACTED] in 2018 to
                [REDACTED] in 2022. Crawford WDT ]] 113, 171.
                ii. Threat Points
                 Professor Crawford then calculated each party's Threat Point, the
                second factor in the Nash Framework. A Threat Point is a theoretical
                construct representing the profit that would accrue to a record label
                and a PSS provider if they are unable to reach an agreement. Each firm
                in a hypothetical negotiation will have a Threat Point. Crawford WDT ]
                67. Under the model, threat points can be positive, negative, or zero.
                Id. at 26 n.71. For a record label, a negative threat point could occur
                where the record label could earn additional profit in a non-PSS market
                (e.g., music downloads) if it reaches an agreement with a PSS in the
                PSS market. If the record label fails to reach the agreement with the
                PSS provider, it loses all prospective profits it would have earned in
                the PSS market and the profits it could have earned in the non-PSS
                market. Id. ] 85.
                 The profit each firm earns in a bargain equals its threat point
                plus its bargaining power (discussed below) times incremental profits.
                Id. ] 82. Incremental profits are the difference between the joint
                agreement profits and the sum of the firms' threat points. Id. ] 81.
                Professor Crawford determined that Music Choice's threat point would be
                zero because, in the absence of an agreement between Music Choice and a
                theoretical record label, Music Choice would not be able to offer a
                viable residential audio service and therefore would have economic
                profits of zero. Id. ] 173. Professor Crawford asserted that assigning
                a zero threat point to Music Choice is conservative because it is based
                on an assumption that Music Choice could not offer a viable service in
                the absence of an agreement with a single label.\35\ If Music Choice
                could offer such a service in the absence of the catalog of any record
                label, then Music Choice's threat point would be higher than zero,
                which would suggest that Music Choice should pay a lower royalty rate
                under the model. Id. at 49 n.149.
                 \35\ Rather than postulate the hypothetical PSS market as a
                negotiation between a single PSS and a single record label Professor
                Crawford could have constructed the model as a negotiation between a
                single PSS and a group of record labels. Under this scenario, the
                PSS might reach agreements with some labels but not others. The
                failure of an agreement with certain labels (i.e., smaller labels)
                might not preclude the PSS from offering a service whereas the
                failure of the PSS to reach an agreement with any of the larger
                labels might preclude the PSS from offering any type of service
                (i.e., PSS service or non-PSS service). Under this scenario, the
                assignment to the PSS of a negative threat point might be more
                appropriate than assigning a zero threat point because if Music
                Choice failed to reach an agreement with one major label then it
                might be precluded from offering any service.
                 Outside of the threat point discussion, however, Professor Crawford
                asserted that Music Choice's residential audio service remains the most
                important in terms of revenues and company strategy. Indeed, Professor
                Crawford asserted that if the residential audio service were to cease,
                Music Choice would cease providing any services and would close
                altogether. Id. ] 129. Placed in the context of the threat point
                discussion, this concession strongly suggests that Music Choice
                deserves a negative threat point under Professor Crawford's model, the
                extent of which would be measured by the amount of profits Music Choice
                would lose if it closed its non-PSS business lines. SoundExchange's
                expert pointed out this inconsistency in Professor Crawford's
                presentation. 5/3/17 Tr. 2461, 2343 (Wazzan) (``Dr. Crawford concedes
                that Music Choice would go out of business altogether without the
                residential music business. So they would lose their commercial and
                video revenue streams. And if you look at the financials, we know that
                Music Choice is forecasting significant profits in its non-PSS lines of
                 Music Choice's responses to this disconnect between Professor
                Crawford's threat point assessment and his statements about the primacy
                of Music Choice's residential audio business are unavailing. For
                example, Music Choice contended that the SDARS II decision is precedent
                for treatment of the threat point analysis that Professor Crawford
                employed. Music Choice Reply to SE PFF 2044 at 817-18. The passage from
                SDARS II that Music Choice referred to pertained to an analysis of
                Factor B in Section 801(b)(1), regarding the setting of a rate that
                provides a fair return (for the service) and a fair income (for the
                copyright owners) under existing market conditions. The Judges were
                concerned in that context that Music Choice was making claims of
                unprofitability of its business as a whole to support a downward
                adjustment in the rates under the Section 801(b) factors. The Judges
                pointed out that the subject of the section 114 license was Music
                Choice's residential audio business rather than its entire business,
                which included non-PSS lines. 78 FR at 23059. By that point in the
                determination, the Judges had already discounted the use of the
                Crawford model and the proffered musical works benchmark the results of
                which the model purportedly corroborated. The Judges did not opine on
                how Professor Crawford should have calculated the threat point for his
                own model because the Judges dismissed the usefulness of the model. 78
                FR at 23058 (``without real world data to support its predictive
                capacity [Professor Crawford's application of the Nash Framework] is
                unworthy of further consideration.'').
                 Therefore, the Judges agree with SoundExchange's criticism that
                Professor Crawford incorrectly assigned a threat point of zero to Music
                Choice when, under Professor Crawford's own testimony, Music Choice
                would lose profits from non-PSS business lines if Music Choice could
                not reach an agreement with one or more record labels. Based on that
                fact alone, the results of Professor Crawford's model in the current
                proceeding are suspect, but the flaws in Professor Crawford's
                presentation do not end there.
                 With respect to the threat point for a hypothetical record label,
                Professor Crawford asserted that it would be zero in the PSS market. As
                for the label's threat point in the non-PSS market (e.g., sales of CDs
                and downloads), Professor Crawford asserted that the analysis was more
                ``nuanced.'' Crawford WDT ]] 94-95, 174-175. Due to an alleged
                promotional effect that the PSS has on the label in the non-PSS market,
                Professor Crawford concluded that the record label's threat point could
                be negative. Professor Crawford has no way of estimating the purported
                promotional effect of Music Choice's services in the non-PSS market so
                he assigned a zero threat point to the hypothetical record label. Id.
                ]] 175-176. We concur with Professor Crawford's decision not to attempt
                to assign any promotional value to Music Choice's service in the non-
                PSS market. The evidence he cited to support such an effect is either
                dated (i.e., from a 1998 CARP decision) or anecdotal (i.e., record
                labels provide Music Choice with ``promotional copies'' of new singles
                or albums). Id. ]] 97-104. The Judges do not doubt that record labels
                seek exposure for the artists they promote, and digital platforms like
                Music Choice may provide meaningful exposure to the artists that appear
                on its PSS service. The Judges find no evidence in the record in this
                proceeding that they can use to quantify what impact, if any,
                promotional activities on Music Choice's platform would have on artists
                (and the labels that sign them) in non-PSS markets.
                 The Judges are less sanguine, however, about Professor Crawford's
                assignment of a zero threat point to the
                [[Page 65217]]
                first portion of a record label's threat point (i.e., that dealing with
                the PSS market). It is not at all clear that a record label's failure
                to reach an agreement with Music Choice would mean a loss of all record
                company profits in the PSS market if that market includes all providers
                of residential audio services. There is evidence in the record that at
                least one Music Choice competitor, Stingray Music, provides a service
                that is comparable to the residential audio service that Music Choice
                provides, but pays a much higher royalty rate than Music Choice
                pays.\36\ Although that competitor, which is a recent entrant to the
                U.S. market, has not sought a royalty rate closer to that which Music
                Choice pays, it certainly could in the future, perhaps using the lower
                rate paid by Music Choice as a comparable to support its own rate
                reduction. In other words, the lower rate that Music Choice pays as a
                PSS could put downward pressure on the rates that competing services
                pay to record labels.
                 \36\ Stingray Music is a Canadian digital pay television audio
                service owned and operated by Stingray Digital. It has about 50
                music channels that are available to television service subscribers
                of several cable and IPTV providers in the U.S. Like Music Choice,
                Stingray also has a business service and streams to individuals who
                subscribe to television services that provide Stingray Music. Wazzan
                WDT ] 62. The PSS and services such as Stingray, which SoundExchange
                refers to as CABSAT (cable/satellite) services compete for the same
                MVPD wholesale buyers. Stingray bought Music Choice's European
                affiliate, which it operates as Music Choice International. In the
                U.S., Music Choice and Stingray are direct competitors. Id. ] 62(g),
                 By contrast, if Music Choice and the theoretical record label were
                unable to reach an agreement, the rate that Music Choice pays could no
                longer be used by providers of comparable services to justify lower
                royalty rates. Under that scenario, a record label could actually
                benefit from the loss of Music Choice to the extent that the rate it
                pays could be shown to be below a market rate, which would result in a
                positive threat point for the record label.\37\ As with the asserted
                promotional effect, however, such an effect is impossible to estimate
                with any accuracy. The Judges do not conclude from this discussion that
                zero is the correct threat point for the hypothetical record label but
                rather confirm the lack of usefulness of the Crawford model because
                critical components of the model, at least as presented by Dr. Crawford
                in the current proceeding, allow a broad level of discretion and
                subjectivity, which undermines the credibility of the results.
                 \37\ See Wazzan WRT ] 57 (``there is considerable reason to
                believe that the existence of Music Choice imposes significant
                opportunity costs on record companies in today's market [in that]
                record labels receive substantially higher revenues from interactive
                and non-interactive music services than from the PSS'').
                SoundExchange's expert, Dr. Wazzan, attempted to correct this error
                and others in Professor Crawford's model and derived a range of
                rates that are several times greater than those Professor Crawford's
                estimated. Wazzan WRT ] 48. SX PFFCL ] 2046 (comparing Crawford's
                range of 1.4% to 5.6% to Wazzan's ``Corrected'' range of 9.0% to
                36%). If the Judges were to rely to some extent on the Crawford
                model, the evidence in the record does not support a rate outside of
                this wide range of 1.4% to 36% of gross revenues. After reviewing
                each party's evidence regarding the Crawford model, however, the
                Judges do not have a high level of confidence regarding where within
                that broad range a reasonable rate might lie. Nevertheless, the many
                flaws in Professor Crawford's model suggest that the lower end of
                the range of rates that the Crawford model yields is likely outside
                the zone of reasonableness.
                iii. Relative Bargaining Power
                 Professor Crawford's assignment of the parties' respective
                bargaining powers (the last element of the Nash Framework) was also
                based on faulty reasoning. Under the Nash Framework, each firm's
                bargaining power is a number between 0 and 1, which measures the
                strength of that firm in the negotiation. Crawford WDT ] 81. The sum of
                the two parties' bargaining powers equals 1. Id. Professor Crawford
                related each firm's bargaining power to each party's patience in a
                negotiation. The party with greater patience also has greater
                bargaining power. Professor Crawford contended that that comparison is
                consistent with the nature of bargaining between Music Choice and the
                copyright owners. According to Professor Crawford,
                [b]oth record labels and Music Choice have a history of successful
                negotiations, so there is nothing a priori to suggest that in the
                hypothetical marketplace, one would be more or less patient than the
                other. Furthermore, estimating Bargaining Parameters of firms in
                marketplace settings is a challenging undertaking at the frontier of
                economic research. . . . I will therefore assume that a range of
                Bargaining Powers is possible. As I think it unreasonable to believe
                that either a record label or a PSS provider could extract all the
                profits from a bargain, I choose a range of bargaining powers for
                each party between 0.2 and 0.8.
                Crawford WDT ] 105. The Judges interpret Professor Crawford's statement
                regarding relative bargaining power as saying he has no way to quantify
                what the relative bargaining powers are between Music Choice and the
                record labels. Ultimately, the Judges believe that this is an accurate
                statement that further undermines the usefulness of the Nash Framework
                in the proceeding. That being said, what evidence there is in the
                record regarding the relative bargaining power of Music Choice and the
                record labels suggests that the record labels have much greater
                bargaining power than Music Choice (or a similarly situated PSS in the
                hypothetical market).
                 Mr. Del Beccaro, Music Choice's President and CEO testified about a
                history of ``inequality in bargaining power'' between Music Choice and
                the record labels that forced Music Choice to accept rates that were
                higher than it would have otherwise. See, e.g., Del Beccaro WDT at 10
                (``Music Choice had no choice but to accept a rate increase to 7
                percent for 2002 to 2003 and 7.5 percent for 2004 through 2007''); id.
                at 11 (``[d]espite repeated efforts by Music Choice to engage in
                settlement negotiations, when the royalty rate came up for adjustment
                for the next rate period, SoundExchange did not negotiate a settlement
                until directed to by the Judges during the direct trial opening
                statements of the SDARS I proceeding in June 2007''); id. at 12 (``[In
                SDARS III] Music Choice reached out to SoundExchange yet again, in
                January 2016, to attempt settlement solely to avoid the costs of
                litigation. SoundExchange once again failed to negotiate, and did not
                even respond to Music Choice's offer until July.'').
                 Professor Crawford contended that ``there is no direct evidence on
                the relative bargaining power of either a record label or Music Choice
                in a hypothetical market for sound recording performance rights for
                PSSs.'' Crawford WDT ] 177. But he needed look no further than Mr. Del
                Beccaro's statements about Music Choice's efforts to negotiate
                settlements with SoundExchange. These statements strongly suggest that
                Music Choice has very little if any bargaining power in its
                negotiations with the labels. The greater the bargaining power by the
                record labels, the higher the rates that Music Choice would be required
                to pay. Crawford WDT at 73, Ex. B.3. Therefore, the Judges find no
                support in the record to suggest that Music Choice or a similarly
                situated PSS would enjoy anything but minimal bargaining power in
                negotiations with the labels, particularly any of the major labels. As
                a result, even under the fundamentally flawed Crawford model, nothing
                but the highest projected rate of 5.6% would even be considered to fall
                within a zone of reasonableness. Given the inherent subjectivity of the
                model, however, the Judges continue to conclude that it provides no
                useful information regarding the royalty rates that a PSS should pay,
                other than perhaps to eliminate from a potential zone of reasonableness
                all rates at or below 5.6%. Therefore, the Judges reject, for the
                second time in two consecutive PSS
                [[Page 65218]]
                proceedings, the usefulness of Professor Crawford's presentation of the
                Nash Framework as a model for determining reasonable royalty rates for
                the PSS.
                b. SoundExchange's Proffered CABSAT Rate
                i. The CABSAT Benchmark
                 SoundExchange asserted that there is no applicable marketplace
                benchmark suitable for the PSS market, even with a comparability
                adjustment. See Wazzan CWDT ] 12. According to SoundExchange ``nobody
                has identified any agreements relating exclusively to a PSS, or even
                relating in material part to a PSS.'' Id. ]] 45, 47.\38\ SoundExchange
                observed that even if such agreements existed, one would expect the
                rates under those agreements to be influenced by the statutory license.
                Id. ] 44.
                 \38\ SoundExchange acknowledged that the record includes
                evidence of two Muzak agreements that address Muzak's PSS service,
                but SoundExchange asserted that these agreements are concerned
                primarily with Muzak's business establishment service. Trial Exs.
                401, 402. In any case, SoundExchange asserted that there are a
                number of reasons why these agreements would not make suitable
                benchmarks. See Wazzan CWDT ] 45.
                 Rather, SoundExchange proffered as its benchmark a royalty rate
                developed in a settlement under section 114 of the Act and applicable
                to certain ``new subscription services'' that offer digital music
                transmissions to cable or satellite television subscribers.\39\
                SoundExchange referred to these new subscription services' rates as
                ``CABSAT'' rates. The Judges adopted the ``CABSAT'' rates in a separate
                proceeding under a statutory provision that prescribes a rate-setting
                standard different from the one at issue in the present proceeding. See
                Written Direct Testimony of Paul Wazzan, Trial Ex. 27, ] 11 (Wazzan
                 \39\ See 37 CFR part 383. Three services currently offer
                residential audio services through cable and satellite television
                providers and pay royalties under part 383 regulations as New
                Subscription Services: Stingray, Sirius XM, and Muzak's legacy DMX.
                 SoundExchange asserted that the CABSAT rates are set in a
                ``hybrid'' market in which negotiations occur in a marketplace setting
                but, in the case of an impasse, either party can appeal to a judicial
                or regulatory body for a rate determination. SoundExchange contended
                this ``hybrid'' environment makes CABSAT rates an appropriate benchmark
                if the parties have similar stakes in the benchmark and target markets.
                See Crawford WDT ] 50; Wazzan CWRT ] 20. SoundExchange concluded that
                while no party has identified a suitable marketplace benchmark for the
                PSS that is not constrained by regulation, the statutory CABSAT rates
                are ``a market-like rate.'' See Crawford WDT ] 58.
                 SoundExchange argued that the two services that use the statutory
                PSS license (i.e., Music Choice and Muzak's Dish CD service) ``are in
                all important respects functionally equivalent to the three services
                ``that use the statutory CABSAT license.'' See SX PFFCL at xxiv.
                SoundExchange asserted that both services are cable radio services that
                are delivered to consumers through MVPDs; both provide a similar number
                of channels and similar genres of music; both would negotiate in the
                hypothetical market for the same rights from the same entities; and
                PSSs would meet every element of the regulatory definition of a CABSAT
                service. SoundExchange argued that PSSs and CABSAT services compete
                head-to-head for carriage on MVPDs. In short, according to
                SoundExchange, the only material difference between the two types of
                services is the date on which they commenced operation. See, e.g.,
                Wazzan CWDT ]] 59, 60, 66; Crawford WDT ] 50; 5/3/17 Tr. at 2305-06
                (Wazzan); 4/24/17 Tr. at 714 (Crawford); Written Direct Testimony of
                Jonathan Bender, Trial Ex. 29, at 29 (Bender WDT). For that reason and
                ``because setting relatively lower rates for the PSS would distort the
                market in their favor'' SoundExchange asserted: ``the CABSAT rates
                present an appropriate benchmark in the absence of any clearly-
                appropriate unregulated marketplace benchmark.'' Id.
                 According to SoundExchange, Music Choice considers Stingray, one of
                the CABSAT services, to be its primary competitor. 5/18/17 Tr. 4641-42
                (Del Beccaro). SoundExchange acknowledged that the CABSAT rates, which
                are statutory rates set in the context of a CRB rate proceeding, are
                not unregulated marketplace rates. Nevertheless, SoundExchange asserted
                that the CABSAT rates represent the ``best available benchmark for the
                PSS rates.'' SX PFFCL at xlv. SoundExchange acknowledged that the
                statutory rate standard for CABSATs is a willing buyer/willing seller
                standard. Nonetheless, SoundExchange contended that no adjustment would
                be required to the CABSAT rates under the Section 801(b) factors before
                applying them to the PSS services. See Wazzan CWDT ] 18. The extant
                CABSAT rates only apply for three of the five years of the current PSS
                rate period (2018-2020), therefore SoundExchange proposed that the
                Judges apply a 3% per year rate increase (the size of the CABSAT rate
                increases in 2018-2020) to the 2020 CABSAT rate to derive the rates for
                2021 and 2022, the last two years of the upcoming PSS rate period. See
                Bender WDT at 29-31.
                 Under SoundExchange's proposal, the rate for PSSs' residential
                audio services would be a monthly per-subscriber rate of $0.0190 for
                2018, $0.0196 for 2019, $0.0202 for 2020, $0.0208 for 2021, and $0.0214
                for 2020. SX Amended Rate Proposal at 7, 10. These rates would cover
                the PSSs' royalty obligations under the section 114 and 112(e)
                licenses. Id.
                 For PSSs' webcasting activities,\40\ SoundExchange proposed that
                the PSS pay the same rates that apply to commercial webcasters
                providing a subscription service under 37 CFR 380.10. Through 2020,
                that rate would be a per-performance rate of $0.0022, adjusted for
                inflation. For PSSs that are unable to measure performances, the rate
                would be based on the average number of recordings on the service
                played per hour multiplied by the Aggregate Tuning Hours. SX Amended
                Rate Proposal at 8.
                 \40\ This proposed rate would apply to ``all licensed
                transmissions and related ephemeral recordings through an internet
                streaming service qualifying as a PSS (or any similar service
                capable of tracking the individual sound recordings received by any
                particular consumer).'' SX Amended Rate Proposal at 8.
                 In advocating for the CABSAT benchmark, SoundExchange also stressed
                the importance of changing the current rate structure from a percent-
                of-revenue to a per-subscriber structure, because CABSAT rates are
                calculated per-subscriber. SX PFFCL ] 1949. SoundExchange acknowledged
                that one could convert the proffered CABSAT-based rates to a percentage
                rate. SoundExchange estimated that in 2015, Stingray paid an effective
                percentage royalty rate of ``just under [REDACTED] %'' of its revenues.
                SX PFFCL ] 1949. This converted CABSAT rate compares to Professor
                Crawford's estimate that Music Choice would pay between [REDACTED] %
                and [REDACTED] % of its unadjusted residential audio service revenue
                under SoundExchange's rate proposal. See Crawford WRT ] 113. Given this
                perceived equivalence, SoundExchange perceived no reason to adopt a
                percent-of-revenue rate structure for PSS in the current proceeding.
                 SoundExchange contended that a per-subscriber rate structure is
                preferable because Music Choice is paid under such a structure by its
                MVPD customers. Id. ] 1950. SoundExchange also argued that a per-
                subscriber rate is easier to apply and more transparent than a
                percentage-of-revenue rate. See Orszag AWDT ] 27; Crawford WDT ]] 147-
                [[Page 65219]]
                148; Bender WRT at 13.\41\ Of particular concern to SoundExchange was
                the perception that a revenue-based structure gives Music Choice the
                flexibility to reduce the amount of royalties it pays by charging its
                affiliated owners discounted prices. According to SoundExchange, Music
                Choice is partially owned by cable companies, including Comcast, Time
                Warner Cable, and Cox, and charges lower prices to its MVPD owners than
                it charges to other MVPDs. See Wazzan CWDT ] 90. SoundExchange argued
                that ``the Judges should be suspicious of commercial arrangements
                between Music Choice and its MVPD partners.'' Id. ] 1979.
                 \41\ SoundExchange acknowledged that although allocation
                disputes can arise under a percent-of-revenue structure, ``such
                disputes have not materialized between SoundExchange and Music
                Choice in recent memory.'' SXPFFCL at ] 1952.
                 SoundExchange disputed Music Choice's attestations that its MVPD
                partner affiliate fees are a function of the relative size of
                affiliated MVPDs vis-[agrave]-vis non-affiliates. See Del Beccaro WDT
                at 22-23; but see Wazzan WDT ] 91. SoundExchange contended that
                evidence in the record shows that all affiliates received discounted
                rates from Music Choice, regardless of the number of subscribers they
                had at the time. SX PFFCL ] 1990; Trial Ex. 410, Music Choice Partner
                Affiliation Agreement, Sch. B at MC0012247-48; 5/3/17 Tr. 2333
                (Wazzan). SoundExchange contended that this purported affiliate
                discount, which remains in effect, represents a [REDACTED] % discount
                to fees that non-affiliated MVPDs are required to pay. 5/3/17 Tr. 2333-
                37 (Wazzan). SoundExchange represented that Music Choice's non-partners
                with the largest number of subscribers are expected to pay $[REDACTED]
                or $[REDACTED] per subscriber per month in 2018, while the partners are
                expected to pay $[REDACTED] per subscriber per month, about one third
                as much. See Wazzan CWRT, App. C. at 43-44.
                ii. Music Choice's Opposition to the CABSAT Benchmark and Per-
                Subscriber Rate Structure
                 Music Choice opposed SoundExchange's proffered CABSAT benchmark and
                proposed per-subscriber rate structure. As a preliminary matter, Music
                Choice contended that SoundExchange's identification of the necessary
                components of a comparable market for benchmarking purposes omits two
                key requirements, namely that the benchmark represent a workably
                competitive market and that the buyers and sellers in both the target
                market and the benchmark market have similar stakes. See Crawford WDT ]
                50; 5/24/17 Tr. at 695-96 (Crawford). Music Choice contended that the
                proffered CABSAT benchmark fails on both accounts because the CABSAT
                rates and terms were set by a settlement between SoundExchange and
                Sirius XM. Crawford WDT ]] 55-56. According to Music Choice, the
                settlement did not reflect any sort of competitive marketplace. Id.
                 Music Choice asserted that Sirius XM is not an active participant
                in the CABSAT market, providing its CABSAT service to only one
                affiliate (DISH Network). Music Choice contended that Sirius XM's
                CABSAT service is merely a promotional vehicle to drive subscriptions
                to its primary business, the satellite radio service. See Crawford WRT
                ] 43. In support of this argument, Music Choice noted that Sirius XM's
                CABSAT service generates only [REDACTED] % of Sirius XM's revenues.
                Given that the CABSAT service generates such a miniscule percentage of
                Sirius XM's revenues, Music Choice argued that Sirius XM had no real
                incentive to vigorously negotiate the CABSAT settlement let alone incur
                the costs of a rate proceeding.\42\ Id. ]] 55-56. By contrast, Music
                Choice has a far different stake because the PSS service is its primary
                business. Crawford WDT ] 129 (Music Choice's residential audio service
                remains its most important business in terms of revenues and company
                 \42\ Music Choice argued that the ``bargaining and market
                dynamics that led to the settlement from which the current CABSAT
                rates and terms are derived also make clear that those rates are not
                market rates, or even market-like . . .'' MC Reply to
                SoundExchange's PFFCL at 68. According to Music Choice, Sirius XM
                had no rational business incentive to litigate the last CABSAT
                proceeding, so it had little choice but to settle. Id. at 69-70 (and
                evidence cited therein).
                 In Music Choice's estimation, the proffered CABSAT benchmark lacks
                a key indicator of comparability--similar stakes--which Music Choice
                asserted must be present when using a benchmark from a hybrid market
                (i.e., a market in which negotiations occur in a marketplace setting
                but, in the case of an impasse, either party can appeal to a judicial
                or regulatory body for a rate determination). See Crawford WRT ]] 55-
                56. Music Choice also argued that the ``sellers'' in the proffered
                CABSAT market and the hypothetical PSS market are not comparable
                because in the CABSAT market SoundExchange represents the entire record
                industry as opposed to individual record companies which purportedly
                would reflect the sellers in the hypothetical PSS market. Id.
                 Music Choice also argued that the proffered CABSAT benchmark is
                flawed because the underlying CABSAT market is neither competitive nor
                stable. See Del Beccaro WRT at 5-6. According to Music Choice,
                ``[t]here has never been a CABSAT licensee that has proven able to
                operate a long-term profitable business from its CABSAT operations, nor
                have the majority of participants in the CABSAT market actively or
                successfully sought new affiliates or competed in the marketplace.''
                Id. Music Choice asserted that Stingray is the ``only active CABSAT.''
                Id.\43\ According to Music Choice, after six years in the CABSAT market
                Stingray has captured only 6% of the MVPD market and, until recently,
                all of its affiliates were small cable operators that pay high rates,
                which have sustained Stingray. See Del Beccaro WRT at 10. Music Choice
                projected that if it left the market, Stingray could not replace it
                because Stingray would have to reach agreements with larger MVPDs at
                lower rates while still paying the high per-subscriber CABSAT rates.
                Id. Over time under this market dynamic Music Choice contended Stingray
                would be forced to exit the CABSAT market. Id.
                 \43\ According to Music Choice, the only companies ever to enter
                the CABSAT market are MTV, DMX, Sirius XM, and Stingray. Music
                Choice represented that MTV and DMX have since exited the CABSAT
                market. According to Music Choice, Sirius XM has only one affiliate,
                which it purportedly uses as a promotion tool, and is not competing
                for new business. MC Reply to SX PFFCL at 71-72 (and evidence cited
                 Music Choice also faulted SoundExchange for glossing over the
                legislative history of the PSS license and the Section 801(b) policy
                standard, which, Music Choice contended, reflects Congressional intent
                to ``protect the unique business expectancies of the PSS, even against
                later market entrants, which is inapplicable to other statutory
                licensees and must inform any interpretation or application of the
                801(b)(1) policy standard to the PSS.'' MC Reply to SX PFFCL at 66.
                Music Choice noted that ``Congress `grandfathered' the three PSS, Music
                Choice, DMX and Muzak, which were already in operation at the time
                Congress passed the Digital Millennium Copyright Act (DMCA) \44\
                allowing the PSS to continue operating under the 801(b)(1) policy-based
                rate standard rather than be subjected to the new [willing buyer/
                willing seller] marketplace standard.'' Id. at 65. Thus, Music Choice
                concluded, ``the mere fact that non-comparable services pay different
                rates provides no useful data for setting the PSS rates.'' Id. at 66.
                 \44\ Public Law 105-304, 112 Stat. 2860 (Oct. 28, 1998).
                 Music Choice agreed with SoundExchange (and Dr. Wazzan) that
                [[Page 65220]]
                there are no types of licensed music services comparable to the PSS.
                Id. at 67. Music Choice disagreed, however, that the current PSS rate
                is below market. In fact, it contended that the current PSS rate is an
                above-market rate, given that it is the result of settlements that
                Music Choice had little choice but to accept to avoid litigation costs.
                Id. (MC Reply to SX PFFCL ] 1789).
                 Music Choice contended that, despite SoundExchange's claims to the
                contrary, the reason Music Choice has not sought direct licenses is not
                because it would not get a better rate than the statutory rate but
                because the cost of direct license negotiations would be too high. Id.
                Music Choice also noted that since the current statutory rate does not
                exclude revenues from direct licenses for PSS, Music Choice would still
                have to pay a share of revenues attributed to the sound recordings from
                the direct licenses in addition to the royalties required by those
                direct licenses. Id. at 67-68. According to Music Choice, direct
                licensing would only make sense if it could directly license 100% of
                its music. Id. at 68 (Reply to SX PFFCL ] 1789).
                 Music Choice acknowledged that PSS providers and CABSAT services
                both sell cable radio to MVPDs but contended that material differences
                in quality, programming, on-screen displays and other features set the
                PSS (or at least Music Choice's) service apart from that of the
                CABSATs. Id. at 77. Music Choice contended that its screen displays
                provide significantly more promotional impact than those of any CABSAT
                service. Id. at 78-79.\45\
                 \45\ Music Choice cited the fact that it bundles its residential
                PSS with its video offerings as ``critical and relevant, because
                those bundled offerings provide a value proposition that is
                appealing to MVPD providers and allows [Music Choice] to compete
                effectively against the Stingray and Sirius XM's CABSAT services.''
                MC Reply to SXPFFCL at 85.
                 Music Choice also opposed the per-subscriber rate structure that
                SoundExchange proposed. Music Choice contended that the proposal is
                based on the false premise that Music Choice provides unfairly
                advantageous discounts to cable providers with which Music Choice is
                affiliated. MC PFF ] 279; Wazzan WDT at 37-38; 5/3/17 Tr. 2330
                (Wazzan). Music Choice represented that a supermajority interest in
                Music Choice is owned by non-cable companies, including some affiliated
                with record companies, which would be harmed if Music Choice gave
                below-market rates to its cable affiliates. Therefore, according to
                Music Choice, doing so would make no economic sense. MC PFF ]] 283,
                285-288; Del Beccaro WRT at 16, 19-20.
                 Music Choice asserted that any preferential pricing it offers is
                the result of the size of the cable company, although factors such as
                long-term commitment to the Music Choice service may also play a role.
                Del Beccaro WRT at 16-17. Indeed, Music Choice represented that at
                times its cable affiliates have made concessions on price just to help
                Music Choice survive. MC PFF ] 299; 5/18/17 Tr. 4593-94 (Del Beccaro);
                4/24/17 Tr. 804-05 (Crawford).
                iii. Judges' Analysis of SoundExchange's Proffered CABSAT Benchmark and
                Proposed Per-Subscriber Rate Structure
                 In determining whether a proffered marketplace benchmark is
                comparable to the hypothetical target market the Judges have looked at
                the comparability of the buyers, sellers, and rights over which the
                parties negotiated.\46\ When the two markets were comparable (i.e., the
                buyers, sellers, and rights are the same), the Judges have found that
                the rate that the buyers and sellers have negotiated in the market can
                provide useful guidance in determining the rate for the target
                market.\47\ In the present proceeding, SoundExchange conceded that
                ``[t]he CABSAT benchmark is not a marketplace benchmark. It is instead
                a regulated rate.'' SX PFFCL ] 1847 (and evidence cited therein). The
                prevailing CABSAT rates were agreed to by SoundExchange and Sirius XM,
                the only remaining participants, in a CRB rate-setting proceeding. See,
                e.g., Crawford WRT ] 33.\48\
                 \46\ See, e.g., SDARS I, 73 FR 4080, 4088 (Jan. 24, 2008).
                 \47\ See id. (`` `comparability' is a key issue in gauging the
                relevance of any proffered benchmarks . . . potential benchmarks are
                confined to a zone of reasonableness that excludes clearly
                noncomparable marketplace situations'').
                 \48\ The rates that the participants agreed to and the Judges
                adopted based on that agreement were monthly per subscriber payments
                of: 2016: $0.0179; 2017: $0.0185; 2018: $0.0190; 2019: $0.0196; and
                2020: $0.0202. 80 FR at 36928 (37 CFR 383.3(a)(1)).
                 As a threshold matter, the Judges note that in setting a statutory
                rate for PSS they are not required to approximate a market rate.\49\
                Rather, the Judges' mandate is to set a reasonable rate consistent with
                the Section 801(b) factors.\50\ In enacting the DMCA, Congress carved-
                out the PSS from application of the willing buyer/willing seller
                standard intended to approximate a market rate.\51\ The intent of the
                carve-out was to acknowledge the pioneering status of the PSS, which
                invested in a new type of digital audio service (i.e., transmission of
                noninteractive audio to the television) in reliance on the existing
                801(b) rate standard and to protect their prior investments.\52\ The
                PSS took the risks and received the benefits, one of which was a
                statutory exception from the rate-setting provisions in the DMCA that
                were designed to ``move the industry to market rates.'' \53\
                SoundExchange now argues, however, that the Judges should adopt the
                proffered CABSAT rate benchmark as a market-like rate. The Judges
                 \49\ Music Choice v. CRB, 774 F.3d. 1000, 1012 (``nothing in the
                statute requires the Judges to rely on market rates or agreements
                when setting Section 114 rates'').
                 \50\ 78 FR at 23055; Music Choice v. CRB, 774 F.3d at 1013
                (``The Copyright Act does not `clearly require[ ] the use of `market
                rates'. [I]nstead, `reasonable rates' are those that are calculated
                with reference to the four statutory criteria.'').
                 \51\ SoundExchange v. Muzak, 854 F.3d 713, 714-15 (D.C. Cir.
                 \52\ See Id. at 719.
                 \53\ Id.
                 Notwithstanding the similarities in PSS and CABSAT service
                offerings that SoundExchange noted, the Judges do not find the
                proffered CABSAT rate benchmark is a useful starting point from which
                to apply the Section 801(b) factors.
                 First, it is not at all clear to the Judges that the proffered
                CABSAT benchmark market and the hypothetical PSS market offer the same
                rights. As discussed below in reference to the Register's Memorandum
                Opinion regarding the scope of the PSS market, the rights that the PSS
                can exercise while maintaining the grandfathered rate-setting
                methodology are limited to PSS entities' existing service offerings and
                expanded service offerings, as the Register defines those terms.
                Services that a PSS entity provides outside the scope of the
                grandfathered categories constitute different service offerings, i.e.,
                rights outside those offered in the hypothetical PSS market. Although
                the types of activities that PSS and CABSAT entities perform may
                overlap in certain respects, for purposes of determining comparability
                of the hypothetical market to the target market, the relevant service
                bundle is limited to those activities that the hypothetical PSS entity
                may provide consistent with the grandfathered rate methodology.
                 PSS entities, such as Music Choice, and CABSAT entities may (and
                do, subject to an appropriate royalty rate) provide services outside
                the scope of the PSS license (e.g., internet-based and mobile
                application-based services that are consumed outside the home).\54\
                [[Page 65221]]
                These different services, however, are not included within the bundle
                of rights that PSS entities would negotiate for in the hypothetical
                market. Although it is theoretically possible to adjust the proffered
                CABSAT benchmark to accommodate for the difference in the bundle of
                rights that the CABSAT and PSS services negotiate for, SoundExchange
                acknowledged no such difference and, consequently, offered no
                adjustment in the current proceeding to account for the difference. The
                Judges can find no persuasive evidence in the record that would allow
                the Judges to develop such an adjustment sua sponte.\55\
                 \54\ Dr. Wazzan referenced some of the differences he perceived
                between the services that PSS and CABSAT entities provide. Wazzan
                WDT ]] 67-72. For example, he noted that Music Choice provides
                ``internet simulcasts of its channels to subscribers of the MVPDs
                that distribute Music Choice'' but took no position on whether such
                streaming is part of its PSS. Id. ]] 67-68. He continued that ``the
                CABSAT rates in Part 383 are quite clearly limited to a service
                `transmitted to residential subscribers of a television service'
                through an MVPD using `a technology that is incapable of tracking
                the individual sound recordings received by any particular
                consumer.'' Id. ] 70. According to Dr. Wazzan, ``internet streaming
                is something else, because streams are typically transmitted to
                devices other than televisions, over the public internet.'' Id. Dr.
                Wazzan noted that Sirius XM and Stingray both provide internet
                streaming services but do so under a different rate structure than
                that applicable to the CABSAT service. Id. ] 72. In finding that the
                rights conveyed to the CABSAT services are not comparable, for
                benchmarking purposes, to those for which a theoretical PSS would
                negotiate, the Judges do not take a position on whether the rights
                conveyed to the theoretical PSS entities are broader or narrower
                than those conveyed to the CABSAT services. They could be broader in
                some senses and narrower in others, but the evidence in the record
                shows that there are meaningful differences. All differences could
                affect the value of the underlying license and therefore are
                relevant in assessing the comparability of the proffered benchmark
                market and the target market. Ultimately, a detailed analysis might
                support a finding that, on balance, the differences are a wash,
                which would support a finding that, notwithstanding the differences
                in the rights granted, no comparability adjustment was necessary.
                Based on the record in the current proceeding, however, the Judges
                are not in a position to make such an assessment and therefore are
                left with a record that shows a lack of comparability of rights with
                no adjustment to sufficiently align the markets.
                 \55\ Although the Register's Memorandum Opinion was issued after
                the record was closed in the current proceeding, the D.C. Circuit's
                Muzak decision, which highlighted the limitations in the rights that
                a PSS could exercise consistent with the grandfathered rate
                methodology, was issued during the proceeding. As a party to the
                case, SoundExchange advocated for the restrictions on the PSS
                license that the D.C. Circuit found. SoundExchange certainly could
                reasonably anticipate the impact that the Muzak decision would have
                on the rights that other PSS entities could exercise consistent with
                the grandfathered rate-setting methodology. Indeed, one of
                SoundExchange's witnesses referenced the decision and the
                limitations it placed on the rights that a PSS entity could exercise
                consistent with the grandfathering provision. SX PFFCL ] 1807; 5/10/
                17 Tr. 3205 (Bender); see SX PFFCL ] 1807 (``[d]uring the hearing in
                this case, the Court of Appeals for the D.C. Circuit held that
                Muzak's PSS status is limited to its historic DishCD service.'')
                Therefore, SoundExchange had notice that the rights that a
                hypothetical PSS entity could exercise consistent with the
                grandfathering provision were limited to providing the types of
                services (i.e., existing and expanded service offerings) that the
                Register set forth in her Memorandum Opinion addressing the scope of
                the PSS license.
                 SoundExchange attempted to conflate what the PSS services and
                CABSAT services do (as represented by SoundExchange) with what they
                have the right to do either in the hypothetical PSS market or in the
                CABSAT market. SX PFFCL ] 1794 (``the same rights are conveyed, because
                both create audio music channels incorporating the licensed sound
                recordings and sell them to MVPDs, who in turn resell those channels to
                consumers as part of subscription bundles.''); see 5/3/17 Tr. at 2305-
                06 (Wazzan); see also SX PFFCL ]] 1797-1799 (``CABSAT Services And PSS
                Are Functionally Equivalent Cable Radio Services And So Implicate the
                Same Rights''). Similarities in service offerings do not necessarily
                equate to comparability of rights that each of the service types is
                authorized to exercise.
                 SoundExchange's attempted direct compare-and-contrast of the
                various activities in which the two types of entities engage also
                ignores the fundamental, statutory difference between PSS and CABSAT:
                Legislative intent that PSS and non-PSS be treated differently with
                respect to the way in which their respective royalty rates are
                determined. By SoundExchange's own admission, the CABSAT rates were
                based on a settlement agreement negotiated in the context of a
                proceeding in which the applicable rate standard was a willing buyer/
                willing seller standard. In adopting the DMCA, Congress expressly
                carved-out the PSS from that standard. The Judges conclude that
                applying the CABSAT rate benchmark as proffered by SoundExchange in the
                current proceeding would effectively subject the PSS to the willing
                buyer/willing seller standard, which, in the Judges' view, would be
                inconsistent with Congress's intent in adopting the PSS rate-setting
                methodology in the DMCA.
                 The proffered CABSAT benchmark also raises concerns because of the
                enormous difference between the current PSS statutory rate of 8.5% of
                gross revenues and the rates proposed under the CABSAT benchmark
                (converting to approximately [REDACTED] % of revenue in the first
                year). In SDARS II, the Judges characterized a difference between the
                prevailing statutory rate of 8% and a proposed rate as high as 32.5%
                (for SDARS services) as a ``yawning gap'' that raised concerns about
                the reasonableness of the proffered benchmark that yielded such rates.
                See 78 FR at 23066. The Judges have the same concerns about the rates
                derived from the proffered CABSAT benchmark and find that the wide gap
                strongly suggests that the buyers in the CABSAT market lack
                comparability with those in the theoretical PSS market. This difference
                in comparability of buyers is supported by SoundExchange's own
                admission that Sirius XM, which negotiated the CABSAT rates with
                SoundExchange, ``is first and foremost the provider of an SDARS'' that
                ``also provides a CABSAT service.'' SX PFFCL ] 1838. The PSS in the
                theoretical market are buyers negotiating for rights to operate their
                core business and therefore will have a greater stake in negotiating
                the most favorable rate. On the other hand, a buyer negotiating for
                rights for a non-core service might be more willing to settle for an
                acceptable rate rather than the best possible rate. Significant
                differences in the stakes of the respective buyers between the PSS and
                the CABSAT services suggest a lack of comparability between the two for
                benchmarking purposes.
                 The Judges conclude that the CABSAT benchmark as proposed in the
                current proceeding is not sufficiently comparable to the hypothetical
                PSS target market and that the CABSAT rates are outside of the zone of
                reasonableness for determining PSS rates for the upcoming rate period.
                The only useful information that the proffered CABSAT benchmark
                provides is to identify a rate ceiling that any reasonable PSS rates
                must remain below. In other words, a reasonable PSS rate for the
                upcoming rate period must be lower than the lowest rate proposed by
                SoundExchange based on the CABSAT benchmark (i.e., $0.0190 per
                subscriber or [REDACTED] % of gross revenues).
                 By rejecting the proffered CABSAT benchmark, the Judges also reject
                one of SoundExchange's arguments in support of abandoning the current
                percent-of-revenue rate structure in favor of a per-subscriber rate
                structure. See SX PFFCL ] 1949. The Judges find SoundExchange's other
                reasons in support of a per-subscriber rate structure equally
                unpersuasive. Even reviewing the evidence SoundExchange presents in a
                light most favorable to SoundExchange, the Judges do not find that
                Music Choice's arrangements with its affiliated MVPD customers support
                a change in the rate structure to a per-subscriber structure. In this
                regard, the Judges accept as credible the evidence that Music Choice
                presented that historically it has charged and currently charges
                similarly situated non-partner
                [[Page 65222]]
                affiliates rates that are the same as or lower than those charged to
                its partners. MC Reply to SX PFFCL at 188 (Reply to SX PFFCL ] 1960)
                (and evidence cited therein); see, e.g., 5/18/17 Tr. 4582, 4593-94 (Del
                Beccaro); Del Beccaro WRT at 18.
                 If SoundExchange and Music Choice were to agree to a per-subscriber
                rate structure, that structure would not, on its face, be inconsistent
                with the Copyright Act. Without a persuasive argument, supported by the
                evidentiary record, however, the Judges are reluctant to change the
                existing rate structure, which has thus far seemingly operated
                effectively. The arguments and record in the current proceeding do not
                support such a change. Therefore, the Judges reject SoundExchange's
                request to change the rate structure to a per-subscriber structure.
                 After reviewing and dismissing both proffered benchmarks, the
                Judges are left with the broad parameters of a zone of reasonableness
                that must be higher than 5.6% of gross revenues \56\ and lower than
                [REDACTED] % of gross revenues (or $0.0190 per subscriber). The current
                rate of 8.5% of gross revenues falls within that range, albeit toward
                the lower end. In SDARS II, the Judges could endorse no proffered
                benchmark as an appropriate starting point for application of the
                Section 801(b)(1) factors. See 78 FR at 23059. Therefore, the Judges
                looked to the prevailing statutory rate to begin the analysis of the
                Section 801(b)(1) factors. Id.
                 \56\ See supra, section IV.C.1.a.
                 Notwithstanding that no party advocated using the statutory rate as
                the starting point of the Section 801(b)(1) analysis and that the rate
                was negotiated in the shadow of the statutory license, the Judges found
                in SDARS II that the current rate was neither too high, too low, nor
                otherwise inappropriate. Id. The Judges reach the same conclusion in
                the current proceeding. As was the case in SDARS II, neither party has
                proposed using the current statutory rate as the starting point for
                applying the Section 801(b)(1) factors. SX PFFCL ] 1889; 4/25/17 Tr.
                848 (Crawford). Music Choice contended that the current rate is too
                high and SoundExchange contended that it is too low. The parties do not
                contend that the previous PSS proceeding was ``necessarily'' wrongly
                decided, only that the Judges now must look elsewhere to find a
                reasonable rate. See 5/3/17 Tr. 2305 (Wazzan).\57\
                 \57\ As discussed below, Music Choice did fault the Judges'
                decision to make an upward adjustment to the prevailing statutory
                rate to account for Music Choice's anticipated increase in the
                number of channels it offered.
                 Both parties' disdain for the current statutory rate appears to
                stem primarily from the fact that in the first proceeding to set a rate
                for the PSS, which occurred about twenty years ago, the CARP looked to
                the musical works royalty rate to help determine what the rate should
                be for the PSS. See, e.g., SX PFFCL ]] 1894-1900. Since then, the
                parties have either agreed to a royalty rate or, as occurred in SDARS
                II, the Judges selected a rate after fully reviewing the evidence in
                the record. The Judges and their predecessors each chose a rate that
                they viewed as reasonable and supported by the evidence before them at
                the time. The fact that once upon a time one decision-maker relied on a
                type of evidence that the Judges do not find persuasive in the current
                proceeding on the current record is irrelevant in the current
                proceeding. Unlike Music Choice and SoundExchange, the Judges are not
                convinced that the specter of the musical works rate on the prevailing
                PSS rate is so great as to preclude the Judges from using the current
                PSS rate as the starting point for applying the Section 801(b)(1)
                 The Judges must continue to have the flexibility to rely on the
                best evidence they have available on the record before them in
                selecting reasonable rates and terms for the upcoming rate period. At
                this time, in this proceeding, on this record, the best available
                evidence is the prevailing statutory rate, which falls within the broad
                parameters of the zone of reasonableness indicated by the evidence that
                the parties presented. Therefore, the Judges look to the prevailing
                statutory rate of 8.5% as the starting point for the Section 801(b)
                2. Application of the 801(b)(1) Factors
                 The digital performance license requires that the rates (but not
                the terms) be determined to achieve the statutory objectives detailed
                above. See 17 U.S.C. 801(b)(1). SoundExchange asserted that if the
                Judges use the prevailing statutory rate as the starting point of the
                section 801(b) factor analysis then they should adjust the rates upward
                to provide copyright owners a fair return (Factor 2), to reflect their
                greater contributions to the product made available to the public
                (Factor 3), and to avoid further disruption of the industries involved
                (Factor 4). SX PFFCL ] 2112.
                 Music Choice contended that the Judges should not have adjusted the
                prevailing statutory rate upward in SDARS II to account for Music
                Choice's projected increase in usage of sound recordings. Music Choice
                argued that the PSS license is not a general ``usage'' license (in that
                making more channels available does not necessarily lead to a greater
                number of performances), and that listeners can only listen to one
                channel at a time, regardless of how many channels are available for
                them to choose from. Del Beccaro WDT at 16.\58\ The Judges find this
                claim somewhat peculiar. Music Choice appears to assume that all
                members of a household are transfixed to the same television set as
                they might have been at the dawn of the television age. Modern viewing
                habits, however, are far different. Televisions and other comparable
                electronic devices abound in modern households. It is not unreasonable
                to assume that each individual in a modern household could have access
                to his or her own viewing or listening device, any one of which might
                be capable of viewing or listening to the Music Choice service.
                 \58\ Music Choice contended that had there been any increase in
                revenues due to the increase in the number of channels that Music
                Choice offered, that SoundExchange would have reaped the benefits
                through increased royalties under as a percentage of revenues. In
                SDARS II, the Judges found no evidence to support a projected
                increase in revenues. 78 FR at 23060 (``Music Choice provided no
                evidence, however, to suggest that the planned expansion in usage
                would result in increased revenues to which the statutory royalty
                rate is to be applied''.) Indeed, Music Choice represented that even
                though it added 25 channels to its app and internet platforms during
                the current rate period, its listenership remained flat while its
                revenues actually decreased. Del Beccaro WDT at 16, 18.
                 In SDARS II, the Judges found evidence of Music Choice's then
                current intention to increase the number of Music Channels offered from
                46 to 300. 78 FR at 23059. Music Choice does not dispute that
                intention. Del Beccaro WDT at 15. A greater variety of channels could
                reasonably be expected to attract its own audience.\59\ The Judges may
                rely on a party's present intentions as to future actions. Of course,
                present intentions of future actions do not ensure that the latter will
                come to fruition. In this instance, the Judges' finding was based on
                the evidence in the record before them. Music Choice represented in the
                current proceeding that in actuality, the expansion of its service was
                far more limited than it had anticipated in the last rate period. Del
                [[Page 65223]]
                Beccaro WDT at 18. Consequently, Music Choice contended that it has
                been overpaying for the past rate period because the rate should have
                been kept at 7.5% of gross revenues. Del Beccaro WDT at 18. Indeed,
                Music Choice argued that this alleged ``overpayment justifies a rate
                reduction in the next rate period'' below the previous period's 7.5%
                rate. Crawford WDT ] 214.
                 \59\ Mr. Del Beccaro suggested that the Judges should follow the
                principle that PSS royalties should only be payable based on actual
                performances, which occur when a song is actually received by a
                listener as is the case with respect to webcasters. He quickly
                cautioned, however, that Music Choice is not able to track the
                actual number of performances to enable such a per-performance rate.
                Del Beccaro WDT at 16-17 and n.2.
                 While Music Choice chose not to expand its channel offerings as it
                had anticipated, it had the right to do so consistent with the
                statutory license, and the rate that the Judges adopted reflected Music
                Choice's stated intention regarding that projected expansion. A
                licensee has no general statutory or regulatory right to a rebate in a
                subsequent proceeding. Nevertheless, the Judges specifically noted in
                SDARS II that if Music Choice's projected increase in channels did not
                materialize the Judges could take that fact into account in a future
                proceeding. 78 FR at 23061. In SDARS II, the Judges found the increase
                from 7.5% to 8.5% was consistent with the second section 801(b) factor
                (fair return to copyright owners).\60\ In this proceeding, the Judges
                examine again whether the basis for that increase continues to exist in
                the present market.
                 \60\ 78 FR at 23059.
                a. Factor A: Maximize Creative Works to the Public
                 Music Choice contends that the PSS services are favored under this
                factor because the PSS (and Music Choice in particular) generate
                original content (such as on-screen displays and curated channels) in
                providing the PSS service. MC PFF ] 334-335. Music Choice contends that
                this original creative content has great promotional impact on the
                sound recordings they play on the service, which is illustrated by the
                fact that record labels lobby to get their sound recordings played on
                the service. Id. ]] 352-362. The Judges do not doubt that Music Choice
                expends resources promoting the artists that appear on the service and
                that such exposure can be promotional to the artists and their record
                labels. These efforts are already incorporated into the current
                statutory rate and therefore no downward adjustment is justified to the
                extent Music Choice promotes artists.
                 Music Choice contended that the current rate is actually hindering
                it in providing the types of promotional services that help artists and
                labels. Del Beccaro WDT at 17-18. By Music Choice's own admission,
                however, much of the decline is due as much to Music Choice's declining
                revenues as to the royalty rate it pays. Written Direct Testimony of
                Damon Williams, Trial Ex. 56, at 32-33 (Williams WDT). Indeed, since
                the royalty is currently based on a percent of revenue, a decrease in
                revenues would actually result in a decrease in the royalties Music
                Choice pays. Nevertheless, Music Choice provided no quantification of
                the promotional effects, if any, its service has on the artists it
                promotes. Moreover, it provided no persuasive evidence to connect the
                current statutory rate with any decrease in such artist services. Given
                the record before them, the Judges do not find that the evidence
                supports a decrease from the current rate based on this section 801(b)
                 SoundExchange limited its discussion regarding this factor to
                arguments in support of adoption of the CABSAT rate and arguments
                against lowering the current PSS rate. The Judges do not adopt the
                CABSAT rates and find no persuasive evidence in the record to support a
                lower rate based on the first section 801(b) factor.
                b. Factor B: Afford Fair Return and Fair Income
                 The second section 801(b) factor requires the Judges to assess
                whether the rate (or rates) they have chosen to begin the section
                801(b) analysis affords the copyright owner a fair return for his or
                her creative work and the copyright user a fair income under existing
                economic conditions. 17 U.S.C. 801(b)(1)(B).
                 As discussed above, in SDARS II the Judges found that an increase
                from the then-prevailing statutory rate was warranted because Music
                Choice anticipated greatly expanding the number of channels of music it
                would offer without any anticipated increase in revenues that would
                adequately compensate copyright owners for this increase. 78 FR at
                23060. In actuality, Music Choice's expansion was far more modest than
                it had anticipated. Del Beccaro WDT at 18; 5/18/17 Tr. 4521 (Del
                Beccaro); Del Beccaro WDT at 4 (Music Choice currently provides 50
                television-accessible music channels). Given that the basis for the
                Judges' increase in the royalty rate after the SDARS II hearing was a
                projected expansion of music channels that did not materialize, the
                Judges find that, all things being equal, a downward adjustment to the
                PSS rate from 8.5% back to 7.5% is most supported by the evidence and
                by SDARS II. See 17 U.S.C. 803(a)(1) (``The . . . Judges shall act in
                accordance with . . . prior determinations . . . of . . . the Judges .
                . . .'').
                 According to Music Choice, the current rate has not provided the
                service a fair income under existing economic conditions. MC PFF ] 395.
                Music Choice asserted that, due to changes in Music Choice's downstream
                MVPD market, it anticipates losing money on its residential audio
                business over the next two years under the current rate. Id. ]] 395-
                396. Music Choice's main contention was that a hyper-competitive market
                for its services is making it more difficult for it to remain
                profitable and provide the same level of services to copyright owners
                under current market conditions. Nevertheless, all of the conditions
                that Music Choice cited to support a downward adjustment are already
                incorporated into the current statutory rate. Music Choice provided no
                evidence that any new threat is on the horizon that might warrant a
                downward adjustment from the current statutory rate going forward.
                Moreover, as SoundExchange correctly noted, no copyright user, not even
                a PSS, is guaranteed any level of profitability.
                 Music Choice argued that a decrease from the current rate would not
                have a material effect on the copyright owners and artists. MC PFF ]
                409. SoundExchange contended that the PSS pay lower royalty rates than
                any other music service and that these rates have a negative effect on
                copyright owners and artists who receive these low rates. See 5/18/17
                Tr. at 4621-23 (Del Beccaro) (PSS pay lower rates than other music
                services); Harrison WDT ] 29 (record companies would not agree to
                current PSS rates). SoundExchange contended that the PSS rate is so far
                below a market rate that it would be ``foolish'' for any record company
                to attempt to directly license their sound recordings at rates near the
                current rate. SX PFFCL ] 2131 (and evidence cited therein).
                SoundExchange also asserted that a higher rate for PSS would not be
                unfair because Music Choice could continue to operate; it would only
                make less money doing so, and the Copyright Act does not guarantee a
                copyright user a certain minimum level of profits. Id. ] 2134.
                 The Judges do not mean to discount the fact that the market for
                providing content to cable and satellite providers is competitive and
                perhaps likely to grow more competitive in the future. Nevertheless,
                nothing in section 114 of the Copyright Act would authorize the Judges
                to shield PSS services from market forces and the Judges see no reason
                to do so in the absence of such a mandate. Music Choice's argument that
                a rate reduction would not materially affect the return that record
                labels receive for the sound recordings
                [[Page 65224]]
                they put into the marketplace is also misplaced. The relevant market
                for determining whether an adjustment is warranted is the market for
                PSS services, not the sound recordings market as a whole. As a
                percentage of total royalties, the amount copyright owners receive from
                the PSS services may be low. Nevertheless, all revenue sources are
                important for those that have earned them, and the rate charged for the
                use of sound recordings by the PSS must ensure that the copyright
                owners receive a fair return. Therefore, no additional downward
                adjustment is warranted.
                 SoundExchange claimed that the PSS pay the lowest royalty rates of
                any type of music service. Even if true, those comparative rates are
                already reflected in the current statutory rate. Section 114 is clear
                that the PSS that qualify for the grandfathered rate methodology are
                sui generis. At the time the grandfathered provision was adopted the
                number of qualifying services was very limited and has become more
                limited over time. Only two companies qualify for the grandfathered
                rate methodology and only for portions of their respective businesses.
                Therefore, consistent with the section 114 grandfathering provision,
                the correct question to ask is not whether the current statutory rate
                (or whatever rate the Judges choose to begin analysis of the section
                801(b) factors) offers copyright owners a fair income vis-[agrave]-vis
                the rate they would earn from non-PSS music services but whether the
                current statutory rate offers copyright owners an unfairly low return
                that warrants an upward adjustment to ensure that copyright owners
                receive a fair return in the upcoming rate period. Admittedly, it is a
                difficult standard to meet, but SoundExchange has not provided
                sufficient persuasive evidence to support such an upward
                 \61\ Having determined that a downward adjustment is justified
                by the second section 801(b) factor, the Judges have reassessed the
                first section 801(b) factor and determined that no further
                adjustment is warranted notwithstanding the rate decrease supported
                by the second factor. The Judges review the evidence with respect to
                the third and fourth factors with the assumption that a rate
                reduction is already supported based on the second factor. 78 FR
                31842, 31843 (May 28, 2013).
                 After reviewing the evidence provided by both parties, the Judges
                conclude that (outside of a 1 percentage point reduction due to the
                anticipated expansion of the number of music channels that did not
                materialize) neither party has provided sufficient evidence to support
                a change from the current rate based on the second Section 801(b)
                c. Factor C: Reflect Relative Roles
                 The third section 801(b) factor requires the Judges to assess
                whether the rate they have chosen to begin the section 801(b) analysis
                reflects the relative roles of the copyright owner and the copyright
                user in the product made available to the public with respect to
                relative creative contribution, technological contribution, capital
                investment, cost, risk, and contribution to the opening of new markets
                for creative expression and media for their communication. 17 U.S.C.
                 Music Choice contended that with respect to this factor it has made
                a much stronger evidentiary showing than SoundExchange and therefore a
                lower rate should be warranted. MC PFF ] 426. For example, Music Choice
                noted that it makes significant creative contributions in terms of
                original programming, curation, and promotional content that increases
                subscribers' engagement with the music and increases the promotional
                impact of the Music Choice service. Williams WDT at 56; 5/18/17 Tr. at
                4693 (Williams). Music Choice noted that it expends substantial
                resources on improving its service offerings but that declining
                revenues over the past rate period have forced Music Choice to cut
                staff that are used to provide these services. Williams WDT at 7. Music
                Choice discounted the record labels' contributions in this regard,
                arguing that they apply only to the sound recordings and not
                specifically to the PSS service. See MC PFF ] 447. Music Choice also
                noted that historically it has had to invent the technology necessary
                to get high-quality digital music programming to subscribers, but that
                the current rate has limited its ability to continue investing in
                improving its technology. Id. ]] 450-52.
                 Music Choice asserted that the risks it faces are increasing
                relative to those faced by the record companies. Music Choice also
                contended that it (and other PSSs) has fewer opportunities for
                profitability. Del Beccaro WDT at 20. Music Choice noted that its
                residential business has still not become profitable on a standalone
                basis. Id. at 19-20. Music Choice pointed to consolidation among MVPDs
                and shrinking margins in the cable industry combined with competitive
                pressures that have led to a rapid deterioration of Music Choice's
                subscriber fees. Id. at 21. Music Choice represented that this changing
                MVPD market has fundamentally changed the financial outlook for Music
                Choice's residential audio service. Id. at 24-25.
                 Music Choice disputed SoundExchange's assertions that the Music
                Choice service is substitutional. See 5/16/17 Tr. 4076-77 (Harrison);
                5/15/17 Tr. 3882 (Walker). Finally, Music Choice argued that it
                contributed more to the opening of new markets for creative expression
                and new media for its communication than the record companies. For all
                of these reasons Music Choice believes that this factor warrants a
                downward adjustment. MC PFF ]] 500-501.
                 Not surprisingly, SoundExchange argued that no downward adjustment
                is warranted under this factor. SoundExchange believes that ``Music
                Choice's wholesale distribution model seems to be relatively
                inexpensive to operate.'' See Wazzan CWDT ] 80. By comparison, record
                companies spend far more on artists, repertoire, and marketing. Id.
                SoundExchange countered Music Choice's argument that the record
                companies' expenditures are not PSS-centered, arguing that without the
                record companies' expenditures the PSS would have no sound recordings
                to use for their services. Id. ] 80. SoundExchange further disputed
                Music Choice's contentions that past expenditures by investors in Music
                Choice warrant a rate reduction. According to SoundExchange, these
                capital costs were invested long ago and the investors have made no
                investments in the last eighteen years. See SX PFFCL ] 2141; but see
                Del Beccaro WDT at 20. SoundExchange contended that these investors
                have realized returns on their investments and that those investments
                have helped fuel Music Choice's non-statutory video service line of
                business. See SX PFFCL ] 2141; but see 5/18/17 Tr. at 4630-31 (Del
                 With the exception of Music Choice's assertion that market
                conditions have deteriorated recently, neither party made a persuasive
                argument that a further change in the current statutory rate is
                warranted, in either direction. Virtually all of the evidence that the
                parties present reflects conditions that have occurred under the
                current statutory rate. Therefore, all of the relative contributions of
                SoundExchange and Music Choice are already incorporated into that rate
                and no adjustment is warranted. The small rate reduction from the
                current statutory rate that the Judges found warranted under the second
                section 801(b) factor does not change the Judges' assessment.
                 As for the negative change in market conditions, Music Choice only
                noted a decline in the resources it spends and the staff it intends to
                employ to improve the service. If anything, a decrease in the resources
                it spends on the service, if quantifiable, would militate against a
                rate reduction. At this time, it is unclear
                [[Page 65225]]
                how market conditions will affect Music Choice's business in the
                upcoming rate period. Conceivably, persuasive evidence of dramatically
                deteriorating conditions in the market for PSS service might militate
                against an upward rate adjustment if such adjustment could be deemed
                disruptive but any such adjustment would be warranted under the fourth
                section 801(b) factor rather than the third. At this point, on the
                current record, the Judges find no persuasive evidence to support an
                adjustment from the current statutory rate in either direction under
                the third factor.
                d. Factor D: Minimize Disruptive Impact
                 The fourth and final section 801(b) factor requires the Judges to
                assess whether the rate (or rates) they have chosen to begin the
                Section 801(b) analysis minimizes any disruptive impact on the
                structure of the industries involved and on generally prevailing
                industry practices. 17 U.S.C. 801(b)(1)(D). A royalty rate may be
                considered disruptive ``if it directly produces an adverse impact that
                is substantial, immediate and irreversible in the short-run because
                there is insufficient time for [the parties affected by the rate]
                adequately to adapt to the changed circumstances produced by the rate
                change and, as a consequence, such adverse impacts threaten the
                viability of the music delivery service currently offered to consumers
                under this license.'' SDARS I, 73 FR 4080, 4097 (Jan. 24, 2008).
                 Music Choice argued that the current statutory rate has had a
                disruptive effect on the PSS market. As support for this premise, Music
                Choice noted the previously discussed deterioration of Music Choice's
                financial condition, which it contended is due, in part, to the fact
                that the rate was increased in SDARS II. MC PFF ] 503. Music Choice did
                not argue that profits from Music Choice's other business lines should
                be considered in determining the possible disruptive effect of the PSS
                rate. Id. ] 506.
                 SoundExchange contended that if Music Choice and other PSSs cannot
                continue to operate then the market will adjust by allowing other
                competitors to take their place. See Wazzan CWRT ]] 83, 86. From
                SoundExchange's perspective, Music Choice's quest for a lower rate is
                motivated by increased competition from Stingray. According to
                SoundExchange, Music Choice seeks a lower rate that would serve as a
                subsidy that would allow Music Choice to maintain its unfair advantage
                and its market share over non-PSS competitors. See 5/18/17 Tr. at 4532-
                37 (Del Beccaro). SoundExchange asserted that such a subsidy ``fosters
                Music Choice's inefficient operation and risks disrupting the market
                for residential audio services.'' Wazzan CWDT ] 84. From
                SoundExchange's perspective, the PSS rates are already artificially low
                and merely serve to insulate Music Choice from market forces at the
                record companies' expense. See Wazzan CWRT ]81, n. 112; 4/25/17 Tr. at
                933-34 (Crawford). SoundExchange argued that the current statutory rate
                is disruptive because it provides Music Choice a significant barrier to
                entry in the market for non-PSS (CABSAT) services. 5/3/17 Tr. at 2318
                (Wazzan); SX PFFCL ] 2147. SoundExchange did not accept that a higher
                rate (even one as high as SoundExchange proposes) would be disruptive
                to the PSS market. Rather it contended that an upward adjustment would
                introduce a needed element of competition. See 4/25/17 Tr. at 902-03
                (Crawford); Wazzan CWRT at 76, 83.
                 The Judges find that neither party provided persuasive evidence to
                warrant any further adjustment of the current statutory rate (other
                than that warranted by the second 801(b) factor) in either direction.
                Music Choice argued that the ``significant deterioration of its
                financial condition'' is due in part to the current statutory rate but
                the only evidence it cited deals with the effects of market
                competition. See Del Beccaro WDT at 21. The competitive pressures that
                Music Choice faces were not caused by the current statutory rate. While
                the rate increase that the Judges approved in SDARS II may have
                negatively affected Music Choice's margins, the Judges addressed any
                potential disruptive effect of that increase by phasing it in over the
                first two years of the rate period. The grandfathered rate calculation
                methodology was not intended to shield Music Choice from all negative
                impacts arising from competitive pressures. The reversal of that
                increase that the Judges find warranted under the second section 801(b)
                factor only makes Music Choice's arguments on this point less
                 The reality of the marketplace contradicts SoundExchange's
                contention that the current rate is disruptive. As SoundExchange
                pointed out, Music Choice faces stiff competition in the market. SX
                PFFCL ] 1879. The modest decrease in the statutory rate that the Judges
                find warranted under the section 801(b)(1)(B) factor does not change
                the Judges' assessment on this point.
                 On balance, the Judges find that neither party has provided
                persuasive evidence to support a finding that, under current market
                conditions, an adjustment to the current statutory rate (other than
                that discussed with respect to the second section 801(b) factor), is
                warranted under the fourth Section 801(b) factor. Therefore, the Judges
                determine that the appropriate rate for PSS services in the upcoming
                rate period shall be 7.5%. This rate shall apply to the gross revenues
                that the PSS services earn for all ``existing service offerings'' in
                addition to all ``expanded service offerings'' as those terms are
                defined and used at pages 15-16 of the Register of Copyright's
                (Register's) Memorandum Opinion On Novel Material Questions of Law
                (Memorandum Opinion) (Nov. 20, 2017). Based on the limited evidence in
                the record, the Judges find no justification for applying a different
                rate methodology to these two types of services at this time.
                 The Judges accept as credible Music Choice's evidence that
                additional channels that might conceivably fall within the expanded
                service category currently constitute a marginal portion of Music
                Choice's PSS service in terms of music usage. See Del Beccaro WDT at
                16. While those types of services may increase over time, at this point
                the Judges do not find that the service offerings that fall within this
                category are sufficiently distinct from the existing service offerings
                to justify the creation of a separate rate methodology. Nevertheless,
                the Judges acknowledge SoundExchange's assertion that PSS services that
                might fall within the expanded service category have recently increased
                and may warrant a different rate methodology in the future. See Del
                Beccaro WRT at 25; 5/18/17 Tr. 4658-59, 4661 (Del Beccaro).
                D. Music Choice's Internet Streaming Service
                 For the first time, in the present proceeding, SoundExchange
                proposed a separate rate for PSS that stream their services over the
                internet. For all licensed transmissions and related ephemeral
                recordings through an internet streaming service qualifying as a PSS
                (or any similar service capable of tracking the individual sound
                recordings received by any particular consumer), SoundExchange
                requested that the per-performance royalty fee for a commercial
                webcaster set forth in 37 CFR 380.10 apply.\62\ Music Choice
                [[Page 65226]]
                contended that its streaming activity is already included within the
                PSS statutory license and the royalty rate that PSSs pay already
                includes this service. See Del Beccaro WRT at 27. As a result, Music
                Choice contended that no additional royalty payment should apply for
                internet streaming of the PSS service. Id.
                 \62\ If a PSS does not have the technological capability to
                track individual performances, SoundExchange proposes that the PSS
                estimate its performances by multiplying its Aggregate Tuning Hours
                by the average number of recordings played per hour across its
                service. SX Amended Proposed Rates and Terms at 8.
                1. Referral to the Register of Copyrights
                 The Judges concluded that the threshold issue of whether the
                streaming activities of a PSS were included within the scope of the PSS
                license was a novel material question of copyright law that the Judges
                must refer to the Register of Copyrights (Register). 17 U.S.C.
                802(f)(1)(B). Hence, the Judges referred the issue to the Register,
                 (1) Are a preexisting subscription service's transmissions of
                multiple, unique channels of music that are accessible through that
                entity's website and through a mobile application ``subscription
                transmissions by preexisting subscription services'' for which the
                Judges are required to determine rates and terms of royalty payments
                under Section 114(f)(1)(A) of the Copyright Act?
                 (2) If yes, what conditions, if any, must the PSS meet with
                regard to streaming channels to qualify for a license under Section
                114(f)(1)(A)? For example, must the streamed stations be identical
                to counterpart stations made available through cable television? Is
                there a limitation on the number of channels that the PSS may
                stream? Is there a limitation on the number or type of customers
                that may access the website or the mobile application?
                Order Referring Novel Material Question of Substantive Law and
                Setting Briefing Schedule at 3-4 (Oct. 5, 2017).
                2. Register's Conclusions
                 The Register concluded that
                transmissions by a PSS entity that are accessible to a cable or
                satellite television subscriber through that entity's website and
                through a mobile application can be ``subscription transmissions by
                preexisting subscription services'' for which the CRJs must
                determine rates and terms of royalty payments under section
                114(f)(1)(A), but only if such transmissions are sufficiently
                similar to the transmissions made to those subscribers via the
                entity's preexisting residential cable or satellite music service.
                Memorandum Opinion at 12.
                 As a preliminary matter, ``the preexisting services must be limited
                to the three named entities in the [DMCA] Conference Report, i.e., DMX
                (operated by TCI Music), Music Choice (operated by Digital Cable Radio
                Associates), and [DiSHCD] (operated by Muzak).'' Id. at 14, internal
                footnotes omitted. Moreover, the Register noted that ``not every
                subscription transmission made by a PSS entity is subject to section
                114(f)(1).'' Id. at 13. The Register observed that the DMCA's
                amendments to section 114 of the Copyright Act were designed to move
                the industry to market rates. Id. at 23. Nevertheless, the Register
                noted that ``Congress intended for PSS entities to be able to expand
                their service offerings to some limited extent and still have those
                service offerings be considered PSS offerings.'' Id. at 14.
                 According to the Register, the ultimate question is ``whether a
                particular program offering by a PSS entity qualifies as a PSS offering
                within the meaning of section 114(j)(11), and is therefore subject to
                the grandfathered rate standard under section 114(f)(1).'' Id. at 15.
                 The Register distinguished among three different types of service
                 (1) A service offering identified by Congress as being a PSS
                offering as of July 31, 1998, that is still offered today in the
                same transmission medium identified by Congress in 1998. (The
                Register refers to this type of offering as an ``existing service
                offering''). According to the Register, an existing service offering
                would be entitled to both a rate established under the grandfathered
                rate standard under section 114(f)(1) and the grandfathered license
                requirements in section 114(d)(2)(B). Id.
                 (2) A service offering identified by Congress as being a PSS
                offering as of July 31, 1998, that is still offered today, but in a
                different transmission medium than the one identified by Congress in
                1998, where only transmissions similar to the existing service
                offering are provided. (The Register refers to this type of offering
                as an ``expanded service offering''). According to the Register, an
                expanded service offering would be entitled to a rate established
                under the grandfathered rate standard in section 114(f)(1), but
                would not be able to take advantage of the grandfathered license
                requirements in section 114(d)(2)(B). A PSS that offered this type
                of service would be required to comply with the more detailed
                license requirements in section 114(d)(2)(C). Memorandum Opinion at
                 (3) A service offering that is not an existing service offering
                or an expanded service offering. (The Register refers to this type
                of offering as a ``different service offering''). A ``different
                service offering'' is insufficiently similar to an ``existing
                service offering'' to be considered an ``expanded service offering''
                and would not be entitled to either a rate established under the
                grandfathered rate standard under section 114(f)(1) or the
                grandfathered license requirements in section 114(d)(2)(B). Instead,
                the royalty rate for a different service offering would be set under
                the willing buyer/willing seller standard in section 114(f)(2). A
                PSS marketing a different service offering would be required to
                comply with the license requirements in section 114(d)(2)(C).\63\
                 \63\ The Register's categorizations of service types presumes
                that a service offering is eligible for the section 114 license. The
                categorization is meant to delineate whether the rate for a license-
                eligible service is determined pursuant to section 114(f)(1) or
                section 114(f)(2). If a PSS entity began offering an interactive
                service, for example, that service offering would not fall into one
                of the categories and would not be eligible for the statutory
                license. Memorandum Opinion at 16-17.
                Memorandum Opinion at 16.
                 The Register noted that ``an existing service offering can grow and
                expand significantly within the same transmission medium while
                remaining a PSS offering.'' Id at 19. Consistent with this
                understanding, the Register noted that
                [t]he user interface can be updated, certain functionality can be
                changed, the number of subscribers can grow, and channels can be
                added, subtracted, or otherwise changed. The only restriction is
                that the existing service offering as it is today must be
                fundamentally the same type of offering that it was on July 31,
                1998--i.e., it must be a non-interactive, residential, cable or
                satellite digital audio transmission subscription service.
                Id. at 19-20 (internal footnotes omitted).
                 With respect to the second category of offerings (i.e., expanded
                service offerings) ``a [PSS] does not lose its designation as such in
                the event the service decides to utilize a new transmission medium,
                provided that the subscription transmissions are similar.'' Id. at 20
                 \64\ For a service offering to qualify as an expanded service
                offering, the PSS entity must continue to operate its existing
                service offering. According to the Register, ``[a] service offering
                that is not an existing service offering can only be subject to the
                grandfathering provision if it provides transmissions similar to
                their existing service.'' Memorandum Opinion at 20, internal quotes
                 In assessing whether a service offering is an expanded service
                offering and thus qualifies as a PSS offering, the Judges must compare
                the service offering in question to the existing service offering as it
                exists at the time of the comparison (rather than as it existed on July
                31, 1998). Id. at 21. To aid the Judges in this comparison, the
                Register offers a non-exhaustive list of factors:
                 (1) Whether the service offering has a similar effect on
                displacing or promoting sales of phonorecords.
                 (2) Whether the quantity and nature of the use of sound
                recordings by the service offering is similar.
                 (3) Whether the service offering provides similar content to
                similar user groups.
                 (4) Whether the service offering is consumed in a similar
                manner, provides a similar user experience, and has similar form,
                feel, and functionality.
                 (5) Whether and to what degree the service offering relates to
                the pre-July 31, 1998 investments Congress sought to protect.
                 (6) Whether and to what degree the service offering takes
                advantage of the capabilities of the medium through which it is
                transmitted (i.e., whether and the extent to which differences
                between the service offerings are due to limitations in the existing
                [[Page 65227]]
                offering's transmission medium that are not present in the other
                service offering's transmission medium).
                Id. at 21-22.\65\
                 \65\ Even if a service offering is found to be an expanded
                service offering (rather than an existing service offering)
                qualifying for the section 114(f)(1) grandfathering provision for
                purposes of rate calculation, it would still not be eligible for the
                section 114(d)(2)(B) grandfathering provision (regarding license
                requirements) because it uses a different transmission medium than
                the existing service offering. Such an offering would be subject to
                the license requirements in section 114(d)(2)(C). Memorandum Opinion
                at 22.
                 A ``different service offering'' (the third category the Register
                identified) can never qualify as a PSS offering because it would not be
                one of the specifically identified pre-July 31, 1998 business
                operations (i.e., the three PSS offerings) Congress sought to protect
                when it enacted the DMCA. This is true regardless of whether the
                service offering is developed internally or acquired. Id. at 22. When a
                PSS entity expands its operations and provides additional transmissions
                to subscribers to a different service, this is an entirely new
                investment and is not a PSS offering. Id. at 23.
                 The Register offered guidance regarding applications of the above
                categorization of service offerings. First,
                in accordance with the principles of narrow construction afforded to
                grandfathering provisions, the Register finds that, as a matter of
                law, it is irrelevant whether or not Music Choice or another PSS
                entity, to some limited degree, was making transmissions via a
                different medium than those specified in the legislative history on
                July 31, 1998, such as the internet. If such a service was in fact
                doing so, it would not be as part of an existing service offering--
                any such transmissions today would be considered either an expanded
                service offering or a different service offering. . . .
                Id. at 19.
                 The Judges must determine a royalty rate for the former type of
                service (i.e., expanded service offering) in the current proceeding.
                The latter type of service (i.e., different service offering) is
                outside the scope of the current proceeding; a royalty rate for any
                different service offering by a PSS (if any) must be determined by
                reference to existing rate regulations covering that type of service
                offering, in a separate, future proceeding under the willing buyer/
                willing seller standard, or through voluntary negotiations.
                 The Register observed that
                the mere fact that a service offering is transmitted to cable or
                satellite television subscribers over the internet does not
                automatically disqualify the service offering from being an expanded
                service offering subject to the grandfathered rate standard, so long
                as the service offering, as a factual matter . . . is sufficiently
                similar to the PSS entity's existing cable or satellite service
                Id. at 25.
                 In assessing whether an internet-based service offering is
                sufficiently similar to a PSS entity's existing cable or satellite
                service offering, the Judges should consider ``the degree to which
                making the existing service offering accessible outside the home of the
                subscriber constitutes a fundamental change to the offering.'' Id.
                 According to the Register:
                At least in the cable television market, there appears to be a
                distinction drawn between accessing content within the home and
                accessing that same content outside of it. To be clear, this
                distinction is one based on the location where the PSS offering is
                consumed, not the type of device on which the service is accessed.
                If the service offering is available through an internet-connected
                smartphone or tablet, but is designed so that the service offering
                will only work when accessed within the confines of the subscriber's
                residence, then it would be within the home and more similar to the
                PSS entity's existing cable or satellite service offering.
                Id. at 26 (internal footnote omitted).
                 With respect to the impact that the number and type of channels
                offered by a service has in determining its categorization for rate-
                setting purposes, the Register identified examples of factors the
                Judges could consider, such as how many additional or fewer channels
                there are, how many channels offer different programming, and how
                different that programming is from that offered by the existing service
                offering. Id. The Register also notes that the Judges should consider
                the reasons why any such differences exist. If the service offering has
                more channels because of some benefit the internet provides (e.g.,
                greater bandwidth or different contractual arrangements with cable
                operators), then the PSS entity could be taking advantage of the
                capabilities of the internet as a transmission medium, which could tend
                to disqualify that service offering from the grandfathered royalty
                calculation method. Id. at 26-27. A similar analysis could be conducted
                with respect to the number and type of customers. Id. at 27.\66\
                 \66\ Differences in a service offering that directly and solely
                result from the imposition of the section 114(d)(2)(C) requirements
                that do not apply to the existing service offering (which is subject
                to section 114(d)(2)(B)) should not alone disqualify the service
                from the grandfathered royalty calculation methodology necessitated
                by the change in medium, nor should minor differences in the user
                interface or in the visual presentation. Memorandum Opinion at 27.
                 The Register noted that if a service offering qualifies for the
                grandfathered rate-setting methodology, the Judges still have the
                authority under section 114(f)(1)(A) to distinguish among the different
                types of digital audio transmission services in operation. If material
                differences between an existing service offering and an expanded
                service offering exist, the Judges may set separate rates based on
                those difference, using the section 801(b)(1) standard. Id. at 27-28.
                3. Application of Register's Conclusions to Current Proceeding
                 Music Choice provides 50 channels of audio music programming
                delivered to subscribers' televisions (the Cable Radio Service). It
                also makes these 50 channels, plus an additional 25 internet-only
                channels, available to authenticated television subscribers through its
                website and a mobile app (the internet Service). Del Beccaro WDT at
                 \67\ See also Wazzan CWDT at ] 62(e) (``Music Choice provides 75
                audio channels through various MVPDs, . . . and streaming to
                subscribers of the cable services that carry its channels, through a
                family of apps and a web portal.'') (internal footnotes omitted).
                 The Register has determined, as a matter of law, that Music
                Choice's internet Service \68\ is not an ``existing service offering.''
                Memorandum Opinion at 19. Consequently, the internet Service is either
                an ``expanded service offering'' (i.e., qualifying for grandfathered
                royalty determination under the Section 801(b) factors but subject to
                the expanded license requirements under section 114(d)(2)(C)) or a
                ``different service offering'' outside the scope of the PSS license.
                 \68\ Neither party asked the Judges to determine whether Music
                Choice's Cable Radio Service, as it exists today, constitutes an
                ``existing service offering'' or and ``expanded service offering''
                by a PSS. As the Judges have already determined that the PSS rate
                covers both types of offerings, the question is moot and the Judges
                need not address it.
                 By reference to the Register's six-factor list of criteria to
                differentiate an expanded service offering from a different service
                offering, the Judges find that an internet-based service that allows
                subscribers to access music outside their residences is a ``different
                service offering'' and is not eligible for grandfathered PSS rate
                structures or license requirements applicable to PSS. The regulations
                in Appendix A, therefore, exclude internet-based transmissions to the
                extent they are available outside a subscriber's residence.
                [[Page 65228]]
                V. SDARS Performance License--Rate Structure
                A. Rate Structure Arguments
                1. Maintaining the Current Rate Structure
                 Sirius XM emphasized that the Judges have utilized a percent-of-
                revenue rate structure for ten years, and that absent any new and
                sufficient factual bases to deviate from that history, the Judges
                should continue to adopt this rate structure. SXMRPFF ] 384 (and record
                citations therein). Moreover, it noted that SoundExchange itself
                proposed a percent-of-revenue rate structure, not a ``greater-of''
                structure, as recently as in the SDARS II proceeding. SXMPFF ] 253 (and
                record citations therein).
                 SoundExchange did not take issue with the historical bona fides of
                the current rate structure. However, SoundExchange noted that it urged
                the Judges to adopt what it describes as a simpler percent-of-revenue
                approach in SDARS II, but the Judges refused, opting instead for a more
                complicated structure that led to substantial disputes. SERPFF ] 253.
                 The Judges are not convinced by Sirius XM's argument that the rate
                structure should be maintained merely because it has been in place over
                the past two rate periods. The Judges are charged with setting rates
                and terms de novo for each period. If there are sufficient valid
                reasons why the rate structure should be changed, then the Judges will
                adopt those changes. Accordingly, the Judges consider the issues to
                determine whether to change the existing rate structure.
                2. Factors Relating to a Change in Structure
                a. Lack of Expert Support
                 SoundExchange advocated a deviation from the percent-of-revenue
                rate structure that has existed throughout the SDARS I and SDARS II
                rate periods. SoundExchange asked the Judges to establish a ``greater
                of'' structure, by which the royalty rate is calculated ``on a calendar
                year basis,'' but payable monthly, as the greater-of a specified
                percentage of revenue or a specified per subscriber dollar value. See
                Amended Proposed Rates and Terms of SoundExchange, Inc. and Copyright
                Owner and Artist Participants App. A at 14-15. (Jun. 14, 2017).
                 Sirius XM noted that no economist appearing in this proceeding
                endorsed the use of a greater-of formula. SXM RPFF ] 383. Moreover,
                Sirius XM pointed out that Mr. Orszag, an economic witness appearing
                for SoundExchange, expressly testified that he advocated either a
                percent-of-revenue rate structure or a per subscriber structure, and
                that he did not testify in support of a structure incorporating those
                two approaches in a single greater-of approach. SXM PFF ] 251. In
                response, SoundExchange did not identify any testimony that explicitly
                or adequately endorsed the use of a greater-of formula from an economic
                point of view.
                 The Judges are troubled by the lack of a cogent explanation from
                the licensors' economic witnesses as to the merits, on balance, of a
                greater-of rate formula. The absence of such evidence could be overcome
                by explanations derived from other evidence or testimony. Not having
                that further evidence, the Judges find it significant that no economist
                has sufficiently explained the benefits of this greater-of approach.
                b. Impact on the Parties' Risks and Rewards
                 SoundExchange maintained that its proposed greater-of approach is
                warranted because it allows record companies to share in the growth of
                Sirius XM's revenue, while offering protection to the record companies
                on the downside if revenues are too low. SEPFF ] 252 (and record
                citations therein). Sirius XM argued, in essence, that this approach
                smacks of a heads I win, tails you lose approach, whereby record
                companies share the upside of Sirius XM's success, but have protection
                in the form of a default to the per subscriber rate if the upside does
                not materialize. SXM PFF ] 252.
                c. Benchmarks Include a Greater-Of Rate Structure
                 SoundExchange emphasized that many interactive license agreements
                utilize the greater-of approach that SoundExchange advocates here,
                demonstrating the market's adoption of this approach. SEPFF ]] 164-165
                (and record citations therein). However, Sirius XM noted that these
                interactive agreements were all negotiated in a market characterized by
                the lack of effective competition, and that the lack of competition
                would affect the structure as well as the level of rates. SXMPFF ] 385
                (and record citations therein).
                 The Judges find Sirius XM's effective competition point well-taken
                in this context. Given that SoundExchange's expert economic witnesses
                acknowledged the need for rates that reflect an effectively competitive
                market, it is no surprise that none of their economists touted the
                greater-of structure as a reflection of effective competition. The
                Judges find that the greater-of rate structure, advantageous to
                licensors through the shifting risks, may well represent an example of
                what licensors can and would obtain when they exploit their ``must
                have'' status for a special competitive advantage. The Judges do not
                find it persuasive that interactive streaming services and record
                companies adopt the greater-of structure in their negotiated licenses.
                d. Impact on Royalty Disputes
                 SoundExchange argued at length that a greater-of rate structure
                that contains a per-subscriber prong will eliminate disputes regarding
                the definition of revenue under the percent-of-revenue approach. SEPFF
                ]] 1646-1650 (and record citations therein). However, Sirius XM
                convincingly countered that a greater-of formula will not eliminate the
                issues of revenue definition and identification, because the issue of
                which prong creates the ``greater'' royalty will itself be dependent on
                the definition, identification, and calculation of the revenue-based
                royalty prong. SXM PFF ] 386.
                 The Judges agree with Sirius XM. If SoundExchange had proposed a
                per-subscriber rate only, then the issues surrounding the percent-of-
                revenue rate would be eliminated. But SoundExchange did not proposed a
                pure per-subscriber rate; nor did Sirius XM. Thus, the problems
                regarding the revenue-based royalty would continue to be present
                (albeit perhaps less often than under a pure revenue-based rate).
                e. The Greater-Of Rate Structure and Trial Subscriptions
                 SoundExchange argued that its greater-of proposal helps to obviate
                the dispute between the parties regarding the length of free trials
                offered to potential subscribers by new owners of automobiles.
                SoundExchange noted that interactive services are generally required to
                pay royalties for any free trial that exceeds [REDACTED]. Orszag AWDT ]
                85.\69\ By contrast, Sirius XM typically offers free trials to new and
                used car purchasers that last three to twelve months.\70\ Id. ] 81.
                SoundExchange argued that ``there is no
                [[Page 65229]]
                sound economic basis for the present disparate treatment, under which
                Sirius XM is permitted to offer the repertoires of rights owners for
                durations greater than one month without the payment of royalties,''
                id. at ] 85, and proposed to eliminate that disparate treatment by
                classifying trial users as ``subscribers'' for royalty purposes, and
                setting a per-subscriber rate that varies depending on how long the
                user has been in the free trial period.\71\ Thus, it would be
                irrelevant to the licensors if the free trial generated no revenue or
                lower revenue from automobile Original Equipment Manufacturers (OEMs)
                during the period offered free to the listener. SEPFF ]] 1657-1665.
                 \69\ The benchmark interactive services agreements address free
                trials longer than [REDACTED] by imposing a [REDACTED] royalty. See
                Orszag AWDT ] 89.
                 \70\ Some paid promotions (where the automobile Original
                Equipment Manufacturer pays a reduced subscription fee to Sirius XM
                during the free (to the consumer) trial period) may last longer than
                [REDACTED] months. See Trial Ex. 322 at 14, 15 ([REDACTED]-month
                free trial for purchasers of certain high-end luxury cars
                ([REDACTED])). Under a percentage revenue rate structure Sirius XM
                pays a royalty on this discounted subscription revenue. See Orszag
                AWDT ] 82.
                 \71\ SoundExchange's amended rate proposal would charge no
                royalties for subscribers who are in the first month of their free
                trial. During the second and third months of a free trial,
                SoundExchange proposes a per-subscriber royalty rate that represents
                a discount of approximately 42% off SoundExchange's proposed full
                per-subscriber rate. The full per-subscriber rate would apply to all
                free trials after three months. See Amended Proposed Rates and Terms
                of SoundExchange, Inc. and Copyright Owner and Artist Participants,
                at 3 (Jun. 14, 2017).
                 Sirius XM argued that trials, both paid and unpaid, provide value
                to licensors to the extent they entice new subscribers whose
                subscription revenue is then shared by the licensors. Sirius XM
                described the trials as a ``joint effort'' by Sirius XM and the record
                companies to attract more Sirius XM subscribers and produce future
                subscription revenues that inure to their mutual benefit. Corrected
                Written Rebuttal Testimony of Carl Shapiro, Trial Ex. 9, at 55 (Shapiro
                CWRT). Sirius XM further argued that it is in the best position to
                determine the most beneficial length of the trial period, and that
                requiring Sirius XM to pay per-subscriber royalties without recompense
                from the trial users would act as a disincentive to Sirius XM to
                utilize what it otherwise understood to be the optimal trial period.
                SXMRPFF ] 388.\72\
                 \72\ Sirius XM also argued that the record companies have a
                higher benefit/cost ratio from trial subscriptions than Sirius XM,
                and would thus agree in an unregulated market to waive royalties
                ``for as long as Sirius XM would choose to run unpaid trials.''
                Shapiro CWRT at 55-56. SoundExchange rejected this argument because
                Professor Shapiro assumed, in computing his benefit/cost ratio, that
                no record company is a ``must have'' for Sirius XM. SEPFF ] 1619;
                see 4/24/17 Tr. 562 (Shapiro). As a result of this assumption,
                Professor Shapiro's benefit/cost calculation relied on a much lower
                record company opportunity cost than that adopted by the Judges. See
                infra, section VI.B.3. The Judges do not rely on this Sirius XM
                argument, therefore, in rejecting SoundExchange's proposal with
                regard to trial subscriptions.
                 The Judges agree with Sirius XM. Under a percent-of-revenue royalty
                structure, Sirius XM and the record companies are aligned in their
                interest to minimize the time period for unpaid trials and trials paid
                by OEMs at less than the full subscription rate. Moreover, because
                Sirius XM is in the business of recruiting and interacting with
                potential subscribers, it would be less efficient for the licensors (or
                the Judges) to second-guess Sirius XM's downstream (retail) business
                model as it relates to the optimal period of trial use. Although it
                would appear from a cursory analysis that artists and record companies
                suffer from the use of their recordings without recompense (or
                sufficient recompense) during trial periods, the fuller view, given
                Sirius XM's aligned economic incentive to maximize revenues,
                demonstrates that the length and terms of trial periods are likely
                consonant with the interests of the licensors. This record evinces no
                evidence to the contrary.\73\
                 \73\ For example, there is no credible evidence that Sirius XM
                is interested in growing market share irrespective of revenue
                growth, in order to compete for the market (rather than merely in
                the market). This is unsurprising, because Sirius XM has already
                captured the satellite radio market. See infra, text following note
                B. Conclusion Regarding the Rate Structure
                 For the foregoing reasons, the Judges adopt a percent-of-revenue
                rate structure in this proceeding for the 2018-2022 rate period.
                VI. SDARS Performance License: SoundExchange Proposal
                 SoundExchange proposed a royalty fee that is the greater-of a per-
                subscriber rate and a percent-of-revenue rate. With regard to the
                percent-of-revenue prong, SoundExchange requested a rate equal to 23%
                of Sirius XM's ``Gross Revenues,'' as that quoted term shall be defined
                in the forthcoming regulations. See SoundExchange's Proposed Rates and
                Terms, at 2-3.\74\ The per-subscriber rate proposed by SoundExchange is
                set forth in the table below:
                 \74\ The definition of ``Gross Revenues'' for the forthcoming
                rate period is discussed infra, section XI.A.2.
                 Free trial
                 subscribers All other
                 Year (months two subscribers
                 and three)
                2018.................................... $1.45 $2.48
                2019.................................... 1.49 2.55
                2020.................................... 1.54 2.63
                2021.................................... 1.58 2.71
                2022.................................... 1.63 2.79
                 For affirmative economic support of its rate proposal,
                SoundExchange relied principally on the expert opinions of two economic
                witnesses, Mr. Jonathan Orszag and Professor Robert Willig. Mr. Orszag
                used a ``ratio equivalency'' analysis, which he applied through two
                separate approaches. Professor Willig considered several economic
                models: (1) An ``Opportunity Cost'' analysis; \75\ (2) a ``Ramsey
                Pricing'' analysis; \76\ and (3) a ``Nash Bargaining Solution''
                approach.\77\ Professor Willig also discussed a fourth model--the
                Efficient Component Pricing Rule (ECPR), which he noted in his oral
                testimony as analytically analogous to his ``Opportunity Cost''
                analysis, and yielded the same rate.\78\
                 \75\ See infra, sections VI.A-VI.C.
                 \76\ See infra, section VI.G.
                 \77\ See infra, section VI.F.
                 \78\ See infra, section 0.
                A. Professor Willig's Opportunity Cost Model
                1. ``Walk-Away'' Opportunity Cost
                 SoundExchange called Professor Robert Willig in support of its
                proposed rates. Professor Willig approached the rate determination
                using an opportunity cost model. As Professor Willig testified,
                opportunity costs are incurred when ``sales through one distribution
                channel reduce (i.e., substitute for, or ``cannibalize'') sales through
                other distribution channels (thereby reducing compensation earned by
                content creators from those other channels . . . ).'' Written Rebuttal
                Testimony of Robert Willig, Trial Ex. 46, ] 20 (Willig WRT); see also
                Written Direct Testimony of Carl Shapiro, Trial Ex. 8, at 19 (Shapiro
                WDT) (sellers incur opportunity cost when sales in one market diminish
                sales in other markets). Based upon his interpretation of survey
                evidence, Professor Willig established a walk-away opportunity cost of
                $2.55 per subscriber, which he equates to [REDACTED]% of Sirius XM's
                relevant revenue.
                 SoundExchange asserted that the appropriate opportunity cost for
                rate-setting purposes is the ``walk-away'' opportunity cost. SE PFF ]]
                486-95. Professor Willig defined a record label's walk-away opportunity
                cost as ``compensation that it would earn from other sources of
                distribution,'' if a label were ``to literally walk away from a
                distributor.'' 5/2/17 Tr. 2014-15 (Willig). Professor Willig referred
                to the opportunity cost as ``creator compensation cannibalization,''
                \79\ and observed that ``the need to cover opportunity cost is part of
                what assures efficiency in the ultimate choice of the
                [[Page 65230]]
                balance of . . . varieties of modes of distribution.'' 5/2/17 Tr. 2019-
                20 (Willig). In an unregulated market, a supplier (record label or
                copyright owner) will not sell (license) to a service unless the
                supplier is compensated at or above its walk-away opportunity cost. See
                id. at 2019. In this regulated market, however, the creators do not
                have the option to walk away; the licenses are compulsory. Id. at 2015.
                Professor Willig thus perceived the role of the Judges to ``redress
                that imbalance created by the statutory license.'' \80\ Id. at 2017.
                 \79\ Sirius XM's rebuttal economic expert, Professor Farrell,
                concurred with the substance of this definition, agreeing that walk-
                away opportunity cost ``is the profit that a label would realize
                elsewhere'' if it did not license to Sirius XM. 4/24/17 Tr. 607
                 \80\ Opportunity costs are more than a theoretical concept. For
                example, UMG recognizes that on-demand subscription services may
                substitute for sales of digital downloads. See Written Direct
                Testimony of Aaron Harrison, Trial Ex. 32, at ] 17 (Harrison WDT).
                Accordingly, when UMG licenses fully interactive streaming services,
                it [REDACTED]. Because the direct marginal costs of distributing
                additional sound recordings to Sirius XM are ``zero or nearly
                zero,'' the principal marginal cost to a record company of licensing
                to a service is its opportunity cost. Shapiro WDT at 19; see also
                SEPFF ] 460 (not disputing Professor Shapiro's point that physical
                marginal cost is zero and that the only marginal cost at issue is
                marginal opportunity cost).
                 As a matter of economic principle, Sirius XM did not dispute the
                use of an opportunity cost approach as appropriate in identifying a
                market-based SDARS royalty rate. See SX RPFF ] 109. However, Sirius XM
                disagreed with Professor Willig's use of ``walk-away opportunity
                cost,'' as he defined that phrase. Id.
                 The Judges summarize the parties' opportunity cost dispute as:
                Whether, in a hypothetical market with freely negotiated rates,
                opportunity cost should (1) include the value of each Major's ``must-
                have'' status which gives each Major the theoretical ability to put
                Sirius XM out of business by refusing to grant it a license at a
                royalty less than opportunity cost; or (2) exclude this value--a
                complementary oligopoly power--by which each Major hypothetically could
                put Sirius XM out of business.\81\
                 \81\ Professor Willig calculated walk-away opportunity cost on
                the tautological assumption that, because each Major is a ``must
                have,'' its refusal to provide a license to Sirius XM would cause
                Sirius XM to go out of business. As discussed elsewhere in this
                Determination, Professors Shapiro and Farrell proposed the use of a
                different form of opportunity cost, one that does not assume that
                the loss of any one Major would cause Sirius XM's demise.
                 Professor Willig asserted that the walk-away opportunity cost for a
                ``must-have'' label is effectively the same as the label's pro rata
                share of the industry-wide opportunity cost.\82\ See 5/2/17 Tr. 2137
                (Willig); \83\ see also SEPFF 502 at ] 502. Professor Willig's
                opportunity cost calculation thus measures what a must-have single
                record label would earn elsewhere, and proposes it as an industry-wide
                measure, even if that single record label is the only label that
                declines to license. On this theoretical point, Professor Farrell, one
                of Sirius XM's economic experts was in basic agreement. See, e.g., 4/
                24/17 Tr. 665-66 (Farrell) (for label to recover pro rata walk-away
                opportunity cost, industry-wide royalty rate would have to be at least
                equal to industry-wide opportunity cost).
                 \82\ The evidence in this proceeding strongly demonstrates the
                ``must have'' status of each Major. See SE PFF ]] 517-525 (and
                record citations therein). Indeed, Sirius XM implicitly acknowledged
                the ``must have'' status of a Major, citing a steering adjustment as
                a method by which to mitigate the ``must have'' status and
                complementary oligopoly power of a Major to allow for an effectively
                competitive market.
                 \83\ Professor Willig did not cite any authority that has
                previously used the phrase ``walk-away opportunity cost.'' Sirius
                XM's economic experts asserted that Professor Willig's ``walk-away
                opportunity cost'' is actually the ``monopoly'' or ``cartel''
                opportunity cost. For the sole purpose of referring to and
                discussing Professor Willig's approach, the Judges will use his
                ``walk-away'' terminology; that usage does not suggest an
                equivalence with, or distinction from, monopoly or cartel
                opportunity cost.
                 Further, Professor Willig opined that individual labels would
                bargain with an understanding that a royalty unacceptable to that label
                is likely also unacceptable to other labels. As a result, a label
                inclined to reject a proposed royalty will expect that other labels
                will do the same, with the result that each label's opportunity cost
                will equate to an industry-wide opportunity cost. See 5/2/17 Tr. at
                2030 (Willig).
                2. Sirius XM's Criticism of Willig's Use of ``Walk-Away'' Opportunity
                 Sirius XM disputed the notion that opportunity costs should be
                defined and calculated on an industry-wide basis; rather, it asserted
                that the appropriate calculation must be undertaken in a ``label
                specific'' manner. Sirius XM asserted an essential and disqualifying
                premise: The opportunity cost Professor Willig calculated is the
                opportunity cost of ``either a single monopoly record label or a fully
                effective cartel.'' \84\ Farrell WRT ] 27; see also id. ] 31. As
                Professor Shapiro noted:
                 \84\ Professor Farrell testified that if a particular label's
                decision to license is based on ``the profit impact on the industry
                as a whole, that's what we would normally describe as monopoly or
                cartel behavior.'' 4/24/17 Tr. 614 (Farrell).
                 Most fundamentally, Professor Willig is asking the wrong
                question. Rather than attempting to calculate the opportunity cost
                to an individual label of having its sound recordings performed on
                Sirius XM, Professor Willig calculates the opportunity cost to the
                entire recorded music industry, as if a single entity (or a fully
                functioning cartel) controls the rights to all sound recordings.
                Shapiro CWRT at 34. Moreover, Sirius XM claimed Professor Willig
                acknowledged that his opportunity cost calculation was identical to the
                opportunity cost that would apply ``if there were a single monopoly
                seller of sound recordings. . . .'' 5/2/17 Tr. at 2140 (Willig); see
                also Farrell WRT ]] 67-71 (Willig's calculation is ``extreme'' and
                leads to inflated opportunity costs).
                 According to Sirius XM, Professor Willig's opportunity cost
                approach ignores the goal of determining a statutory rate reflective of
                an effectively competitive marketplace (as tempered by the enumerated
                section 801(b)(1) factors). See 4/20/17 Tr. 418 (Shapiro) (``he is
                measuring the wrong thing by looking at the monopoly opportunity
                cost.''). Thus, Professors Shapiro and Farrell both opined that a rate
                based on this industry-wide opportunity cost would be inconsistent with
                the economic concept of ``workable competition.'' \85\ See Shapiro CWRT
                at 37; Farrell WRT ]] 27-29.
                 \85\ ``Effective'' competition, as used in this Determination is
                synonymous with the term ``workable competition'' that is more
                commonly used by economists.
                 Sirius XM candidly admitted that its criticism of Professor
                Willig's walk-away opportunity cost analysis is premised on the
                assumption that a single label ``does not have the `must-have' monopoly
                power to effectively shut-down Sirius XM's music offering . . . .'' SXM
                PFFCL ] 367 (and record citations therein). Having made this
                assumption, Sirius XM's witnesses explained what they characterize as a
                fairly simple intuition grounded on their economic modeling in the
                record: ``[A] change in Sirius XM's music mix (i.e., something less
                dramatic than losing access to all music) is likely to result in only
                some relatively modest loss in subscribers, if any--not, as Professor
                Willig models, every Sirius XM subscriber seeking music elsewhere. See
                Farrell WRT ] 67.\86\
                 \86\ Professor Farrell's argument ``demonstrated mathematically
                that if Sirius XM's failure to obtain a license from a record label
                led to the loss of some, but not all, subscribers, then the walk-
                away opportunity cost for that label would be significantly less
                than that label's pro-rated share of the monopoly opportunity cost
                calculated by Professor Willig, the difference between the two
                depending on the fraction of Sirius XM subscribers who would cancel
                their subscriptions in response to the failure of Sirius XM to
                secure a license from the individual label.'' Farrell WRT ]] 68, 71.
                 Sirius XM lodged another fundamental objection to Professor
                Willig's opportunity cost approach. As Sirius XM noted, Professor
                Willig's $2.55 opportunity cost calculation was
                [[Page 65231]]
                derived by applying the royalties alternative services pay to record
                companies. In Web IV, the Judges found these rates to be inflated by
                the complementary oligopoly power of the Majors. Sirius XM criticized
                ``importing'' that ``supracompetitive'' rate into this statutory
                setting in the absence of any adjustment or allowance for effective
                competition. The royalty with the most disproportionate impact in this
                regard is the $[REDACTED]/month royalty charged to subscription
                interactive services.\87\ See Written Direct Testimony of Robert
                Willig, Trial Ex. 28, ] 41 & Table 2 (Willig WDT). Professor Farrell
                argued that Professor Willig's calculations are significantly infected
                by the noncompetitive market for licenses to interactive services. See
                4/24/17 Tr. 636, 640 (Farrell). Professor Farrell cautioned against
                putting ``heavy weight on a rate that has been found to be
                supracompetitive and driven by complementary oligopoly . . . .'' 4/24/
                17 Tr. at 641 (Farrell). Even Professor Willig agreed that a lack of
                steering in the interactive market could inflate the opportunity cost
                calculation for Sirius XM. 5/2/17 Tr. at 2037-38 (Willig).
                 \87\ Based upon Professor Dhar's survey, interactive services'
                diversion ratio of 31% comprises 70% of Professor Willig's $2.55
                opportunity cost. The Judges examine the survey data infra, section
                 Further, Sirius XM chastised Professor Willig for a claimed
                inconsistency. Professor Willig acknowledged on the one hand that
                benchmarks from other distribution channels, such as the interactive
                services benchmark, must be free of the effects of complementary
                oligopoly. Nonetheless, he applied the rates from these same
                distribution channels without a downward adjustment to offset the
                upward impact of the complementary oligopoly effect when computing
                opportunity cost. See 5/2/17 Tr. 2152-54 (Willig).
                 Sirius XM also criticized Professor Willig for his second
                alternative justification for using the industry-wide opportunity cost;
                that is what Sirius XM labeled his ``unilateral alignment'' approach.
                See SXM PFFCOL ]] 379-382. Sirius XM characterized this as the
                ``conscious parallelism'' of like-minded oligopolists, viz., a form of
                anticompetitive ``tacit collusion which, even though not a violation of
                any antitrust laws, would nonetheless lead to results that would be
                inconsistent with the necessity that rates be consistent with the
                principles of effective (workable) competition.'' Id. ] 381 (and record
                citations therein).
                3. The Judges' Use of the Opportunity Cost Model To Set the SDARS
                Royalty Rate
                 The Judges find that Professor Willig's industry-wide walk-away
                opportunity cost approach is an appropriate tool, on the present
                record, to apply as an interim step in crafting the statutory rate. On
                the one hand, there is no dispute between the parties that the Majors
                would use this industry-wide opportunity cost calculation to set
                royalty rates in an unrestricted market. On the other hand, the Judges
                find there is no bona fide dispute but that these rates would partially
                reflect the complementary oligopoly effect of Majors.
                 Standing alone, the complementary oligopoly effect within the walk-
                away opportunity cost model would inflate the rate above the
                ``reasonable rate'' the Judges must determine. However, the Judges may
                mitigate the industry-wide walk-away opportunity cost that incorporates
                complementary oligopoly effects, as they do in their ``fork in the
                road'' approach later in this Determination. Thus, even if one could
                construe Professor Willig's ``walkaway'' approach, standing alone, as
                inconsistent with the concept of effective competition, that
                inconsistency can be--and is--mitigated because the because the Judges
                have considered and accounted for such ``must have''/complementary
                inefficiencies by also accepting Professor Willig's practical and
                reasonable ``fork in the road'' approach, discussed below.
                 The Judges find unhelpful SoundExchange's alternative justification
                for the use of walk-away opportunity costs in the marketplace. This
                alternative point simply noted that the major record labels, who are
                oligopolists, would engage in some form of what is known as ``conscious
                parallelism'' when negotiating royalties. See 5/2/17 Tr. 2027 (Willig)
                (``decision-making is unilateral, but parallel, across the record
                [l]abels''); see also SE PFF ] 526. This exposition explains why
                oligopolists would move in concert without engaging in explicit
                collusion, but begs the question whether that concerted price movement
                would incorporate walk-away opportunity cost ab initio. It is Professor
                Willig's first point--that each Major's knowledge of its ``must have''
                status imbues it with individual market power to walk-away--that is
                sufficient to demonstrate the market logic of the industry's collective
                exploitation of walk-away opportunity cost. See 5/2/17 Tr. 2031-34
                 The Judges also find unhelpful Sirius XM's argument that Professor
                Willig's opportunity cost approach is the equivalent of a benchmarking
                approach. To be sure, the point is correct, but its advancement as a
                criticism is wrong. 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. To the extent the
                opportunity cost is infected by complementary oligopoly inefficiencies
                that increased the rates from which that opportunity cost is derived,
                the Judges look to the entire record to ascertain whether and how to
                account for that factor, as they have by applying Professor Willig's
                ``fork in the road'' approach.
                B. Application of the Opportunity Cost Approach
                 To apply the walk-away opportunity cost approach in the satellite
                radio market, Professor Willig utilized the survey conducted by
                Professor Ravi Dhar (Dhar Survey) to calculate his $2.55 per subscriber
                per month opportunity cost of licensing sound recordings to Sirius XM.
                Willig WDT ] 41. Professor Willig's analysis is built upon two
                principal elements: Diversion ratios and creator compensation data.
                 Professor Willig derived the first element (his ``diversion
                ratios''), from substitution data which indicate the other sources and
                modes of distribution of recorded music to which Sirius XM subscribers
                would gravitate if Sirius XM were no longer available at acceptable
                prices. 5/2/17 Tr. 2057-58 (Willig). More particularly, the Dhar Survey
                examined how Sirius XM subscribers would react to a higher price for a
                subscription to Sirius XM. 5/2/17 Tr. 2057-58 (Willig). The Dhar Survey
                first asked respondents if they would discontinue their Sirius XM
                service at various higher prices. Willig WDT ] 40. Those respondents
                who answered these ``pricing questions'' by stating they would cancel
                their Sirius XM subscriptions were then asked certain ``switching
                questions.'' The respondents were asked how they would listen to music,
                and specifically which of the alternative distribution channels
                presented in the survey question they would select. Willig WDT ] 40
                (summarizing relevant aspects of Dhar Survey); Corrected Written Direct
                Testimony of Ravi Dhar, Trial Ex. 22, ]] 58-60 & App. D at 69-70 (Dhar
                 With the foregoing information in hand, Professor Willig needed to
                assign monetary values to the diversion ratios.
                [[Page 65232]]
                This second element, for which Professor Willig coined the phrase
                ``creator compensation data,'' is the amount of compensation that would
                flow to sound recording licensors from the distribution platforms to
                which Sirius XM subscribers would migrate. 5/02/17 Tr. 2058-59
                 To link the diversion ratio and creator compensation data for each
                alternative distribution mode to which Sirius XM subscribers would
                migrate, Professor Willig multiplied the diversion ratio by the creator
                compensation data (per subscriber). The product according to Professor
                Willig equals the opportunity cost associated with consumers listening
                to Sirius XM as opposed to each alternative distribution mode. 5/2/17
                Tr. 2059-60 (Willig).
                 Professor Willig then added each of the positive weighted levels of
                monthly creator compensation for each alternative distribution mode.
                Willig WDT ] 41. According to Professor Willig, this summation
                represents the total opportunity cost of licensing Sirius XM across all
                alternative modes of distribution. He summarized his calculations in
                the following table.
                 Opportunity Cost Based on Dhar Survey Responses--Summary of Results
                 Alt. mode mix Unit creator Wghtd creator
                 Distribution across alternative modes (%) comp $/Sub-Mo. comp $/Sub-Mo.
                Paid Interactive................................................ 31 [REDACTED] [REDACTED]
                Paid Noninteractive............................................. 15 [REDACTED] [REDACTED]
                Purchase CDs/downloads.......................................... 10 [REDACTED] [REDACTED]
                Ad-supported Noninteractive..................................... 4 [REDACTED] [REDACTED]
                Ad-supported Interactive........................................ 3 [REDACTED] [REDACTED]
                Music video..................................................... 2 [REDACTED] [REDACTED]
                Cable/satellite music channels.................................. 2 0.00 0.00
                Other (zero creator comp)....................................... 32 0.00 0.00
                 Total/Weighted-Average...................................... 100 2.55 2.55
                Willig WDT ] 41, Table 2.
                 \88\ Professor Willig detailed how he derived the creator
                compensation data for each line item in his table. See Willig WDT ]]
                477-485. (The calculation methods are not in dispute.)
                 As his tabular data demonstrate, Professor Willig calculated the
                full opportunity cost across all alternative modes of distribution as
                totaling $2.55 per subscriber per month. Willig WDT at ] 41. This
                opportunity cost calculation is consistent with SoundExchange's
                proposed per-subscriber royalty range of $2.48 in 2018 to $2.79 in
                2022. Given Sirius XM's ARPU of $[REDACTED] per month, Professor
                Willig's $2.55 per subscriber rate is equivalent to [REDACTED] % of
                revenue.\89\ Thus, Professor Willig's conclusion is consistent with
                SoundExchange's 23%-of-revenue rate proposal covering all five years in
                the forthcoming rate period.
                 \89\ ARPU is the industry acronym for ``Average Revenue per
                User.'' See also infra note 142 regarding the quantification of
                1. Survey Data Underlying ``Opportunity Cost'' Approach
                 Professor Willig's opportunity cost approach is dependent upon the
                weights he placed on various distribution channels. The Judges,
                therefore, test the underlying survey data on which he relied to assess
                their reliability or, more specifically, their strength in supporting
                Professor Willig's conclusions.
                 The Dhar Survey was conducted as an online survey. The purpose was
                to measure, inter alia, the preferences of Sirius XM subscribers who
                would choose to cancel their Sirius XM subscriptions at a given price.
                Dhar CWDT ] 10; 5/8/17 Tr. 2728 (Dhar). The survey respondents
                consisted of current paid Sirius XM subscribers who stated they have
                the Sirius Select package, as well as current users of a free trial
                subscription to Sirius XM (typically available with certain new or used
                vehicle purchases). Dhar CWDT ] 10. Accordingly, the potential
                population of survey respondents excluded those who understood
                (correctly or incorrectly) that they subscribed to any other Sirius XM
                package, such as ``XM Select,'' ``Mostly Music,'' or ``All Access.''
                 Professor Dhar directed and conducted the survey between September
                14 and September 22, 2016. To ensure the reliability and validity of
                his online survey results, Professor Dhar designed and administered the
                survey by applying principles of survey research applicable to online
                surveys. In total, 2,602 respondents completed the survey. Dhar CWDT ]]
                 \90\ An online survey obtains respondents from existing panels
                of individuals who have expressed a willingness to participate.
                Thus, the respondents are not randomly selected from a statistical
                perspective and, accordingly, no margin of error or confidence
                interval can be applied to the results. However, Professor Dhar used
                what is known as a ``bootstrapping procedure,'' by which a sampling
                of the survey respondents is itself randomly selected and thereby
                created a confidence interval around each of the reported survey
                results. Dhar CWDT ] 90.
                 As noted above, the Dhar Survey consisted of two broad types of
                questions: ``pricing questions'' and ``switching questions.'' The
                pricing questions measured the preferences of Sirius XM subscribers who
                would choose to cancel their subscriptions at given prices. The Dhar
                Survey results demonstrated that 76% of Sirius XM subscribers would
                cancel their subscriptions to Sirius XM at various prices between
                $11.49 and $20.49 per month.
                 The first of the ``switching questions'' asked the 76% who said
                they would cancel their Sirius XM subscription (at any of the price
                levels examined) to identify the type of music distribution channel to
                which they would subscribe. The results showed that 28% of Sirius XM
                subscribers said they would switch to a paid on-demand (i.e.,
                interactive) music streaming service and 14% said they would switch to
                a paid not-on-demand (i.e., noninteractive) music streaming service. 5/
                8/17 Tr. 2761-62 (Dhar).\91\ In offering survey respondents
                [[Page 65233]]
                alternative subscription services, the Dhar survey specified a cost of
                $9.99 per month for interactive services and $4.99 per month for
                noninteractive services. Respondents were prompted to choose only ``a
                new subscription . . . not . . . a music service that you currently
                subscribe to.'' Dhar CWDT App. D at 69.
                 \91\ The percentages of respondents selecting an alternative
                service are stated as a portion of the entire population of the
                Sirius XM respondents in the survey, rather than as a portion of
                those who would choose to cancel their Sirius XM subscription. There
                were 388 respondents who stated they would cancel their Sirius XM
                subscription at various price points, which is the denominator
                Professor Dhar used in his trial testimony to arrive at the 28% and
                14% figures. Dhar CWDT ] 92. Professor Willig's percentages were
                higher because he excluded 33 respondents who answered ``Don't Know/
                Unsure'' to the switching question. Professor Willig thus determined
                that 31% (not 28%) of the relevant universe would switch to a paid
                on-demand service and 15% (not 14%) to a paid not-on-demand service.
                Willig WDT, App. B at B-2. Sirius XM's witness, Professor Farrell,
                did not dispute that the relevant denominator is the number of
                respondents who would choose to cancel their Sirius XM subscription.
                He used the same adjustment in his rebuttal opportunity cost
                analysis, as explained elsewhere in this Determination.
                 The Dhar Survey also explored preferences of respondents who
                indicated they would not subscribe to a paid music service. Respondents
                were permitted to choose more than one alternative music source from
                among: (1) Purchased physical or digital tracks or albums, (2) free
                music, (3) other, (4) none of the above, and (5) ``don't know/unsure.''
                The follow-on question to those respondents who chose ``free music''
                asked them to identify all of the free music sources they would choose.
                Dhar CWDT at 59-60. The free music options listed included, inter alia,
                (1) free not-on demand (including AM/FM radio over the internet), (2)
                free (ad-supported) on-demand music services, (3) borrowed recordings,
                (4) recordings the respondent already owns, and (5) AM/FM or AM/FM HD
                broadcast radio. Id.
                 Professor Willig used the results of this Dhar Survey to identify
                the ``Alternative Mode Mix'' in his Opportunity Cost analysis, and
                presented his results in the previous table.
                2. Professor Hauser's Criticisms of the Dhar Survey
                 Sirius XM called Professor John Hauser as a rebuttal expert witness
                on survey design and methodology. In his written and oral testimony,
                Professor Hauser leveled a number of criticisms at the Dhar Survey. In
                particular, he criticized the switching questions and accompanying
                response choices in the Dhar Survey. Professor Hauser testified that
                the Dhar Survey was constructed in a manner that biased its results
                because it: (1) Over-emphasized paid interactive and paid
                noninteractive subscriptions in a biased and artificial manner; (2)
                ``buried'' the choice of free music, such as terrestrial radio \92\ as
                an alternative to Sirius XM; and (3) failed to give respondents the
                option of replacing a Sirius XM subscription with increased listening
                to an existing (as opposed to a new) paid interactive or non-
                interactive subscription. Rebuttal Expert Report of John Hauser, Trial
                Ex. 11, ]] 66-69 (Hauser WRT).
                 \92\ In this Determination, ``terrestrial radio'' refers to
                free, over-the-air AM/FM and AM/FM HD radio, but not to AM/FM radio
                streamed over the internet.
                 As a preliminary matter, Sirius XM and Professor Hauser asserted
                that Professor Dhar's tilt toward paid subscription services was the
                consequence of his understanding that the relevant inquiry was ``if
                [respondents] cancelled their [Sirius XM] subscription, what would they
                subscribe to.'' 5/8/17 Tr. 2886-87 (Dhar). Accordingly, Sirius XM
                asserted that the Dhar Survey was tainted from the inception because it
                presented respondents only with definitions for three types of
                services: Satellite radio, on-demand services, and non-on-demand
                services. Dhar CWDT at 66 (Question 200), 69 (Question 200 and 210).
                According to Professor Hauser, putting only these three types of
                services in respondents' minds immediately prior to asking the
                switching questions ``emphasize[d] both on-demand and not on-demand
                services.'' 5/9/17 Tr. 3034-35 (Hauser). Professor Hauser contended
                that the Dhar survey ``provided no cues to aid in the recall of other
                music options (e.g., terrestrial radio) to which respondents could
                switch.'' Hauser WRT ] 68. As Professor Hauser explained, ``[b]y aiding
                in the recall of paid music services, but relying on unaided recall for
                other music options (including free music options), Professor Dhar
                biase[d] his results in favor of switching to paid music services.''
                 According to Professor Hauser, this phrasing and choice selection
                inevitably skewed responses in a way that did not reflect real-world
                behavior. Specifically, he opined that the non-subscription option that
                Professor Dhar provided as a potential response (``No, I would not
                subscribe to a paid music service'') was not nearly specific enough to
                capture a wide range of non-paid music options that respondents might
                consider, including terrestrial radio. He further testified that, if
                Professor Dhar had ``provided a list of non-paid alternatives or
                existing paid subscriptions to which respondents might reasonably
                switch, respondents may have been more likely to select non-paid
                alternatives or existing paid subscriptions and less likely to select
                new paid subscriptions.'' Hauser WRT ] 69; see also 5/9/17 Tr. 3034-35
                (Hauser) (discussing ``availability heuristic'' and how ``when you show
                people something, it becomes available in memory and they're much more
                likely . . . to choose it'').
                 Accordingly, Professor Hauser concluded that the Dhar Survey
                wrongly buried other switching options such as listening to terrestrial
                radio and omitted altogether listening to services to which the
                respondents already paid to subscribe. Hauser WRT ]] 65-70.\93\ He
                described the terrestrial radio option as buried because, for a Dhar
                Survey respondent to select terrestrial radio as a choice, he or she
                would first need to indicate an unwillingness to subscribe to a paid
                music service in place of Sirius XM. Only then would the respondent be
                shown the undifferentiated choice of listening to ``free music.'' Even
                then, the respondent would need to indicate that he or she would
                ``listen to free music,'' and still would not be offered the explicit
                choices of listening to terrestrial radio or to increase listening to a
                streaming service to which he or she already subscribed or listened.
                Only if the survey respondent selected the ``free music'' option would
                he or she be presented--for the first time--with terrestrial radio as
                an optional answer. See SXM PFF ] 390 (citing Dhar CWDT at 69; 5/8/17
                Tr. 2916-20 (Dhar)).
                 \93\ Confirming the importance of this criticism, Professor
                Willig criticized the survey by Joseph Lenski, on behalf of Sirius
                XM, for the same failure to offer the alternative of more intense
                listening to an existing subscription service. Willig WRT ] 48. This
                is an important failure, according to Professor Willig, because a
                survey that does not offer respondents the option of listening more
                to an existing subscription ``cannot provide the information needed
                to assess the relevant effect, namely, the impact on creator
                compensation.'' Willig WRT ] 46.
                 In addition to critiquing the Dhar Survey's switching questions,
                Professor Hauser created and implemented a ``Modified Dhar Survey.'' In
                the Modified Dhar Survey, he essentially repeated Professor Dhar's
                pricing questions, but attempted to reformulate the switching questions
                in order to provide respondents with the immediate and explicit choices
                of replacing Sirius XM with either terrestrial radio or increased
                listening to streaming services to which they already subscribed.\94\
                 \94\ Professor Hauser also criticized the ``pricing'' questions
                in the Dhar Survey for listing from ``low to high'' the choice of
                prices at which Sirius XM subscribers would not renew their
                subscriptions, rather than also randomly reversing the order to
                ``high to low'' for 50% of the surveys. He also found fault with the
                overall Dhar Survey because it only permitted participation by
                individuals who thought they were subscribers to Sirius Select. Only
                about 27% of all Sirius XM subscribers subscribe to the Sirius
                Select package, and it was unclear whether subscribers knew the name
                of the Sirius XM product to which they subscribed. Hauser WRT ] 124
                & Figure 13; see also 5/8/17 Tr. 2858-2859 (Dhar). However,
                Professor Hauser essentially utilized the same predicates to the
                ``switching'' questions in his Modified Dhar Survey.
                 In the Modified Dhar Survey, Professor Hauser first moved the
                option of listening to terrestrial radio forward in the survey. 5/9/17
                Tr. 3049-50 (Hauser). He also added additional alternative responses to
                the options of
                [[Page 65234]]
                choosing ``new CDS and/or music downloads,'' the respondent's
                ``existing collection of CD and/or music downloads,'' and ``other free
                music option(s) (e.g., free, ad-supported Pandora or Spotify, AM/FM
                radio over the internet, and YouTube.)'' Hauser WRT ] 79; id. App. I at
                10. Professor Hauser then added yet more response options to allow
                respondents to choose explicitly to switch to existing music service
                subscriptions. Hauser WRT ]] 79, 88, App. I at 10; 5/9/17 Tr. 3061
                 When Professor Hauser administered his Modified Dhar Survey to a
                group of on-line survey respondents, he obtained results significantly
                different from those Professor Dhar reported. Specifically, Professor
                Hauser's modifications led to a material drop in the percentage of
                Sirius Select respondents who indicated that they would replace their
                Sirius XM subscription with a new paid on-demand service: From 28% of
                respondents in Professor Dhar's survey (31% as measured by Professor
                Willig) to only 15% in the Modified Dhar Survey. See Hauser WRT Table 1
                & ]] 101, 104; 5/9/17 Tr. 3056 (Hauser).
                 In addition, when Professor Hauser provided respondents the
                terrestrial radio option early and explicitly, approximately 78% of
                Sirius Select respondents indicated they would switch to terrestrial
                radio. Hauser WRT Figure 11-A; 5/9/17 Tr. 3059 (Hauser). This result
                was in stark contrast to the results from the original Dhar Survey,
                which indicated that only 29% of the total Sirius Select respondents
                would replace Sirius XM with terrestrial radio. Hauser WRT Fig 10-B;
                Dhar CWDT ] 52, Table 1. Sirius XM notes that Professor Dhar himself
                was unsurprised by these results. He testified at the hearing that he
                anticipated that, if he had explicitly offered respondents the choice
                of free music or AM/FM radio from the outset, he would have expected
                the number of people who chose those options to be higher. 5/8/17 Tr.
                2920-22 (Dhar).
                 The Judges find the original Dhar Survey to be seriously flawed.
                The Dhar Survey failed to make prominent to respondents the option of
                selecting terrestrial radio as an alternative source of music if they
                made a price-based decision not to renew their Sirius XM subscriptions.
                Equally problematic are the absences from the Dhar Survey of any choice
                for a respondent to state that he or she would either increase
                listening to a streaming service to which he or she already subscribed,
                or to increase listening to downloads or CDs that the respondent
                already owned.
                 Professor Dhar testified that the purpose of the study, as
                explained to him by the SoundExchange economic expert witnesses, was to
                estimate the number of cancelling Sirius XM subscribers who would then
                subscribe to an on-demand or a ``not-on-demand'' music streaming
                service. He explained that he did not make alternative free choices
                more prominent and explicit because the ``marketplace context'' that
                ``the [SoundExchange] economists . . . were really interested in'' was
                the subscription streaming context. Tr. 5/18/17 2752 (Dhar); see also
                id. at 2751, 2752, 2754, 2810, 2889, 2921 (multiple instances of
                justifying the original formulation by reference to ``marketplace
                context''). The Judges find this testimony to be credible, and it
                suggests that Professor Dhar was not engaged to prepare a study that
                would give equal prominence to the potential alternative that Sirius XM
                subscribers might choose free alternatives. Thus, the Judges agree with
                Sirius XM that, by his own admission, Professor Dhar did not
                comprehensively measure what Sirius XM subscribers would do if they
                stopped using Sirius XM. By focusing myopically on what he
                (misleadingly) was told was the ``marketplace context'' of subscription
                streaming, the Dhar Survey essentially assumed its conclusion. This is
                a crucial defect, given that the use for which the Dhar Survey was
                intended was to weight ``opportunity costs'' in a manner that expressly
                included at least one free alternative, i.e., the substitution of
                terrestrial radio. It is disingenuous for SoundExchange to argue,
                through Professor Dhar, that its intention was not to identify the
                percent of Sirius XM listeners who would choose terrestrial radio (or
                any other free alternative), given that the Dhar Survey actually did
                solicit such responses, albeit in a fashion that reduced the frequency
                of that response, particularly in contrast with the results of the
                Modified Dhar Survey.
                 The switching questions in the original Dhar survey are problematic
                for additional reasons. First, the power of a ``free'' alternative is
                well-understood. See C. Anderson, Free: The Future of a Radical Price
                4, 2 (2009) (``Free is both a familiar concept and a deeply mysterious
                one. . . . `Free-to-air' radio . . . created the mass market.''); D.
                Ariely, Predictably Irrational at 51-52 (2009) (when offered a Lindt
                Truffle for 26 cents and a Hershey's Kiss for 1 cent, 40% opted for
                each choice; when price of each decreased by one cent (making the Kiss
                free), 90% opted for free chocolate).
                 Second, as the Lenski Survey \95\ made clear, 62% of Sirius XM
                subscribers had listened primarily to terrestrial radio before
                switching to Sirius XM. Written Direct Testimony of Joe Lenski, Trial
                Ex. 7, at 8 (Lenski WDT). Notwithstanding any problems in the Lenski
                Survey, it is not disputed that a substantial portion of the Sirius XM
                listener base migrated from listening to terrestrial radio. Sirius XM
                also presented testimony that the ``vast majority'' of Sirius XM
                listening, occurs in the automobile, and most listeners in automobiles
                still utilize terrestrial radio as their primary music source. See
                Written Direct Testimony of James Meyer, Trial Ex. 1, ] 21 (Meyer WDT).
                Simply put, the marketplace is suffused with evidence of the
                substantial past and present use of terrestrial radio.
                 \95\ Sirius XM commissioned a listener survey to determine the
                sources of Sirius XM listeners and the destinations to which they
                would migrate if Sirius XM were not available. The Lenski survey is
                discussed infra, section VII.D.
                 These data underscore the Judges' finding that the Dhar Survey's
                burying of the terrestrial radio alternative fails to depict the
                marketplace reality. Indeed, it is surprising that Professor Dhar (and
                anyone who directed him regarding the purpose of his survey) would
                repeatedly rely on the ``marketplace context'' rationale to justify the
                construction of the switching questions in the Dhar Survey and the
                results those questions elicited. The failure of the Dhar Survey
                explicitly to offer to a respondent, in any set of responses to any
                questions, the choice of increased listening to a streaming service to
                which the respondent has an existing subscription is especially
                problematic. From an economic perspective increased listening by a
                respondent to a service to which a respondent already subscribes is
                marginally ``free,'' because there is no increase in cost to access an
                existing monthly ``all-you-can-eat'' subscription to a music service in
                the car. More egregiously, the Dhar Survey explicitly instructs
                respondents before presenting the first switching question:
                 Keeping in mind all other music services you subscribe to would
                you or would you not subscribe to a paid music service in place of
                Sirius? This would only include a new subscription, and would not
                include a music service that you currently subscribe to.
                Dhar CWDT, at 69, App. D. Thus, not only did the Dhar Survey fail to
                provide respondents with an explicit choice to utilize a music
                streaming service to which they had an existing subscription, it
                explicitly primed them to think specifically of such services
                [[Page 65235]]
                and then to consciously NOT select that service as an alternative.
                 The Judges' foregoing critique should not be understood as a
                finding that Professor Hauser's Modified Dhar Survey is without
                defects. Professor Hauser altered the composition of the survey
                population by excluding respondents who had recently taken a music
                survey (in an attempt, he claimed, to eliminate respondents who
                participated in the original Dhar Survey). Hauser WRT ] 96. Professor
                Hauser's different population renders the Modified Dhar Survey less
                than perfectly analogous to the original Dhar Survey. The record does
                not reflect that this alteration of the survey population biased the
                results; nor is there any evidence that the change was in any way
                material. Consequently, the Judges do not find this defect to render
                the Modified Dhar Survey unreliable.
                 In addition, 24 participants in the Modified Dhar survey said they
                would listen to an on-demand service to which they already subscribe,
                even though they had answered the ``pricing question'' by stating that
                they were not then subscribing to such a service.\96\ See 5/8/17 Tr.
                2822 (Dhar); Trial Ex. 293, at 1. In his defense, Professor Hauser
                explained that he used Professor Dhar's non-switching (i.e., pricing)
                questions verbatim in order to tease out any differences arising from
                the switching questions, and that the non-switching questions listed
                only Spotify and Apple Music as interactive services, and Pandora, then
                a noninteractive service. See Dhar CWDT, App. D at 61, 63. Professor
                Hauser testified that, in his opinion, the anomaly could be explained
                by the fact that respondents who used other interactive streaming
                services, such as those offered by Amazon or Google, might have thought
                the ``pricing'' question about existing subscriptions to interactive
                services was limited to Apple Music and Spotify. Thus the respondents
                indicated they did not subscribe to either of them, but could respond
                affirmatively that they would listen to another On-Demand service to
                which they subscribed. 5/9/17 Tr. 3104-05 (Hauser). While that
                explanation is plausible, it is unsupported by record evidence.\97\ As
                Professor Dhar demonstrated, this anomaly materially affected the
                survey results: If one were to re-categorize those 24 responses as
                having stated that they would subscribe to a new on-demand service, the
                percentage of respondents who would switch to a new interactive service
                would increase from 15% to 19%. 5/8/17 Tr. 2822-23 (Dhar).\98\ The
                Judges adopt Professor Dhar's re-categorization to correct this anomaly
                in the Modified Dhar Survey.
                 \96\ Professor Dhar identified a potential similar problem with
                regard to respondents who indicated they would switch to an existing
                noninteractive service, but had previously indicated they did not
                subscribe to such a service. However, he did not make any
                adjustments to correct this problem.
                 \97\ Professor Dhar posited a different explanation for this
                anomaly. See 5/8/17 Tr. 2814-16 (Dhar). In light of Professor
                Hauser's failure adequately to explain the anomaly, the Judges need
                not consider Professor Dhar's alternative explanation.
                 \98\ Professor Hauser also conceded that he checked all the
                numbers in Trial Ex. 293 (in which Professor Dhar tabulated
                inconsistent answers in Professor Hauser's survey and listed the
                sources for the data), and Professor Hauser found them to be
                correct. 5/9/17 Tr. 3143-44 (Hauser).
                 Finally, Professor Hauser did not identify confidence intervals
                around his survey results which could have been estimated by use of the
                ``bootstrap'' method. Such a subsequent sub-sampling and calculation
                would have bolstered Professor Hauser's weighting based on the Modified
                Dhar Survey. Cf. Dhar CWDT ] 90. There is no evidentiary requirement
                that an on-line survey that, by its non-random nature, fails to produce
                a statistical random sample must be subjected to a bootstrapping
                approach to carry evidentiary weight. Indeed, the requirements for
                precise statistical reliability that exist in the academic world should
                not constrain Judges from accepting and relying on evidence that is
                otherwise probative when considered in the context of the entire
                evidentiary record. See, e.g., Matrixx Initiatives, Inc. v. Siracusano,
                563 U.S. 27, 44 (2011) (demonstration of ``statistical significance''
                not required to demonstrate reliable causal relationship when
                relationship demonstrated through ``content and context'' evidence).
                Moreover, the standard-setting organization for survey work, the
                American Association for Public Opinion Research (AAPOR), upon which
                Professor Dhar relied to use a bootstrapping approach, is by its
                express language a ``nonbinding document,'' and thus does not require
                the use of the bootstrapping technique through which statistical
                significance could be ascertained. See Dhar WDT, Ex. G, at 1(AAPOR
                Guidance on Reporting Precision for Nonprobability Samples).
                 On balance, the Judges find the Modified Dhar Survey (corrected by
                Professor Dhar, as noted supra) to be more probative than the original
                Dhar Survey. Once corrected to account for the anomalous responses
                described above, the potential deficiencies in Professor Hauser's
                Modified Dhar Survey appear to the Judges to be of relatively marginal
                significance when compared with the defects in the original Dhar
                survey. The Modified Dhar Survey came closer to the core of the issue
                at hand: Distinguishing among the alternative distribution channels to
                which erstwhile Sirius XM subscribers would migrate if the Sirius
                subscription price became so high as to dissuade renewal.
                3. Re-Weighting Opportunity Cost Calculation With Modified Dhar Survey
                 Professor Farrell took Professor Hauser's data from the Modified
                Dhar Survey and plugged them into Professor Willig's opportunity cost
                calculations. In so doing, Professor Farrell persuasively demonstrated
                that Professor Willig's opportunity cost fell significantly below the
                $2.55 per subscriber per month level, and thus below the [REDACTED]%
                royalty rate Professor Willig found to be implied by that $2.55
                figure.\99\ See 4/24/17 Tr. 636-37 (Farrell); Farrell WRT ]] 62-66.
                 \99\ To be clear, Professor Farrell did not agree with the
                opportunity cost values that Professor Willig calculated, because
                Professor Farrell described them as monopoly-based opportunity costs
                (as noted, supra, Professor Willig called them walk-away opportunity
                costs). However, Professor Farrell's re-working of Professor
                Willig's opportunity cost analysis utilizes, arguendo, Professor
                Willig's ``walk-away'' opportunity costs.
                 Professor Farrell noted that the Modified Dhar Survey had 498
                respondents who self-identified as paid Sirius XM subscribers. Among
                these 498 respondents, 13 answered the survey's pricing questions by
                stating that they would continue to subscribe to Sirius XM at any
                price. Therefore, like Professor Willig, Professor Farrell excluded
                these 13 from the pool used to weight the opportunity cost calculation.
                Another 22 respondents to the Modified Dhar Survey answered ``Don't
                know/unsure'' to whether they would cancel at various hypothetical
                Sirius XM subscription prices. Again, consistent with Professor
                Willig's treatment of respondents who answered in this manner,
                Professor Farrell excluded these 22 respondents from the pool used to
                weight the opportunity cost calculation. The remaining 463 respondents
                were then asked what source of music they would switch to in lieu of
                listening to Sirius XM. Farrell WRT, App. F at F-1.
                 Professor Farrell presented in tabular form (1) the options from
                which the 463 respondents in the Modified Dhar Survey could choose; (2)
                the counts of respondents who chose each option; (3) the ratio by which
                the respondents would divert to each option; and (4) the creator
                compensation for each option. His calculations are detailed on the
                following table.
                [[Page 65236]]
                 Modified Dhar Survey Responses--Diversion and Creator Compensation
                 Diversion Creator comp/
                 Respondent choice Count ratio (%) subscriber/mo.
                Alternate paid interactive service (e.g., Spotify/Apple Music).. 69 15.10% $[REDACTED]
                Existing paid interactive service (e.g., Spotify/Apple Music)... 57 12.50 0.00
                Alternate paid non-interactive service (e.g., Pandora One etc.). 45 9.90 [REDACTED]
                Existing paid non-interactive service (e.g., Pandora One etc.).. 30 6.60 [REDACTED]
                Alternate CDs or music downloads................................ 97 21.30 [REDACTED]
                Existing CDs or music collection................................ 240 52.60 0.00
                AM/FM radio..................................................... 359 78.70 0.00
                Other free options.............................................. 184 .............. ..............
                 Free, ad-supported non-interactive service.................. 138 30.30 [REDACTED]
                 Free, ad-supported interactive service...................... 92 20.20 [REDACTED]
                 Free, ad-supported music video sites........................ 70 15.40 [REDACTED]
                 Music channel included in existing cable/SAT TV subscription 59 12.90 0.00
                 Peer-to-peer file sharing or free download sites............ 17 3.70 0.00
                 Borrow CDs, vinyl or tapes from friends or a library........ 52 11.40 0.00
                 Other free services......................................... 13 2.90 0.00
                 Don't know/unsure........................................... 9 2.00 [REDACTED]
                Other........................................................... 15 3.30 0.00
                None............................................................ 8 1.80 0.00
                Don't know/unsure............................................... 7
                 Total....................................................... 463
                Farrell WRT, App. F at F-2 (Table 3).\100\
                 \100\ Professor Farrell used the creator compensation figures
                from Table 2 in the Willig WDT whenever available. However,
                Professor Willig had not covered in his Table 2: Peer-to-peer file
                sharing or free download sites, borrowed CDs, vinyl or tapes from
                friends or a library, other free services, don't know/unsure
                regarding free options, and ``other.'' Professor Farrell discounted
                this point, noting that (with the exception of ``Don't know/unsure''
                under free options), these other services not in Professor Willig's
                Table 2 have zero creator compensation value.
                 Professor Farrell used the above data to calculate the opportunity
                cost (i.e., the walk-away opportunity cost). More particularly,
                Professor Farrell engaged in a nine-step calculation to compute
                opportunity costs.
                 Professor Farrell first eliminated the seven respondents who chose
                ``Don't know/unsure,'' noting that this was equivalent to assuming that
                these seven would divert to the different options in the same
                proportions as the remaining 456 respondents.\101\ He calculated the
                diversion ratio for each option as the number of respondents who chose
                that option divided by 456. Professor Farrell then used the same values
                for ``creator compensation per subscriber per month'' as set forth in
                Table 2 of Professor Willig's WDT, including Professor Willig's
                adjustments for intensity of use.\102\ See Farrell WRT, App. F at F-2.
                 \101\ Professor Willig adopted the same approach when treating
                ``Don't know/unsure.'' Willig WDT at B-3.
                 \102\ Professor Farrell did not opine on the appropriateness of
                Professor Willig's adjustment for intensity of use. Farrell WRT at
                 Professor Farrell noted that in both the Dhar Survey and the
                Modified Dhar Survey, many respondents chose multiple nonsubscription
                options. Professor Farrell generally matched Professor Willig's
                approach, assuming equal intensity of use for the multiple options
                chosen by a given respondent.\103\ Professor Farrell calculated the
                overall intensity of use for a given option across all respondents who
                selected that option as equal to the average intensity of use for that
                option across all respondents who selected that option. See Farrell
                WRT, App. F at F-3. Applying this foregoing approach for each option,
                Professor Farrell calculated an ``intensity-adjusted creator
                compensation.'' \104\ Professor Farrell's calculation generated an
                opportunity cost of $1.44 per subscriber per month.\105\ (Professor
                Farrell also applied the diversion data from the Lenski Survey
                (discussed later in this Determination) and arrived at a similar
                opportunity cost estimate of $1.43. Farrell WRT ] 66.\106\)
                 \103\ See Willig WDT at B-3 and B-4. Unlike Professor Willig,
                Professor Farrell assumed equal intensity of use percentages
                whenever individuals selected combined free options and paid
                services in in their multiple option choices, whereas Professor
                Willig assigned 50% to alternate CD or music downloads, and 25% to
                each of the free options. According to Professor Farrell, this
                difference did not have a large impact on the size of the
                opportunity cost.
                 \104\ Professor Farrell assumed that creator compensation for
                the option ``Other'' to be zero. See Farrell WRT, App. F, at F-3.
                Professor Willig appeared to make the same assumption. See Willig
                WDT at B-8.
                 \105\ Professor Farrell recognized that the value (unweighted)
                of the monthly ``unit creator compensation $ per subscriber'' could
                decrease if a lower intensity of use (fewer plays) among those who
                selected multiple options also reduced the overall revenue base
                under a per play royalty structure as calculated under Professor
                Willig's assumptions. The $1.44 opportunity cost set forth in the
                accompanying text assumes (in favor of the licensors) that creator
                compensation for paid services and paid non-interactive services
                does not decrease for decreased intensity of use. Professor Farrell
                opined that--if noninteractive services alone would pay a lower
                royalty (because their royalty payments are based on a per-play/
                intensity-based formula), but interactive service royalties would
                not be similarly reduced because of a reduction in intensity of use
                (i.e., if they more likely to pay royalties on a per-subscriber or
                percent-of-revenue basis)--his opportunity cost calculation would
                generate a lower opportunity cost of $1.35. See Farrell WRT, App. F,
                at F-3. However, Professor Farrell does not provide in his written
                or oral testimony a basis to make this ``creator contribution''
                adjustment based on relative changes in intensity, and the Judges
                therefore do not credit his argument that--under his reworking of
                Professor Willig's opportunity cost calculations--the opportunity
                cost can be reduced from $1.44 to $1.35.
                 \106\ As explained elsewhere in this Determination, the Lenski
                Survey did not provide pricing information to respondents, making it
                a less valuable tool for estimating opportunity cost. Accordingly,
                the Judges do not rely on Professor Farrell's $1.43 opportunity cost
                calculation that is based on the Lenski Survey as an independent
                basis to calculate opportunity cost, but rather consider it as
                confirmation that Professor Willig's opportunity cost calculation
                (based on the original Dhar Survey) was too high.
                 Professor Farrell used the same methodology for survey respondents
                who were Sirius XM free trial subscribers. See id., App F at F-3-F-4.
                However, the Judges do not find the trial subscriber population to be
                an appropriate universe from which to calculate opportunity cost
                because trial subscribers have not demonstrated a positive WTP.
                 SoundExchange failed to raise persuasive objections to Professor
                Farrell's opportunity cost calculation
                [[Page 65237]]
                based on the Modified Dhar Survey. In its PFF, SoundExchange asserts
                 Professor Farrell also revised Professor Willig's opportunity
                cost calculations to show what the industry-wide opportunity cost
                would be if one used diversion ratios from the Hauser and Lenski
                surveys. Trial Ex. 10 at 17-21 (Farrell WRT); 4/24/17 Tr. 636:2-7
                (Farrell). It is not clear what the point of this exercise was --
                neither the Lenksi nor the Hauser survey can reliably be used to
                calculate opportunity costs, as Sirius XM's own experts admit.
                SEPFF561. Likewise, in its RPFF, SoundExchange does not attack any
                aspect of Professor Farrell's application of the Modified Dhar Survey,
                but rather renews its attack on the underlying work of Professor
                 Professor Farrell's recasting of Professor Willig's calculations
                using the Hauser survey is invalid since the Hauser survey entirely
                misstated the switching question, see SE FOF ]]614-22, and since
                Professor Hauser conceded unequivocally that the economists should
                not rely on his survey, see SE FOF ]619 (citing Hauser testimony).
                SERPFF, Response to ] 408 at 266.
                 SoundExchange's objection to the use of Professor Farrell's
                approach is dependent on its antecedent criticism of Professor Hauser's
                analysis. As discussed, however, the Judges have found the Modified
                Dhar Survey results to be more accurate and probative than the results
                produced by the Dhar Survey. Accordingly, SoundExchange's criticism is
                without merit.\107\
                 \107\ In its RPFF, SoundExchange added to its argument:
                ``Professor Hauser conceded unequivocally that the economists should
                not rely on his survey.'' However, Professor Hauser made this
                comment because he also objected to other aspects of the Dhar
                Survey, particularly with regard to its ``pricing'' questions, that
                he nonetheless retained in the Modified Dhar Survey. Thus, he argued
                that these antecedent deficiencies in the Modified Dhar Survey
                precluded reliance on the results derived from his modified
                ``switching'' questions in the Modified Dhar Survey. The Judges
                disagree with Professor Hauser's characterization of the
                deficiencies he identified in the Dhar Survey that were unrelated to
                the ``switching'' questions. Thus, the Judges can and do give
                considerable weight to the Modified Dhar Survey, which they find
                sufficiently credible and probative.
                 Using Professor Dhar's corrected calculation indicating that 19% of
                Sirius XM subscribers would switch to a new interactive subscription
                service, the per Sirius XM subscriber opportunity cost increases from
                $1.44 to $[REDACTED].\108\ Given Sirius XM's ARPU of $[REDACTED], the
                percent-of-revenue royalty rate derived from the $[REDACTED] per
                subscriber per month opportunity cost is 15.5%.\109\
                 \108\ 15.1% of the ``creator contribution'' value of $[REDACTED]
                equals $[REDACTED]. 19% of $[REDACTED] equals $[REDACTED]. The
                difference is $[REDACTED] ($[REDACTED] - $[REDACTED] = $[REDACTED]).
                When that $[REDACTED] is added to the $1.44 calculated by Professor
                Farrell, the full opportunity cost based on the Modified Dhar Survey
                (as adjusted for the foregoing anomaly in the Hauser survey answers)
                is $[REDACTED].
                 \109\ Professor Willig attempted to corroborate Professor Dhar's
                diversion ratios with a regression analysis seeking to measure
                relative cross-elasticities. The Judges do not apply that analysis
                because: (1) The Dhar Survey results are without value (as discussed
                previously) and therefore cannot be ``corroborated''; and (2) there
                were significant disputes regarding the accuracy of Professor
                Willig's regression that rendered the value of that analysis
                inconclusive. See Shapiro WRT at 27-37.
                C. Opportunity Cost Model and Effective Competition
                 In Web IV, the Judges reconfirmed that a statutory willing-buyer,
                willing-seller royalty rate is one that would emerge in a market that
                is effectively competitive. See Web IV, 81 FR at 26334. Both
                SoundExchange and Sirius XM acknowledged that the rate set in this
                proceeding must reflect a market with such effective competition. 4/26/
                17 Tr. 1103 (Orszag) (agreeing that ``the rates to be set here by the
                Judges . . . must reflect the workings of effective competition'');
                Shapiro CWDT at 21 (``My approach here is consistent with the one taken
                by the Judges in Web IV . . . . I use the terms `workably competitive'
                and `effectively competitive interchangeably.''); 4/20/17 Tr. 366
                (Shapiro) (``prices . . . at a complementary oligopoly level [are] not
                [at] a workably competitive level.'').
                 The Judges defined an effectively competitive market In Web IV as
                one that ``mitigate[s] the effect of complementary oligopoly on the
                prices paid by . . . services . . . .'' Web IV, 81 FR at 26366. To
                obtain the rate that is effectively competitive, the Judges considered
                the services' ability to ``steer'' listeners as a sufficient
                counterweight to the Majors' complementary oligopoly power. Id. at
                26343. The Judges also noted in Web IV that SoundExchange had correctly
                described the concept of effective competition as ``fuzzy'' and that
                ``no `bright line' can be drawn between effectively competitive and
                noncompetitive rates.'' Id. As the Judges further noted, the
                implication of this ``fuzziness'' was not that the principle of
                effective competition should be discarded, but rather that this ``fuzzy
                line'' needs to be drawn on a case-by-case basis, from the evidence and
                testimony adduced at the hearing.'' Id. (emphasis added).
                 In the present proceeding, the parties' economists proposed that
                the Judges once again adjust for improper market power by applying a
                steering adjustment. SoundExchange proposed that the Judges select from
                one of three possible adjustments: (1) The 12% steering adjustment
                revealed by the specific steering evidence in Web IV; (2) a [REDACTED]%
                steering adjustment allegedly implied by the provisions of ``Mid-tier''
                agreements \110\ between record companies and streaming services, see
                4/25/17 Tr. at 1053 (Orszag); or (3) a [REDACTED]% steering adjustment
                implied by rates in direct licenses between Sirius XM and certain
                Indies. See Written Rebuttal Testimony of Jonathan Orszag, Trial Ex.
                43, ] 70 (Orszag WRT). However, in this proceeding, these proposed
                adjustments are unacceptable.
                 \110\ ``Mid-tier'' services means internet streaming services
                that offer only limited interactivity, and thus offer a tier of
                service between a noninteractive service and a fully interactive
                service. The limited interactive functionality of the mid-tier
                service offerings includes limited caching and playbacks.
                 The Judges cannot simply import the 12% steering adjustment from
                Web IV into the satellite market; that 12% figure was derived from
                highly specific evidence presented in Web IV. There is not an adequate
                basis in the present record to support a finding that the
                noninteractive market from which that steering adjustment arose is
                sufficiently similar to the satellite radio market to render reasonable
                an importation of the 12% steering adjustment here. In particular, the
                record shows that Sirius XM does not steer in the satellite market
                despite the ability of its human programmers (as opposed to algorithmic
                programmers) to do so in order to potentially reduce rates in exchange
                for additional plays, which is the essence of steering. See infra,
                section VII.C.
                 For two reasons, the Judges cannot accept the proffered [REDACTED]%
                steering adjustment that SoundExchange divined from the Mid-tier
                agreements. First, there is no evidence in the record to indicate
                whether that proposed adjustment may reflect a premium that a Major may
                impose not to prohibit a licensee from steering away from the licensor,
                rather than a discount offered to encourage a licensee to steer toward
                the licensor. Further, the rate differentials in those agreements on
                which SoundExchange's economic expert, Mr. Orszag, relied appear to be
                the product of many other differences in those agreements in addition
                to the steering/no-steering distinction, as Mr. Orszag candidly
                acknowledged. 4/26/17 Tr. 1155-56 (Orszag); see also SXM RPFF ]] 85-86
                (and record citations therein).
                 Finally, the Judges reject any steering adjustment based on the
                direct licenses between Sirius XM and various Indies. As explained in
                the discussion of
                [[Page 65238]]
                Professor Shapiro's reliance on these direct licenses as benchmarks,
                the record is clear that multiple other provisions of those direct
                licenses provided substantial consideration to the Indie licensors to
                justify their willingness to enter into those deals. Moreover, the
                Indie direct licenses contain neither legal guarantees nor economic
                incentives that would compel or motivate steering by Sirius XM in favor
                of direct licensors.
                 Accordingly, the Judges must review the record in this proceeding
                to identify a means to establish rates that are consistent with
                effective competition. The Judges accept certain principles regarding
                the nature of effective competition. ``Between the extremes of a market
                with `metaphysically perfect competition' and a monopoly (or collusive
                oligopoly) market devoid of competition there exists `[in] the real
                world . . . a mindboggling array of different markets' . . . all of
                which possess varying characteristics of a `competitive marketplace.'
                '' Web IV at 26333 (citing Web III Remand, 79 FR at 23114, n.37).\111\
                Economists have long understood that the ``fuzzy'' nature of the
                concept of effective competition is inescapable, yet the concept must
                be applied, lest pragmatic economic analysis be straightjacketed by
                rigid textbook models such as perfect competition and simple
                monopoly.\112\ The D.C. Circuit has recognized this conceptual
                fuzziness, acknowledging in the rate-setting context the need for
                pragmatic market analysis, establishing rates intermediate between the
                pedagogical poles of perfect competition and pure monopoly. See
                Intercollegiate Broad. Sys., Inc. v. Copyright Royalty Board, 574 F.3d
                748, 757 (D.C. Cir. 2009) (IBS) (statutory provisions ``do[ ] not
                require that the market assumed by the Judges achieve metaphysical
                perfection in competitiveness'' (emphasis added)).\113\
                 \111\ See J. M. Clark, Toward a Concept of Effective
                Competition, 30 a.m. Econ. Rev. 241, 243 (1940) (``The specific
                character of competition in any given case depends on a surprisingly
                large number of conditions . . . .'').
                 \112\ See A. Kahn, Antitrust Policy, 67 Harv. L. Rev., 28, 35,
                (1953) (``[T]here exists no generally accepted economic yardstick
                appropriate for incorporation into law with which objectively to
                measure monopoly power or determine what degree is compatible with
                workable competition.''); J. Markham, An Alternative Approach to the
                Concept of Workable Competition 349, 361 (1950) (The concepts of
                ``market performance and workable competition are essentially
                pragmatic''); G. Stocking, Economic Change and the Sherman Act: Some
                Reflections on ``Workable Competition,'' 44 Va. L. Rev. 537, 553
                (1958) (``the economists' concept of workable competition . . . is
                vague . . . .).
                 \113\ The quoted language refers to section 114(f)(2)(B), which
                governs the compulsory license for eligible nonsubscription services
                and new subscription services. Under the license at issue in the
                present case, the D.C. Circuit has not required the Judges to adopt
                market rates. However, to the extent that the Judges choose to use
                market rates as an input for the development of rates under section
                801(b)(1) (as they do here), the quoted language from IBS is
                D. Professor Willig's ``Fork in the Road'' Approach and Sirius XM's Own
                Market Power
                 The Judges find no basis to lock themselves into a Hobson's choice
                by which they must either adopt an inapplicable steering adjustment as
                a proxy for an adjustment to reflect effective competition, or accept a
                rate that is higher than an effectively competitive rate.\114\
                ``Steering'' is not the only way the inefficient market power of
                complementary oligopoly can be offset or mitigated in order to
                establish an effectively competitive rate.
                 \114\ A third possibility would be to utilize an otherwise
                appropriate market benchmark rate that is effectively competitive.
                However, the Judges cannot identify such a rate in the present
                 In this regard, in his hearing testimony, Professor Willig
                explained how and why his opportunity cost approach would result in a
                rate that is effectively competitive. Professor Willig described a
                ``fork in the road'' for the Judges as follows:
                 [T]he fork in the road is whether, in considering the comparison
                between the opportunity cost and the royalty rate in the target
                market, should you take the other markets as they are or should you
                bring in hypotheticals and make adjustments to the opportunity cost
                based on . . . changes in the other markets? And that to me is a
                very consequential fork in the road . . . .
                5/2/17 Tr. 2040 (Willig); see id. at 2047, 2153. Professor Willig
                opined that attempts to adjust one rate downward, such as the
                interactive rate, to account for the complementary oligopoly effect,
                would be incomplete, because other distribution modes, such as
                terrestrial radio, do not generate sound recording royalties and thus
                do not create a positive opportunity cost. Thus, Professor Willig
                described as a ``morass'' any attempt to take the ``fork-in-the-road''
                by which the Judges attempt to adjust every rate that fails to reflect
                market forces. See id. at 2057, 2048. Rather, he recommends that the
                Judges ``should take the fork in the road that says take those markets
                as they are because that's what drives honest-to-goodness opportunity
                cost.'' Id. at 2057.
                 This is precisely what the Judges accomplish by taking the
                opportunity cost analysis that results in the 15.5% rate.\115\ The
                Judges further note that Sirius XM did not challenge Professor Willig's
                ``fork in the road'' concept, either in cross-examination or in its
                post-hearing proposed findings and replies to proposed findings.
                 \115\ The Judges' rate is less than the rate proposed by
                Professor Willig, because the Judges give less probative weight to
                the Dhar Survey, not because they disagree with Professor Willig's
                opportunity cost approach.
                 Accordingly, the Judges find that the 15.5% opportunity-cost
                derived rate: (1) Reflects the offsetting market forces of higher
                complementary oligopoly rates and lower (zero) opportunity costs
                attributable to listeners who otherwise would migrate to terrestrial
                radio; and (2) is consistent with Professor Willig's opinion regarding
                the need for a consistent treatment of market forces, as described in
                his ``fork in the road'' analysis.
                 This ``fork in the road'' approach is also consistent with a
                recognition of the countervailing downstream market power that Sirius
                XM, the sole SDARS licensee, possesses as a monopolist in that
                downstream market, narrowly defined as the market for the sale of
                subscriptions to satellite radio. To be sure, this narrow definition of
                the market ignores various other forms of music distribution, such as
                terrestrial radio and all other alternative distribution channels
                identified in the survey analyses. However, as that survey evidence
                makes clear, even terrestrial radio, which is free to the listener,
                cannot attract sufficient listeners to deprive Sirius XM of the
                substantial profits it realizes from its unique position as the only
                supplier of satellite radio in the market. Further, Sirius XM is priced
                higher than interactive (and noninteractive) streaming services. Yet,
                despite their differentiated features, those services to date have been
                unable to convince enough Sirius XM subscribers to convert to a new
                paid subscription service to reduce the revenues and profits realized
                by Sirius XM. Clearly, Sirius XM's uniquely differentiated service has
                struck a chord with music listeners--particularly those who listen to
                Sirius XM in the car. This point was made clearly by Professor Shapiro,
                who testified:
                 Sirius XM spends substantial sums of money on its infrastructure
                and satellites. In doing so, it creates a unique differentiated
                service. That is quite valuable to consumers. That's why they are
                willing to pay for the service and, of course, most of the listening
                is in the car.
                5/4/17 Tr. 2550 (Shapiro).\116\
                 \116\ Sirius XM is both a monopolist, in the sale of satellite
                radio subscriptions, and a competitor among the various distribution
                channels more broadly. This is not an inconsistency. Since 1933,
                economists have recognized that a firm may be a ``monopolistic
                competitor,'' with the power of a monopoly (as reflected in the
                downward sloping demand curve it faces) but the restraints of
                competition (making that demand curve relatively elastic compared to
                the demand curve for the product of a full-fledged monopolist). See
                E. Chamberlin, The Theory of Monopolistic Competition (1933).
                [[Page 65239]]
                 Correspondingly, Sirius XM bears all the hallmarks of a ``natural
                monopoly.'' A natural monopoly develops when ``it is cheaper for [an]
                entrepreneur to produce q units than it is to have those units produced
                by two [or more] smaller firms . . . .'' A. Schotter, Microeconomics: A
                Modern Approach 416 (2009); see also W. Baumol and R. Willig, Fixed
                Costs, Sunk Costs, Entry Barriers, and Sustainability of Monopoly, 96
                Q.J.Econ. 405, 409, 418 (1981) (``[A]n industry has been called a
                natural monopoly if . . . industry outputs can be produced more cheaply
                by a single firm than by any combination of several firms. These per
                unit costs arise from relatively large sunk costs (compared to marginal
                costs) and those sunk costs act as ``barriers to entry [that] . . .
                impede the establishment of new firms [because] [t]he need to sink
                money into a new enterprise, whether into physical capital,
                advertising, or anything else imposes a difference between the
                incremental cost and the incremental risk that are faced by an entrant
                and an incumbent''); H. Varian, Intermediate Economics: A Modern
                Approach at 453 (``When there are large fixed costs and small marginal
                costs, [that] situation is referred to as a natural monopoly.''). As a
                natural monopolist in the satellite radio market, Sirius XM can, and
                does, realize substantial profits, as demonstrated in fine detail by
                Professor Lys. The history of Sirius XM bears out this point. When
                there were only two satellite firms--Sirius and XM--both were on the
                brink of bankruptcy. See SDARS II, 78 FR at 23069. After they merged,
                they were transformed from two pumpkins into a single coach, as it
                were, realizing profits across many financial measures. See Lys WDT,
                 In the hypothetical market the Judges construct in this proceeding,
                they identify significant power on both the licensor side and the
                licensee side. On the licensor side, that power is reflected in the
                opportunity cost analysis--the ``creator contribution'' values
                identified by Professor Willig. Those values embody the complementary
                oligopoly features that flow from the ``must have'' nature of the
                Majors' repertoires. On the licensee side, there are profits that flow
                from two sources: (1) The highly differentiated nature of Sirius XM's
                offerings that permits it to attract listeners who otherwise would
                listen to free terrestrial radio; and (2) the entrepreneurial ability
                by which Sirius XM has harnessed the natural monopoly structure of
                satellite radio delivery to its financial benefit.
                 The Judges find from this record that the hypothetical upstream
                market negotiations between such economically powerful entities would
                resemble a bilateral monopoly. Thus, as Professor Willig testified, the
                record companies would be expected to recover their opportunity costs
                (inclusive of any complementary oligopoly profits). Through its own
                market power, Sirius XM could afford to pay those opportunity costs
                because, as Professor Lys explained,\117\ it earns sufficient profits
                to pay those opportunity costs and still earn a significant profit.
                 \117\ Professor Lys's detailed examination of Sirius XM's
                profitability is discussed later in this Determination.
                 Thus, Professor Willig's ``fork in the road'' approach, and Sirius
                XM's capacity to pay the market-based opportunity costs, taken together
                or separately, are supportive of the 15.5% rate determined by the
                E. The ``Efficient Component Pricing Rule''
                 Professor Willig identified another approach to rate-setting: The
                Efficient Component Pricing Rule (ECPR). As he described this approach:
                 The ECPR rates would be calculated by adding on to the direct
                cost of providing access the opportunity cost of the competitive
                entry; i.e. the margin on the competitive business that the
                copyright owners would lose if the entrant won that business away.
                In short, ECPR prescribes rates for access equal to direct plus
                competitive opportunity costs.
                Willig WDT ]35.
                 Professor Willig testified that the ECPR could be ``somewhat
                relevant here since the statutory royalty at issue can be construed as
                the price of access to the copyrights protecting the sound recordings,
                and since the various modes of distribution of the sound recordings do
                compete with each other to various extents.'' Willig WDT ]14. Moreover,
                Professor Willig noted that ``by its very design, ECPR is arguably
                consistent with the policy objectives (a), (b), and (c) of section
                801(b)(1).'' Id. At first blush, it is puzzling that Professor Willig
                did not include in his written testimony an explicit application of the
                ECPR model.\118\ However, in a colloquy with the Judges, Professor
                Willig acknowledged that his ``opportunity cost'' model constituted an
                application of the ECPR model.\119\
                 \118\ The absence of a more explicit application of the ECPR
                approach by Professor Willig in his Written Direct Testimony is also
                somewhat surprising because Professor Willig has been identified by
                his colleagues as the economist who first developed the ECPR
                approach, also known as the ``parity pricing'' principle. See W.
                Baumol, J. Ordover, and R.D. Willig, Parity Pricing and Its Critics:
                A Necessary Condition for Efficiency in the Provision of Bottleneck
                Services to Competitors, 14 Yale J. Reg. 145, 148 n.4 (1997) (``So
                far as we have been able to determine, the ECPR proposal stems from
                Willig's work. Robert D. Willig, The Theory of Network Access
                Pricing, in Issues in Public Utility Regulation 109 (1979).'').
                 \119\ See 5/2/17 Tr. at 2107.
                 Professor Willig testified that he was reluctant to rely solely on
                the ECPR approach because it is intended to establish rates that
                correct for the case in which an owner of an upstream essential (``must
                have'') input also competes downstream in the retail market (i.e., a
                vertically-integrated firm) but refuses to make the essential input
                available to would-be competitors (i.e., the upstream firm engages in
                what is known as ``foreclosure'').
                 The Judges find the Opportunity Cost/ECPR approach to be more
                applicable here than Professor Willig suggested. Although the Judges do
                not constitute an ``antitrust court,'' the parties acknowledge that the
                Judges must establish rates that are effectively competitive, i.e.,
                that adjust or offset sufficiently for any complementary oligopoly
                power in the benchmark markets or in the markets from which opportunity
                costs arise. Whereas an ``antitrust court'' would seek to remedy, ex
                post, pricing that was in excess of an ECPR-derived price, the Judges
                here are charged with setting a rate, ex ante, that reflects an
                effectively competitive rate. There is no reason why an ECPR rate could
                not accommodate ex ante rate-setting as well provide an ex post
                 \120\ One of Professor Willig's colleagues and frequent co-
                authors, and a developer of the ECPR approach, the late Professor
                William Baumol, explicitly noted the appropriateness of applying the
                ECPR approach to the setting of royalties for licenses in the music
                industry. W. Baumol, The Socially Desirable Size of Copyright Fees,
                1 Rev. Econ. Res. on Copyright Issues 83 (2004).
                 Moreover, a particular limitation of the Opportunity Cost/ECPR
                approach is expressly accounted for in the present statutory and
                regulatory structure. That is, some economists have questioned whether
                the ECPR truly models for an efficient and competitive price, because
                the opportunity cost of the upstream supplier(s) that must be covered
                by the rate has embedded within it supracompetitive profits that are
                not the consequence of more efficient operations. See generally C.
                Decker, Modern Economic Regulation 151 (2015) (``[T]he ECPR does not
                seek to
                [[Page 65240]]
                address concerns about monopoly pricing . . . . [T]he ECPR approach
                effectively guarantees the pre-entry profits of the incumbent,
                including any inefficiency associated with its historic
                activities.'').\121\ In rate-setting proceedings, when presented with
                sufficient evidence, the Judges can and do expressly adjust or offset
                marketplace rates in order to reduce the royalty to a level that better
                reflects effective competition, rather than simply allowing the rate to
                incorporate (without a downward adjustment or offset) the full
                complementary oligopoly effect baked into the opportunity cost.
                 \121\ The inefficiently high downstream price is set when, in
                the usual situation, the vertically-integrated supplier sells at a
                monopoly retail price. In the present context, the Majors, as
                complementary oligopolists, price their sound recordings in the
                unregulated interactive market above even the monopoly level and the
                retail interactive services must cover their input costs through
                retail prices higher than they would be in the absence of such
                inefficiently high input prices. See Web IV, 81 FR at 26343.
                 On balance, the Judges find Professor Willig's discussion of the
                ECPR approach to be persuasive confirmation of the Judges' finding that
                his Opportunity Cost approach provides an appropriate basis for setting
                a reasonable rate when the proper survey data are used as inputs.\122\
                 \122\ As discussed in connection with Factor C in the itemized
                801(b)(1) factors, Sirius XM's development of a differentiated
                product through its satellite-based network constitutes a form of
                product differentiation that creates value and profits that, under
                Factor C (and under an appropriate consideration of the ECPR
                approach) should continue to inure to the benefit of Sirius XM, net
                of the licensors' opportunity costs.
                F. Professor Willig's Nash Bargaining Solution Approach
                 Professor Willig asserted that the walk-away opportunity cost he
                calculated, $2.55 per subscriber per month, represented only the
                minimum that each label would accept in unregulated negotiations with
                Sirius XM. As he further explained, in an unregulated market, even
                after receiving the full walk-away opportunity cost, the label would
                still negotiate with Sirius XM for a portion of the surplus value
                (revenue over costs) that remained. In order to quantify this surplus,
                and to calculate and then add the label's share of the surplus to the
                label's walk-away opportunity cost, Professor Willig applied what is
                known in game theory and in economics as the ``Nash Bargaining
                Solution,'' which he described as a type of price discovery engaged in
                by an ``unregulated profit-maximizing firm.'' Willig WDT ]38. The Nash
                Bargaining Solution is an analytic approach that identifies a price
                agreed to in a bilateral negotiation between one buyer and one seller,
                in which each party will refuse to accept a value below that which it
                would receive absent an agreement (referred to as its ``threat,''
                ``disagreement,'' or ``fallback'' point), and each party uses its
                ``bargaining power'' to negotiate for itself the greatest share of any
                surplus value (i.e., value in excess of the sum of both parties'
                ``threat/disagreement'' point values). See id. Under this model, the
                surplus that can be created may be split evenly between the parties. 5/
                2/17 Tr. 2116-18 (Willig). A 50:50 split of the surplus assumes the
                parties have equal bargaining power and means the parties benefit
                equally by executing the agreement.\123\ 5/2/17 Tr. 2110 (Willig).
                 \123\ Importantly, this does not mean each party enjoys equal
                profit. The parties may not profit equally ``because their fallback
                values (opportunity costs) may have been different.'' 5/2/17 Tr.
                2110 (Willig). Even if parties do not possess equal bargaining
                power, and even if that disparity in bargaining power is
                incorporated into a Nash model, neither party would be compelled by
                the assumptions of the model to accept less than its fallback value,
                i.e., its opportunity cost. Id. at 2110-11 (Willig).
                 In this model a record label's fallback point would be its walk-
                away opportunity cost, which Professor Willig calculated to be $2.55
                per subscriber per month. Willig WDT ]48; 5/2/17 Tr. 2110-11 (Willig).
                Sirius XM's fallback point would be its projected ARPU in the absence
                of music programming, less variable costs (i.e., its earnings in a
                world absent an agreement with the single seller (record company) in
                this model).\124\ Professor Willig computed this amount to be
                $[REDACTED] per subscriber per month. See Willig WDT ]48.
                 \124\ Professor Willig based his projection on the finding in
                the Boedeker Survey that 70% of Sirius subscribers would leave in
                the absence of music programming. See Willig WDT ]48 & n.22. He
                computed variable costs as [REDACTED]% of ARPU, based on Professor
                Lys's testimony. See id. ]48 & n.21.
                 Professor Willig calculated the total earnings created by Sirius
                XM's compulsory license (Sirius XM's ARPU less variable costs exclusive
                of royalties) as $[REDACTED] per subscriber per month. This resulted in
                a surplus from the agreement of $2.78 per subscriber per month.\125\
                Assuming that the parties would divide the surplus equally, Professor
                Willig opined that the record labels would earn from the agreement
                their opportunity cost of $2.55 plus one-half of the surplus ($1.39)
                for a total of $3.94 per subscriber per month. See id. ]49. Given a
                Sirius XM ARPU of $[REDACTED], this per subscriber rate is equivalent
                to a percent-of-revenue rate of [REDACTED]%.
                 \125\ Professor Willig computed the surplus as the total
                earnings from the agreement less the sum of the parties' fallback
                points. See Willig WDT ]48.
                 Based on this alternative approach, SoundExchange concluded that
                ``Professor Willig's Nash Bargaining Solution therefore appropriately
                suggests a rate above the copyright owners' opportunity costs.'' SEPFF
                ]725 (emphasis added). As such, SoundExchange argued that this approach
                confirms the reasonableness of its even lower $2.55 per month
                subscriber royalty and the equivalent 23%-of-revenue rate implied by
                that per-subscriber proposal.
                 Sirius XM leveled two basic criticisms at Professor Willig's Nash
                Bargaining Solution model. First, it asserted that Professor Willig's
                Nash Bargaining Solution posited a monopoly seller of sound recording
                performance licenses, which is antithetical to the requirement that the
                statutory rate must represent the product of a hypothetical market that
                is effectively competitive. SXMRPFF ]196 (and record citations
                therein).\126\ Second, Sirius XM noted that SoundExchange's proposal
                that the Nash surplus be deemed split 50/50 (rather than in favor of a
                record company) is irrelevant, because the opportunity cost figure of
                $2.55 is already inflated by the complementary oligopoly effect in that
                opportunity cost figure. See id. ]197 (and record citations therein).
                 \126\ Sirius XM also relies on Professor Farrell's ``Nash-in-
                Nash'' model, as a counterpoint to Professor Willig's Nash
                Bargaining Solution. Professor Farrell injects a second record
                company to the Nash approach, as contrasted with the single record
                company assumed by Professor Willig. However, Sirius XM acknowledged
                that Professor Farrell's ``Nash-in-Nash'' approach was not intended
                to provide a separate rate proposal, but rather to demonstrate the
                fact that the absence of competition would inflate the rate above an
                effectively competitive rate. Id. ]]198-200 (and record citations
                 As the Judges have held previously, a significant problem with a
                Nashian analysis is that the bargaining power of the respective parties
                is speculative and thus the outcome of the bargain is indeterminate.
                See SDARS I, 74 FR at 23058; see also id. at 23083 (dissenting opinion)
                (concurring on the indeterminacy of a ``surplus-splitting'' analysis).
                In the present case, the Nash Bargaining Solution again was not
                developed sufficiently in the record for the Judges to rely on that
                approach as an independent useful tool for setting the statutory rate.
                G. Professor Willig's ``Ramsey Pricing'' Approach
                 In another pricing approach, Professor Willig applied the economic
                concept of ``Ramsey Pricing.'' This approach is
                [[Page 65241]]
                designed to address the economic issue of ``[h]ow to price various
                products or services whose supply draws on common assets in a fashion
                that maximizes consumer welfare while also providing enough net revenue
                to meet an overall financial target.'' Willig WDT ]13.\127\ In the
                context of this proceeding the ``common assets'' are the sound
                recordings supplied by the record labels. Professor Willig did not look
                to the Ramsey Pricing approach to recommend an SDARS royalty rate;
                rather, he used the Ramsey Pricing approach as ``directional'' guidance
                to substantiate his conclusion that the SDARS royalty rate should be
                higher than the current statutory rate. 5/2/17 Tr. 2086 (Willig).
                 \127\ Ramsey pricing is frequently employed as an analytic
                framework for such applications as sales taxes levied to raise
                sufficient revenue to meet a government financial target, prices for
                various telecommunications services that all are enabled by the same
                underlying electronic network, and prices for various railroad
                services that all make use of the same track infrastructure. Willig
                WDT ]13 n.4.
                 Ramsey pricing requires that for different modes of distribution of
                sound recordings, price-cost margins should be inversely proportional
                to each distributor's own price elasticity of demand. See Willig WDT
                ]32; 5/2/17 Tr. 2094 (Willig). In setting prices to meet the Ramsey
                financial target, ``the Services that should contribute relatively
                more, relative to their cost, on a percentage basis are the Services
                with the relatively low own price elasticities of demand.'' 5/2/17 Tr.
                2095 (Willig).\128\
                 \128\ Shorn of economic jargon: For certain distribution
                channels, subscribers will be relatively less likely to cancel their
                subscriptions if their subscription charge increases, as compared
                with other distribution channels.
                 When demand for a music service is relatively less sensitive to
                price, that suggests that the service is relatively more valuable to
                its users. Willig WDT ]33. Accordingly, it follows that Ramsey prices
                should be relatively higher for users of that service, to allow for
                greater contributions toward compensation to the producers of the
                recorded music (i.e., the common asset used by all distribution
                channels). Willig WDT ]32. Services with relatively lower elasticities
                of demand will lose relatively less downstream revenue, so higher
                royalties, even if passed on to subscribers or advertisers, will have
                less impact on usage decisions made by those distribution modes and
                their consumers, as compared to services with higher elasticities of
                demand. See Willig WDT ]]32-33.
                 Ramsey pricing reasonably assumes there is a target amount of money
                that the producers of the common assets need to realize. In the present
                context, Professor Willig identified that financial target as equal to
                the monetary value of download sales lost by the labels due to the
                increase in streaming. Willig WDT ]31. To identify his Ramsey target,
                Professor Willig measured the amount of creator compensation lost as a
                result of the movement toward streaming and away from paid downloads
                since 2010. Willig WDT ]22. Based on his econometric analysis, he
                concluded that substitution of streaming services for downloads has
                cost the recording industry about $800 million per year from 2010
                through 2016. Willig WDT ]]22-28, & App. B. Professor Willig concluded
                that the Ramsey Pricing across distribution channels must be sufficient
                to offset these shortfalls, and that, specifically, SDARS royalties
                must be increased.
                 Professor Willig then estimated the relevant upstream elasticity of
                Sirius XM's demand for sound recordings, factoring in both downstream
                and upstream effects. He opined that, at current royalty rates, Sirius
                XM's upstream demand for sound recordings is much more inelastic than
                the upstream demand of interactive services. Given this finding,
                Professor Willig concluded that ``even at royalty rates proposed by
                SoundExchange, the music input would still be a significantly smaller
                percentage of the downstream price for Sirius, meaning that upstream
                [price] elasticity is not going to be bigger, probably lower than the
                upstream elasticities for the other Services that we're talking
                about.'' 5/2/17 Tr. 2099-2100 (Willig). Thus, Professor Willig
                estimated that Sirius XM could pay a royalty of $[REDACTED] per
                subscriber per month and still achieve the same margin as the
                interactive streaming services. Willig WDT ]50. According to Professor
                Willig the upshot of that conclusion is that Ramsey pricing principles
                suggest that Sirius XM should pay a substantially higher royalty in
                order to contribute appropriately (under his Ramsey approach) to meet
                the Ramsey revenue target. Willig WDT ]50.
                 Sirius XM noted the facial ``theoretical attractions'' of an
                appropriately specified Ramsey pricing approach, but finds Professor
                Willig's approach not to constitute an actual Ramsey pricing analysis.
                Sirius XM found two essential elements of the Ramsey pricing approach
                missing from Professor Willig's analysis. First, he did not identify a
                financial target sufficient to provide for the creation of the sound
                recordings. See 5/2/17 Tr. 2171-72 (Willig); 4/24/17 Tr. 652 (Farrell);
                see also 5/2/17 Tr. 2176-77 (Willig) (acknowledging no analysis of
                ``how much revenue is actually necessary to fund the recording
                industry's investment in sound recordings'').\129\
                 \129\ While (as noted in the text, supra) Professor Willig did
                offer a regression analysis purporting to identify $800 million in
                annual losses to the record industry over the past several years
                caused by ``streaming'' (not simply satellite radio), Willig WDT
                ]]22-27, he acknowledged that the figure played no direct role in
                any of his calculations, including his ``Ramsey'' analysis. 5/2/17
                Tr. 2167:24-2169:18 (Willig).
                 Second, Sirius XM asserted that Professor Willig did not identify
                all users of the common assets and set prices for each that
                collectively would meet the Ramsey financial target, i.e., cover record
                industry costs while maximizing consumer welfare. Professor Willig
                concedes this point. See 5/2/17 Tr. 2172 (Willig) (did not ``analyze[ ]
                all the different modes of distribution that use sound recordings and
                determine[ ] the Ramsey prices that would result''); id. at 2177-78
                (Willig) (``I have not done a formal financial analysis of impacts of
                royalty rates on either creation or what you just called
                 In addition, Sirius XM noted that the analysis takes as its
                starting point the same measure of opportunity cost used in all of
                Professor Willig's approaches, the improper $2.55 opportunity cost
                inflated by complementary oligopoly effects. See Farrell WRT ]]90-94;
                see also 4/24/17 Tr. 653-54 (Farrell).
                 The Judges find Professor Willig's implementation of the Ramsey
                pricing approach unhelpful. Professor Willig ultimately neither derived
                nor proposed a royalty rate from this analysis.\130\ Nor could he do
                so, given that his analysis does not establish a revenue target, and
                does not factor in the contribution of other users of the common
                assets. To the extent Professor Willig's assertion that his Ramsey
                approach has value in this proceeding because it provides
                ``directional'' evidence has any validity, the Judges note that the
                adoption of the 15.5% rate derived from his opportunity cost analysis
                is consistent with this directional guidance.
                 \130\ Professor Willig stated that one reason he declined to
                propose the $[REDACTED] monthly per subscriber royalty (which the
                Judges understand to be equivalent to [REDACTED]% of revenue) is
                that he could not evaluate how such a substantial increase in the
                royalty rate would increase subscription rates and create a loss of
                subscribers and subscriber revenue. In economic terms, he could not
                opine as to whether, assuming that Sirius XM passed through to
                subscribers such a higher royalty rate, the downstream elasticity at
                that price point would be so high as to actually reduce Sirius XM's
                H. Mr. Orszag's Ratio Equivalency Model
                 SoundExchange also presented expert testimony from Mr. Jonathan
                Orszag. Mr. Orszag's approach to determining
                [[Page 65242]]
                SDARS rates was based upon ratio equivalencies. Specifically, he opined
                that the royalties in the target market (i.e., those paid by an SDARS)
                should be set at a rate that makes the ratio between royalties and
                revenues in that target market equal to the ratio between royalties and
                revenues in a benchmark market. Mr. Orszag noted that the Judges
                ``found this assumption to be warranted as a matter of economic
                theory'' in Web IV. Amended Written Direct Testimony of Jonathan
                Orszag, Trial Ex. 26, ]37(Orszag AWDT).
                 Mr. Orszag began his analysis by opining that in this case ``[i]t
                is . . . appropriate to use current marketplace agreements in
                evaluating the range of reasonable rates for the upcoming licensing
                period.'' 4/25/17 Tr. 953 (Orszag) (emphasis added). Marketplace rates
                are the appropriate starting points, according to Mr. Orszag, because
                ``a standard way in which economists estimate a reasonable royalty rate
                for the blanket license under consideration in this proceeding is by
                examining comparable rates generated through arm's length negotiations
                outside the purview of the compulsory license regime for which
                satellite radio qualifies,'' i.e., ``[r]ates yielded through . . .
                unfettered negotiations . . . .'' Orszag AWDT ]12. Accordingly, Mr.
                Orszag utilized a marketplace benchmarking approach.
                 Mr. Orszag's first step was to identify what he found to be
                comparable benchmark rates that he could adjust, if and as warranted,
                to determine the rates that would apply in the target market (SDARS) if
                it were unregulated. Orszag AWDT ]13. He looked first at royalty rates
                in the interactive music streaming services for data. Then, he analyzed
                retail price data for both the interactive and noninteractive music
                streaming services. In selecting his benchmarks, Mr. Orszag looked for
                agreements entered into by record companies with streaming services
                that in his opinion are comparable to satellite radio across pertinent
                dimensions. Additionally, he considered whether the benchmark evidence
                permitted him to account for material differences, if any, between the
                benchmarks and the target market. Orszag AWDT ]28.
                1. Mr. Orszag's Benchmark ``Approach One'': Ratio Equivalency With the
                Interactive Market
                 Applying these considerations, Mr. Orszag identified the market for
                the licensing of sound recordings by record companies to interactive
                streaming subscription services as the best available benchmark
                category for satellite radio, due to what he believed to be ``the
                comparability of the two types of service along key dimensions and the
                availability of reasonable methodologies with which to adjust for
                pertinent differences.'' Orszag AWDT ]29. More particularly, Mr. Orszag
                identified the following alleged comparable qualities in the
                ``downstream market'' \131\ between the target and benchmark markets:
                 \131\ The ``downstream market'' is the market in which licensees
                of sound recordings offer their services to subscribers or other end
                users/consumers. The ``upstream market'' is the market in which
                record companies (a/k/a/labels), as licensors, license their
                repertoires to services, as licensees, for ultimate dissemination in
                the downstream market. See Web IV, 81 FR at 26332 n.69.
                 Both categories of services offer a full repertoire of
                 both categories of services offer subscription-based
                models, thereby demonstrating that their listeners' have a positive
                willingness to pay;
                 both categories of services face similar downstream
                elasticities of demand;
                 both categories of services offer products that compete
                with each other;
                 consumers in both categories of services receive music
                 consumers in both categories of services obtain
                unlimited usage;
                 both categories of services offer mobile functionality,
                Sirius XM principally through in-vehicle receivers and interactive
                streaming through smartphones and other mobile devices; and
                 interactive streaming services increasingly offer a
                ``lean-back'' \132\ functionality (akin to the functionality of
                Sirius XM listening) through playlists generated by the services,
                third parties, and subscribers, as well as algorithmic streams.
                 \132\ Functionally noninteractive services are generally
                described in the industry as ``lean-back'' services, as contrasted
                with ``lean forward'' services that have varying degrees of
                interactivity. See Web IV, 81 FR at 26336 n.75.
                4/25/17 Tr. 968 (Orszag); Orszag AWDT ]32.
                 Mr. Orszag further opined that sound recording performance rights
                are similarly indispensable inputs in the upstream market for both
                interactive streaming services and Sirius XM. From an economic
                perspective, he explains that the upstream demand for sound recording
                rights is what economists call a ``derived demand,'' i.e., upstream
                demand is derivative of downstream consumer demand. Mr. Orszag further
                opined that, because of this indispensability, sound recording
                copyright holders should receive a material portion of the overall
                value of satellite radio service, as reflected in the prices paid by
                subscribers, just as they do for interactive music services. Orszag
                AWDT ]31.
                 To determine the rates actually paid by subscription interactive
                services, Mr. Orszag reviewed the monthly royalty rates and royalty
                payments set in 27 current license agreements between three major
                record labels \133\ and nine interactive streaming services,\134\ from
                January 2014 through June 2016. Orszag AWDT ]45; see 4/25/17 Tr. 985
                (Orszag) (``So I got the royalty statements from each of the . . .
                Services for each of the labels by month, and I went to what they
                actually were being paid, which prong was governing.'').\135\
                 \133\ Sony Music Entertainment (Sony), Universal Music Group
                (UMG), and Warner Music Group (WMG) are the three major record
                labels (together, the Majors).
                 \134\ The nine services are listed in the table that follows in
                the text, infra.
                 \135\ The agreements Mr. Orszag studied contain royalty rate
                provisions that require the services to calculate royalty
                obligations under separate ``prongs'': a [REDACTED] metric and a
                [REDACTED] metric, and in some cases a [REDACTED] metric, and then
                pay each label its pro rata share of [REDACTED]. A label's pro rata
                share of the royalty is based on the share of the total performances
                on the service accounted for by sound recordings controlled by that
                label. Orszag AWDT ]45.
                 The table below presents the actual monthly per-subscriber royalty
                payments made by the subscription interactive services to each of the
                Majors. These data produce an average monthly per-subscriber payment of
                $[REDACTED], weighted by the number of subscribers per service. Orszag
                AWDT ]46.
                [[Page 65243]]
                 Actual Licensing Fees Per-Subscriber
                 Sony UM WM
                 2014 2015 2016 2014 2015 2016 2014 2015 2016
                Apple Music................... ................ $[REDACTED]..... $[REDACTED]..... ................ $[REDACTED]..... $[REDACTED]..... ................ $[REDACTED]..... $[REDACTED]
                Beats......................... $[REDACTED]..... $[REDACTED]..... ................ $[REDACTED]..... $[REDACTED]..... ................ $[REDACTED]..... $[REDACTED]..... ................
                Google Play................... $[REDACTED]..... $[REDACTED]..... $[REDACTED]..... $[REDACTED]..... $[REDACTED]..... $[REDACTED]..... $[REDACTED]..... $[REDACTED]..... $[REDACTED]
                Microsoft..................... $[REDACTED]..... $[REDACTED]..... $[REDACTED]..... $[REDACTED]..... $[REDACTED]..... $[REDACTED]..... $[REDACTED]..... $[REDACTED]..... $[REDACTED]
                Rdio.......................... $[REDACTED]..... $[REDACTED]..... ................ $[REDACTED]..... $[REDACTED]..... ................ $[REDACTED]..... $[REDACTED]..... ................
                Rhapsody...................... $[REDACTED]..... $[REDACTED]..... $[REDACTED]..... $[REDACTED]..... $[REDACTED]..... $[REDACTED]..... $[REDACTED]..... $[REDACTED]..... $[REDACTED]
                Slacker....................... $[REDACTED]..... $[REDACTED]..... $[REDACTED]..... $[REDACTED]..... $[REDACTED]..... $[REDACTED]..... $[REDACTED]..... $[REDACTED]..... $[REDACTED]
                Spotify....................... $[REDACTED]..... $[REDACTED]..... $[REDACTED]..... $[REDACTED]..... $[REDACTED]..... $[REDACTED]..... $[REDACTED]..... $[REDACTED]..... $[REDACTED]
                TIDAL......................... ................ $[REDACTED...... $[REDACTED]..... ................ $[REDACTED]..... $[REDACTED]..... ................ $[REDACTED]..... $[REDACTED]
                 Source: Royalty payment data from Sony, UMG, and WMG.
                Orszag AWDT at 19, Table One.
                 For the nine subscription interactive services in the above table,
                over the 2014-2016 period covered, individual subscriptions were
                offered to consumers at $9.99 per month. At that monthly price, the
                weighted average monthly per-subscriber payment of $[REDACTED]
                translates to a royalty equal to approximately [REDACTED] % of the
                services' revenues ($9.99 x [REDACTED]). Orszag AWDT ] 47.\136\
                 \136\ Mr. Orszag did not include in his royalty calculation any
                non-rate consideration, such as access to the services' user data
                and user email addresses; the services' marketing and promotional
                support; and the record companies' right to offer exclusives to
                services; including the right to ``window'' certain sound recordings
                (i.e., to offer an initial, time-limited exclusivity). Because these
                non-pecuniary items are not available under the statutory license at
                issue in this proceeding, Mr. Orszag asserts that his omission of
                these non-monetary benefits renders his calculated royalty payment
                lower than it otherwise would be, thus reducing the royalty rate
                derived from his benchmark in favor of Sirius XM. Orszag AWDT ] 106.
                See also SE PFF ]] 119-122 (and record citations therein).
                 Because Mr. Orszag's interactive data were limited to agreements
                with the Majors, he also considered whether the rates paid by
                subscription interactive streaming services to the Indies were lower
                than those paid to the Majors. He determined that, whether the Indies'
                recordings were distributed by a Major or a Major affiliate, or were
                distributed by another entity, the terms regarding royalties were
                ``highly similar'' to the rates paid to the Majors. Consequently, Mr.
                Orszag made no adjustment to his interactive benchmark to account for
                the rates paid by interactive services to independent record labels.
                Orszag AWDT ]] 101-105; see Written Direct Testimony of Jeremy Sirota,
                Trial Ex. 36, at 3 (Sirota WDT).
                 Mr. Orszag utilized the concept of ``ratio equivalency'' to compare
                his benchmark rate for the interactive streaming market to the target
                SDARS market. He applied essentially the same ratio equivalency
                approach as the Judges applied to the noninteractive subscription
                market in Web IV.\137\ Orszag AWDT ] 37. More specifically, Mr. Orszag
                relied on the following points from Web IV to identify what he
                considered necessary conditions for the application of a ratio
                equivalency approach:
                 \137\ In Web IV, the Judges stated that the ratio equivalency
                concept ``assume[s] equality between two ratios: (1) subscription
                revenues to royalties in the interactive market; and (2)
                subscription revenues to royalties in the noninteractive market.''
                Web IV, 81 FR at 26344.
                 (1) Revenues in both markets must be derived from subscription
                revenues and thus be reflective of buyers with a positive
                willingness to pay (WTP) for streamed music;
                 (2) Functional convergence and downstream competition for
                potential listeners must indicate a sufficiently high cross-
                elasticity of demand as between interactive and noninteractive
                services, provided the noninteractive subscription rate is reduced
                to reflect the absence of the added value of interactivity; and
                 (3) The benchmark market rate must be adjusted downward \138\ to
                eliminate the ``complementary oligopoly'' effect arising from the
                presence of multiple ``must have'' suppliers, thereby establishing a
                rate that is ``effectively competitive.''
                 \138\ In Web IV, the Judges applied a ``steering adjustment'' to
                reflect noninteractive services' ability to offset the complementary
                oligopoly power of the Majors by ``steering'' listeners to sound
                recordings licensed from Indies at lower royalty rates.
                Id. ] 41 (citing Web IV, 81 FR at 26353). Mr. Orszag posited that all
                three of these Web IV conditions are satisfied in this proceeding.
                 He noted that in both the interactive streaming and SDARS markets
                revenues are derived from subscribers with a positive WTP. More
                particularly, subscribers to interactive services typically pay $9.99
                per month, Orszag AWDT ] 36, while subscribers to Sirius XM typically
                pay at least that amount. Id. at ] 49 & n.40. With regard to the second
                condition, Mr. Orszag cites record evidence of functional ``lean-back''
                convergence and downstream competition, particularly with regard to the
                use of playlists and enhanced mobile technology, which have allowed
                interactive streaming services to gain an increasing share of in-car
                listening. See 4/24/17 Tr. 605 (Farrell); Orszag AWDT ] 39. Finally,
                Mr. Orszag testified that changes in the interactive market after Web
                IV had obviated the need for a complementary oligopoly adjustment.
                Nonetheless, he provided three alternative potential steering
                adjustments in the event the Judges disagreed with his conclusion
                regarding complementary oligopoly: (1) A [REDACTED]% steering
                adjustment derived from Sirius XM's direct licenses; (2) a 12% steering
                adjustment borrowed from Web IV; or (3) a [REDACTED]% steering
                adjustment identified in a comparison of two ``Mid-tier'' services
                contracts, one with a prohibition on steering and the other
                 \139\ These potential steering adjustments are discussed in
                detail infra.
                 The interactive market benchmark ratio equivalency approach is
                well-depicted in algebraic form: \140\
                 \140\ The ratios are sometimes expressed reciprocally, with
                royalties in the denominator and revenues in the numerator. Because
                royalty rates in this proceeding are expressed as a percent-of-
                revenue, it is more intuitive to state the ratio as set forth in the
                text, supra.
                [[Page 65244]]
                 Benchmark Ratio Target Market Ratio
                 (A) ............ (C)
                 Royalty Payment (in $) in ............ Royalty Payment (in $) in
                 Benchmark Market = Target Market
                 ------------------------------------- -------------------------------------
                 (B) (D)
                 Downstream Revenue (in $) in Downstream Revenue (in $)
                 Benchmark Market in Target Market
                 (Rates and revenues to be calculated on a per-subscriber per month basis.)
                 By inserting the known (i.e., calculable) values for (A) and (B),
                Mr. Orszag was able to calculate a ratio, or percentage, that--under
                the ratio equivalency approach--he opined would also be applicable to
                the target market. That is, the royalty payment (C) in the Target
                Market would be the same percent of (D) as (A) is a percent of (B) in
                the Benchmark Market.
                 In this, his ``Approach One,'' Mr. Orszag calculated the royalty
                payments of interactive subscription services as a percentage of their
                subscription revenues by dividing the effective monthly per-subscriber
                royalty payment by the monthly consumer subscription price of the
                benchmark services. Orszag AWDT at ] 43. Applying the theory of ratio
                equivalency, Mr. Orszag then proposed that the record companies receive
                the same percentage of Sirius XM's subscription revenue as they receive
                from the interactive services. See 4/25/17 Tr. 985-86 (Orszag).
                 Because Sirius XM provides listeners with both music and non-music
                content, Mr. Orszag opined that his Benchmark Market Ratio must be
                adjusted to be comparable to the Target Market Ratio. Relying
                principally on a survey by Stefan Boedeker, Mr. Orszag determined that
                the music content on Sirius XM constituted 50% of the value of total
                content.\141\ Orszag AWDT ]54. Additionally, SoundExchange asserted
                that the pricing structure reflects Sirius XM's understanding that its
                customers value music at least as much as non-music content. Id. ] 49 &
                n.40 (discussing Sirius XM monthly pricing of $10.99 for News, Sports &
                Talk versus $12.52 for Mostly Music). Moreover, as SoundExchange noted,
                in the previous SDARS proceeding, Sirius XM itself took the position
                that music accounts for more than 55% of Sirius XM's content value.
                SDARS II, 78 FR at 23064-65 (Sirius XM's expert Roger Noll attributed
                55% of value to music content). Both parties and the Judges agreed on
                this issue. See id. at 23063, 23088 (noting SoundExchange's expert Dr.
                Ordover conservatively assumed music accounts for at least 50%); id. at
                23065, 23089 (Judges finding ``the success of Sirius XM is dependent
                upon its access to music'' citing testimony of Sirius XM witnesses).
                The Judges take note that Sirius XM provided no evidence or argument to
                support a different position that might place in doubt Mr. Orszag's
                reliance on the Boedeker survey. Mr. Orszag reasonably and
                conservatively utilized an assumption that at least 50% of the value of
                a Sirius XM subscription is derived from music offerings. Applying this
                assumption, Mr. Orszag divided the benchmark ratio result, [REDACTED]%
                of revenue, by two to arrive at a proposed percentage-of-revenue rate
                of [REDACTED]% for Sirius XM. Orszag AWDT ] 54.
                 \141\ Mr. Boedeker surveyed subscribers to Sirius satellite
                radio packages that contain both music and non-music programming,
                (i) to measure the degree to which these subscribers value the music
                versus non-music content; (ii) to examine subscribers' willingness
                to accept a hypothetical Sirius XM package that contains just music
                programming or just non-music programming; and (iii) to identify the
                discounts they would demand for such a hypothetical product. Written
                Direct Testimony of Stefan Boedeker, Trial Ex. 21, ]]7, 19 (Boedeker
                WDT); 5/8/17 Tr. 2933, 2947-49 (Boedeker). Mr. Boedeker concluded
                from the survey results that Sirius XM subscribers value music
                content significantly more than non-music content. Boedeker WDT at
                ]] 14, 97; 5/8/17 Tr. 2933-34, 2963 (Boedeker). More precisely,
                70.1% of all survey respondents said they would no longer subscribe
                to Sirius XM satellite radio at their current subscription rates if
                music programming were no longer offered, while only 32.4% said they
                would no longer subscribe at their current subscription rates if
                non-music programming were no longer offered. Boedeker WDT ]77; 5/8/
                17 Tr. 2951 (Boedeker). Even if discounts were offered for a non-
                music service, 42.7% of respondents still would no longer subscribe
                to their Sirius XM package, compared with only 10.0% of respondents
                would no longer subscribe to their current package if non-music
                programming were no longer offered (even with a discount). Boedeker
                WDT ]]83-84; see also 5/8/17 Tr. 2952-53 (Boedeker). In a critique
                of Mr. Boedeker's survey, Professor John Hauser, a Sirius XM expert
                witness, identified several inconsistencies in Mr. Boedeker's survey
                results. Nonetheless, it was undisputed by Sirius XM that Mr.
                Boedeker's results are generally consistent with other available
                evidence. See SEPFF ]] 252-258 (and record citations therein). Thus,
                Mr. Orszag opined that his use of the 50% figure was conservative,
                in the sense that it favored Sirius XM rather than the party for
                whom he testified, SoundExchange. Orszag AWDT ] 54.
                 Mr. Orszag opined that a benefit of his ``Approach One'' is that it
                avoids the need to account explicitly for differences between the
                target and benchmark services. Rather, he stated that the differences
                are implicit in the formula and thus revealed by the market. A
                service's retail (subscription) revenues are a direct function of
                consumer subscription prices. Those prices should reasonably reflect
                consumer valuation of the features and functions of the benchmark and
                target services, respectively. In turn, according to Mr. Orszag,
                percentage-of-revenue royalty rates should reflect such differences,
                because the sound recordings performed by the services in the benchmark
                and target markets are identical. Id. ] 55.
                 As noted, SoundExchange is proposing a greater-of statutory rate
                with a per-subscriber prong as well as a percent-of-revenue prong. To
                obtain what Mr. Orszag described as an equivalent per-subscriber rate,
                he applied the [REDACTED]% of revenue rate (derived from his benchmark
                ratio equivalency analysis) to the ARPU. Mr. Orszag adjusted the Sirius
                XM ARPU of $[REDACTED] (as gross revenue is calculated using the
                statutory license terms) using the same ratio he applied to reach a
                percent-of-revenue rate.\142\ This resulted in a per-subscriber rate of
                $[REDACTED] (i.e., $[REDACTED] x [REDACTED]). See id. ] 54.
                 \142\ Mr. Orszag calculated ARPU using Sirius XM's regulatory
                revenue base for the first six months of 2016. See Orszag AWDT ]]
                58-60 and Table Three. Professor Shapiro, on behalf of Sirius XM,
                initially identified a monthly ARPU of $[REDACTED] per subscriber,
                apparently using Sirius XM's 10-Q filing with the SEC and an
                internal Sirius XM planning document. See Lys WRT ]] 151-152 nn.174,
                177 & Fig. 18. However, the parties apparently reached agreement
                that, under the current definition of ``Gross Revenues,'' the
                appropriate monthly ARPU is $[REDACTED]. See SX RPFF ] 392 (``That
                $[REDACTED] figure was used directly by economists from both parties
                to convert monthly per-subscriber fees into proposed percent-of-
                revenue rates.''); see also Lys WRT ]] 149-155.
                2. Mr. Orszag's ``Approach Two'': Retail Price Comparison
                 Mr. Orszag's Approach One implicitly accounted for the different
                values of interactive and noninteractive services by utilizing retail
                prices in the denominators that reflected the market-based differences
                in those values. In ``Approach Two,'' Mr. Orszag applied an alternative
                methodology designed to
                [[Page 65245]]
                account explicitly for the absence of interactivity in the target SDARS
                market. Orszag AWDT ] 56.
                 In Approach Two, Mr. Orszag continued to use the interactive market
                as his polestar. In this approach, however, he compared the interactive
                retail subscription price not to the target SDARS market, but to the
                market for noninteractive services, on the assumption that an SDARS
                functionally is a noninteractive service.\143\ In this manner Mr.
                Orszag was able to isolate explicitly the value of interactivity by
                comparing the retail prices of interactive and noninteractive
                subscription services. See 4/25/17 Tr. 986 (Orszag). Mr. Orszag opined
                that this approach is sensible because these two categories of service
                differ only with respect to the distinguishing feature: Interactivity.
                See id.\144\
                 \143\ A noninteractive service is one that meets the statutory
                definition and pays statutory royalties calculated under 17 U.S.C.
                114(f)(2)(B). An SDARS service may be described as functionally a
                noninteractive service because the listener cannot interact with the
                service to select, repeat, skip, or cache specific sound recordings.
                See supra, n.73 and accompanying text.
                 \144\ Approach Two avoids the need to adjust for non-music
                content because streaming services are music-only services. It also
                avoids any purported need to adjust for the separate value of a
                satellite network because streaming services are internet-based. See
                Orszag AWDT at ]56. The Judges address later the question Sirius XM
                raises relating to whether its satellite network creates an
                additional value that should reduce the statutory royalty rate.
                 To determine the monthly retail price in the noninteractive market,
                Mr. Orszag used the retail prices of three non-interactive subscription
                services: Pandora One, Rhapsody (Napster) unRadio, and Slacker Radio.
                He calculated their weighted average monthly retail price to be $4.91.
                See Orszag AWDT ] 56 & Table Two.
                 As noted before, the monthly retail price for interactive
                subscription services was $9.99. Accordingly, the ratio of the
                subscription price from the noninteractive market to the subscription
                price from the interactive market was $4.91/$9.99, or 0.49. Mr. Orszag
                then used the ratio of 0.49 to convert the interactive subscription
                services monthly per-subscriber royalty rate of $[REDACTED] to an
                equivalent per-subscriber rate for Sirius XM of $[REDACTED] (0.49 x
                $[REDACTED]). See id. ] 57.
                 The final step in Mr. Orszag's Approach Two is the calculation of a
                percentage-of-revenue rate that corresponds to this $[REDACTED] per-
                subscriber rate. Applying the same $[REDACTED] ARPU \145\ to the per-
                subscriber rate of $[REDACTED], Mr. Orszag derived a percentage-of-
                revenue rate of [REDACTED]%. See id. ] 60.
                 \145\ See supra note 142 and accompanying text.
                3. Adjustment for Lack of Effective Competition in Benchmark Market
                 In his attempt to apply the Web IV prerequisites for use of a
                ``ratio equivalency'' benchmarking approach, Mr. Orszag considered
                whether to apply a downward adjustment to reflect any alleged lack of
                ``effective competition'' in his benchmark interactive market. He
                acknowledged that in Web IV the Judges found that the market for
                subscription interactive services (i.e., Mr. Orszag's benchmark market
                here) was not effectively competitive. The Judges, therefore, adjusted
                downward the rate SoundExchange's economic expert calculated using an
                interactive services benchmark. Web IV, 81 FR at 26344.
                 In this proceeding, however, Mr. Orszag concluded that the record
                establishes that more recently the market for subscription interactive
                services has become effectively competitive. Mr. Orszag concluded that
                he need not adjust to offset a lack of effective competition. Mr.
                Orszag's opinion is based on:
                 The presence in the market of larger interactive
                streaming services, such as Amazon, Apple, Google, and Spotify,
                which has injected countervailing ``substantial bargaining power and
                leverage'' on the licensee side of the equation, offsetting any
                relative disproportionate power that the record companies might have
                previously possessed. Written Rebuttal Testimony of Aaron Harrison,
                Trial Ex. 49, ]]3-5 (Harrison WRT); 5/16/17 Tr. at 3953-57
                 The increasing importance of interactive services as a
                revenue source to the record companies, which gives the services
                leverage strengthen their bargaining position in negotiations for
                sound recording performance licenses. Written Rebuttal Testimony of
                David Blackburn, Trial Ex. 39, ]]18, 20 (Blackburn WRT).
                 The treatment of Spotify's licensing agreement with the
                Majors when it expired, by not [REDACTED], but rather [REDACTED]. 5/
                01/17 Tr. 1703-04, 1804-05 (Blackburn).
                 The additional bargaining power of individual services
                because they have differentiated their offerings, based on platform
                preference ([REDACTED]); catalog size ([REDACTED]); and payment
                terms ([REDACTED]), meaning that the withdrawal of any
                differentiated service from the market would result in customer
                ``churn'' that would negatively affect record companies financially.
                5/16/17 Tr. 3942-45 (Harrison).
                 The lack of market evidence of: (1) Suppression of the
                output of recorded music; (2) supracompetitive profits achieved by
                the record companies; or (3) ready alternatives to which downstream
                consumers might turn. SEPFF ]] 305-322 (and record citations
                 The inability of the Majors to act as price-setters,
                [REDACTED]. 5/16/17 Tr. 3926-27, 3946-47 (Harrison).
                 The Majors' agreements in the Mid-Tier limited
                interactivity sector to rates as low as [REDACTED] % of revenue when
                the licensing agreement includes [REDACTED]. SEPFF ] 356 (and record
                citations therein).
                 The agreements between Indies and interactive streaming
                services that [REDACTED]. SEPFF ]] 335-340 (and record citations
                 Mr. Orszag maintained that the interactive streaming rates reflect
                an ``effectively competitive'' market. He nonetheless offered three
                alternative ``steering adjustments'' to apply to those benchmark rates,
                should the Judges find the interactive market to be not effectively
                competitive. Mr. Orszag first presented a [REDACTED]% steering
                adjustment, reflecting his calculation of an arguable steering effect
                arising from Sirius XM's direct licenses with certain Indies.\146\
                Next, Mr. Orszag proposed a 12% steering adjustment, simply adopting
                the adjustment the Judges made in Web IV. See Web IV, 81 FR at 26404-
                05. Finally, he presented a [REDACTED]% steering adjustment, that
                reflects the differences in royalty rates in the mid-tier market,
                depending upon whether the license agreement has a [REDACTED] (and an
                attendant lower rate) or [REDACTED] (with an attendant higher royalty
                rate). See 4/25/17 Tr. 1054 (Orszag). The Table below summarizes Mr.
                Orszag's alternative rates based on the absence of a steering
                adjustment and on all three of the alternative steering adjustments.
                 \146\ These direct licenses are discussed in more detail in the
                Judges' consideration of Sirius XM's reliance on these licenses as
                potential benchmarks.
                 Approach One Approach Two
                 Steering adj % -------------------------------------------------------------------------------
                 Rev. % Per sub Rev. % Per sub
                None............................ 28.0.............. $ 3.00............ 25.7.............. $ 2.76
                [REDACTED]...................... [REDACTED]........ $[REDACTED]....... [REDACTED]........ $[REDACTED]
                12.............................. 24.6.............. $ 2.64............ 22.7.............. $ 2.43
                [[Page 65246]]
                [REDACTED]...................... [REDACTED]........ $[REDACTED]....... [REDACTED]........ $[REDACTED]
                SE PFF ] 361 (Sirius XM did not dispute the accuracy of this summary
                table derived from record evidence.).
                4. The Mid-Tier Agreements as Corroboration
                 According to Mr. Orszag, the applicability of the theory of ratio
                equivalency is further supported by agreements between record companies
                and Mid-tier services. These Mid-tier Agreements'' are comprised of
                recently executed voluntary direct licenses for subscription mid-tier
                services, between Pandora and iHeart, respectively, as licensees, and
                the Majors and Merlin, a digital rights agency representing Indie
                record companies, as licensors.\147\
                 \147\ The agreements executed by Pandora and iHeart also covered
                fully interactive tiers and, in the case of Pandora, an ad-supported
                tier. See, e.g., Trial Exs. 112-114. For ease of exposition, the
                Judges use the term ``Mid-tier Agreements'' to refer to the portion
                of each agreement that relates to the subscription service offered
                to consumers for $4.99 and providing limited on-demand
                 The Table below provides a breakdown of rates contained in Mid-tier
                Agreements that were admitted into evidence in this proceeding: \148\
                 \148\ The agreements in the table were made a part of the
                record. See Trial Ex. 112-16B at sec. 11 (SoundX_000107538-39)
                (Pandora Plus and Pandora Premium royalty provisions); Trial Ex.
                112-16A at Service Schedule #1 sec. 7(a) (SoundX_000107458) (iHeart
                Plus royalty provisions); Trial Ex. 112-16A at Service Schedule #2
                sec. 7(a) (SoundX_000107492) (iHeart All Access royalty provisions);
                Trial Ex. 113-017B at Schedule 1 sec. 3.1(a)(i)-(ii), sec.
                3.2(a)(i)-(ii), sec. 4.1 and sec. 4.2 (SoundX_000107051-52, 056);
                (Pandora Plus and Pandora Premium Royalty provisions); Trial Ex.
                113-017A at Schedule 1 sec. 1.1 and sec. 1.2 (SoundX_000106973)
                (iHeart Plus and iHeart All Access royalty provisions). Trial Ex.
                113-017B at Schedule 1 sec. 3.2(a)(iii) (SoundX_000107052, 056).
                Trial Ex. 114-018B at 11-14 (SoundX_000107127-30) (Pandora Plus and
                Pandora Premium royalty provisions); Trial Ex. 114-018A at sec. 3(a)
                and sec. 3(b) (SoundX_000107206-07) (iHeart Plus and iHeart All
                Access provisions). Trial Ex. 243 at sec. 3(b) and sec. 3(c)
                (SoundX_000477169-170) (Pandora Plus and Pandora Premium royalty
                provisions); Trial Ex. 272 at Schedule 3 (SoundX_000488916) (iHeart
                Plus and iHeart All Access).
                 [Restricted]--Mid-Tier Agreements
                 Pandora plus ($4.99) Pandora premium ($9.99) iHeart plus ($4.99) iHeart all access ($9.99)
                 % of Revenue Per sub % of Revenue Per sub % of Revenue Per sub % of Revenue Per sub
                Sony............................ [REDACTED]........ $[REDACTED]....... [REDACTED], $[REDACTED],-$[RED [REDACTED],-[REDAC $[REDACTED],-$[RED [REDACTED],-[REDAC $[REDACTED],-$[RED
                 [REDACTED]. ACTED]. TED]. ACTED]. TED]. ACTED]
                UMG............................. [REDACTED]-[REDACT $[REDACTED]-$[REDA [REDACTED]-[REDACT $[REDACTED]-$[REDA [REDACTED]........ $[REDACTED]....... [REDACTED]........ $[REDACTED]
                 ED]. CTED]. ED]. CTED].
                 ED]. CTED]. [REDACTED]. CTED]. TED]. ACTED]. TED]. ACTED]
                Merlin.......................... [REDACTED]........ $[REDACTED]....... [REDACTED], $[REDACTED],-$[RED [REDACTED],-[REDAC $[REDACTED],-$[RED [REDACTED],-[REDAC $[REDACTED],-$[RED
                 [REDACTED]. ACTED]. TED]. ACTED]. TED]. ACTED]
                These Mid-tier Agreements bundled terms for separate tiers offered by
                Pandora and iHeart, respectively, including the actual mid-tier
                services identified as Pandora Plus and iHeart Plus, respectively, with
                limited interactive functionality, and a tier providing fully
                interactive functionality. Orszag WDT ] 38.
                 Mr. Orszag found confirmation for his benchmarking approach in the
                rates at which Pandora and iHeart will license from major and
                independent record companies, i.e., at rates ranging from $[REDACTED]-
                $[REDACTED] per subscriber per month. These rates are similar to the
                per subscriber rates SoundExchange proposes in this proceeding. Trial
                Exs. 112-114. Mr. Orszag also noted that these Mid-tier Agreements
                include [REDACTED]. See Orszag AWDT at ] 38. When these percent-of-
                revenue rates are halved (as in his Approach One) to reflect that 50%
                of the value of Sirius XM's service is attributable to non-music
                content, the percent-of-revenue rates in these Mid-tier Agreements lie
                in the range of [REDACTED]-[REDACTED]%, ``strikingly similar'' to the
                23% royalty rate SoundExchange has proposed. See SXPFF ]] 845-847.
                 Mr. Orszag found the rates in these Mid-tier Agreements to be
                instructive and corroborative of SoundExchange's rate proposal.
                SoundExchange conceded that the mid-tier services of iHeart and Pandora
                offer some interactivity, whereas Sirius XM's satellite service offers
                no interactivity. Mr. Orszag opined, however, that it is not plausible
                that the differential would have a significant impact on consumer
                valuations and, consequently, on per-subscriber rates. In support of
                that argument, he noted that subscriptions to the mid-tier services
                offered by Pandora and iHeart are priced at the same $4.99 per month as
                Pandora's prior noninteractive offering. See Harrison WDT at ] 19.
                Further, Mr. Orszag noted that his highly conservative estimate of the
                value of music content on Sirius XM, is even higher, at $[REDACTED].
                See Orszag WRT ] 55 & n.68.
                 More particularly, Mr. Orszag noted that Pandora's offering of
                increased skips, rewind capability, and limited caching to convert its
                noninteractive service into a mid-tier service did not cause Pandora to
                increase its monthly subscription price above the $4.99 it charged
                previously for its noninteractive service. Mr. Orszag testified that
                this suggests that consumers' valuation of the increased functionality
                is not so high as to allow Pandora to increase its mid-tier retail
                subscribership price off the $4.99 per month and closer to the $9.99
                monthly price for fully interactive services. 4/25/17 Tr. 1063-64
                (Orszag). Mr. Orszag concluded that these facts demonstrate that the
                mid-tier services have a value commensurate with a noninteractive
                 Finally, Mr. Orszag recognized the hypothetical possibility that,
                because these Mid-tier Agreements bundle fully interactive services,
                the record companies could have applied their market power in that
                segment to extract higher rates and better terms in the mid-tier
                segments. To test that hypothetical, Mr. Orszag reviewed the
                negotiation documents relating to the Mid-tier Agreements and concluded
                that they contained no evidence that the Majors used their alleged
                market power in the fully-interactive services market to obtain
                concessions on mid-tier terms. Orszag WRT ] 55. To the contrary, the
                evidence suggests that Merlin obtained
                [[Page 65247]]
                rates similar to those negotiated by the Majors in its licensing
                agreements with [REDACTED]. Id. Sirius XM did not proffer any evidence
                that the record companies leveraged their alleged interactive market
                power to obtain better terms in the mid-tier market.
                5. Evaluating Orszag Ratio Equivalency Benchmarking Approaches
                 Sirius XM asserted that Mr. Orszag incorrectly emphasized an
                economically unimportant point, i.e., that ``there is no difference
                between interactive streaming services and satellite radio in terms of
                the music content they deliver to subscribers.'' See 4/26/17 Tr. 1190-
                91 (Orszag) (emphasis added). According to Sirius XM, similarity ``at
                this high level of generality'' is meaningless. SXM RPFF ]11.
                 The Judges agree. Although markets in which sound recording
                performances are licensed (upstream) and delivered (downstream) to
                subscribers may be considered as potential benchmarks for each other,
                that broad brush of comparability does not indicate whether the
                benchmark is suitable on the whole. Mr. Orszag was correct that the
                benchmarking approach can commence at a high level of generality, even
                though that basic level of comparison is by no means probative or
                dispositive.\149\ Not every market in which sound recording
                performances are licensed could serve as a benchmark for every other
                sound recording performance market.
                 \149\ In fact, a market in which some product other than music
                is delivered could be a useful benchmark market if it is otherwise
                comparable in terms of economic structure. For example, patents, as
                a form of intellectual property, may be found to have similar
                economic characteristics as copyrights, rendering relevant
                information from the market for patent licenses.
                 Sirius XM argued that the common use of digital transmissions and
                the allowance of unlimited usage by listeners are not illuminating
                similarities. SXM PFF ] 12. Once again, the Judges agree; these basic
                points are not probative of the usefulness of the interactive market as
                a benchmark. Nonetheless, Mr. Orszag's reliance on such common elements
                is helpful in identifying and then narrowing the range of potential
                 Sirius XM criticized as superficial Mr. Orszag's assertion that the
                target and benchmark markets are similar because each offers ``mobile
                functionality.'' SXM RPFF at 19; Orszag AWDT ] 32. The Judges find this
                criticism to be without merit.\150\ The majority of Sirius XM listening
                occurs in the car, Meyer WDT ] 21 n.5, and the improved mobile
                functionality of interactive streaming through ``connected cars'' and
                more complete cellular coverage allows listeners to access streaming
                services in the car. SE PFF ]] 156-159 (and record citations therein).
                Thus, the Judges do not agree with Sirius XM that Mr. Orszag's reliance
                on the interactive services' mobile functionality is superficial;
                indeed, the issue of whether their respective mobile functionalities
                are substitutional for each other bears on the Opportunity Cost/ECPR
                analysis undertaken by Professor Willig.
                 \150\ The Judges address the value of Sirius XM mobile
                functionality elsewhere in this Determination.
                 Nonetheless, the Judges decline to adopt Mr. Orszag's reliance on
                evidence he claimed suggested a ``growing'' use of streaming services,
                including interactive services, in the car. Orszag AWDT ] 39(C).
                Although the evidence on which he relied is somewhat supportive of this
                point, it is not sufficiently persuasive. The Judges are reluctant to
                adopt or extrapolate from potential market trends or rates of change
                and use them as a basis for a fixed five-year rate. As the Judges have
                noted on other occasions, the adoption of market predictions is a
                fraught exercise. More probative in the Judges' opinion are the results
                from the survey experts who have appeared for both parties. These
                experts have attempted to measure present intentions regarding the
                substitutability of interactive services (and other services) for
                Sirius XM. While their surveys yield starkly different results when
                attempting to elicit whether Sirius XM listeners would switch to
                interactive services if Sirius XM were nonexistent or too expensive,
                none shows anything close to a 1:1 substitutability of interactive
                services for Sirius XM.\151\
                 \151\ The Judges analyze these survey results in detail, supra,
                sections VI.B.1-VI.B.2.
                 The survey results highlight a related criticism by Sirius XM of
                Mr. Orszag's ratio equivalency approaches. Sirius XM correctly argued
                that the economic rationale that supports a ratio equivalency approach
                requires ``significant competition, or a high cross-elasticity of
                demand, between Sirius XM and subscription services. . . . [A] limited
                degree of head-to-head competition . . . will not suffice.'' Shapiro
                CWRT at 12; see also Web IV, 81 FR at 26353; 4/26/17 Tr. 1198 (Orszag).
                 In Web IV, the Judges stated that the ratio equivalency approach
                might be appropriate if the record reflected that
                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[.]
                81 FR at 26353. In the present case, Mr. Orszag did not provide either
                qualitative or quantitative evidence of a sufficiently high cross-
                elasticity. In fact, it is noteworthy that even the survey results
                reported by SoundExchange's own survey witnesses, Professors Ravi Dhar
                and Itmar Simonson, indicated that there is no such high
                substitutability between subscribership to interactive services and to
                Sirius XM. These survey conclusions negate any complete or overwhelming
                ratio equivalency Mr. Orszag has posited. Moreover, even Professor
                Willig, another SoundExchange economic expert, relied on and adopted
                Professor Dhar's survey, which revealed a substitutability of
                interactive services for Sirius XM at significantly less than 1:1. See
                Willig WDT ] 41.
                 Sirius XM also challenged SoundExchange's predicate that there is
                ``increasing convergence of the interactive services and Sirius XM''
                because of ``some `lean back' functionality'' offered by the
                interactive services (in the form of pre-programmed playlists). Sirius
                XM noted that Mr. Orszag acknowledged on cross-examination that, if the
                rate-setting exercise were based solely on his posited convergence, any
                increased use of playlists by interactive services would suggest that
                interactive services were becoming more like noninteractive services,
                rather than vice versa. If any purported convergence is in the
                direction of lean-back service, then interactive services' rates should
                be falling in an effectively competitive market, rather than
                noninteractive or satellite services' rates increasing. 4/26/17 Tr.
                1191-92 (Orszag).
                 Sirius XM's criticism in this regard is well-taken. There is
                insufficient evidence in the record to show that interactive services'
                royalty rates have fallen in response to any asserted increase in
                listener use of playlists. Indeed, as Sirius XM correctly noted,
                [REDACTED]. See, e.g., 5/16/17 Tr. at 3939 (Harrison); 5/15/17 Tr. at
                3836 (Walker).\152\
                 \152\ Playlists could engender price competition. As the Judges
                noted in Web IV, services could lower royalty rates with playlist
                steering. Further, the possibility of steering could result in lower
                industrywide rates without any actual steering taking place. See Web
                IV, 81 FR at 26367. In the present case, there is no evidence of any
                such price competition through playlist-based steering in the fully
                interactive market.
                 Ultimately, the Judges place no weight on the alleged corroboration
                of the Mid-tier Agreements identified by Mr. Orszag, for several
                reasons. First, as
                [[Page 65248]]
                a SoundExchange industry witness testified, UMG requires [REDACTED].
                Harrison WDT ] 20 (``Even if mid-tier subscription services succeed in
                drawing some consumers away from poorly-monetized free ad-supported
                streaming services, there is also a danger that they could to a degree
                cannibalize the premium on-demand subscription services. [REDACTED].
                 Second, the mid-tier services include interactive features which
                the record companies recognize are valuable to subscribers. Id. Absent
                evidence in this record of an interactivity adjustment specifically
                related to the valuable but limited interactive functionality of the
                mid-tier services, the probative value of the mid-tier rates in this
                proceeding is compromised.
                 In sum, the Judges agree with Sirius XM that the record does not
                provide sufficient evidence to support Mr. Orszag's ratio equivalency
                approaches to rate-setting in this proceeding.\153\
                 \153\ Therefore, Mr. Orszag's attempted steering adjustments are
                moot with regard to his approaches. The applicability of those
                adjustments, vel non, is addressed in connection with the
                establishment of effectively competitive rates elsewhere in this
                Determination. Also, because Mr. Orszag did not present the mid-tier
                royalties as benchmarks in their own right, but rather as
                corroborative evidence supporting his (now rejected) ratio
                equivalency approach, the Judges do not accept Mr. Orszag's use of
                mid-tier royalties as corroborative or probative.
                VII. SDARS Performance License--Sirius XM Proposal
                 In its specific proposed rate regulations, Sirius XM advocated a
                single royalty fee--8.1% of ``Gross Revenues.'' See Second Amended
                Proposed Rates and Terms of Sirius XM . . . at Sec. 382.12(a) (2d
                APR). However, more broadly, Sirius XM proposed a rate range of 8.1% to
                11% of relevant revenue, which it claims is consistent with the
                evidence. 2d APR at 1. The existing rate, for 2017, is 11%.
                 Sirius XM's expert witness, Professor Carl Shapiro, analyzed three
                possible starting points for setting the performance royalty rates in
                this proceeding. Professor Shapiro began with an analysis of the
                existing rates. He also analyzed two potential benchmarks: Direct
                licenses negotiated between Sirius XM and 498 Indie record labels and
                the rates determined by the Judges for noninteractive digital
                performances over the internet (webcasting).\154\
                 \154\ Professor Shapiro did not label the existing rate as a
                ``benchmark'' per se. Rather, he opined that the existing ``11
                percent of revenue rate that Sirius XM will pay in 2017 can be
                viewed as an upper bound on the reasonable royalty level for the
                2018-2022 period.'' Shapiro WDT at 34. The Judges consider Professor
                Shapiro's use of the existing rate as an ``upper bound'' is
                functionally similar to a use of that rate as a ``benchmark.'' That
                is, he is urging a similarity between: (1) The description of the
                SDARS market as it was presented to the Judges in SDARS II in 2012,
                and the rates that were set in that Determination (the de facto
                benchmark); and (2) the description of the SDARS market (the target
                market) as it has been presented to the Judges in this 2017
                A. Current Rates
                 Professor Shapiro noted that the current statutory rate is 11% of
                ``Gross Revenues,'' as defined by the relevant regulations. See 37 CFR
                part 382, subpart B. The Judges configured the SDARS rates for the
                period 2013 to 2017 to increase from 9% to 11% over the five-year
                period. Before recommending adoption of the extant rate for the ensuing
                rate period, Professor Shapiro analyzed the state of the music industry
                to determine whether any changes in the marketplace might warrant a
                deviation from the current rate. See Shapiro WDT at 27. Evidence in
                this proceeding overwhelmingly supports a finding of increased use of
                streaming, both interactive and noninteractive, as the preferred method
                of ``consuming'' music. Professor Shapiro's testimony was no exception.
                Id. at 28. As Professor Shapiro noted, in 2012, streaming accounted for
                approximately 12% of record industry revenues; whereas in the first
                half of 2016, streaming accounted for 43% of record industry
                revenues.\155\ Id. Analogously, Sirius XM's subscribership grew from
                approximately 24.9 million subscribers in 2014 to 28.3 million
                subscribers in 2015. Id. at 29.\156\ This growth in subscribers
                increased satellite radio's share of music industry revenues during the
                period from [REDACTED]% to [REDACTED]%. Id. at 28, Fig. 5.
                 \155\ Professor Shapiro defined revenue from streaming services
                as that derived from subscription and on-demand services as well as
                webcasting. Music industry revenues included those streaming
                services, physical sound recording sales, digital downloads,
                synchronization royalties, and satellite radio. Shapiro WDT at 28.
                 \156\ Sirius XM predicts [REDACTED] during the upcoming rate
                period from an estimated [REDACTED] million subscribers in 2018 to
                [REDACTED] million subscribers in 2021. Shapiro WDT at 29.
                 Professor Shapiro proposed continuing the current percent-of-
                revenue rate structure. He concluded that, when using percent-of-
                revenue rates, any increase in Sirius XM's relevant revenue would
                redound to the benefit of the record companies obviating a need to
                change the rate. See Shapiro WDT at 29-30.
                 He further argued that the relevant starting consideration for the
                Judges would be the rate that would emerge in an effectively
                competitive marketplace. 5/3/17 Tr. 2479-80 (Shapiro). Professor
                Shapiro asserted that Sirius XM's overall profits would be irrelevant
                to the negotiation. Shapiro WRT at 51-52. He opined that, in an
                effectively competitive market, the negotiating parties would look only
                to the licensee's ``contribution margin''; that is, ``the percentage of
                Sirius XM's receipts from a subscriber . . . that drops to their bottom
                line.'' Id. This contribution margin is the measure of sales revenue
                available for fixed costs and profit after paying variable costs. See
                Lys WDT ] 83. According to Professor Lys, Sirius XM includes in
                variable costs [REDACTED]. Id. ] 85. Professor Shapiro and Professor
                Lys agree that Sirius XM's contribution margin has remained
                ``remarkably consistent'' over time. See id. ] 87; Shapiro WRT at 5.
                 Professor Shapiro focused on the stability of the Sirius XM
                contribution margin to argue for a like stability in royalty rates.
                Countering that proposition, Professor Lys looked at an economic
                bargaining model and concluded that with greater overall profitability,
                Sirius XM and any licensor would negotiate to divide those overall
                profits, which would result in a higher percentage royalty rate.
                 Neither expert's opinion in this regard, however, is persuasive.
                Professor Lys may well be correct that record companies, given their
                ``must have'' status, i.e., in the absence of effective competition,
                would seek in unregulated market negotiations to appropriate a portion
                of the additional profits (through a rate increase in addition to the
                automatic increase from a larger pool of revenue), notwithstanding that
                the profits accrued via Sirius XM's scale and growth rather than
                through an increase in the contribution margin. On the other hand, as
                discussed elsewhere in this Determination, the growth of Sirius XM's
                profits allows it to compensate the record companies for the
                opportunity costs the latter incur when licensing to Sirius XM. But
                neither of these factors is relevant to the appropriateness of adopting
                the extant rate in the forthcoming rate period.
                 SoundExchange opposed reliance on the current, SDARS II royalty
                rates, asserting that the current rates do not capture the effect of
                the expansion of music streaming on the labels' opportunity cost.
                SoundExchange contended that Professor Shapiro's analysis of current
                rates fails to acknowledge or address changes (1) in opportunity cost,
                (2) in Sirius XM's financial performance, (3) in the upstream market
                for digital sound recording rights,\157\ and (4) in current
                [[Page 65249]]
                circumstances as opposed to those prevailing at the time of the SDARS
                II determination.
                 \157\ For this third point of criticism, SoundExchange focused
                on the direct licenses Sirius XM negotiated with Indie labels. The
                criticism is better directed at the direct license benchmark and the
                Judges will discuss it in that portion of the Determination, section
                 SoundExchange's arguments regarding opportunity cost relied on the
                assumption that Sirius XM and streaming services are closely
                substitutable for one another. However, that assumed close
                substitutability is contradicted by the survey results as analyzed by
                the Judges, supra, in connection with Professor Willig's opportunity
                cost analysis. SoundExchange also does not take into account Sirius
                XM's unique position of being the only satellite radio provider--
                resulting in a remarkable growth in subscribers--as well as the fact
                that changes in Sirius XM revenues have resulted from additional
                factors, i.e., lower non-music content costs and lower royalty rates in
                negotiated direct licenses.\158\ Thus, to the extent discussed above,
                changes in the overall market do militate against using current rates
                as an appropriate starting point.
                 \158\ The Judges do acknowledge Sirius XM's increased
                profitability in a different context, i.e., whether Sirius XM should
                contribute to the legitimate opportunity costs incurred by the
                record companies without disruption that would threaten the
                viability of Sirius XM. See infra, section X.D.
                 Moreover, the current rates as set in SDARS II were a function of
                the deficiencies in the proffered evidence in that proceeding, evidence
                that, by comparison, made the then extant rates a relatively superior
                guide to an appropriate rate. The Judges were dissatisfied with a
                benchmark derived from licenses in the interactive streaming business.
                Further, the Judges found it necessary to allow for a downward
                adjustment (within the zone of reasonableness) to account for the
                enormity of Sirius XM's satellite launch and replacement costs. See
                SDARS II, 78 FR at 23069. SoundExchange argued that the ``incredible
                financial success'' enjoyed by Sirius XM during the current license
                period obviates the need for consideration of Sirius XM's costs of
                doing business for the license period at issue in this proceeding. See
                Lys WRT ] 56. The Judges agree; in fact, that financial success is a
                basis for increasing the royalty rate in this proceeding, as indicated
                 For the reasons highlighted by SoundExchange and its experts, the
                Judges will not use the extant rates as a starting point (or benchmark
                or upper bound) for determination of appropriate rates for the period
                2018 through 2022. The SDARS II rates were derived on a record much
                less robust than the record in this proceeding. The participants in
                this proceeding have presented sufficient facts and analysis to inform
                the Judges and to lessen the value of the current rates as a desired
                starting point for analysis in these changed circumstances.
                B. Current Direct Licenses Negotiated by Sirius XM
                 Professor Shapiro proposed a benchmark derived from direct licenses
                Sirius XM has negotiated in the market at issue in this proceeding,
                i.e., the satellite radio music streaming (upstream) market. In 2012,
                when the Judges established rates for the 2013 through 2017 rate
                period, direct licensing was in its infancy, with approximately 100
                direct licenses executed at the time of the determination. Shapiro WDT
                at 34. By 2016, Sirius XM had negotiated almost 500 direct licenses
                with record labels. Id. at 35. Because of its direct license effort,
                Sirius XM has access to approximately 23,000 music catalogs containing
                as many as 5 million tracks, or 6.4% of the tracks on the Sirius XM
                playlists. Shapiro WDT at 35 (citing White WDT). Professor Shapiro
                promoted the direct licenses as ideal benchmarks, asserting that they
                represent market outcomes involving the same sellers (record labels),
                the same buyer (Sirius XM), and the same rights (digital performance of
                sound recordings) and effectively competitive conditions for the
                negotiations. Id. at 37.
                 Professor Shapiro reasoned that these negotiations reflect an
                effectively competitive marketplace because Sirius XM controls such a
                small share of the record industry's overall revenues (approximately
                [REDACTED]%). See Shapiro WDT at 37. Measuring Sirius XM's royalties
                against the entirety of music industry revenues, however, ignores the
                fact that Sirius XM dominates the market for paid services that
                listeners use in a vehicle. As the primary alternative to (non-royalty
                paying) terrestrial radio in cars, Sirius XM in fact wields tremendous
                bargaining power, which would tend to drive down the negotiated rates.
                Professor Shapiro contended that, in fact, direct license rates
                negotiated in an unregulated market would be lower because based on
                recent trends, he believes the statutory license rates act as a
                ``magnet'' to pull directly negotiated rates up to the statutory rates.
                Id. at 45.
                 Professor Shapiro's endorsement of direct licenses as a benchmark
                ignored the difficulties inherent in determining the effective royalty
                rates the parties negotiated. With the direct licenses, Sirius XM
                receives the same rights it would under the statutory license and
                additional benefits, such as a relaxation of the statutory performance
                complement rule, allowing Sirius XM to rely more heavily on the (lower
                priced) directly-licensed tracks. Id. at 35-36. Licensors also benefit
                from consideration negotiated in direct licenses that is not available
                under a statutory license. Licensors might receive more exposure for
                their recordings, might benefit from direct payment of both recording
                and artist royalties, and could avoid the SoundExchange administrative
                fee. No expert in this (or any similar) proceeding has attempted to
                value the considerations behind the headline percent-of-revenue rates
                in direct licenses, let alone determine which party enjoys the net
                 Looking at the upstream market (record labels to streaming
                services), Professor Shapiro anticipated more negotiation of direct
                licenses influenced by the noninteractive streaming services' ability
                to ``steer'' listeners to a particular catalog of music. Id. at 30. As
                Professor Shapiro noted, in the webcasting market, the availability of
                steering resulted in negotiation of direct licenses with headline rates
                below the statutory rates based on the potential benefits of greater
                streaming frequency of the labels' music. Id. at 30.
                 SoundExchange was critical of Professor Shapiro's reliance on
                direct licenses primarily because more recent direct license agreements
                have omitted steering incentives or have included anti-steering
                alternatives that recognize the prospect of steering but muddy the
                analytical waters with regard to the effect steering might have on
                their negotiated rates. Even Professor Shapiro conceded that he could
                not ``quantify the value of steering.'' 4/20/17 Tr. 488 (Shapiro).
                Furthermore, the direct licenses involve exchanges of consideration
                apart from the headline royalty rate that no party has attempted to
                 \159\ The record labels also derive benefit from the direct
                licenses. See Shapiro WDT at 36. Notably, Sirius XM is able to
                distribute both the label's share and the artists' share of
                performance royalties directly to the contracting label. Sirius XM
                provides administration of the royalties without charging the fee
                that would be payable to SoundExchange under the statutory scheme.
                Under the direct license agreements with Sirius XM, some licensors
                also benefit from a more generous methodology for calculating the
                label's royalty pool. Id.
                 The Judges do not accept Sirius XM's direct licenses as
                sufficiently probative of the relevant market to accept them as a
                meaningful benchmark. Direct licenses cover only a small portion of the
                sound recordings on Sirius XM's playlists.
                [[Page 65250]]
                They are uninformative of any effect of steering on royalty rates
                because none of them contain steering guarantees or economic incentives
                to promote (or avoid) steering. There is no basis for the Judges to
                segregate consideration in these licenses that is properly attributed
                to elements that are unavailable under the compulsory license.
                C. Web IV Rates
                 Professor Shapiro offered as a final benchmark the rates
                established by the Judges in Web IV. The Judges used benchmarks in Web
                IV, including direct licenses,\160\ and considered interactive market
                (non-statutory) negotiated direct license rates to determine the Web IV
                rates. See Shapiro WDT at 49. Professor Shapiro converted the Web IV
                per-performance rate of $0.0022 to derive a percentage-of-revenue rate
                applicable in this proceeding of 8.1%. Id. at 55. Professor Shapiro
                used a figure of 469 performances per subscriber per month for his
                conversion. Id. at 54.\161\
                 \160\ Professor Shapiro opined that the direct licenses, such as
                the Pandora/Merlin agreement, ``reflected the forces of competition
                at work,'' namely the leveling power of steering. Shapiro WDT at 49.
                 \161\ In a similar exercise, Professor Willig used a weighted
                average figure of [REDACTED] performances per subscriber in his
                calculation of creator compensation cannibalization (opportunity
                cost). The higher opportunity cost would result in a higher
                percentage-of-revenue rate. See Willig WDT at B-7.
                 Anticipating questions regarding whether webcasting and satellite
                radio are too different to warrant this benchmark, Professor Shapiro
                analyzed the Web IV benchmark to resolve the differences. According to
                Professor Shapiro, there are two key differences to examine. First is
                the possible difference between a label's full marginal cost of a
                Sirius XM satellite performance and a webcast performance.
                Specifically, Professor Shapiro defined the marginal cost difference,
                if any, as one of relative promotional or substitutional effects.
                Second, Professor Shapiro looked at differences in the ability to steer
                as between Sirius XM and a webcaster. Noting that Sirius XM relies on
                human programmers while webcasters rely more heavily on algorithms,
                Professor Shapiro felt Sirius XM might be more able to steer without
                losing listeners. On the other hand, he noted that webcasters (using
                Pandora as an example) have the ability to and the practice of allowing
                listeners to create individualized ``stations'' giving Pandora greater
                flexibility to steer without alienating listeners. See Shapiro WDT at
                 In the end, Professor Shapiro concluded that Sirius XM and
                webcasters are ``quite comparable along both dimensions.'' Shapiro WDT
                at 50. When he combined the favorable comparison of satellite radio and
                webcasting with the fact that the sellers in both markets are the same,
                the rights at issue are the same, and that the Web IV benchmark
                accounts for the forces of competition, ``it becomes clear that the Web
                IV benchmark is a very good benchmark for rate setting in this
                proceeding.'' Id.
                 Sirius XM witness, Steven Blatter, detailed anecdotal evidence of
                the promotional effects of sound recording plays on Sirius XM. See
                Written Direct Testimony of Steven Blatter, Trial Ex. 5, passim
                (Blatter WDT). Mr. Blatter touted Sirius XM's subscription model as
                supportive of its ability to broaden the listening (and presumably
                consumption) habits of its subscribers. Freed of the commercial demands
                of ad-supported radio, Mr. Blatter contended, Sirius XM can cultivate a
                broader audience than the ``Top-40'' stations. Listeners to Sirius XM's
                curated playlists and niche channels thus discover music that might
                otherwise have gone unnoticed. Id. ] 2. Mr. Blatter recited ``thank-
                you'' letters from artists and labels, trade publication reporting and
                analysis, and sales statistics on selected titles as evidence of Sirius
                XM's promotional value to licensors. In addition to artist testimonials
                and press coverage, Mr. Blatter noted that ``many musicians and record
                labels'' grant Sirius XM waivers of statutory limitations relating to
                frequency of play under a statutory license (i.e., the ``sound
                recording performance complement'') in order to enjoy the benefits of
                promotion on Sirius XM. Id. ] 36.
                 Countering Mr. Blatter's assertions, SoundExchange expert, Dr.
                George Ford, opined that promotional effects of a particular platform
                are irrelevant to the Judges' task in this proceeding. See Written
                Direct Testimony of George S. Ford, Trial Ex. 23, at 3-4 (Ford WDT).
                Dr. Ford pointed out most notably that no ``broad inter-platform
                analysis'' of promotion and substitution is in evidence. Id. Further,
                he asserted promotional effect is meaningless unless it is net of
                substitutional effects. In the current music marketplace, Dr. Ford
                asserted, given the dramatic decline in sales of permanent music media,
                a streaming service's promotion of CD sales and downloads is outdated.
                Id. at 4. Professor Willig actually performed econometric analyses
                looking at all streaming services (including Sirius XM) and found a net
                substitutional effect when compared to permanent sales. Willig WDT ]]
                24-27. According to Professor Willig, the substitution of streaming for
                permanent sales contributed to a dramatic drop in creator compensation,
                meaning the opportunity cost to artists and labels of streaming is
                significant. Id. ] 30.
                 Mr. Orszag likewise disputed Professor Shapiro's reasoning relating
                to the relative ability to steer in satellite radio and webcasting. As
                Mr. Orszag reasoned, the Judges relied on direct licenses and their
                steering provisions to make an adjustment to bring the webcasters'
                marketplace in line with a hypothetical effectively competitive market.
                See Orszag WDT ]] 64-66. Direct licenses negotiated by Sirius XM are
                [REDACTED], however. Id. ] 67. Nor is there any record evidence of any
                actual steering by Sirius XM. As the Judges noted elsewhere in this
                Determination, [REDACTED].
                 The most salient criticism of Professor Shapiro's Web IV benchmark
                came from Professor Willig. Professor Willig discounted use of the Web
                IV rates, specifically the Pandora noninteractive rates, for various
                reasons, but the most telling was his uncontradicted assertion that not
                even [REDACTED] uses the statutory rates. After the Web IV
                determination, [REDACTED] negotiated direct licenses with [REDACTED].
                Using the renegotiated rates as a benchmark, Professor Willig
                calculated the SDARS rate resulting from Professor Shapiro's
                methodology would be [REDACTED]% of revenue, approximately [REDACTED]
                the 8.1% of revenue proposed by Professor Shapiro. See Willig WRT ] 57.
                 The Judges are troubled by the implicit assumption in Professor
                Shapiro's use of the Web IV per play rate, given that Sirius XM, as
                opposed to noninteractive streaming, is listened to predominantly in
                the car. As Mr. Orszag testified, any per play analysis implicitly
                starts with the questionable assumption that each play has an
                equivalent value in both distribution channels. Orszag WRT ] 53.
                Further diminishing the value of a per play analogy, the Judges note
                that the parties' use of a percent-of-revenue form of royalty is
                inconsistent with the idea that there is a single per play value that
                cuts across all distribution channels
                 Further, the Judges agree with Mr. Orszag that there is no valid
                reason--and certainly no proof in the record--that would permit the
                Judges to conclude or presume an equal per play value for a Sirius XM
                play--usually in the car--and a play of a noninteractive song. In fact,
                the Judges find that, as a matter of common sense, there is likely
                greater utility in a sound recording played in an automobile. A driver
                (in particular) has a limited set of options for entertainment, given
                his or her need to remain attentive to the road and to
                [[Page 65251]]
                traffic. In the car, therefore, radio listening is a scarce form of
                entertainment and therefore more valuable product than it is elsewhere,
                where it competes with all other forms of utility and diversion (market
                and non-market).\162\
                 \162\ Sirius XM asserted that Mr. Orszag did not undertake any
                empirical analysis in support of this argument. SXM RPFF ]] 273-274.
                However, Mr. Orszag explained sufficiently that this value is a
                particular form of ``access'' value, whereby the driver knows he or
                she has the option of listening to music on Sirius XM in the car, a
                particular value given the limited alternatives for entertainment
                and diversion behind the wheel. See SE PFF ]] 1228-1229 (and record
                citations therein). Moreover, the limited nature of alternatives for
                entertainment and diversion for a driver are matters of common
                knowledge, and that point is not dependent upon expert testimony.
                Further, because Sirius XM advanced the argument that the per play
                values are equivalent across these two distribution channels, it
                should have proffered evidence to support the assertion that
                consumers value access and per play values provided by Sirius XM the
                same as they value such benefits when provided by a noninteractive
                service, given the greater use of Sirius XM in the car.
                 The participants have not provided evidence sufficient for the
                Judges to reach any conclusions regarding a conversion of the Web IV
                per-play rates to a Sirius XM percent-of-revenue rate. Even if the
                parties had provided sufficient evidence to make the conversion, the
                Judges are unconvinced that the characteristics of webcasting and
                satellite radio are sufficiently similar to transfer, without
                adjustment, the royalty rate from one platform to the other.
                D. Lenski Survey Data
                 Sirius XM engaged Mr. Joe Lenski of Edison Research to collect
                empirical data regarding the sources of Sirius XM satellite radio
                listeners and to evaluate where those listeners might turn for music
                consumption if Sirius XM were unavailable. See Written Direct Testimony
                of Joe Lenski, Trial Ex. 7, 2 (Lenski WDT). Sirius XM also asked Mr.
                Lenski to develop similar data for Pandora listeners.\163\ See id. Mr.
                Lenski conducted a national random digit dial telephone survey, using
                both landline and cellular telephone contacts (Lenski Survey). He
                employed a survey methodology ``widely recognized as the most reliable
                form of survey research and . . . used by most major polling
                organizations. . . .'' Id. at 3. The survey queried 983 Sirius XM
                listeners and 1,323 Pandora listeners. Of the total respondents, 350
                identified themselves as listeners to both Sirius XM and Pandora. The
                surveyors asked respondents in the two groups (Sirius XM and Pandora)
                separate sets of questions. Respondents identifying as listeners to
                both Sirius XM and Pandora answered both sets of questions.
                 \163\ At the time of the Lenski Survey, Pandora had not yet
                launched its fully interactive subscription service. It operated
                only lean-back or Mid-tier services that were not fully interactive.
                 A large majority--62%--of Sirius XM listeners responded that they
                migrated from terrestrial radio, with 20% of respondents answering that
                before Sirius XM they listened to ``CDs or your own music downloads.''
                See id. at 5. Online streaming services, AM/FM stations streaming on
                the internet, and interactive streaming services in the aggregate
                accounted for 7% of Sirius XM's current listeners. Id. As for
                alternatives to Sirius XM, survey respondents indicated they would turn
                to terrestrial radio (74%), CDs or music downloads (65%), online
                streaming services (49%) and interactive streaming services (32%).\164\
                Id. Once survey respondents identified all possible alternatives to
                Sirius XM, the surveyors asked respondents to distribute their possible
                alternatives by frequency. In this cut, a plurality of respondents'
                listening time, 40.8%, would be to terrestrial radio. Id. at 6. CDs and
                digital downloads would capture 23.1% of former Sirius XM listening
                time. In the aggregate, 22.1% of listening time would be to
                noninteractive (14.3%) and interactive (7.8%) streaming services.
                 \164\ At this juncture, listeners could choose more than one
                potential alternative to Sirius XM; hence the percentages exceed
                100%. Notably, 28% of survey respondents answered they would listen
                to less audio overall if Sirius XM were unavailable. See Lenski WDT
                at 5.
                 By contrast, Pandora listeners reported migrating slightly more
                frequently from ``CDs or your own music'' (35%) than from terrestrial
                radio (33%).\165\ As alternatives, if Pandora were no longer available,
                survey respondents chose CDs or music downloads (67%), terrestrial
                radio (59%), interactive streaming services (47%), noninteractive
                streaming services (46%), and Sirius XM (23%).\166\ When asked to
                allocate their time among the alternatives, Pandora listeners allocated
                their listening time to CDs or music downloads (26.3%), terrestrial
                radio (24.4%), interactive streaming services (16.6%) and other
                noninteractive streaming services (11.7%). Id. at 7.
                 \165\ Sixteen percent of Pandora respondents answered that their
                Pandora listening was new listening time, not diverted from other
                sources. Lenski WDT at 6-7.
                 \166\ As they did with Sirius XM, the surveyors first
                established all alternatives (adding to more than 100%) before
                having respondents allocate their time by preference. Id. at 6.
                 These survey results showed that Sirius XM competes most directly
                with terrestrial radio, whereas Pandora's noninteractive service
                competes almost equally with CDs and downloads, interactive streaming
                services, and terrestrial radio. Professor Shapiro applied these
                conclusions to support his assertion that Sirius XM is mostly
                substitutional for terrestrial, non-royalty paying, radio. See Shapiro
                WRT at 14. In other words, Sirius XM is not cannibalizing creator
                compensation from other sources; it is augmenting creator compensation
                with an alternate source of royalties. Id. at 37. Professor Shapiro
                pointed out that, using the Modified Dhar Survey, Professor Farrell
                calculated a much lower opportunity cost than Professor Willig, viz.,
                $1.35 per subscriber per month as compared with $2.55 per subscriber
                per month. See id. The Farrell conclusions, he testified are ``notably
                closer'' to the results Professor Shapiro obtained using the Lenski
                Survey. Id.
                 Professor Dhar criticized the Lenski Survey as having ``no
                scientific value.'' Dhar WRT ] 9. Professor Dhar criticized the
                methodology, the response order, and the word choices in the Lenski
                Survey. See Dhar WRT passim. In essence, Professor Dhar concluded the
                Lenski Survey could not be of any value in reflecting ``marketplace
                reality.'' See, e.g., id. ] 16. The thrust of the Dhar criticisms
                revealed the differences in the assignments the parties gave their
                survey experts. Sirius XM asked Professor Lenski to gather listener
                preference information, whereas SoundExchange tasked Professor Dhar
                with looking at a defined, limited marketplace.
                 Professor Willig acknowledged that the ``the structures of these
                two surveys [Dhar and Lenski] are fundamentally different: they ask
                fundamentally different questions.'' Willig WRT ] 41. Professor Willig
                also criticized the Lenski Survey because it purported to measure
                listeners' assessments of their use of time whereas the Dhar Survey
                measures listeners' assessment of their spending, or more precisely,
                their willingness to pay. See Willig WRT ]] 13, 46. Professor Willig
                asserted that the latter would be a more appropriate measure to
                determine creator compensation cannibalization. Id. Professor Willig,
                at bottom, criticized Professor Shapiro's reliance on the Lenski Survey
                data to evaluate relative substitutional effects of webcasting and
                satellite radio because the Lenski Survey did not give Professor
                Shapiro a basis to quantify the effects. Professor Shapiro testified in
                response to that criticism that, nonetheless, ``switching behavior
                that's not price-based is quite useful in terms of how [economists] . .
                . see things,'' yet he cautioned that ``I would accept that because Mr.
                Lenski is
                [[Page 65252]]
                asking about where would you move your listening, that could give a
                different answer than what would you subscribe to if Sirius XM were
                more expensive.'' 4/20/17 Tr. 3765-76 (Shapiro).
                 The Judges accept that the Lenski Survey and the Dhar Survey (and
                even the Modified Dhar Survey) were not aimed at establishing the same
                empirical evidence. The Judges do not agree with Professor Dhar's
                criticism of the Lenski Survey methodology. Without parsing every
                question in the Lenski Survey for ambiguity or order bias, the Judges
                also accept that both the Lenski Survey and the Dhar Survey were
                faulty. Those surveys are, however, sources of empirical evidence
                available in this proceeding. The Modified Dhar Survey resulted in
                adjustment of Professor Willig's analyses and conclusions. The Lenski
                Survey supported Professor Shapiro's analyses and conclusions. But in
                addition, the Judges understand the Lenski Survey to be of limited use
                in comparing the opportunity cost analyses conducted by Professors
                Willig and Farrell, as discussed supra.
                VIII. GEO Music Rate Proposals for PSS and SDARS
                A. Rate Structures and Proposals
                 Mr. George D. Johnson testified \167\ on behalf of GEO Music and
                proposed that the Judges bridge what he described as a ``gap'' in
                creator compensation. See 5/2/17 Tr. at 2203, 2209-10 (Johnson). The
                premise upon which GEO relied is that each performance of a copyrighted
                work should be compensated. See (Corrected) Testimony of George D.
                Johnson (GEO), Trial Ex. 60, at 24-25 (Johnson CWDT). GEO acknowledged,
                however, that for some digital services, including the two services
                seeking licenses in this proceeding, measurement of individual
                performances might not be possible. Consequently, GEO sought rate
                structures that could provide
                 \167\ As adjuncts to his testimony, Mr. Johnson proffered
                numerous exhibits. Sirius XM and Music Choice filed objections to
                GEO's exhibits, citing lack of foundation, hearsay, and relevance
                objections. The Judges grant those objections in their entirety. The
                GEO exhibits are not admitted for the truth of the matters asserted
                therein, but are nonetheless permitted to remain in the record as
                illustrative of Mr. Johnson's testimony.
                a livable music royalty rate . . . [with which creators] can be sure
                in our royalty payments, real payments, that are guaranteed, at a
                rate we would get if there were no `shadow' of a compulsory license
                . . . .
                Id. at 5; see id. at 14 (``to know that they are secure in their
                royalty income . . . .'').
                 The solutions GEO proposed appeared to arise from a per-work
                formula.\168\ He began his analysis with reference to the history of
                ``mechanical'' royalties paid to license musical works.\169\ Mechanical
                royalties for physical phonorecords and permanent digital downloads
                have and continue to be structured on a per-unit basis. To capture a
                value he considered equivalent to a per-unit royalty for streaming
                services, Mr. Johnson proposed four different rate structures: A per-
                subscriber rate, a percentage of revenue rate, a per-play rate, and a
                permanent download rate.
                 \168\ Mr. Johnson has advocated in each of his appearances
                before the CRB a holistic approach to licensing music performances.
                See id. at 2209. In his approach he asked the Judges to take into
                account royalties for all uses of musical works embodied in sound
                recordings: Royalties for the publishers, songwriters, record
                companies, and artists.
                 \169\ Section 115 of the Copyright Act creates the compulsory
                license to make and distribute phonorecords of musical works. See 17
                U.S.C. 115; 106(1) and (3) (exclusive right to reproduce in copies
                or phonorecords and to distribute reproductions of musical works).
                The definition of phonorecords has evolved to include digital
                reproductions of embodied musical works.
                 GEO proposed a per-subscriber SDARS rate ranging from $ 4.96 per
                subscriber per month in 2018 to $ 5.58 per subscriber per month in
                2022. GEO would have this rate apply to all subscribers except those
                that receive channels with no, or incidental, music content and free
                trial period subscribers (limited to 30 days royalty free). Proposed
                Rates and Terms of George D. Johnson . . . at 10 (GEO Rates). GEO
                proposed PSS per-subscriber rates ranging from $ 0.10 in 2018 to $ 0.20
                in 2022. Id. at 14.
                 GEO proposed a SDARS percentage of revenue rate within a ``current
                marketplace'' range of 25% to 40% of ``Gross Revenues.'' He proposed
                defining ``gross revenues'' in a manner similar to the current
                regulations, but to include payments or payments in kind to key
                executives or shareholders. See id. at 12. For PSS, GEO proposed using
                the same definition of ``gross revenues'' and calculating the royalty
                rate at 45% of gross revenues.
                 For per-play rates for SDARS, GEO relied on ``anonymous, but
                actual'' Sirius XM royalty rates and adjusted those rates by varying
                the percent-of-revenue target. Id. at 13.
                 As an additional revenue stream for both the services and the
                copyright owners, GEO proposed requiring both Sirius XM and Music
                Choice to create a ``BUY button.'' In this proposal, GEO envisioned
                listeners acquiring (1) a permanent download to the listener's device
                of choice, (2) a ``cloud locker'' stored sound recording, or (3) a
                permanent download to a purchased content locker or paid locker
                service.\170\ GEO proposed a royalty range of $1.00 in 2018 to $2.50 in
                2022 per purchase. Id. at 15.
                 \170\ GEO did not clarify how a paid locker service or purchased
                content locker service might be different from a ``cloud locker.''
                 The economic underpinnings of Mr. Johnson's proposals are that
                streaming and broadcasting music, i.e., the access models of music
                consumption, have substituted for (``cannibalized'') music sales. With
                this shift in music consumption, Mr. Johnson opined, users and
                exploiters of the artists' work have continued to prosper as the
                artists' revenue streams have declined. See Johnson CWDT at 36-40.
                 Sirius XM did not rebut directly the GEO proposals, but filed
                replies to GEO's proposed findings and conclusions. See generally
                Sirius XM . . . Reply to George Johnson's Proposed Findings . . .
                (Sirius XM Reply to GEO). With one exception,\171\ Sirius XM disputed
                all of GEO's proposed findings and conclusions. With respect to all
                other proposed findings and conclusions, Sirius XM did not uniformly
                dispute the content of GEO's cited material, but argued that the
                citations were inapposite or irrelevant to the SDARS/PSS rate
                proceeding or without factual or legal support. Id., passim. Sirius XM
                argued that GEO's proposals conflated with SDARS the rate
                configurations for different licenses, e.g., Phonorecords and
                Webcasters, without regard for the differences in rate setting
                standards for those configurations and without acknowledging the
                separateness of the record evidence supporting those different rates.
                 \171\ Sirius XM did not dispute GEO's Proposed Conclusion of Law
                number 24, to wit: ``George D. Johnson is an individual pro se
                singer/songwriter, music publisher and independent sound recording
                creator.'' Sirius XM Reply to GEO at 27.
                 Music Choice addressed directly the GEO proposals. Mr. David Del
                Beccaro, President and CEO of Music Choice, testified that he could not
                parse the GEO proposals. See Del Beccaro WRT at 65. Mr. Del Beccaro
                pointed out that the GEO rate proposals lacked explanation,
                ``benchmark, model, or any other evidence . . . .'' Id. at 66.
                 Further, Mr. Del Beccaro took issue with the GEO proposal that
                Music Choice be required to offer a digital download service. As Mr.
                Del Beccaro observed, the digital performance sound recording license
                at issue in this proceeding does not extend to sales of sound
                recordings--physical or digital. Id. Music Choice has not licensed the
                [[Page 65253]]
                rights necessary to sell phonorecords. Further, Music Choice provided
                retail sales of physical phonorecords (CDs), a business that did not
                require a license from record companies. Ultimately, Music Choice
                abandoned that service because it was not profitable. Id. at 66-67.
                 The Judges agree with Sirius XM that GEO's proposed rates and terms
                are unsupported by record evidence. The Judges also agree with the
                Music Choice criticisms of GEO's presentations. GEO's arguments are
                primarily policy arguments beyond the scope of this proceeding. The GEO
                proposed findings, conclusions, and rate proposals are inadequately
                supported in the record.
                B. Statutory and Constitutional Considerations
                 GEO referred to the constitutional provision giving Congress the
                power to provide for copyrights.\172\ He acknowledged that Congress
                provided for certain ``exclusive rights'' for copyright holders in
                section 106 of the Act. He argued unconvincingly, however, that the
                statutory licenses inappropriately infringe on the exclusive rights
                Congress created. He also questioned whether the Judges, or their
                predecessors whose precedent the Judges consider, were at worst
                confiscating, or at best marginalizing, copyright owners' rights by
                failing to provide for fair compensation. See Johnson CWDT at 6, 13.
                GEO asserted that current statutory royalty rates are ``extremely low
                below-market'' rates. Id. at 13.
                 \172\ Article I, Section 8, clause 8 of the Constitution gives
                Congress the power ``to promote the progress of science and useful
                arts, by securing for limited times to authors and inventors the
                exclusive right to their respective writings and discoveries.'' U.S.
                Const., Art. I, sec. 8, cl. 8.
                 GEO made much of the ``full independence'' of the Judges. See,
                e.g., Johnson CWDT at 7; 5/3/17 Tr. at 2244 (Johnson). Mr. Johnson
                appeared to equate judicial independence for the Copyright Royalty
                Judges with disconnection from the dictates of the law. His arguments
                failed to analyze the separate licenses created by Congress or the
                differing standards by which the Judges must set those rates. By
                focusing unduly on ``fair market'' considerations, Mr. Johnson ignores
                the policy factors Congress established for certain licenses in section
                801(b)(1) of the Act. Further, in every rate setting or rate adjustment
                proceeding, the Judges hear testimony from economists and other market
                experts to determine a fair rate for each license under the
                circumstances extant at each license period.
                 Notwithstanding the import of Mr. Johnson's (and other's) evidence
                of economic imbalances in the present-day music industry, nothing in
                the Constitution or the Copyright Act empowers the Judges to create new
                law or fill in legislative ``gaps'' arising by the course of commerce.
                Only Congress has that power.
                IX. Adjustment for Promotional or Substitutional Effect
                 Neither SoundExchange nor Sirius XM proposed an adjustment to the
                rates that they advocated to account for any promotional effect.
                Compare Shapiro WDT at 56 (``good reason'' to conclude promotional
                value from performances on Sirius XM greater than promotional value of
                performances by webcasters, ``I am not able to precisely quantify just
                how much lower the royalty rate would be, so I make no downward
                adjustment to the rate) with Orszag AWDT ]] 97-100 (considered whether
                adjustment was required between target market (Sirius XM) and benchmark
                market (interactive services) with respect to promotion and concluded
                no adjustment necessary).
                 Additionally, as the Judges explained in Web IV:
                 To the extent that the Judges adopt a rate based on benchmark
                evidence, it is not necessary to make additional adjustments to
                benchmarks to reflect the promotion and substitution factors. The
                Judges hold in this determination, as they have held consistently in
                the past, that the use of benchmarks ``bakes-in'' the contracting
                parties' expectations regarding the promotional and substitutional
                effects of the agreement.
                Web IV, 81 FR at 26326
                 The Judges have also repeatedly found that relative promotion, not
                absolute promotion/substitution, is the relevant factor in their
                consideration of statutory rates. See SDARS II, 78 FR at 23066-67
                (``Because only the relative difference between the benchmark market
                and the hypothetical target market would necessitate an adjustment, the
                absence of solid empirical evidence of such a difference obviates the
                need for such further adjustment''). Testimony from a SoundExchange
                economic expert in the present proceeding re-confirmed the logic of
                these conclusions in more formal economic terms. See 5/1/17 Tr. 1827
                (Ford); see generally Ford WDT; Written Rebuttal Testimony of George
                Ford, Trial Ex. 41 (Ford WRT). In the present case, the parties'
                position is consistent with these pronouncements regarding relative
                promotion, in that they do not propose a rate adjustment on the basis
                of any relative promotional differences.
                 Accordingly, the Judges do not adjust the rates they establish in
                this proceeding to reflect any hypothetical, absolute or relative
                promotional effects arising from performances on Sirius XM.\173\
                 \173\ There is anecdotal evidence in the record regarding
                promotional effect. The Judges have previously noted the
                insufficiency of anecdotal evidence to support a rate adjustment. In
                this proceeding, however, they find that issue to be moot given that
                the parties' respective experts have not proposed a rate adjustment
                to reflect promotional effect.
                 Further, as discussed elsewhere in this Determination, the
                substitution effects arising from record company licensing of sound
                recordings to Sirius XM is a lynchpin for the setting of the rate in
                this proceeding.
                X. The Itemized Section 801(b) Policy Considerations
                 As detailed in this Determination, the Judges find that the 15.5%
                of revenue rate arising from the Opportunity Cost approach represents a
                market-based rate that, in its entirety, mitigates the complementary
                oligopoly effects of certain positive opportunity costs embedded within
                it and reflects the parties' existing market power. Further, the record
                in this proceeding does not support any adjustment to the resulting
                rate to account for performances on Sirius having a promotional or
                substitutional effect. Accordingly, the Judges find this 15.5% of
                revenue rate to be an effectively competitive rate, and therefore a
                ``reasonable rate'' under 17 U.S.C. 801(b)(1) before consideration of
                the policy factors within that statutory section.
                 The Judges now analyze each of the itemized 801(b)(1) policy
                considerations to determine whether they should make any upward or
                downward adjustment in this proceeding and, if so, the magnitude of any
                such adjustment. In this and prior proceedings, the Judges have
                concluded that these four factors cannot necessarily be considered
                separately from one another. See, e.g., SDARS I, 73 FR at 4094.
                Moreover, in the process of identifying the ``reasonable rate'' before
                specifically applying these four itemized factors, the Judges may have
                already considered issues that overlap with the four factors, such that
                any further application of the same considerations would constitute
                improper double-counting of those considerations.
                 SoundExchange argued that the first three statutory objectives
                promote policies that are generally advanced through market
                transactions. According to its economic expert, Mr. Orszag, ``market-
                based rates are consistent with
                [[Page 65254]]
                the first three of the 801(b) factors.'' 4/25/17 Tr. 954 (Orszag). If
                that were true, then any attempt by the Judges to adjust a market-based
                rate would be improper or, to the extent the Judges had already
                considered market principles, a form of double-counting, were they to
                use those factors again to adjust the rate.
                 By contrast, Sirius XM asserted that, as a matter of law, ``it is
                well established that reasonable 801(b)(1) rates need not correspond to
                market rates.'' SXPFF ] 87 (citing SoundExchange v. Librarian of
                Congress, 571 F.3d 1220, 1224 (D.C. Cir. 2009) (any ``claim that
                [section 801(b)] clearly requires the use of market rates is simply
                wrong''); Recording Indus. Ass'n of Am. v. Librarian of Congress, 176
                F.3d 528, 533 (D.C. Cir. 1999) (same).
                 Thus, Sirius XM further asserted that in a proceeding governed by
                the section 801(b)(1) rate standard, ``market-approximating rates''
                must be further evaluated against the Section 801(b)(1) policy
                objectives in order to arrive at ``reasonable rates'' that comport with
                the statutory command. Id. The Judges do not agree that this
                construction of their statutory charge is legally mandated or otherwise
                necessary. The Judges understand that they may establish ``reasonable
                rates,'' and only thereafter decide whether or how to apply the four
                itemized factors. If the Judges find that a market-based rate \174\ is
                consistent with a ``reasonable rate,'' they may adopt that rate and
                apply the four factors to that rate. And, if the record does not
                support a further adjustment based on an application of the four
                itemized factors, or any of them individually, then the Judges may
                allow their market-based reasonable rate to stand as the new statutory
                 \174\ Although the Judges are not required to utilize market-
                based rates, they surely are not prohibited from doing so, as
                discussed supra.
                 As the foregoing analysis of the parties' proposals makes clear,
                the Judges have found that the 15.5% rate is a ``reasonable rate''
                derived from a combination of market-based opportunity costs, survey
                evidence and countervailing considerations. Thus, the Judges do not
                consider the four itemized factors in section 801(b)(1) as bearing upon
                the reasonableness of the market-based rate they have already
                identified as ``reasonable.'' Rather, in this case, the Judges consider
                whether these four factors, separately or in combination, require any
                policy-based adjustments of the 15.5% rate and whether the Judges have
                already incorporated those factors into the analysis that led them to
                identify the 15.5% rate.
                 Before embarking on an analysis of the parties' separate factor
                arguments, the Judges note an overarching theme in many of those
                discrete arguments. The parties argue broadly that their costs and
                investments are significant (Factor C issues) and that they are
                entitled to a ``fair'' income or return (Factor B issues) that is not
                disruptive of their businesses (Factor D issues), in order to maximize
                the distribution of sound recordings to the public (Factor A issues).
                These arguments echo the historical ambiguity in the creation of the
                itemized section 801(b)(1) factors and the debate between Messrs.
                Nathan and Arnold prior to the adoption of those factors, as discussed
                supra.\175\ Because the historic antecedent of the factors is the
                traditional public utility rate-setting process, the Judges cannot
                easily apply the factors to a determination of rates that is not based
                on a rate of return that accounts for specified costs, invested
                capital, a delineated rate base and a return on invested capital.
                Rather, the arguments in this context are by necessity more directional
                in nature. With this caveat, the Judges examine the parties' evidence
                regarding the need for any adjustment pursuant to the four itemized
                factors in section 801(b)(1).
                 \175\ See supra, section II.B
                A. Factor A: Maximizing the Availability of Creative Works to the
                 SoundExchange construed Factor A as calling for royalty rates that
                are sufficiently high to foster the creation of new content, but not so
                high as to jeopardize the ongoing viability of a licensee-service
                ``that has gained acceptance among consumers in the marketplace.'' SE
                PFF ]1435. Based on this understanding of Factor A, SoundExchange
                asserts that the market-based rates it has proposed do not require
                adjustment to satisfy the objectives of Factor A.
                 In support of this point, SoundExchange first relied on an
                explanation by Professor Willig as to why Factor A is consistent with
                his Ramsey Pricing approach. Willig WDT ] 13 (``The defining objective
                of Ramsey pricing is the maximization of consumer welfare, and this is
                an economic concept fully consistent with the portion[ ] of the Section
                801(b)(1) criteria that call[s] for the maximization of the
                availability of creative works to the public.''); see also 5/2/17 Tr.
                1981 (Willig) (``Ramsey pricing by definition . . . says the price has
                got to be high enough to be financially sustainable on the supply side,
                but balanced across uses in a way that maximizes consumer welfare.'').
                However, because Professor Willig did not identify a proposed rate
                under his Ramsey pricing approach, the Judges do not find that this
                approach compels a Factor A adjustment.
                 Nevertheless, Professor Willig did indicate that his Ramsey Pricing
                approach generally demonstrated that the statutory rate should increase
                from the present rate of 11%. Because the reasonable market-based rate
                identified by the Judges of 15.5% is 41% higher than the present rate,
                the Judges see no need to make an additional increase in order to be
                consonant with Professor Willig's directional recommendation arising
                from his Ramsey pricing approach.
                 SoundExchange's other economic expert, Mr. Orszag, provided a
                separate reason why SoundExchange's rate proposal was consistent with
                the Factor A principles. He stated that rates that are ``market-based''
                meet the Factor A criteria because they cause rates to be
                ``sufficiently high to incentivize copyright holders to create content,
                as reflected in content distributors' [licensees']--and by extension
                consumers'--willingness to pay for sound recordings.'' Orszag WDT ] 15.
                In addition, Mr. Orszag opined that the presence of streaming services
                operating under market-based rates demonstrates that those ``market-
                based rates are not so high as to prevent content distributors from
                earning economic returns sufficiently attractive to induce the
                investments required to transmit content to consumers, to broaden their
                distribution networks, and to develop quality enhancements and a richer
                menu of features and functionality.'' Id. Thus, he concluded that
                ``market-based rates will produce rates that are high enough to incent
                artists and labels to create their product,'' and ``are high enough for
                the content distributors to earn sufficiently high returns that they
                will want to distribute that content.'' 4/25/17 Tr. 956-57 (Orszag).
                 In support of this argument, SoundExchange noted the many specific
                costly ways in which labels must invest in their businesses, incurring
                repeated ``sunk costs,'' in order to provide a continuing flow of
                recorded music. As SoundExchange noted, the testimony and evidence
                highlight these specific risky and costly investments incurred to sign
                artists, create and produce recordings, manufacture product, market and
                distribute the music, build an audience and fan base, and license the
                copyrighted content to services such as Sirius XM for listening by end
                users. See, e.g., Written Direct Testimony of Jason Gallien, Trial Ex.
                30, at 2 (Gallien WDT).
                [[Page 65255]]
                 In opposition, Sirius XM correctly argued that Mr. Orszag ``merely
                offers truisms,'' such as that higher revenue encourages record
                companies to make sound recordings available to the public. However,
                Sirius XM noted that SoundExchange does not go beyond this truism to
                ``elucidate how properly determined market rates fail to ensure that
                record companies are fairly compensated.'' SXRPFF ] 340.
                 The mere (and obvious) fact that record companies incur substantial
                costs is not illuminating, because that fact simply begs the question
                whether rates are sufficient in light of those costs. Moreover, the
                Judges do not acknowledge that SoundExchange's position even rises to
                the level of a ``truism.'' An increase in the royalty rate will not
                necessarily result in an increase in revenue, if the increase causes a
                downstream retail percentage reduction in quantity demanded that is
                greater than a percentage increase in subscription prices.
                 The Judges find that a rate properly crafted to reflect an
                effectively competitive market rate will maximize the availability of
                creative works to the public by providing appropriate market
                incentives. Lower rates, ceteris paribus, would result in increased
                distribution but less incentive to produce sound recordings. Higher
                rates, ceteris paribus, would encourage increased production of sound
                recordings but discourage distribution. Nothing in the record indicates
                that, on balance, either an increase or a decrease in the reasonable
                rate of 15.5% would increase the availability to the public of sound
                 Further, because the 15.5% rate identified by the Judges is market-
                based, the Judges are advancing the general proposition asserted by
                SoundExchange, that the market, properly construed, will balance the
                interests of producers (licensors) and distributors (licensees),
                without an increase in that rate under Factor A. See 5/2/17 Tr. 1956-57
                (Willig) (from economic perspective, factor will ``require rates,
                royalty rates and terms generally that perform the economic function of
                motivating the record companies and the artists to create desirable
                sound recordings . . . [and] at the same time, . . . those rates and
                those terms should motivate . . . the distribution Services, to
                distribute those recordings to the public in a way that reflects
                consumer preferences.'').
                 Sirius XM suggested that the record supports a reduction in the
                royalty rate below the present 11% rate. In support of that point, it
                relied on the testimony of Professor Shapiro, who noted that an element
                of providing proper economic incentives to both the creators of sound
                recordings and to Sirius XM to make the necessary investments to
                ``maximize the availability of creative works to the public'' is the
                extent to which plays on Sirius XM's satellite radio service promote or
                substitute for other record label revenue streams. Shapiro WDT at 57-
                58. The Judges find this argument to be as much a ``truism'' as
                SoundExchange's argument emphasizing the incentivizing effect of higher
                royalty rates, and thus equally unavailing. Moreover, the Judges have
                already incorporated into their rate analysis survey evidence that
                demonstrates the substitution patterns between Sirius XM and other
                distribution channels. In that analysis, the Judges relied on an
                evidentiary roadmap provided to them by Sirius XM, through Professors
                Hauser and Farrell, for the identification and valuation of the
                substitutability of other distribution channels for Sirius XM.
                 Finally with regard to Sirius XM's argument, although Professor
                Shapiro asserted that a downward adjustment is warranted because Sirius
                XM is more promotional and less substitutional than non-interactive
                webcasters for other record label revenue streams, he found it too
                difficult to measure the magnitude of such an adjustment. Id. at 58 &
                App. D. Accordingly, he declined to propose such an adjustment. Shapiro
                WDT at 58. The Judges, therefore, have no evidentiary basis to make
                such a downward adjustment, even if they had found that a reduction was
                 The Judges interpret the ``maximize'' directive more broadly than
                either party to this proceeding. SoundExchange interpreted maximization
                as an upstream supply issue while Sirius XM interpreted maximization as
                a downstream distribution issue. The Judges must look at both steps in
                the process. Aside from the economic issues the parties argued, there
                is also simply no record evidence that indicates a shortfall in the
                overall production of sound recordings, or in the dissemination of
                sound recordings through Sirius XM or other distribution channels. For
                all these reasons, the Judges find no basis in the record for a policy
                adjustment to the 15.5% ``reasonable rate'' based on Factor A.
                B. Factor B: Fair Income/Fair Return Under Existing Market Conditions
                 Factor B requires the Judges to balance fair return to licensors
                and fair income to licensees. There is an inherent tension within this
                factor. Further, economic analysis cannot identify royalty rates or a
                division of revenue that is ``fair.'' See 4/25/17 Tr. 957 (Orszag)
                (``Fairness is not a well-defined term in the economics literature.'').
                Economics can, however, provide a framework for a fair process. Id. at
                958 (``Market-based rates are fair in the sense of, as long as they are
                being determined in a workably competitive environment, they are going
                to produce outcomes that are efficient.''). Thus, the Judges analyze
                the Factor B issues with an understanding of the inherent subjectivity
                of the endeavor, and an appreciation for the nuanced distinction
                between a ``fair outcome'' and a ``fair process.''
                 Equating the market rate with a rate that provides a fair return,
                SoundExchange argued that the current rate does not afford a fair
                return to copyright owners because it is lower than a market rate.
                Exacerbating this problem, according to SoundExchange, is the decline
                in sales of downloads and physical products, which have made royalty
                revenues from Sirius XM (and other services that offer ``access''
                rather than ``ownership'') even more important than in the past. See
                Gallien WDT at 3-6. To the extent this argument is simply a plea by
                SoundExchange for rates that subsidize declining business segments, it
                is rejected. As the Judges have said previously with regard to
                services' business models, rates are not set merely to support a
                particular business model. See Web IV, 81 FR at 26329 (the statute
                ``neither requires nor permits the Judges to protect any given business
                model proposed or adopted by a market participant''). Likewise in this
                proceeding, the Judges are not obliged to offset, mitigate, or
                subsidize a decline in physical or download sales by setting higher
                royalty rates for satellite radio. Moreover, as Sirius XM correctly
                argued, in this proceeding there is no record evidence that the decline
                in revenues from other distribution channels can be laid at the
                doorstep of Sirius XM and, further, any such decline cannot
                automatically mean that the current level of income received by the
                record companies is not ``fair.'' See SXM RPFF ] 344.
                 SoundExchange refined its argument by reformulating its
                substitution/cross-elasticity argument as a basis to raise rates
                pursuant to Factor B. More particularly, noting the self-evident fact
                that consumers have a limited amount of time to listen to music,
                SoundExchange pointed out that, when subscribers tune in to Sirius XM,
                they forego other direct revenue generating services, like Apple Music
                or Spotify, and that may also diminish their purchases of physical
                product and downloads because they spend their music-listening time
                tuned in to Sirius
                [[Page 65256]]
                XM. Gallien WDT at 7. The Judges reject this argument as a basis to
                adjust the rates pursuant to Factor B. In setting the ``reasonable
                rate'' of 15.5% for an effectively competitive market, the Judges
                examined the survey evidence that demonstrated the relevant
                substitution patterns. The Judges cannot gainfully pursue that same
                issue a second time by reconfiguring it as a basis for making
                adjustments under Factor B.
                 Approaching the Factor B issue from the other side of the ledger,
                so to speak, SoundExchange argued that ``Sirius XM earns far more than
                a fair income under the current 11% rate, and will continue to do so
                under SoundExchange's rate proposal.'' SE PFF at 605. In support of
                this conclusion SoundExchange pointed to several facts proffered by
                Professor Lys that demonstrate how and why Sirius XM has realized
                substantial and profitable growth: \176\
                 \176\ The summary of Professor Lys's exhaustive analysis of
                Sirius XM's financial success lays out SoundExchange's Factor B
                analysis and also demonstrates that the 15.5% rate set by the Judges
                cannot be construed as ``unfair.'' The rate provides the record
                companies with their opportunity costs, a form of return that
                Professor Willig acknowledged to be appropriate, while allowing
                Sirius XM to realize ongoing profits.
                 (a) At the time of SDARS I, Sirius and XM were two separate
                companies competing for subscribers based on price, and likewise
                engaged in price competition for non-music content such as sports
                leagues and talk show personalities. However, in July 2008, Sirius
                and XM merged, and the merged entity, Sirius XM, became the sole
                provider of satellite radio in the United States, holding a monopoly
                in this market segment. Lys CWDT ] 43.
                 (b) The merger eliminated price competition between the two pre-
                merger satellite radio services for subscribers and for non-music
                content, and also allowed the combined company to take advantage of
                the economies of scale that are central to its business model. Lys
                CWDT ] 44.
                 (c) Sirius XM's operating costs are predominantly fixed with
                respect to subscriber revenue. These fixed costs include programming
                and content, satellite and transmission, sales and marketing,
                engineering and design, subscriber acquisition costs, and general
                and administrative costs.\177\ Id. ] 45.
                 \177\ Alternatively, these costs are the same whether one person
                is listening to a Sirius XM broadcast, or millions.
                 (d) Sirius XM's variable operating costs (i.e., costs that do
                vary with subscriber revenue) are small in comparison, and include
                royalties, customer service, and cost of equipment. See id ] 46; see
                also id. ] 46 n.17 (citation omitted).
                 (e) Because of its largely fixed cost structure and its post-
                merger market share growth, Sirius XM's profits increased
                dramatically once its sales reached its ``break-even point,'' i.e.,
                the point at which its fixed costs are covered. Id. ] 47.
                 (f) This growth in profits is reflected in Sirius XM's high
                contribution margin (i.e., the fraction of each additional revenue
                dollar that covers fixed costs or increases profits). Specifically,
                by 2015, Sirius XM achieved a contribution margin of [REDACTED] %,
                meaning that each additional dollar of revenue increases pre-tax net
                income and cash flows by $[REDACTED]. Id.
                 (g) Sirius XM's ``free cash flow'' (FCF) (a metric commonly used
                to assess a company's performance and value), captures the amount of
                cash that is available, after necessary business investment
                (including satellite investments), that can be used to pay dividends
                and repurchase shares. In 2012, Sirius XM's FCF was [REDACTED]% of
                EBITDA,\178\ a higher percentage than other large entertainment-
                media companies. That is, Sirius XM can distribute [REDACTED]% of
                its EBITDA to its shareholders without affecting its operations.
                 \178\ EBITDA means earnings before interest, taxes, depreciation
                and amortization.
                 (h) Looking at FCF over a longer period, over the past decade
                Sirius XM has generated $2.6 billion in such FCF. Since the merger,
                starting in 2009 Sirius XM has recorded seven straight years of
                positive FCF and has over that seven-year period generated $4.91
                billion of FCF. Lys CWDT ]] 91-92. Sirius XM's FCF has increased
                from a deficit of $1.23 billion in 2006 (meaning that the company
                was not generating sufficient cash and needed to rely on external
                funding sources for its operations and investments) to a positive
                $1.32 billion in 2015. This means that after it satisfied its
                investment needs, its operations generated $1.32 billion in cash
                that it could distribute to its investors. Id. ] 55. Cumulatively,
                from 2006-2015, Sirius XM earned $5.9 billion in operating cash
                flows. Id. ] 90.
                 (i) Sirius XM's executives trumpet the company's more recent
                performance as ``one of the best growth stories in media,'' and
                conclude that its ``business is thriving''--a claim confirmed by
                Professor Lys's analysis. Id. ] 52 & nn.24-25.
                 (j) In the 2009-2015 post-merger period, Sirius XM earned a
                total of $5.6 billion in EBIT.\179\ Similarly, in the period since
                the merger, Sirius XM has generated over $7 billion in adjusted
                EBITDA, an increase from negative $690 million in 2006 to positive
                $1.66 billion in 2015. Lys CWDT ] 54.
                 \179\ EBIT means earnings before interest and taxes.
                 (k) Turning from financial to volume metrics, over the past
                decade, Sirius XM has substantially increased its number of
                subscribers, even as it has increased the prices and fees it
                charges. Lys CWDT ] 57; see also 4/26/17 Tr. 1323 (Lys) (Sirius XM's
                historic revenue base). Specifically, over the past decade Sirius
                XM's subscriber base has grown on average [REDACTED]% per year, more
                than doubling from [REDACTED] million subscribers in 2006 to
                [REDACTED] million subscribers at the end of 2015. Lys CWDT ] 59. As
                of March 2016, Sirius XM had over 30 million subscribers. Id. ] 58 &
                 (l) Sirius XM's total revenue has grown even faster than the
                growth in the number of its subscribers--from $1.57 billion in 2006
                to $4.57 billion in 2015--a 12.6 percent compounded annual growth
                rate (CAGR). Lys CWDT ] 65. This higher revenue growth resulted from
                Sirius XM's increase in its subscription prices and fee charges that
                occurred contemporaneous with the growth of its subscriber base,
                allowing Sirius XM to realize a 15.8% increase in its ARPU between
                2008 and 2015, corresponding to a compounded annual growth rate of
                1.6%. See id. ] 66, Fig. 11. The table below presents the increase
                in the total effective monthly cost of subscribing to Sirius XM's
                most popular subscription package, the ``Select'' package), i.e.,
                combining the subscription fee and the U.S. Music Royalty Fee:
                 Sirius XM Historical Effective Monthly Total Subscription Cost
                 [Select subscription package]
                 Date Nominal U.S. Music effective Increase % Increase
                 subscription royalty fee subscription
                1-Jan-06........................ $12.95 $0.00 $12.95 n/a n/a
                29-Jul-09....................... 12.95 1.98 14.93 1.98 15.3
                6-Dec-10........................ 12.95 1.40 14.35 (0.58) -3.9
                1-Jan-12........................ 14.49 1.42 15.91 1.56 10.9
                1-Feb-13........................ 14.49 1.81 16.30 0.39 2.5
                1-Jan-14........................ 14.99 1.81 16.80 0.50 3.1
                5-Jan-15........................ 14.99 2.08 17.07 0.27 1.6
                27-Apr-16....................... 15.99 2.22 18.21 1.14 6.7
                [[Page 65257]]
                Id. ] 70, Fig. 12; see also Summary of U.S. Music Royalty Fees by
                Package, Trial Ex. 321 (excerpt from Sirius XM website). As this figure
                shows, Sirius XM's pricing on its Select subscription package has
                increased by 41% over the past decade, from $12.95 in 2006 to $18.21 as
                of April 2016, corresponding to a total increase of $5.26 or a
                compounded annual increase of 3.5%. Lys CWDT ] 71.
                 According to Professor Lys, Sirius XM's pricing increases appear to
                have had little effect on demand for its services, as evidenced by the
                essentially non-existent impact of the price increases on subscriber
                ``churn'' (defined by Sirius XM as ``the monthly average of self-pay
                deactivations for the period divided by the average number of self-pay
                subscribers for the period''). Sirius XM Holdings, Inc., Proxy
                Statement & 2015 Annual Report, Trial Ex. 372, at 21 (Sirius XM 2015
                Annual Report).\180\
                 \180\ The only noticeable bump is an increase in churn from 1.8%
                to 2.0% in 2009 when Sirius XM introduced the U.S. Music Royalty
                Fee, resulting in the largest percentage increase in the effective
                subscription price, and coinciding with the 2008-09 recession. Lys
                CWDT ] 73.
                 Sirius XM's most recent annual performance has been consistent with
                its past post-merger growth and profitability, as evidenced by the
                following points.
                 In 2016 Sirius XM set records for subscribers, revenue, adjusted
                EBITDA, and free cash flow, beating its guidance on all of those
                metrics. 5/15/17 Tr. 3759-60 (Meyer).
                 In 2016, Sirius XM added more than 1.7 million net subscribers,
                outperforming expectations. It added 1.66 million ``self-pay net
                subscribers,'' also exceeding expectations (Sirius XM's original
                guidance was 1.4 million). Trial Ex. 25, Figs. 43 at 56.
                 In 2016, Sirius XM's subscriber level increased by 6%, raising
                its subscribership level to 31.346 million. Lys WRT ] 164.
                 In 2016, Sirius XM's 2016 revenue grew by 10% compared to 2015,
                to more than $5 billion; EBITDA grew by 13% to $1.9 billion; FCF per
                share grew 26% to $0.30; and net income grew 46% to $746 million.
                Lys WRT ] 166.
                 In sum, SoundExchange argued that there is abundant and undisputed
                evidence that Sirius XM's profitability has grown dramatically--and
                significantly faster than its revenue--indicating an improved ability
                to monetize the operational gains and scale.
                 Accordingly, SoundExchange's critical conclusion from Professor
                Lys's exhaustive analysis was this: Sirius XM has been facing a
                relatively inelastic demand, enabling it to increase prices to
                consumers without causing a loss of subscribers. Lys CWDT ] 74.\181\
                 \181\ Professor Lys also opined that Sirius XM will continue to
                grow across these metrics for all of 2017 and into the foreseeable
                future. See Lys CWDT ]] 152-198. As the Judges have stated
                previously, they are less than sanguine about projections and
                forecasts given the inherent speculative nature of such a process.
                However, as Professor Lys pointed out, his projections in SDARS II
                regarding the future financial performance of Sirius XM were
                accurate, and prior financial forecasts, as well as Sirius XM's own
                internal forecasts, [REDACTED]. See id. These facts suggest that
                there is no present reason to project a scenario in which Sirius
                XM's current level of profitability will fall or will not be
                 Sirius XM did not challenge the wealth of evidence demonstrating
                its economic, market, and financial success. Rather, Sirius XM
                contended that these measures of Sirius XM's economic position are
                ``entirely irrelevant to the rate-setting task at hand.'' Shapiro CWRT
                at 5. More specifically, Sirius XM argued that ``Professor Shapiro has
                demonstrated'' through his direct and rebuttal testimony ``that Sirius
                XM's overall profitability would not be among the variables impacting
                the outcome of a license negotiation in a workably competitive
                market.'' See Shapiro CWRT, App. D. & 24-26.
                 Professor Shapiro explained that, in his opinion, it is not the
                overall profits that are relevant in a Factor B analysis, but ``the
                incremental profit f[rom] additional Sirius XM customers, as measured
                by the contribution margin (which takes into account only variable
                costs) that enters the analysis. Shapiro CWRT at 52 (emphasis added).
                Sirius XM noted that its ``contribution margin'' has been essentially
                unchanged over time, and that even Professor Lys acknowledged that the
                contribution margin had ``remained remarkably consistent over time.''
                See Lys WDT ] 87) (emphasis added).
                 Sirius XM sought to impeach Professor Lys with excerpts from his
                testimony in Web IV:
                 From the standpoint of economics, a company's ability to pay
                royalties, while still remaining profitable, and the ``willing
                buyer/willing seller'' standard are two very distinct concepts.
                See 4/27/17 Tr. 1592-93 (Lys).
                 It ``is wrong to suggest that [a service's] current or past
                profitability should be used to determine the royalty rate a willing
                buyer and a willing seller would agree upon.''
                See 4/27/17 Tr. 1593 (Lys).
                 It was ``incorrect'' to ``suggest[ ] that Pandora's current
                profitability and financial performance determine its ability to pay
                royalties, and that Pandora's ability to pay determines the rates
                the Judges should adopt.''
                See 4/27/17 Tr. 1592 (Lys).
                 Sirius XM also pointed out that its non-music content costs have
                declined, demonstrating that there is no positive correlation between
                its profitability and its content costs. See Shapiro CWDT at 52-53 &
                Fig. 4.
                 In sum, Sirius XM concluded that its potential ability to pay
                higher royalties out of increasing profits is simply irrelevant to the
                question whether it is receiving a ``fair return'' pursuant to Factor
                 The Judges find that Sirius XM's increased profitability does not
                provide an independent basis to adjust the 15.5% identified by the
                Judges. Sirius XM earns sufficient profits, as the only satellite radio
                provider, to allow it to pay the opportunity costs of its service to
                the record companies. Those opportunity costs, properly weighted,
                constitute the building blocks for the 15.5% rate. The evidence, again,
                as detailed by Professor Lys, makes it abundantly clear that Sirius XM,
                through its monopoly of the satellite radio distribution channel, has
                the financial capacity to pay higher rates and still maintain a high
                level of profitability.
                 The Judges find no inconsistency with regard to Professor Lys's Web
                IV testimony and his testimony in this proceeding. If a service were
                operating at a loss rather than a profit, the record companies would
                not consider that fact relevant, especially if the service did not add
                new (i.e., non-cannibalizing) listeners who could be monetized by
                subscription or advertising revenues. However, when a service is
                profitable, in an unregulated market, the record companies, empowered
                by their ``must have'' status, can and will seek to acquire as much of
                the surplus (profits) as they can through the bargaining process. As
                explained in this determination (and in Web IV), though, the Judges
                reject a division of profits based on the ``must have'' power of the
                record companies, absent application of an appropriate offsetting
                factor, such as identified in the steering analysis in Web IV or in the
                opportunity cost analysis in this determination.
                 Beyond Professor Lys's financial analysis, SoundExchange made
                additional arguments with regard to Factor B that do not aid in the
                Judges' analysis. SoundExchange argued essentially that a fair
                allocation of the revenue attributable to satellite radio will arise
                either from: (1) A Ramsey pricing approach as described by Professor
                Willig; or (2) arm's-length negotiations in a benchmark market such as
                the interactive market suggested by Mr. Orszag. Neither of these points
                supports a Factor B analysis. First,
                [[Page 65258]]
                Professor Willig did not identify a rate pursuant to his Ramsey pricing
                approach, and he argued that this approach counseled generally for an
                increase in the existing rate (which the Judges have found to be
                appropriate pursuant to their reasonable rate analysis). Mr. Orszag's
                assertion that arm's length negotiations in the interactive market
                demonstrate a fair process (if not necessarily a fair outcome) is
                belied by the fact that: (1) The survey results reached by all survey
                experts demonstrates the inapposite nature of the interactive
                benchmark; and (2) the interactive benchmark is tainted by a
                complementary oligopoly effect that cannot be mitigated, on the present
                record, by a fact-based steering adjustment.
                 SoundExchange, again relying on Mr. Orszag, cautioned that the
                Judges should not apply Factor B so as to provide an unjustified
                ceiling on the royalty rate, which could constitute a subsidy to Sirius
                XM. The Judges' 15.5% reasonable rate does not constitute an arbitrary
                ceiling or a subsidy, because it is derived pursuant to the
                ``opportunity cost'' approach that, according to Professor Willig,
                resulted in a reasonable rate.\182\
                 \182\ To be sure, Professor Willig calculated a higher rate
                because he used the diversion ratios in the Dhar Survey, but the
                Modified Dhar Survey (as corrected), with its superior diversion
                ratios, applies the same opportunity cost approach advocated by
                Professor Willig, and even applied his ``Creator Contribution''
                walk-away values.
                 Sirius XM found no basis under Factor B to change its proposed
                rate. Shapiro WDT at 58. Of course, the Judges' 15.5% rate is above
                Sirius XM's proposed rate range that extends to 11% (the current rate).
                However, Sirius XM made no arguments that would support a reduction of
                the 15.5% rate pursuant to Factor B. See Shapiro WDT at 58. Sirius XM
                limited its Factor B analysis to the bald assertion that its
                benchmarking analysis (rejected by the Judges) led to a fair return for
                copyright owners and a fair income for copyright users.
                C. Factor C: Relative Roles of the Parties
                 SoundExchange asserted that, pursuant to Factor C, the statutory
                rate should be above its proffered benchmark, or at least at the high
                end of its benchmark range. In support of this argument, SoundExchange
                pointed to testimony that record companies and artists make substantial
                contributions through their search for artistic talent, a process that
                is long, competitive, and often unsuccessful. See 5/11/17 Tr. at 3542-
                43 (Kushner). More particularly, SoundExchange explained that Artist &
                Repertoire (A&R) representatives from labels go to clubs and concerts
                worldwide, listen to thousands of demonstration (demo) recordings, and
                search the internet to identify emerging and undiscovered artists.
                According to SoundExchange, these tasks are labor-intensive, because
                finding musical talent requires people with sufficient industry
                knowledge and experience. Gallien WDT at 8. SoundExchange pointed to a
                2015 RIAA study that found the major labels spent $13.4 billion between
                2003 and 2012 to find new artists and help them reach an audience.
                Written Direct Testimony of Michael Kushner, Trial Ex. 34, ] 77
                (Kushner WDT).
                 SoundExchange noted that after record companies incur the foregoing
                costs, they must also incur costs to shape the artists' music and image
                in order to maximize their commercial appeal. Those investments can
                include the costs of dance and vocal lessons, personal stylists, makeup
                artists, trainers, and media training. Many of those investments do not
                yield a financial return. See 5/11/17 Tr. 3542-43 (Kushner) (``[I]f you
                look at the totality of the number of artists we sign and the numbers
                that are successful, clearly the unsuccessful ones outweigh the
                successful ones'').
                 SoundExchange further noted that recording companies incur
                substantial additional costs to create recorded works, and to market,
                manufacture, and distribute recorded music.\183\ SoundExchange avers,
                for example, that in 2015 alone, UMG spent $[REDACTED] million on
                recording costs, mastering costs, producer and sampling fees, royalty
                advances, and overhead funding to contracting parties who provide A&R
                services. Gallien WDT at 8. Mr. Kushner testified for Atlantic Records
                that, on an album basis, the recording costs for a maiden album from a
                new artist typically range from $[REDACTED] to $[REDACTED]--and can
                exceed $[REDACTED] for an established artist. Kushner WDT ] 36. If the
                record companies cannot recoup these expenditures and advances from
                sales revenue, they--not the artists or the music services--bear the
                unrecouped cost and foregone profits.\184\
                 \183\ These costs typically may include the additional expense
                of a producer's salary, studio rental, hiring a sound engineer,
                paying musicians to play with the featured artist, and preparing a
                master recording. See Written Direct Testimony of Bruce Iglauer,
                Trial Ex. 33, at 10-11 (Iglauer WDT); Kushner WDT at ]] 48-50.
                 \184\ For example, SoundExchange proffered UMG's 2015 income
                statement, which reflects $[REDACTED] in (1) advances and recording
                costs for new unproven artist signings and (2) write offs of
                investments in established artists, net of recoveries. Gallien WDT
                at 10.
                 As to marketing costs, Mr. Kushner testified that for Atlantic
                Records, the typical initial U.S. marketing budget for an album cycle
                for a new artist is in the range of $[REDACTED] to $[REDACTED]. Id. ]
                68. In fiscal year 2015, UMG alone spent $[REDACTED] specifically on
                gross marketing costs, as well as $[REDACTED] in overhead costs for its
                various departments that also provided marketing services. For UMG,
                marketing costs included over $[REDACTED] in advertising, $[REDACTED]
                in artists' press and TV appearances, over $[REDACTED] in internet
                marketing & advertising, over $[REDACTED] in radio promotion, and over
                $[REDACTED] in video production costs. With specific reference to
                streaming and playlisting efforts, UMG has also invested in the setup
                costs and personnel to establish a team dedicated to streaming
                marketing and playlisting efforts. Gallien WDT at 13-14.
                 Regarding recording companies' manufacturing and distribution
                costs, they remain substantial in spite of the industry's transition
                away from physical media. Because of declining physical product sales,
                physical manufacturing has been declining, but it still carries high
                costs. UMG reported that its manufacturing costs for physical records,
                including costs they advance for pressing and distribution deals, were
                $[REDACTED] in fiscal year 2015. Id. at 14. Digital distribution has
                been increasing, and there is misperception that it is costless to the
                record companies. The reality is that digital distribution is highly
                complex and requires expensive investments. UMG reported that since the
                early 2000s, it has invested over $[REDACTED] in IT infrastructure and
                operating costs, as well as the professionals that today distribute the
                thousands of digital files it provides to hundreds of music services
                and to handle the processing of billions of micro transactions related
                to recognizing digital revenues and calculating the associated royalty
                obligations. Id. at 14. And in 2016 and throughout 2017, UMG will be
                investing in its 3rd generation of digital supply systems and digital
                revenue processing systems at an estimated cost of over $[REDACTED].
                Id. at 15-16.\185\
                 \185\ Indies' costs differ in magnitude from those of the
                Majors, but the categories are similar, according to SoundExchange.
                Mr. Iglauer provided qualitative testimony stating that his Indie
                label, Alligator Records, spends substantial time seeking out
                recording artists to sign--listening to demos, attending shows and
                music festivals, reading the music press, and taking referrals from
                other bands, labels, managers, and booking agents. It also devotes
                significant resources to promoting the music and touring of artists
                they have signed, including the payment of recording costs and
                advances. Iglauer WDT at 9.
                [[Page 65259]]
                 In sum, SoundExchange asserted that major labels spend billions of
                dollars finding and developing new artists, helping them reach an
                audience, and creating and marketing recorded music.
                 Sirius XM gave short shrift to these lengthy descriptions of the
                record companies' various expenses. First, Sirius XM claimed that
                SoundExchange's request for an upward adjustment pursuant to Factor C
                is inconsistent with the latter's prior broad proclamation that the
                first three itemized 801(b)(1) factors are satisfied by market rates.
                Second, Sirius XM noted that the categories of costs that SoundExchange
                has itemized ``have long prevailed in the recording industry,'' and
                that nothing set forth in SoundExchange's Factor C argument provided
                specific reasons to suggest that those costs have changed in a manner
                to support an adjustment upward in the statutory rate. Third, Sirius XM
                noted that SoundExchange did not measure ``the investments made by the
                record companies'' against ``Sirius XM's investments ``and thus did not
                perform the ``relative'' analysis of costs, risks, and other factors
                expressly required by the statutory language. In this criticism, Sirius
                XM also noted parenthetically that SoundExchange did not explain how or
                why particular portions of the record industry's costs should be
                allocable to Sirius XM, rather than other distribution channels.
                 Additionally, relying on Professor Shapiro's testimony, Sirius XM
                argued that when the emphasis is placed properly on the ``relative''
                contributions of the parties, the record companies' cost of creating
                sound recordings, ``is almost certainly significantly less than the
                contribution that Sirius XM plans to make over the 2018-2022 license
                period,'' including the launching of two new satellites and improving
                its repeater network.'' Shapiro WDT at 58. Although he concluded that
                this relative difference points toward reducing the statutory rate, the
                relative balancing ``does not readily lend itself to quantifying'' an
                appropriate downward adjustment. Id.
                 Sirius XM also claimed that it contributes additional value through
                its ``delivery network.'' As Professor Shapiro argued: ``[B]y combining
                music, non-music, curation, and a delivery platform all into one
                bundle, Sirius XM is creating significant value for consumers, with
                each piece of the bundle contributing to the overall value of the
                service.'' 4/20/17 Tr. 398-99 (Shapiro) (emphasis added).\186\
                 \186\ Sirius XM did not address its contribution of this
                additional network value in its Factor C argument. However, the
                Judges find that this issue is best considered in the context of
                Factor C, which broadly addresses relative contributions.
                 In response, SoundExchange, through Mr. Orszag, asserted that
                Sirius XM's ``delivery platform'' does not add separate value, because
                any value created by that platform flows principally to Sirius XM; that
                is, even under the SoundExchange proposal the record companies receive
                only 23% of Sirius XM's revenue. Therefore, he noted, most of the gains
                flow to Sirius, ``but there is a portion that goes to the labels which
                [provide] a necessary input,'' 4/25/17 Tr. 1034 (Orszag), which is
                ``consistent with sound economics.'' Id. at 1034-35 (Orszag) (emphasis
                 In reply, Sirius XM argued that Mr. Orszag's justification for the
                labels' sharing of any value added (via revenue) from Sirius XM's
                unique inputs begs the question as to ``what the split should be,'' and
                fails to ``address whether an adjustment to the [interactive] benchmark
                is warranted to account for Sirius XM's independent contributions to
                the value of its service offerings.'' SXM RPFF ] 62.
                 The Judges agree with Sirius XM that the value of its unique inputs
                (relative to interactive and other services), such as its expensive
                satellite and ancillary technical equipment \187\ and its use of live
                ``on-air'' talent and other specialized personnel,\188\ are intended
                to--and do--create a product that is differentiated from interactive
                services. However, SoundExchange is correct that inputs do not have
                independent value per se.\189\
                 \187\ See, e.g., Written Direct Testimony of James E. Meyer, ]
                12 (Meyer WDT); Written Direct Testimony of Bridget Neville, passim
                (Neville WDT); Written Direct Testimony of Terrence Smith, passim
                (Smith WDT).
                 \188\ See Blatter WDT ]] 9-10.
                 \189\ As Professor Orszag asserted, David Frear, Sirius XM's
                CFO, conceded this point during the SDARS II proceeding: [REDACTED]
                See Orszag WRT ] 53 n.65.
                 Rather, Sirius XM incurs the cost of these inputs to create a
                differentiated and thus more profitable service. If it succeeds, the
                benefits will be evidenced by higher revenues (in excess of those input
                costs) and will, therefore, result in higher profits. A separate
                accounting of the costs of the Sirius XM satellite radio platform would
                constitute a clear double-counting of value.
                 By contrast, if the cost of Sirius XM's investments in its unique
                inputs failed to differentiate its output (i.e., its service) from,
                say, interactive services, then there would be no justification for
                Sirius XM to obtain any recompense for its investments, either through
                an adjustment to the revenue (royalty) base or to the royalty rate. As
                the Judges noted previously, a party is not entitled to a rate simply
                to preserve its particular business model. See, e.g., Web IV, 81 FR at
                26329 (``the statute neither requires nor permits the Judges to protect
                any given business model proposed or adopted by a market
                participant.''). If Sirius XM's unique and expensive inputs have
                marketplace value, those inputs will differentiate its service in an
                attractive manner, resulting in relatively low cross-elasticities and
                own-elasticities, lower opportunity costs for the labels in licensing
                to Sirius XM, and higher profits for Sirius XM. It is through this
                economic transmission mechanism that Sirius XM may extract value from
                its unique inputs--not from a separate valuation of the inputs.
                 This argument does not fully address Mr. Orszag's point that the
                labels, as providers of a ``necessary input'' would, in an unregulated
                market, command a portion of the value created by these unique Sirius
                XM inputs. Again, Mr. Orszag concluded that such ``sharing'' is simply
                ``sound economics.'' However, that reasoning is ``sound'' only to the
                extent the Judges would find it appropriate to reject Professor
                Willig's opportunity cost approach and adopt instead his Nash
                Bargaining Solution model. For the reasons set forth at length supra,
                the Judges have done precisely the opposite: Accepting his opportunity
                cost approach and rejecting his Nash Bargaining Solution approach.\190\
                 \190\ The Judges' finding appears consistent with Sirius XM's
                position: ``SoundExchange's attempt to expropriate a portion of the
                value that Sirius XM alone creates is entirely at odds with the
                section 801(b) factors.'' SXM RPFF ] 64. However, Sirius XM's claim
                of expropriation is hyperbolic. By its logic, Sirius XM's use of the
                labels' music likewise would constitute expropriation--of the sound
                recording value that the labels created. The difficult issue is the
                application of the statutory and economic factors to allocate the
                value of the output created by a production function (containing
                sound recordings and a delivery network) that utilizes these
                separate inputs in combination, to cover all costs (including
                opportunity costs) while rewarding the investment in technology that
                leads to innovative product differentiation. The Judges' 15.5% rate
                addresses these various and competing factors in a reasonable
                D. Factor D: Minimizing Disruptive Impact on Structure of the
                Industries Involved and Generally Prevailing Industry Practices
                 The Judges' long-standing test for whether a rate is ``disruptive''
                pursuant to Factor D provides that a rate change would be disruptive if
                it ``directly
                [[Page 65260]]
                produce[s] an adverse impact that is substantial, immediate, and
                irreversible in the short-run because there is insufficient time for
                either the SDARS or the copyright owners to adequately adapt to the
                changed circumstances produced by the rate change and, as a
                consequence, such adverse impacts threaten the viability of the music
                delivery service currently offered to consumers under this license.''
                SDARS II, 78 FR at 23069 (quoting SDARS I, 73 FR at 4097). Accordingly,
                the Judges apply this standard to the 15.5% rate they have found to be
                reasonable in this proceeding to determine whether the 15.5% rate would
                be disruptive.\191\
                 \191\ Nothing in the record indicates that the reasonable rate
                of 15.5% identified by the Judges (a 41% rate increase from 11% to
                15.5%) would be disruptive to the record companies, even though it
                is below the 23% rate sought by SoundExchange. See Shapiro WDT at
                Fig. 5 and p. 59 (noting industry data showing that Sirius XM
                accounted for only about 4% of overall record industry revenue in
                2016). Given the 4% figure identified by Professor Shapiro, 23% of
                that percentage equals .9%, and 15% of that 4% equals .6%. The
                difference in revenue to SoundExchange between its percent-of-
                revenue proposal and the rate set in this Determination therefore is
                approximately .3% of overall record industry revenue, and thus not
                disruptive within the applicable standard. Accordingly, the Judges
                focus on whether this increase would be disruptive for Sirius XM.
                 SoundExchange relied on the testimony of Professor Lys, who
                demonstrated that Sirius XM would still earn substantial returns
                (compared to other companies in closely-related industry sectors), even
                if the Judges were to increase the statutory royalty rate to 24%. See
                4/26/16 Tr. 1321-23 (Lys).\192\ First, Professor Lys calculated that
                the pre-tax incremental impact of even a 24% royalty payment (based on
                2015 figures available to him when preparing his direct testimony) was
                $[REDACTED] million and the net after-tax impact would be $[REDACTED]
                million. Lys CWDT ]] 129-30. At those levels, Sirius XM would obtain
                the following financial results:
                 \192\ The Judges provide this detailed summary of Professor
                Lys's exhaustive analysis of Sirius XM's financial picture not only
                to demonstrate the proper application of an itemized factor, but
                also to underscore that Sirius XM can easily afford to pay the
                market-based reasonable rate of 15.5% crafted by the Judges.
                 Sirius XM 2015 Performance Metrics Under 24% Royalty Rate vs. SIC 483
                 for SIC
                 SXM (@24% 483
                 Performance metric royalty) broadcast
                Return on Assets.................................. 5.5 3.0
                EBITDA Margin..................................... 27.4 19.9
                Free Cash Flow Margin............................. 23.0 6.1
                Lys CWDT ]] 132-42 & Fig. 33; see 4/26/17 Tr. 1321-22 (Lys).
                 Professor Lys also analyzed Sirius XM's forecasted performance,
                again assuming arguendo that the Judges set the statutory rate at 24%
                of revenue. His analysis shows that, at that rate, the incremental
                after-tax impact on Sirius XM would range between $[REDACTED] million
                in 2018 and $[REDACTED] million in 2021. Professor Lys noted that
                Sirius XM is expecting to perform so well in the future that it could
                easily absorb this higher rate for the SDARS III period, 2018 through
                2022. Lys WRT ] 219. More particularly, under this scenario, Professor
                Lys testified that Sirius XM:
                 Would earn between $[REDACTED] and $[REDACTED] in EBITDA in
                every year of the forecast, and would continue growing. Id. ] 220.
                 Would earn over $[REDACTED] in net income each year of the
                forecast, and would continue growing. Id. ] 221.
                 Would generate over $[REDACTED] in free cash flow almost every
                year of the forecast and would continue growing. Id. ] 222.
                 Professor Lys further noted that, even under Sirius XM's own
                internal forecasts, with a royalty rate of 24%, it would remain
                extremely profitable throughout the SDARS III term (2018-22), earning
                $[REDACTED] in EBITDA, $[REDACTED] in net income, and $[REDACTED] in
                free cash flow. Id. ] 223. Additionally, Sirius XM's 2016 [REDACTED]
                indicates that, at the end of the forecasted period (2022), it would
                have a strong balance sheet, with $[REDACTED] in cash and equivalents,
                total assets of $[REDACTED], and shareholder equity of $[REDACTED]. Id.
                ] 224.\193\
                 \193\ The Judges place much less emphasis on projections
                compared with current facts, absent additional proof that the entity
                making the projection has a track record that makes its projection
                credible. However, the Judges note that these projections are
                consistent with [REDACTED].
                 For these reasons, SoundExchange argued that Sirius XM can
                comfortably afford a rate increase from the current 11% to its proposed
                23% of revenue. As Professor Lys colorfully and emphatically opined:
                [REDACTED]. 4/27/17 Tr. 1391-92 (Lys).
                 Professor Lys also examined in great detail Sirius XM's growth in
                equity value compared to broader market metrics such as the S&P 500 and
                the Dow Jones Industrial Average, and noted that Sirius XM far outpaces
                those indices. He further noted that Sirius XM outperforms other firms
                in the noninteractive markets. From these facts, Professor Lys
                concluded that Sirius XM enjoys an ``unfair advantage over competing
                digital music services that pay higher royalty rates.'' SE PFF ] 1584;
                see Lys CWDT ]] 117-124.
                 To provide yet another perspective on the financial success of
                Sirius XM, Professor Lys calculated how its performance would have
                changed in 2015 if the statutory rate had been increased above the 10%
                applicable in that year. His calculations demonstrated that:
                 Sirius XM could have afforded to have its 2015 statutory royalty
                rate increased from 10.0% to up to 41.9%, 35.9% or 31.4% and still
                earned an average EBITDA level of $735.7 million . . . , $909.5
                million . . . , or $1.037 billion . . . , respectively. While this
                level of the royalty rate would have reduced Sirius XM's EBITDA
                profitability by $921 million, $747 million, and $620 million,
                respectively (from the actual $1,657 million), would have only
                equated Sirius XM's performance with its industry peers' EBITDA
                profitability levels.
                Lys CWDT ] 136.
                 Sirius XM could afford to have its 2015 statutory royalty rate
                increased from 10.0% to 65.1% and still earn a free cash flow level
                commensurate with SIC 483 of $278.8 million.
                Id. ] 138.
                 Sirius XM could afford to have its 2015 statutory royalty rate
                increased from the actual 10.0% to 35.0% and still earn an average
                SIC 483-level (in terms of return on assets) net income level of
                $39.6 million.
                Id. ] 142.
                 In sum, SoundExchange made a compelling case that an increase in
                rates far greater than the 15.5% identified as a reasonable rate by the
                Judges would be easily sustainable for Sirius XM, and therefore not
                disruptive under the Factor D standard as quoted supra. Moreover,
                Sirius XM did not provide any evidence sufficient to question Professor
                Lys's analysis, which indicated that Sirius XM could afford a much
                larger rate increase. Accordingly, the Judges find that, a fortiori,
                Professor Lys's analysis indicates that Sirius XM could also afford a
                smaller increase, to the 15.5% rate determined by the Judges.\194\
                 \194\ SoundExchange also asserts that Sirius XM has paid less
                than an appropriate rate in previous rate terms. See SEPFF ]] 1598-
                1606 (and record citations therein). However, the Judges do not
                conclude that, as a matter of law, they can set rates for a
                forthcoming period that reimburse a licensor for any alleged
                underpayments caused by a purported error in the statutory rate for
                a past rate period.
                XI. Terms
                 Besides seeking a revision of the royalty rates for the 2018-22
                rate period, the participants proposed certain additional changes to
                the extant regulations. The final regulations appended to this
                determination reflect
                [[Page 65261]]
                the Judges' decisions on points that were in controversy. For the
                reasons detailed below,\195\ the Judges adopted some of the proposed
                changes and declined to adopt others, as indicated in the final
                regulatory language.
                 \195\ The Judges do not provide narrative discussion about every
                detail of the regulatory changes; rather, they concentrate on the
                areas of legally significant controversy.
                A. Generally Applicable Terms
                1. Advance Payment and Minimum Fee
                 SoundExchange did not propose any substantive change to the current
                ephemeral royalty minimum fee of $100,000 per year, which is creditable
                to ephemeral royalty payments for the relevant year (37 CFR 382.3(b)).
                SE PFF 85. SoundExchange sought to designate the $100,000 annual
                advance payment as the minimum fee for use of the section 112 Ephemeral
                License by SDARS and PSS. Under SoundExchange's proposal, the advance
                payment would be applied first to section 112 royalties due, and the
                balance, if any, would be nonrefundable and not applicable to a
                subsequent year's license. Music Choice argued rightly that section 114
                does not provide for a minimum fee for SDARS or PSS. Compare 17 U.S.C.
                114 (f)(1)(A) with section 114(f)(2)(A).\196\ Section 112 does,
                however, require the Judges to set a minimum fee for ``each type of
                service offered by transmitting organizations'' using the ephemeral
                license. See 17 U.S.C. 112(e)(3).
                 \196\ The extant regulation setting the PSS advance payment does
                not mention a ``minimum fee'' but it does limit application of the
                advance payment to ephemeral license royalties and prohibit rollover
                of any portion of the advance payment to subsequent royalty years.
                See 37 CFR 382.3(b) (2016). Perversely, the current regulation
                establishing the $100,000 advance payment by SDARS is entitled
                ``Ephemeral Recordings Minimum Fee.'' See 37 CFR 382.12(c) (2016).
                Nothing in the subsection mentions a minimum fee, however. Id.
                 By agreement of the parties and in conformity with prior rate
                periods, the section 112 ephemeral license royalty fee is set at a five
                percent portion of the total bundled royalty for both section 112 and
                section 114 and is included in that bundled royalty payment. Music
                Choice contended that in SDARS II, SoundExchange and Music Choice
                stipulated to advance payment language that would have allowed the full
                advance payment to be creditable to the PSS's entire royalty payment,
                rather than to its ephemeral payment only. MC PFF ] 554. According to
                Music Choice, the stipulated language was changed in the final rule
                (i.e., the advance payment is creditable only to the ephemeral royalty
                payment) with no explanation or justification. Music Choice asserted
                that the language SoundExchange and Music Choice stipulated to in SDARS
                II should be adopted and SoundExchange provided no rationale for
                retaining the current language. MC PFF ]] 556-57. SoundExchange did not
                appear to dispute Music Choice's assessment that the extant recoupment
                provision differs from what the parties had stipulated to and has not
                provided a compelling reason to retain the current offset provision for
                PSSs. See, e.g., 5/10/17 Tr. 3308-13 (Bender). Therefore, the Judges
                adopt the minimum fee language Music Choice proposes.
                 It would seem incongruous to require an advance payment for section
                114 and section 112 royalties in the aggregate but to require the
                entirety of that payment to be applied as a ``minimum fee'' for the
                ephemeral license. No participant objects to the $100,000 advance
                royalty payment. The Judges have no basis upon which they could
                allocate 100% of that payment to the ephemeral license.
                 To comply with the statutory requirement that they set a minimum
                fee for use of the section 112 ephemeral license by transmission
                services, viz., SDARS and PSS, the Judges set the section 112 minimum
                fee at five percent of the advance payment, or $5,000, for each type of
                SDARS or PSS service for which the Judges establish a different section
                114 performance royalty. SoundExchange must, thereafter, apply the
                remaining amount of the advance payment, after application of $5,000
                per type of service to ephemeral licenses, to section 114 royalties.
                2. Definitions
                 Music Choice objected to the placement of ``Definitions'' at the
                end of each subpart of the regulations. The Judges agree with Music
                Choice that the placement seems counterintuitive. Definitions will
                migrate to the beginning of each subpart. In addition, Gross Revenues
                calculations will migrate from the Definitions section to the services'
                respective subparts.
                a. GAAP
                 The parties were in essential agreement regarding imposing a U.S.
                geographical limitation in the definition of GAAP. Sirius XM asked the
                Judges to apply a temporal element to the definition requiring
                application of the version of GAAP in effect ``during the month when
                the performances giving rise to a Licensee's royalty payment obligation
                were transmitted.'' SoundExchange countered that a more definite time
                limit would be preferable, viz., ``on the last day of the accounting
                period to which the subject payment relates'' or ``the date payment
                [was] due.'' The Judges adopt the definitive date for choosing GAAP
                principles as the date payment was due.
                b. Qualified Auditor
                 In prior iterations of royalty rate regulations relating to various
                licenses, the Judges noted the repetition of the phrase ``independent
                and qualified auditor.'' In their Web IV determination, the Judges cut
                the verbiage by 50% by defining a Qualified Auditor to be one that is
                independent. In this proceeding, the parties have proposed language to
                assure both the qualification and the independence of any auditor
                working to verify royalty payment and distribution.
                 In a slight departure from the Web IV language, the Judges
                eliminate the Web IV requirement for an auditor to be licensed in the
                state in which the audit is conducted. In this proceeding, the Judges
                accept that Certified Public Accountants are governed by a code of
                ethics that permits them the ``mobility'' to practice across state
                lines. To remove any doubt, the Judges refer to the Code of
                Professional Conduct adopted by the American Institute of Certified
                Public Accountants.
                c. Additional Definitions
                 On their own motion, the Judges added ``Payor'' and ``Verifying
                Entity'' as defined terms. These terms were added during the revamping
                of regulations following the Web IV proceeding because they clarified
                that auditing rights did not reside exclusively in the Collective. In
                this iteration, the Judges clarify the terms they added to convey this
                reciprocal audit right.
                 The Judges also amended SoundExchange's proposed definition of
                ``Licensee'' for clarity.
                3. Regulatory Terms
                a. Section 382.3(a) 197--Payment to the Collective
                 \197\ Section references are to the new numbering system that
                results from reorganizing the regulations in part 382.
                 In general, any due date in federal litigation that falls on a
                Saturday, Sunday, or federal holiday is tolled until the next following
                business day. The Judges regulations currently adopt this convention as
                a general procedural rule when discussing litigation filing deadlines.
                See 37 CFR 350.5. The Judges see no reason not to adopt the suggestion
                of Sirius XM to enunciate the same rule when referring to royalty
                payment due dates.
                [[Page 65262]]
                b. Section 382.4(a)(3)--Signature
                 In updating the royalty regulations after the Web IV proceeding,
                the Judges clarified the capacity of signers of Statements of Account.
                Music Choice objected to reconfiguration of the Web IV language
                suggested by SoundExchange. The Judges agree with Music Choice that the
                language in the Web IV regulation is more appropriate for these
                 \198\ The Judges are not swayed by Music Choice's plaint that it
                could not have an authorized signer because Music Choice is a
                partnership made up of corporations. Music Choice's sophisticated
                representatives can figure out how the partnership may designate an
                authorized signer.
                c. Section 382.5(a)(2)--Best Efforts
                 SoundExchange is obliged to use ``best efforts'' to locate
                Copyright Owners and Performers entitled to receive a distribution of
                royalty payments. The Judges' regulations need not specify the
                specifics of those ``best efforts.''
                d. Section 382.5(b)--Unclaimed Funds
                 At the conclusion of the Web IV proceeding, the Judges adopted
                language proposed by one of the Licensees directing SoundExchange to
                treat unclaimed funds in accordance with federal, state, or state
                common law. SoundExchange argued against this provision seeking to
                retain permission to apply unclaimed funds to administrative expenses.
                The Judges conclude that governance of applicable law will provide more
                transparency regarding the disposition of unclaimed funds.
                e. Section 382.6(c)(3)--Outside Counsel
                 SoundExchange proposed a change to the rule regarding dissemination
                and use of confidential information relating to royalty collection and
                distribution. Music Choice objected to the additional language
                SoundExchange proposed and the Judges agree with Music Choice.
                SoundExchange is required to use and analyze sensitive business
                information in its administration of royalty collection and
                distribution. On occasion, SoundExchange might employ consultants or
                experts to assist in that effort or in the auditing of the
                administrative systems.
                 SoundExchange sought to allow outside counsel access to
                confidential information ``for the purpose of performing their duties
                during the ordinary course of their work.'' This dissemination of
                confidential information is not sufficiently constrained to limit it to
                collection and distribution of royalty payments. The notion of outside
                counsel obtaining the sensitive information ``in the ordinary course of
                their work'' is too broad. The Judges will not grant that privilege.
                Outside counsel has express authority to see confidential information
                when acting on behalf of the Collective for ``verification of a . . .
                statement of account'' or on behalf of a Copyright Owner or Performer
                for purposes of ``verification of royalty distributions . . . .'' This
                permission is sufficient.\199\
                 \199\ Further, in a litigated rate proceeding, outside counsel
                are entitled to obtain confidential information without signing a
                non-disclosure agreement pursuant to a Protective Order specific to
                each proceeding.
                f. Section 382.7(c)--Notice of Intent To Audit
                 SoundExchange requested that the Judges change the requirement that
                a Verifying Entity ``deliver'' a copy of its filed Notice of Intent to
                Audit to the Payor to a requirement that the Verifying Entity ``send''
                the notice. Music Choice defended the term ``delivery'' because it
                provides ``protections'' to the PSS. See MCRFF at 323. The Judges
                conclude that this language issue is a solution in search of a problem.
                The language will remain unchanged.
                g. Section 382.7(d)--The Audit
                 Music Choice and SoundExchange disagreed regarding language
                SoundExchange sought to add to the provision that permits a licensee to
                perform its own, independent audit.\200\ SoundExchange asked the Judges
                to add the qualifier ``with respect to the information that is within
                the scope of the audit'' to describe an acceptable ``defensive audit.''
                This qualifying language is in the current regulation relating to
                audits of SDARS and webcasters. The Judges see no reason not to make it
                equally applicable to PSS. A report of a Qualified Auditor will include
                a description of the scope of the audit and if the scope of the
                defensive audit is too narrow to meet the specific needs of
                SoundExchange, then SoundExchange should be permitted to round out the
                findings with its own audit, limited to the points omitted from the
                scope of the defensive audit.
                 \200\ Music Choice uses the term ``defensive audit'' for this
                h. Section 382.7(f)--Issuance of Audit Report
                 On their own motion, the Judges change the word ``rendering'' to
                the word ``issuing'' for clarity.
                i. Section 382.7(g)--Interest on Underpayments Discovered by Audit
                 The current regulations do not provide for a specific interest
                accrual on underpayments discovered by audit. Sirius XM requested that
                the Judges add a provision setting interest on underpayments discovered
                by audit at the federal post-judgment rate in 28 U.S.C. 1961.
                SoundExchange urged applying the late payment interest rate of 1.5% per
                month, compounded monthly. Sirius XM requested that the federal post-
                judgment rate that it seeks to be applied to late payments also be
                applied to underpayments and overpayments discovered by audit. However,
                Sirius XM opposed as punitive the use of SoundExchange's proposed 1.5%
                per month interest rate, noting that audits may be delayed by up to
                three years, while interest accrues. Barry WDT ] 8.
                 The proposed regulations the Judges adopt in this proceeding
                utilize the federal post-judgment rate rather than the more punitive
                1.5% per month rate. Audits can uncover good faith errors as well as
                bad faith manipulations, and the Judges do not find that a punitive
                interest rate, spanning up to three years on underpayments, is
                appropriate in such a circumstance.
                j. Section 382.7(h)--Cost Shifting
                 Current SDARS/PSS regulations provide that the Verifying Entity
                bears the cost of an audit, unless the auditor finds an underpayment of
                sufficient magnitude to justify shifting responsibility for payment to
                the Payor. For PSS, the underpayment that triggers cost-shifting
                currently is 5%. For SDARS, the underpayment that triggers cost-
                shifting is 10%.\201\ Music Choice sought to equalize the cost-shifting
                threshold, making all services liable if an audit discrepancy reaches
                10%. SoundExchange argued that cost-shifting should occur when an
                auditor discovers underpayment of 5% for PSS or SDARS. The rationale is
                that the absolute value of SDARS royalty payments justifies reducing
                the trigger.
                 \201\ For Webcasters, the costs of the audit shift to the Payor
                when an underpayment equals 10% or more.
                 The Judges are unconvinced that absolute payment amounts are a
                sufficient basis to change the cost-shifting trigger. Further, the
                Judges can find no evidentiary basis to change the cost-shifting
                threshold when all participants in this proceeding indicate that cost-
                shifting has yet to occur at the current thresholds.
                [[Page 65263]]
                k. Sections 382.23(a) and (b)
                 SoundExchange proposed changes to the methodology for Sirius XM to
                calculate the direct license share and the pre-1972 license share.
                Besides inserting language relating to Aggregate Tuning Hours (ATH)
                data, SoundExchange sought to impose a requirement on Sirius XM to
                report that usage data for every eligible track it claims as a directly
                licensed or pre-1972 sound recording for which Sirius XM seeks a
                royalty adjustment. Sirius XM contended that current reporting
                requirements, based on Reference Channel metrics are sufficient to
                support the royalty adjustments it takes for these exempt sound
                 As the Judges decline to adopt the additional ATH language
                requested by SoundExchange, they see no basis to impose the additional
                reporting requirements on Sirius XM at this time.
                l. Proposed Section--Distribution of SDARS Royalties
                 SoundExchange proposed a new section 382.22 adding language to the
                regulations that would permit it to adjust its distribution model by
                reference to ATH if and when Sirius XM becomes able to track listener
                usage of its satellite radio service. Sirius XM countered that it
                anticipates offering next-generation technology within the rate period
                at issue, but that this developing technology will not be sufficiently
                reliable or have sufficient market saturation to make any reports of
                its usage reliable. See 5/17/17 Tr. 4358 (Barry).
                 Given the contingent nature of both the launch and the saturation
                of Sirius XM's anticipated technological advances, the Judges decline
                to adopt contingency regulations at this time.
                m. Proposed Section--Finality of Audit Results
                 Sirius XM proposed an additional subsection for the audit
                provisions to establish the finality of disputed audit reports. Sirius
                XM sought to establish a two-year statute of limitations for disputed
                audit findings after which the Licensee's calculations would be deemed
                binding and final, unless the Collective initiated a legal action
                before the running of that proposed limitations period.
                 SoundExchange objected to the creation of this statute of
                limitations, asserting that the change Sirius XM requests would have
                the effect of overriding the three-year statute of limitations provided
                for in the Copyright Act. As SoundExchange argued, the Judges do not
                have the authority to overrule a statutory provision by regulation.
                 The Judges see no reason to establish a statute of limitations in
                the context of rate setting proceedings where the Act does not provide
                for one. Further, any pursuit of remedies relating to audit findings
                would be outside the Judges' jurisdiction and the Judges would be
                overstepping to attempt to impose a limitation of actions over which
                they have no authority.
                B. Gross Revenues
                 In this proceeding, SoundExchange proposed a per-subscriber rate
                structure for PSS and proffered PSS regulations consistent with its
                proposed rate structure. Accordingly, SoundExchange proposed to place
                its definition of ``Gross Revenues'' only in ``Subpart C,'' the subpart
                regarding SDARS. The Judges have determined that PSS rates shall
                continue to be calculated on a percent-of-revenue basis. Because the
                business models of SDARS and PSS are different, however, the Judges
                maintain separate elements for the calculation of the respective Gross
                Revenues bases for PSS and SDARS.
                 Neither Music Choice nor SoundExchange proposed a change to the
                current definition of Gross Revenues applicable to PSS. The Judges
                adopt that term to describe the method of calculating PSS royalties for
                the 2018 to 2022 period.
                 Sirius XM and SoundExchange proposed essentially the same
                definition to establish the SDARS base for Gross Revenues. Their
                substantive differences arose in the nature and explication of
                permissible exclusions from that base.\202\ In adopting the definition
                applicable to the license period at issue in this proceeding, the
                Judges modified SoundExchange's proposed language to eliminate
                ambiguity \203\ and to effect the decisions detailed below.
                 \202\ Both SoundExchange and Sirius XM presented proposals to
                resolve long-standing controversies that were brought into focus by
                the primary jurisdiction referral of the questions from the D.C.
                District Court. The need for the referral arose in SoundExchange v.
                Sirius XM, 65 F. Supp. 3d 150 (D.D.C. 2014). In September 2017, the
                Judges issued their amended ruling on the referred questions. See
                Amended Restricted Ruling on Regulatory Interpretation Referred by
                the United States District Court for the District of Columbia, No.
                2006-1 CRB DSTRA (20017-12) (Sept. 11, 2017). (Ruling on Referred
                Questions). The Judges resolve the same controversies in this
                proceeding in conformity with that Ruling.
                 \203\ In constructing its proposed definition of Gross Revenues,
                SoundExchange began with a limited definition of what to include in
                the base: Subscription revenues and ad revenues including those
                categories of revenues if they were paid to a parent, subsidiary, or
                division of the Licensee. SoundExchange then listed types of revenue
                that should be excluded from the base ``to the extent otherwise
                included'' in the definition of the base. The result is in the
                nature of a double-negative configuration. For example, equipment
                sales income is NOT included in the revenue base, but the exclusion
                of equipment sales revenues would apply only ``to the extent [those
                equipment sales revenues were] otherwise included'' in the base. The
                better approach is to retain the current regulatory language, which
                states simply, ``Gross Revenues shall exclude . . . .''
                 SoundExchange proposed to amend the definition of ``Gross
                Revenues'' currently found in 37 CFR 382.11 to confirm that revenue
                from non-music offerings ``offered for a separate charge'' shall be
                excludable only when those offerings are ``provided on a standalone
                basis.'' Bender WDT at 22. SoundExchange did not view this new proposed
                language as a substantive deviation from the existing regulations, but
                rather made the proposal ``[p]urely [as] a clarification to language
                that we had previously thought was sufficient.'' 5/10/17 Tr. 3184
                 SoundExchange recounted that, since SDARS I, it has consistently
                understood that the references to a ``separate charge'' in current
                paragraph (3)(vi)(A) and (B) were unambiguous. See SDARS I, 73 FR at
                4087 (explaining that the ``gross revenues'' definition ``excludes
                monies attributable to premium channels of nonmusic programming that
                are offered for a charge separate from the general subscription charge
                for the service.''). See id. at 4081 (noting that, with regard to
                ``data services,'' the ``separate charge'' language was added by the
                Judges ``to make clear that this portion of the definition dealing with
                data services does not contemplate an exclusion of revenues from such
                data services, where such data services are not offered for a separate
                charge from the basic subscription product's revenues.'').
                Additionally, SoundExchange pointed out that, in SDARS II, the Judges
                reiterated the necessity of a ``separate charge,'' ``stress[ing] that
                the exclusion is available only to the extent that the channels,
                programming, products and/or other services are offered for a separate
                charge.'' SDARS II, 78 FR at 23072 n.45.\204\
                 \204\ SoundExchange asserted that its auditor alerted it to the
                fact that, throughout the SDARS I period (at least), Sirius XM was
                [REDACTED]. Trial Ex. 101 at 5-6, Schedule 3. As of the time
                SoundExchange filed its direct case in the present proceeding,
                Sirius XM continued to assert that the ``separate charge'' language
                permitted deduction of an allocated part of its Premiere package.
                Ruling on Referred Questions at 17.
                 Subsequent to the filing of direct cases in this proceeding, the
                Judges decided that ``the language in the revenue exclusion described
                in subsection (vi)(B) did not permit Sirius XM to exclude from the
                Gross Revenues
                [[Page 65264]]
                royalty base the price difference, i.e., the Upcharge, between the
                Premier package and the Basic package.'' Amended Restricted Ruling on
                Regulatory Interpretation Referred by the United States District Court
                for the District of Columbia at 17, No. 2006-1 CRB DSTRA (2007-12)
                (Ruling on Referred Questions). Given that decision, SoundExchange
                noted that its proposed clarification may be unnecessary. Nonetheless,
                in the interest of clarity, SoundExchange urged the Judges to ``confirm
                again'' their position as to the meaning of the regulatory language
                concerning exclusions to gross revenues. Bender WDT at 22.
                 Sirius XM, conversely, criticized the current regulatory language
                that limits the exclusion to revenue recognized for the provision of
                data services and non-music channels, programming, products and/or
                other services to those instances in which the subject programming is
                offered for a ``separate charge.'' Sirius XM proposed to strike the
                longstanding ``separate charge'' requirement and add new language to
                the Gross Revenues definition allowing allocation of all bundle revenue
                regardless of whether the components of the bundle are offered for a
                separate charge. That proposed language specifies that the exclusion to
                be taken in the case of any bundle is ``the difference between: (a) the
                stated sale price of the bundle, minus (b) the stated sale price of the
                bundle multiplied by a fraction, the numerator of which is the publicly
                stated retail price of the standard music/non-music package when sold
                on a standalone and undiscounted basis, and the denominator of which is
                the publicly stated retail price of the bundle when sold on a
                standalone and undiscounted basis.'' Sirius XM First Amended Proposed
                Rates and Terms at 3 (Feb. 17, 2017); 5/17/17 Tr. 4342-48 (Barry);
                Barry WRT ] 21.
                 Sirius XM had no choice but to acknowledge that its proposal fails
                to address the ``economic indeterminacy'' of its bundling approach. In
                the Ruling on Referred Questions, the Judges held that--to use Sirius
                XM's own words--``the difference between the larger bundle price and
                the Select package price may not in all cases reliably measure the
                economic value of the additional programming to consumers, at least
                absent some objective evidence of the market value of that additional
                programming.'' SXM PFF ] 440.
                 Sirius XM sought to minimize the importance of this acknowledged
                economic indeterminacy by noting the importance of bundling to Sirius
                XM's business model and by pointing out the ubiquity of bundling by
                many major businesses. Barry WRT ]] 12-18 & n.6. The Judges recognize
                the importance of product bundling as described by Mr. Barry, both for
                Sirius XM and numerous retailers of multiple products. As the Judges
                explained at length in the Ruling on Referred Questions, such bundling
                is a common form of price discrimination that increases revenue. That
                is, sellers can induce buyers/subscribers to reveal their Willingness
                to Pay (WTP) and pay more through bundling.
                 In a context in which the retailers pay for their inputs on a per
                unit basis, bundled retail pricing is benign, because input suppliers
                would be indifferent to downstream pricing and bundling. However, when
                the input suppler, as here, is paid as a percent of retail revenue, and
                the bundled revenue consists of some revenue attributable to the
                royalty base and other revenue excluded from the royalty base, the
                economic indeterminacy of the revenue attributable to each bucket
                creates a measurement problem, absent further information regarding the
                WTP of buyers/subscribers to the bundle.
                 Nonetheless, Sirius XM urged that the ``practical benefits'' of its
                proposal outweigh such economic indeterminacy. The Judges disagree and
                reaffirm their conclusions in the Ruling on Referred Questions arising
                from the SDARS I proceeding. As Mr. Barry made clear, such bundling was
                undertaken to increase Sirius XM's revenues and it would be reasonable
                to assume that Sirius XM has information relevant to the economic
                allocation of the bundled revenue. However, Sirius XM presented no such
                evidence at the hearing. Sirius XM must bear the burden of providing
                evidence that might mitigate the acknowledged ``economic
                indeterminacy'' problem inherent in bundling, because any such evidence
                would be in its possession, not in the possession of SoundExchange or
                the record companies. If Sirius XM lacks allocation information and
                prices its bundles without that data, it cannot assert ``practical
                benefits'' as grounds for subjecting licensors to the acknowledged
                economic indeterminacy of the revenue split.
                 For all of the reasons stated, and based upon the Judges' analysis
                in the Ruling on Referred Questions, the Judges reject Sirius XM's
                attempts to rewrite the regulations to reach a contrary result. Because
                the Judges are reaffirming here their Ruling on Referred Questions,
                which confirmed the meaning of the present regulatory definition of
                Gross Revenues, they find (as SoundExchange itself anticipated) no need
                to amend the text of the regulatory definition. Accordingly,
                SoundExchange's request for a change in that definitional language is
                rejected as moot.
                 Finally, Sirius XM proposed a change to the prefatory language in
                the exclusion from ``Revenues recognized by Licensee for the provision
                of'' to the simpler ``Licensee revenues for the provision of.'' (That
                language is set forth in forthcoming Sec. 382.22(b)(7)). As Mr. Barry
                explained, this is not meant to imply that Sirius XM can exclude
                revenues that have not been recognized. Rather, it is merely intended
                to avoid SoundExchange's perpetuating the argument (as addressed and
                rejected by the Judges in the recent litigation regarding the SDARS I
                period) that Sirius XM could not exclude revenue for portions of a
                bundle because those items were not separate units of accounting under
                GAAP (and the revenue for those items therefore was not
                ``recognized''). Barry WRT ] 20 n.8.
                 SoundExchange argued that there is no reason to delete the
                reference to ``[r]evenues recognized'' in the preamble, and some risk
                in doing so. SE Response to SXM PFF ] 442. However, SoundExchange did
                not cite to the record for this assertion of risk, nor did it identify
                that alleged risk. SoundExchange also noted that, at the hearing, Mr.
                Barry acknowledged his understanding that revenue would need to be
                ``recognized'' to be excluded. 5/17/17 Tr. 4401-02 (Barry). Thus,
                SoundExchange concluded that deleting the reference to revenue
                recognition would create the implication that that is not the case.
                 The Judges find that these differences can be bridged. The language
                at 382.22(b)(7) will read, ``Revenues recognized by Licensee (or
                otherwise received by Licensee if no GAAP ``recognition'' principles
                are applicable) for the provision of . . . .''
                C. Ephemeral License Terms
                 The participants in the present proceeding raised two issues
                relating to the section 112 Ephemeral Recordings license. The first
                issue was raised by Music Choice regarding the valuation of the
                ephemeral license. The second controversy between SoundExchange and
                Music Choice came to light in response to SoundExchange's proposed
                revisions to Sec. Sec. 382.3(b) and 382.12(c) regarding advance
                payments and minimum payments and is discussed supra, section XI.A.1.
                SoundExchange contended that the record in the proceeding
                ``unanimously'' supports SoundExchange's proposal of a bundled rate for
                both the Section 112(e) and 114 rights, 5% of which should be allocated
                as the Section 112(e) royalty for the
                [[Page 65265]]
                making of ephemeral copies and the remaining 95% of which should be
                allocated as the Section 114 performance royalty. SoundExchange stated
                that ``[t]he parties agree in substance concerning this matter.'' SX
                PFFCL ] 2369. SoundExchange contended that ``it appears that both
                SoundExchange and Music Choice agree that the Judges should set some
                kind of an overall royalty payment and allocate it 95%/5%.'' SX PFFCL ]
                 Sirius XM mirrored SoundExchange's proposal. See SXM PFFCL at 1.
                Music Choice argued, however, that SoundExchange did not demonstrate
                that ephemeral copies have any independent value. See Del Beccaro WDT
                at 46-47 (``I am unaware of any marketplace context in which the record
                labels seek, or get, a separate payment just for ephemeral copies.'').
                Nevertheless, Music Choice acknowledged that the ephemeral license has
                been and can be bundled with the sound recording performance license,
                and took no position on SoundExchange's proposal to continue the
                current apportionment between the performance and ephemeral copying
                license. MC PFF ]551.
                 SoundExchange, Sirius XM, and Music Choice agreed that a portion of
                the overall PSS royalties should be attributed to the ephemeral copying
                license. None of them suggested that the overall PSS royalty rate
                should be increased to account for ephemeral copying royalties.
                SoundExchange and Sirius XM proposed that the current 5% allocation of
                overall royalties to the section 112(e) license should continue in the
                upcoming rate period, and Music Choice took no position on the
                allocation. The only apparent issue concerning the ephemeral
                reproduction license is that Music Choice asserted that that license
                has no ``independent value,'' MC PFF at ]550 (emphasis added), while
                SoundExchange contended that ephemeral copies do ``have economic value
                . . . .'' Designated Web III Written Direct Testimony of Dr. George S.
                Ford, Trial Ex. 51, at 9 (Ford Web III WDT). Music Choice did not
                contend that the ephemeral copies have no economic value--only that the
                ephemeral copies have no economic value independent of the Section 114
                license. Music Choice's position was inconsistent with neither
                SoundExchange's contention that the ephemeral copying does have
                economic value, nor a bundled rate allocated between the two licenses.
                 To support both the bundled rate and the proposed 5% allocation to
                the ephemeral license, SoundExchange relied on the designated testimony
                of Dr. George Ford from the Web III proceeding. See generally Ford Web
                III WDT; see also Web III, 76 FR at 13042 (``The testimony offered by
                SoundExchange supports this proposal and we adopt it.''). According to
                Dr. Ford, ``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.'' Ford Web III
                WDT at 9. Dr. Ford noted that ``marketplace benchmarks show that the
                royalty rate for ephemeral copies, if directly established, is almost
                always expressed as a percentage of the overall royalty rate for
                combined activities under Section 112 and 114.'' Id. at 9-10.
                 As to the specific allocation between the two licenses, Dr. Ford
                noted that it is not the services, but the ``[r]ecord companies and
                artists [who] care about what portion of royalty payments are allocated
                to ephemerals because the higher the portion allocated to ephemerals,
                the lower the portion paid directly to artists per the terms of the
                Section 114 license.'' Id. at 4. Dr. Ford concluded that, in light of
                the purported disinterest by the willing buyer (or licensee) in the
                allocation between the Section 112(e) and 114 licenses, an agreement
                between the artists and the copyright owners (i.e., the licensors) is
                the best measure of how a willing buyer and willing seller would
                allocate royalties between the performance and ephemeral licenses. Id.
                at 10. As evidence of such an agreement, Dr. Ford was informed that
                ``the recording artists and the record companies have reached an
                agreement that five percent (5%) of the payments for activities under
                Section 112(e) and 114 should be allocated to Section 112(e)
                activities.'' Id. at 15. He concluded that ``that appears to be a
                reasonable proposal.'' Id. Upon examination in Web III, Dr. Ford
                clarified that he was informed by counsel for SoundExchange that the
                SoundExchange board, which includes representatives from record labels
                and artists, had approved a recommendation that 5% of royalties should
                be allocated to the ephemeral license. Designated Hearing Testimony of
                George S. Ford, Trial Ex. 51, at 434 (Ford Web III Hrg. Test.).\205\
                 \205\ Dr. Ford represented that he reviewed the minutes of the
                board meeting that referenced the agreement, and it appears that the
                Judges in Web III admitted the board minutes into evidence. Ford Web
                III Hrg. Test. at 434, 438. Those minutes were not introduced into
                evidence in the current proceeding, rendering hearsay Dr. Ford's
                testimony concerning the agreement between artists and record
                companies. The Judges exercise their discretion under 37 CFR
                351.10(a) to admit Professor Ford's hearsay testimony.
                 The Judges find SoundExchange's proposals concerning the bundling
                of performance and ephemeral Royalties, as well as the 95%/5%
                allocation of royalties between the two licenses, to be reasonable and
                supported by the evidence, and therefore adopt them for both PSS and
                XII. Conclusion
                 For all of the foregoing reasons, the Judges issue this
                Determination of Rates and Terms in the captioned proceeding. The
                Register of Copyrights may review the Judges' Determination for legal
                error in resolving a material issue of substantive copyright law. The
                Librarian shall cause the Judges' Determination, and any correction
                thereto by the Register, to be published in the Federal Register no
                later than the conclusion of the 60-day review period.
                 Dated: October 11, 2018.
                 Corrected: October 15, 2018.
                Suzanne M. Barnett,
                Chief Copyright Royalty Judge.
                Jesse M. Feder,
                Copyright Royalty Judge.
                David R. Strickler,
                Copyright Royalty Judge.
                List of Subjects in 37 CFR Part 382
                 Copyright, Digital audio transmissions, Performance right, Sound
                Final Regulations
                 For the reasons set forth in the preamble, the Copyright Royalty
                Judges revise 37 CFR part 382 to read as follows:
                Subpart A--Regulations of General Application
                382.1 Definitions.
                382.2 Scope and compliance.
                382.3 Making payment of royalty fees.
                382.4 Delivering statements of account.
                382.5 Distributing royalty fees.
                382.6 Handling Confidential Information.
                382.7 Auditing payments and distributions.
                Subpart B--Preexisting Subscription Services (PSS)
                382.10 Royalty fees for the digital performance of sound recordings
                and the making of ephemeral recordings by preexisting subscription
                382.11 Calculation of gross revenues for PSS.
                [[Page 65266]]
                Subpart C--Preexisting Satellite Digital Audio Radio Services (SDARS)
                382.20 Definitions.
                382.21 Royalty fees for the public performance of sound recordings
                and the making of ephemeral recordings by SDARS.
                382.22 Calculation of Gross Revenues for SDARS.
                382.23 Adjustments to royalty fee.
                 Authority: 17 U.S.C. 112(e), 114 and 801(b)(1).
                Subpart A--Regulations of General Application
                Sec. 382.1 Definitions.
                 In this subpart:
                 Collective means the collection and distribution organization that
                is designated by the Copyright Royalty Judges.
                 Copyright Owners means sound recording copyright owners who are
                entitled to royalty payments made under part 382 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.
                 Eligible Transmission means a Digital Audio Transmission made by a
                Licensee that is subject to licensing under 17 U.S.C. 114(d)(2) and the
                payment of royalties under 37 CFR part 382.
                 Ephemeral Recording has the same meaning as in 17 U.S.C. 112.
                 GAAP means generally accepted accounting principles in effect in
                the United States on the date payment is due.
                 Licensee means the provider of an Satellite Digital Audio Radio
                Service (SDARS) or Preexisting Subscription Service (PSS) 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.
                 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.
                 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.
                 Preexisting Subscription Service (PSS) has the same meaning as in
                17 U.S.C. 114(j)(11). A service's offering on the internet that is
                available to a subscriber outside the subscriber's residence is not a
                Preexisting Subscription Service for purposes of this part.
                 Qualified Auditor means a Certified Public Accountant independent
                within the meaning of the American Institute Certified Public
                Accountants Code of Professional Conduct.
                 Satellite Digital Audio Radio Service (SDARS) means the preexisting
                satellite digital audio radio services as defined in 17 U.S.C.
                 Transmission has the same meaning as in 17 U.S.C. 114(j)(15).
                 Verifying Entity means the party requesting an audit and giving
                notice of intent to audit. For audits of SDARS and PSS, the Verifying
                Entity is SoundExchange, Inc. For audits of SoundExchange, Inc. the
                Verifying Entity is any Copyright Owner or its authorized
                Sec. 382.2 Scope and compliance.
                 (a) Scope. This part codifies rates and terms of royalty payments
                for the public performance of sound recordings in certain Digital Audio
                Transmissions by certain Licensees in accordance with 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, 2018, through December 31, 2027.
                 (b) 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 17 U.S.C. 112(e) and 114, this part and any other applicable
                 (c) 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. 382.3 Making payment of royalty fees.
                 (a) Payment to the Collective. A Licensee must make the royalty
                payments due under subparts B and C of this part to SoundExchange,
                Inc., which is the Collective designated by the Copyright Royalty Board
                to collect and distribute royalties under this part. If any payment due
                date is a weekend or a federal holiday, then the payment is due on the
                first business day thereafter.
                 (b) Advance payment. Licensees must pay the Collective an annual
                advance payment of $100,000 by January 31 of each year. The Collective
                must credit 5% of the advance payment as payment of the minimum fee for
                Ephemeral Recordings and credit the remaining 95% to section 114
                royalties. The funds are nonrefundable. Any uncredited portion of the
                funds shall not carry over into a subsequent year.
                 (c) Minimum payments. A Licensee must make any minimum annual
                payment due under subpart B or C of this part by January 31 of the
                applicable license year.
                 (d) 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.
                 (e) 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
                 (1) Waiver of late fees. The Collective may waive or lower late
                fees for immaterial or inadvertent failures of a Licensee to make a
                timely payment or submit a timely Statement of Account.
                 (2) Notice regarding noncompliant Statements of Account. If it is
                reasonably evident to the Collective that a timely-provided Statement
                of Account is materially noncompliant, the Collective must notify the
                Licensee within 90 days of discovery of the noncompliance.
                Sec. 382.4 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:
                 (1) Information as is necessary to calculate the accompanying
                royalty payment;
                 (2) The name, address, business title, telephone number, facsimile
                number (if any), electronic mail address (if any) and other contact
                information of the person to be contacted for information or questions
                concerning the content of the Statement of Account;
                 (3) The signature of:
                 (i) The Licensee or a duly authorized agent of the Licensee;
                 (ii) A partner or delegate if the Licensee is a partnership; or
                 (iii) An officer of the corporation if the Licensee is a
                 (4) The printed or typewritten name of the person signing the
                Statement of Account;
                 (5) If the Licensee is a partnership or corporation, the title or
                official position held in the partnership or corporation by the person
                signing the Statement of Account;
                [[Page 65267]]
                 (6) A certification of the capacity of the person signing;
                 (7) The date of signature; and
                 (8) An attestation to the following effect:
                 I, the undersigned owner/officer/partner/agent of the Licensee have
                examined this Statement of Account and hereby state that it is true,
                accurate, and complete to my knowledge after reasonable due diligence
                and that it fairly presents, in all material respects, 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. 382.5 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 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. 370.3 or Sec. 370.4 of this chapter, as
                applicable, and pursuant to this part.
                 (2) Identification of Copyright Owners. The Collective must use its
                best efforts to identify and locate copyright owners and featured
                artists to distribute royalties payable to them under section 112(e) or
                114(d)(2) of title 17, United States Code, or both. Such efforts must
                include, but are not limited to, searches in Copyright Office public
                records and published directories of sound recording copyright owners
                when consulting those records and directories is likely to be helpful.
                 (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 must handle unclaimed funds in accordance with
                applicable federal, state, or common law.
                 (c) Retention of records. Licensees and the Collective shall keep
                books and records relating to payments and distributions of royalties
                for a period of not less than the prior three calendar years.
                 (d) Designation of the Collective. (1) The Judges designate
                SoundExchange, Inc., as the Collective to receive Statements of Account
                and royalty payments from Licensees and to distribute royalty payments
                to each Copyright Owner and Performer (or their respective designated
                agents) entitled to receive royalties under 17 U.S.C. 112(e) or 114(g).
                 (2) If SoundExchange, Inc. should dissolve or cease to be governed
                by a board consisting of equal numbers of representatives of Copyright
                Owners and Performers, it shall be replaced for the applicable royalty
                period 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
                 (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. 382.6 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 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) 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 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. 112 or 114, acting under an appropriate protective
                 (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.
                [[Page 65268]]
                Sec. 382.7 Auditing payments and distributions.
                 (a) General. This section prescribes procedures by which any entity
                entitled to receive payment or distribution of royalties may verify
                those payments or distributions with an independent audit. 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 Copyright Owners or
                Performers. Nothing in this section shall preclude a Verifying Entity
                and the Payor under audit from agreeing to verification methods in
                addition to or different from those set forth in this section.
                 (b) Frequency of auditing. A Verifying Entity may conduct an audit
                of each Payor only once a year and the audit may cover 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,
                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 send a copy to the Payor.
                 (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 the
                Payor made an underpayment or overpayment of royalties. 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
                under audit 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 issuing the report, unless the
                auditor has a reasonable basis to suspect fraud on the part of the
                Payor, 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 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 reasonably
                cooperates with the auditor to remedy promptly any factual error[s] or
                clarify any issue 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 underpaid royalties, the Payor shall remit
                the amount of any underpayment determined by the auditor to the
                Verifying Entity, together with interest at the post-judgment rate
                specified in 28 U.S.C. 1961, accrued from and after the date the
                payment was originally due. In the absence of mutually-agreed payment
                terms, which may, but need not, include installment payments, the Payor
                shall remit promptly to the Verifying Entity the entire amount of the
                underpayment determined by the auditor. If the auditor determines the
                Payor overpaid royalties, however, the Verifying Entity shall not be
                required to remit the amount of any overpayment to the Payor, and the
                Payor shall not seek by any means to recoup, offset, or take a credit
                for the overpayment, unless the Payor and the Verifying Entity have
                agreed otherwise.
                 (h) Paying the costs of the audit. The Verifying Entity must pay
                the cost of the audit, unless the auditor determines that there was an
                underpayment of 10% or more, in which case the Payor must bear the
                reasonable costs of the audit, in addition to paying or distributing
                the amount of any underpayment.
                 (i) Retention of audit report. The Verifying Entity must retain the
                report of the audit for a period of not less than three years from the
                date of issuance.
                Subpart B--Preexisting Subscription Services (PSS)
                Sec. 382.10 Royalty fees for the digital performance of sound
                recordings and the making of ephemeral recordings by preexisting
                subscription services.
                 (a) Royalty fees. Commencing January 1, 2018, and continuing
                through December 31, 2027, Licensees must pay royalty fees for all
                Eligible Transmissions of sound recordings at the rate of 7.5 percent
                of Gross Revenues.
                 (b) Ephemeral recordings royalty fee. (1) The fee for all Ephemeral
                Recordings is part of the total fee payable under this section and
                constitutes 5% of it. All Ephemeral Recordings that a Licensee makes
                that are necessary and commercially reasonable for making
                noninteractive Digital Audio Transmission as a PSS are included in the
                 (2) The minimum fee is $5,000 per year.
                Sec. 382.11 Calculation of gross revenues for PSS.
                 (a) Gross revenues are monies derived from the operation of the
                programming service of the Licensee and are comprised of the following:
                 (1) Monies received by Licensee from Licensee's carriers and
                directly from residential U.S. subscribers for Licensee's programming
                 (2) Licensee's advertising revenues (as billed), or other monies
                received from sponsors, if any, less advertising agency commissions not
                to exceed 15% of those fees incurred to a recognized advertising agency
                not owned or controlled by Licensee;
                 (3) Monies received for the provision of time on the programming
                service to any third party;
                 (4) Monies received from the sale of time to providers of paid
                programming such as infomercials;
                 (5) Where merchandise, service, or anything of value is received by
                Licensee in lieu of cash consideration for the use of Licensee's
                programming service, the fair market value thereof or Licensee's
                prevailing published rate, whichever is less;
                 (6) Monies or other consideration received by Licensee from
                Licensee's carriers, but not including monies received by Licensee's
                carriers from others and not accounted for by Licensee's carriers to
                Licensee, for the provision of hardware by anyone and used in
                connection with the programming service;
                 (7) Monies or other consideration received for any references to or
                inclusion of any product or service on the programming service; and
                 (8) Bad debts recovered regarding paragraphs (a)(1) through (7) of
                this section.
                 (9) Revenues described in paragraphs (a)(1) through (8) of this
                section to which Licensee is entitled but which are paid to a parent,
                subsidiary, division, or affiliate of Licensee, in lieu of payment to
                Licensee but not including payments to Licensee's carriers for the
                programming service.
                 (b) Gross Revenues exclude affiliate revenue returned during the
                reporting period and bad debts actually written off during reporting
                [[Page 65269]]
                Subpart C--Preexisting Satellite Digital Audio Radio Services
                Sec. 382.20 Definitions.
                 In this subpart:
                 Directly-Licensed Recording means a sound recording for which the
                Licensee has previously obtained a license of all relevant rights from
                the sound recording Copyright Owner.
                 Pre-1972 Recording means a sound recording fixed before February
                15, 1972, that is not a restored work as defined in 17 U.S.C.
                104A(h)(6) or otherwise subject to protection under title 17, United
                States Code.
                 Reference Channels means internet webcast channels offered by the
                Licensee that directly correspond to channels offered on the Licensee's
                SDARS that are capable of being received on all models of Sirius radio,
                all models of XM radio or both, and on which the programming consists
                primarily of music.
                Sec. 382.21 Royalty fees for the public performance of sound
                recordings and the making of ephemeral recordings by SDARS.
                 (a) Royalty fees. Commencing January 1, 2018, and continuing
                through December 31, 2027, Licensees must pay royalty fees for all
                Eligible Transmissions of sound recordings at the rate of 15.5% of
                Gross Revenues.
                 (b) Ephemeral recordings royalty fees. (1) The fee for all
                Ephemeral Recordings is part of the total fee payable under this
                section and constitutes 5% of it. All Ephemeral Recordings that a
                Licensee makes that are necessary and commercially reasonable for
                making noninteractive Digital Audio Transmissions as an SDARS are
                included in the 5%.
                 (2) The minimum fee is $5,000 per year.
                Sec. 382.22 Calculation of Gross Revenues for SDARS.
                 (a) Gross Revenues are:
                 (1) Revenue recognized by the Licensee in accordance with GAAP from
                the operation of an SDARS and comprised of the following:
                 (i) Subscription revenue recognized by Licensee directly from U.S.
                subscribers for licensee's SDARS; and
                 (ii) Licensee's advertising revenues, or other monies received from
                sponsors, if any, attributable to advertising on channels other than
                those that use only incidental performances of sound recordings, less
                advertising agency and sales commissions.
                 (2) Revenues set forth above to which Licensee is entitled but
                which are paid to a parent, wholly-owned subsidiary, or division of
                 (b) Gross Revenues exclude:
                 (1) Monies or other consideration attributable to the sale and/or
                license of equipment and/or other technology, including but not limited
                to bandwidth, sales of devices that receive the Licensee's SDARS and
                any shipping and handling fees therefor;
                 (2) Royalties paid to Licensee for intellectual property rights;
                 (3) Monies or other consideration received by Licensee from the
                sale of phonorecords and digital phonorecord deliveries;
                 (4) Sales and use taxes;
                 (5) Credit card, invoice, activation, swap and early termination
                fees charged to subscribers and reasonably related to the Licensee's
                expenses to which they pertain;
                 (6) Bad debt expense; and
                 (7) Revenues recognized by Licensee (or otherwise received by
                Licensee if no GAAP ``recognition'' principles are applicable) for the
                provision of:
                 (i) Current and future data services offered for a separate charge
                (e.g., weather, traffic, destination information, messaging, sports
                scores, stock ticker information, extended program associated data,
                video and photographic images, and such other telematics and/or data
                services as may exist from time to time);
                 (ii) Channels, programming, products and/or other services offered
                for a separate charge where such channels use only incidental
                performances of sound recordings;
                 (iii) Channels, programming, products and/or other services
                provided outside of the United States; and
                 (iv) Channels, programming, products and/or other services for
                which the performance of sound recordings and/or the making of
                Ephemeral Recordings is exempt from any license requirement or is
                separately licensed, including by a statutory license and, for the
                avoidance of doubt, webcasting, audio services bundled with television
                programming, interactive services, and transmissions to business
                Sec. 382.23 Adjustments to royalty fee.
                 (a) Reduction for Direct License Share. The royalty fee specified
                in Sec. 382.21(a) may be reduced by the percentage of Eligible
                Transmissions comprising the Direct License Share.
                 (1) The Direct License Share reduction is available to a Licensee
                only if--
                 (i) The Reference Channels constitute a large majority of and are
                generally representative of the music channels offered on the
                Licensee's SDARS; and
                 (ii) The Licensee provides the Collective, by no later than the due
                date for the relevant payment under Sec. 382.3(d), a list of each
                Copyright Owner from which the Licensee claims to have a direct license
                of rights to Directly-Licensed Recordings that is in effect for the
                month for which the payment is made and of each sound recording for
                which the Licensee takes the reduction, identified by featured artist
                name, sound recording title, and International Standard Recording Code
                (ISRC) number or, alternatively to the ISRC, album title and copyright
                owner name. Notwithstanding Sec. 382.6, the Collective may disclose
                such information as reasonably necessary for it to confirm whether a
                claimed direct license exists and claimed sound recordings are properly
                 (2) To arrive at the percentage allocable to the Direct License
                Share for each month, the Licensee shall divide the internet
                Performances of Directly-Licensed Recordings on the Reference Channels
                by the total number of internet Performances of all sound recordings on
                the Reference Channels. In no event shall the Direct License Share be
                an amount greater than the result of dividing the number of plays of
                Directly-Licensed Recordings on the SDARS by the total number of plays
                of all sound recordings on the SDARS.
                 (3) The Licensee may not credit use of a Directly-Licensed
                Recording under this paragraph if that use is credited as a use of a
                Pre-1972 Sound Recording for purposes of claiming the Pre-1972
                Recording Share reduction to the royalty fee.
                 (b) Reduction for Pre-1972 Recording Share. The royalty fee
                specified in Sec. 382.21(a) may be reduced by the percentage of
                Eligible Transmissions comprising the Pre-1972 Recording Share.
                 (1) A Pre-1972 Recording Share reduction is available to a Licensee
                only if--
                 (i) The Reference Channels constitute a large majority of and are
                generally representative of the music channels offered on the
                Licensee's SDARS; and
                 (ii) The Licensee provides to the Collective, by no later than the
                due date for the relevant payment under Sec. 382.3(d), a list of Pre-
                1972 Recordings for which the Licensee takes the reduction, identified
                by featured artist name, sound recording title, and International
                Standard Recording Code (ISRC) number or, alternatively to the ISRC,
                album title and copyright owner name.
                 (2) To arrive at the percentage allocable to the Pre-1972 Recording
                Share for each month, the Licensee shall divide the internet
                Performances of Pre-1972 Sound Recordings on the
                [[Page 65270]]
                Reference Channels by the total number of internet Performances of all
                sound recordings on the Reference Channels.
                 (c) Definition of Performance. For purposes of this section,
                Performance means:
                 (1) Except as discussed in paragraph (c)(2) of this section, a
                Performance is an instance in which any portion of a sound recording is
                publicly performed to a listener within the United States 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).
                 (2) An instance in which a portion of a sound recording is publicly
                performed to a listener within the United States by means of a Digital
                Audio Transmission is not a Performance if it 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 use during news, talk and sports
                programming, brief background use during disk jockey announcements,
                brief use during commercials of sixty seconds or less in duration, or
                brief use during sporting or other public events; and
                 (ii) Does not contain an entire sound recording 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), except for ambient
                music that is background at a public event.
                Suzanne M. Barnett,
                Chief Copyright Royalty Judge.
                Jesse M. Feder,
                Copyright Royalty Judge.
                David R. Strickler,
                Copyright Royalty Judge.
                 Approved by:
                Carla D. Hayden,
                Librarian of Congress.
                [FR Doc. 2018-26922 Filed 12-18-18; 8:45 am]
                BILLING CODE 1410-72-P