[Federal Register Volume 67, Number 130 (Monday, July 8, 2002)]
[Rules and Regulations]
[Pages 45240-45276]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-16730]



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Part III





Library of Congress





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Copyright Office



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37 CFR Part 261



Determination of Reasonable Rates and Terms for the Digital Performance 
of Sound Recordings and Ephemeral Recordings; Final Rule

  Federal Register / Vol. 67 , No. 130 / Monday, July 8, 2002 / Rules 
and Regulations  

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LIBRARY OF CONGRESS

Copyright Office

37 CFR Part 261

[Docket No. 2000-9 CARP DTRA 1&2]


Determination of Reasonable Rates and Terms for the Digital 
Performance of Sound Recordings and Ephemeral Recordings

AGENCY: Copyright Office, Library of Congress.

ACTION: Final rule and order.

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SUMMARY: The Librarian of Congress, upon recommendation of the Register 
of Copyrights, is announcing the determination of the reasonable rates 
and terms for two compulsory licenses, permitting certain digital 
performances of sound recordings and the making of ephemeral 
recordings.

EFFECTIVE DATE: July 8, 2002.

ADDRESSES: The full text of the public version of the Copyright 
Arbitration Royalty Panel's report to the Librarian of Congress is 
available for inspection and copying during normal working hours in the 
Office of the General Counsel, James Madison Memorial Building, Room 
LM-403, First and Independence Avenue, SE., Washington, DC 20540. The 
report is also posted on the Copyright Office website at http://www.copyright.gov/carp/webcasting_rates.html.

FOR FURTHER INFORMATION CONTACT: David O. Carson, General Counsel, or 
Tanya Sandros, Senior Attorney, Copyright Arbitration Royalty Panel 
(CARP), P.O. Box 70977, Southwest Station, Washington, DC 20024. 
Telephone (202) 707-8380. Telefax: (202) 707-8366.

SUPPLEMENTARY INFORMATION:

Table of Contents

I. Background
II. The CARP Proceeding to Set Reasonable Rates and Terms
    A. The Parties
    B. The position of the parties at the commencement of the 
proceeding
    1. Rates proposed by Copyright Owners
    2. Rates proposed by Services
    C. The Panel's determination of reasonable rates and a minimum 
fee
III. The Librarian's Scope of Review of the Panel's Report
IV. The CARP Report: Review and Recommendation of the Register of 
Copyrights
    A. Establishing Appropriate Rates
    1. The ``Willing Buyer/Willing Seller Standard''
    2. Hypothetical Marketplace/Actual Marketplace
    3. Benchmarks for setting market rates: voluntary agreements vs. 
musical works fees
    a. Fees paid for use of musical works
    b. Voluntary agreements
    4. Alternative methodology: Percentage-of-revenue
    5. The Yahoo! rates--evidence of a unitary marketplace value
    6. Are rates based on the Yahoo! agreement indicative of 
marketplace rates?
    7. Should a different rate be established for commercial 
broadcasters streaming their own AM/FM programming?
    8. Methodology for calculating the statutory rates for the 
webcasting license
    a. Calculation of the unitary rate
    b. The 150-mile exemption
    9. Rates for other webcasting services and programming
    a. Business to business webcasting services
    b. Listener-influenced services
    c. Other types of transmissions
    10. Rates for transmissions made by non-CPB, noncommercial 
stations
    11. Consideration of request for diminished rates and long song 
surcharge
    12. Methodology for estimating the number of performances
    13. Discount for Promotion and Security
    14. Ephemeral recordings for services operating under the 
section 114 license
    15. Minimum fees
    16. Ephemeral recordings for business establishment services 
(``BES'')
    a. Rates for use of the statutory license
    b. Minimum fee
    17. Effective period for proposed rates
    B. Terms
    1. Disputed terms
    a. Definitions
    b. Designated Agent for Unaffiliated Copyright Owners
    c. Gross proceeds
    2. Terms Not Disputed by the Parties
    a. Limitation of Liability
    b. Deductions from Royalties for Designated Agent's Costs
    c. Ephemeral Recording
    d. Definition of ``Listener''
    e. Timing of Payment by Receiving Agent to Designated Agent
    f. Allocation of Royalties among Designated Agents and Among 
Copyright Owners and Performers
    g. Choice of Designated Agent by Performers
    h. Performer's Right to Audit
    i. Effective date
V. Conclusion
VI. The Order of the Librarian of Congress

I. Background

    In 1995, Congress enacted the Digital Performance Right in Sound 
Recordings Act (``DPRA''), Public Law 104-39, which created an 
exclusive right for copyright owners of sound recordings, subject to 
certain limitations, to perform publicly their sound recordings by 
means of certain digital audio transmissions. Among the limitations on 
the performance right was the creation of a new compulsory license for 
nonexempt, noninteractive, digital subscription transmissions. 17 
U.S.C. 114(f).
    The scope of this license was expanded in 1998 upon passage of the 
Digital Millennium Copyright Act of 1998 (``DMCA'' or ``Act''), Public 
Law 105-304, in order to allow a nonexempt eligible nonsubscription 
transmission \1\ (the ``webcasting license'') and a nonexempt 
transmission by a preexisting satellite digital audio radio service to 
perform publicly a sound recording in accordance with the terms and 
rates of the statutory license. 17 U.S.C. 114(a). In addition to 
expanding the section 114 license, the DMCA also created a new 
statutory license for the making of an ``ephemeral recording'' of a 
sound recording by certain transmitting organizations (the ``ephemeral 
recording license''). 17 U.S.C. 112(e). The new statutory license 
allows entities that transmit performances of sound recordings to 
business establishments, pursuant to the limitations set forth in 
section 114(d)(1)(C)(iv), to make an ephemeral recording of a sound 
recording for purposes of a later transmission. The new license also 
provides a means by which a transmitting entity with a statutory 
license under section 114(f) can make more than the one phonorecord 
permitted under the exemption set forth in section 112(a). 7 U.S.C. 
112(e).
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    \1\ An ``eligible nonsubscription transmission'' is a 
noninteractive, digital audio transmission which, as the name 
implies, does not require a subscription for receiving the 
transmission. The transmission must also be made a part of a service 
that provides audio programming consisting in a whole or in part of 
performances of sound recordings; the purpose of which is to provide 
audio or entertainment programming, but not to sell, advertise, or 
promote particular goods or services.
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    The statutory scheme for establishing reasonable terms and rates is 
the same for both of the new licenses. The terms and rates for the two 
new statutory licenses may be determined by voluntary agreement among 
the affected parties, or if necessary, through compulsory arbitration 
conducted pursuant to Chapter 8 of the Copyright Act.
    In this case, interested parties were unable to negotiate an 
industry-wide agreement. Therefore, a Copyright Arbitration Royalty 
Panel (``CARP'') was convened to consider proposals from interested 
parties and, based upon the written record created during this process, 
to recommend rates and terms for both the webcasting license and the 
ephemeral recording license.

[[Page 45241]]

II. The CARP Proceeding to Set Reasonable Rates and Terms

    These proceedings began on November 27, 1998, when the Copyright 
Office announced a six-month voluntary negotiation period to set rates 
and terms for the webcasting license and the ephemeral recording 
license for the first license period covering October 28, 1998-December 
31, 2000. 63 FR 6555 (November 27, 1998). During this period, the 
parties negotiated a number of private agreements in the marketplace, 
but no industry-wide agreement was reached. Consequently, in accordance 
with the procedural requirements, the Recording Industry Association of 
America, Inc. (``RIAA'') petitioned the Copyright Office on July 23, 
1999, to commence a CARP proceeding to set the rates and terms for 
these licenses. The Office responded by setting a schedule for the CARP 
proceeding. See 64 FR 52107 (Sept. 27, 1999).
    However, the schedule proved unworkable for the parties. RIAA filed 
a motion with the Copyright Office on November 23, 1999, requesting a 
postponement of the date for filing direct cases. It argued that the 
Office should provide more time for the parties to prepare their cases 
in light of the complexity of the issues and the record number of new 
participants. The Office granted this request and held a meeting to 
clarify the procedural aspects of the proceeding, especially for the 
new participants, and to discuss a new schedule for the arbitration 
phase of the process. Order in Docket No. 99-6 CARP DTRA (dated 
December 22, 1999). In the meantime, the Office commenced the six-month 
negotiation period for the second license period, covering January 1, 
2001-December 31, 2002. 66 FR 2194 (January 13, 2000). Ultimately, the 
Copyright Office consolidated these two proceedings into a single 
proceeding in which one CARP would set rates and terms for the two 
license periods for both the webcasting license and the ephemeral 
recording license. See Order in Docket Nos. 99-6 CARP DTRA and 2000-3 
CARP DTRA 2 (December 4, 2000). The 180-day period for the consolidated 
proceeding began on July 30, 2001, and on February 20, 2002, the panel 
submitted its report (the ``CARP Report'' or ``Report''), in which it 
proposed rates and terms to the Copyright Office. It is the decision of 
this Panel that is the basis for the Librarian's decision today.\2\
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    \2\ Section 802 (e) of the Copyright Act requires the CARP to 
report its determination concerning the royalty fee to the Librarian 
of Congress 180 days after the initiation of a proceeding. In this 
particular instance, the Panel submitted its report approximately 
three weeks later than anticipated under this provision due to a 
suspension of the proceedings during the period November 9, 2001, 
through December 2, 2001. The Copyright Office granted the 
suspension at the parties' request in order to allow them to engage 
in further settlement discussions. At the same time, the Office 
granted the Panel an additional period of time, commensurate with 
the suspension period, for hearing evidence and preparing its 
report. See Order, Docket No. 2000-9 CARP DTRA 1&2 (November 9, 
2001). Additional details concerning the earlier procedural aspects 
of this proceeding are set forth in the CARP Report at pp. 10-18.
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A. The Parties

    The parties \3\ to this proceeding are: (i) The Webcasters,\4\ 
namely, BET.com, Comedy Central, Echo Networks, Inc., Listen.com, 
Live365.com, MTVi Group, LLC, Myplay, Inc., NetRadio Corporation, Radio 
Active Media Partners, Inc.; RadioWave.com, Inc., Spinner Networks Inc. 
and XACT Radio Network LLC; (ii) the FCC-licensed radio 
Broadcasters,\5\ namely, Susquehanna Radio Corporation, Clear Channel 
Communications Inc., Entercom Communications Corporation, Infinity 
Broadcasting Corporation, and National Religious Broadcasters Music 
License Committee (collectively ``the Broadcasters''); (iii) the 
Business Establishment Services,\6\ namely, DMX/AEI Music Inc. (also 
referred to as ``Background Music Services''); (iv) American Federation 
of Television and Radio Artists (``AFTRA''); \7\ (v) American 
Federation of Musicians of the United States and Canada (``AFM'') ;\8\ 
(vi) Association For Independent Music (``AFIM'') ;\9\ and (vii) 
Recording Industry Association of America, Inc. (``RIAA'').\10\ Music 
Choice, a Business Establishment Service, was initially a party to this 
proceeding, but on March 26, 2001, it filed a motion to withdraw from 
the proceeding. Its motion was unopposed and, on May 9, 2001, its 
motion to withdraw was granted.
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    \3\ At the outset of the proceeding, Webcaster parties also 
included Coollink Broadcast Network, Everstream, Inc., Incanta, 
Inc., Launch Media, Inc., MusicMatch, Inc., Univision Online, and 
Westwind Media.com, Inc., which have since withdrawn or been 
dismissed from the proceeding. Late in the proceeding, National 
Public Radio (``NPR'') reached a private settlement with RIAA and 
withdrew prior to the conclusion of the 180-day hearing period. 
Because RIAA, AFTRA, AFM, and AFIM propose the same rates and take 
similar positions on most issues, they are sometimes referred to 
collectively as ``RIAA'' or ``Copyright Owners and Performers'' for 
convenience. Similarly, Webcasters, Broadcasters, and the Business 
Establishment Services are sometimes referred to collectively as 
``the Services.''
    \4\ The Webcasters are Internet services that each employ a 
technology known as ``streaming,'' but comprise a range of different 
business models and music programming.
    \5\ The Broadcasters are commercial AM or FM radio stations that 
are licensed by the Federal Communications Commission (``FCC'').
    \6\ The Business Establishment Services, DMX/AEI Music, deliver 
sound recordings to business establishments for the enjoyment of the 
establishments' customers. See Knittel W.D.T. 4. DMX/AEI Music is 
the successor company resulting from a merger between AEI Music 
Network, Inc. (``AEI'') and DMX Music, Inc. (``DMX'').
    \7\ AFTRA, the American Federation of Television and Radio 
Artists, is a national labor organization representing performers 
and newspersons. See Tr. 2830 (Himelfarb).
    \8\ AFM, the American Federation of Musicians, is a labor 
organization representing professional musicians. See Bradley W.D.T. 
1.
    \9\ AFIM, the Association For Independent Music, is a trade 
association representing independent record companies, wholesalers, 
distributors and retailers. See Tr. 2830 (Himelfarb)
    \10\ RIAA is a trade association representing record companies, 
including the five ``majors'' and numerous ``independent'' labels.
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B. The Position of the Parties at the Commencement of the Proceeding

1. Rates Proposed by Copyright Owners
    RIAA proposed rates derived from an analysis of 26 voluntarily 
negotiated agreements between itself and individual webcasters. RIAA 
claims that these agreements ``involve the same buyer, the same seller, 
the same right, the same copyrighted works, the same time period and 
the same medium as those in the marketplace that the CARP must 
replicate.'' CARP Report at 26, citing RIAA PFFCL \11\ (Introduction at 
8). Based upon these agreements, RIAA proposed the following rates for 
DMCA compliant webcasting services:
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    \11\ Hereinafter, references to proposed findings of fact and 
conclusions of law shall be cited as ``OFFCK'' preceded by the name 
of the party that submitted the filing followed by the paragraph 
number. References to written direct testimony shall be cited as 
``W.D.T.'' preceded by the last name of the witness and followed by 
a page number. References 9to written rebuttal testimony shall be 
cited as ``W.R.T.'' preceded by the last name of the witness and 
followed by a page number. References to the transcript shall be 
cited asd ``TR.'' followed by the page number and the last name of 
the witness.
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    (i) For basic ``business to consumer'' (B2C) webcasting services:
    0.4c for each transmission of a sound recording to a single 
listener, or 15% of the service's gross revenues.
    (ii) For ``business to business'' (B2B) webcasting services, where 
transmissions are made as part of a service that is syndicated to 
third-party websites:
    0.5c for each transmission of a sound recording to a single 
listener
    (iii) For ``listener-influenced'' webcasting services:
    0.6c for each transmission of a sound recording to a single 
listener
    (iv) Minimum fee (subject to certain qualifications): $5,000 per 
webcasting service

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    (v) Ephemeral license fee:
    10% of each service's performance royalty fee payable under (i), 
(ii), or (iii).
    For the section 112 license applicable to the business 
establishment services, the copyright owners proposed a rate set at 10% 
of gross revenues with a minimum fee of $50,000 a year.
2. Rates Proposed by Services
    Webcasters proposed per-performance and per-hour sound recording 
performance fees, based upon an economic model, that considered the 
aggregate fees paid to the three performance rights organizations 
(ASCAP, BMI, and SESAC) that license the public performances of musical 
works for radio programs that are broadcast over-the-air by FCC-
licensed broadcasters, by 872 radio stations during 2000. From this 
model, the webcasters derived a per-song and a per-listener hour base 
rate of 0.02[cent] per song and 0.3[cent] per hour, respectively. These 
figures were then adjusted to account for a number of factors, 
including the promotional value gained by the record companies from the 
performance of their works. This adjustment resulted in a fee proposal 
of 0.014[cent] per performance or 0.21[cent] per hour.
    At the end of the proceeding, Webcasters suggested in their 
proposed findings of fact and conclusions of law an alternative method 
for calculating royalty fees, namely, a percentage-of-revenue fee 
structure. Specifically, Webcasters proposed a fee of 3% of a 
webcaster's gross revenues for all services. The alternative proposal 
was made with the understanding that the service would be able to elect 
either option.
    Webcasters proposed no additional fee for the making of ephemeral 
recordings and a minimum fee of $250 per annum for each service 
operating under the section 114 license.
    The Business Establishment Services who need only an ephemeral 
recording license proposed a flat rate of $10,000 per year for each 
company.

C. The Panel's Determination of Reasonable Rates and a Minimum Fees

    In this proceeding, the Panel had to establish rates and terms of 
payment for digital transmissions of sound recordings made by 
noninteractive, nonsubscription services and rates for the making of 
ephemeral phonorecords made pursuant to the section 112(e) license; 
either to facilitate those transmissions made or by business 
establishments which are otherwise exempt from the digital performance 
right.
    The proposed rates are set forth in Appendix A of the CARP Report, 
which is posted on the Copyright Office website at: http://www.copyright.gov/carp/webcasting_rates_a.pdf.
    The proposed terms of payment may be found in Appendix B of the 
CARP Report, which is posted on the Copyright Office website at: http://www.copyright.gov/carp/webcasting_rates_b.pdf.

III. The Librarian's Scope of Review of the Panel's Report

    The Copyright Royalty Tribunal Reform Act of 1993 (the Reform Act), 
Pub. L. No. 103-198, 107 Stat. 2304, created a unique system of review 
of a CARP's determination. Typically, an arbitrator's decision is not 
reviewable, but the Reform Act created two layers of review that result 
in final orders: one by the Librarian of Congress (Librarian) and a 
second by the United States Court of Appeals for the District of 
Columbia Circuit. Section 802(f) of title 17 directs the Librarian on 
the recommendation of the Register of Copyrights either to accept the 
decision of the CARP, or to reject it. If the Librarian rejects it, he 
must substitute his own determination ``after full examination of the 
record created in the arbitration proceeding.'' 17 U.S.C. 802(f). If 
the Librarian accepts it, then the determination of the CARP becomes 
the determination of the Librarian. In either case, through issuance of 
the Librarian's Order, it is his decision that will be subject to 
review by the Court of Appeals. 17 U.S.C. 802(g).
    The review process has been thoroughly discussed in prior 
recommendations of the Register of Copyrights (Register) concerning 
rate adjustments and royalty distribution proceedings. See, e.g., 
Distribution of 1990, 1991, and 1992 Cable Royalties, 61 FR 55653 
(1996); Rate Adjustment for the Satellite Carrier Compulsory License, 
62 FR 55742 (October 28, 1997). Nevertheless, the discussion merits 
repetition because of its importance in reviewing each CARP decision.
    Section 802(f) of the Copyright Act directs that the Librarian 
shall adopt the report of the CARP, ``unless the Librarian finds that 
the determination is arbitrary or contrary to the applicable provisions 
of this title.'' Neither the Reform Act nor its legislative history 
indicates what is meant specifically by ``arbitrary,'' but there is no 
reason to conclude that the use of the term is any different from the 
``arbitrary'' standard described in the Administrative Procedure Act 
(APA), 5 U.S.C. 706(2)(A).
    Review of the case law applying the APA ``arbitrary'' standard 
reveals six factors or circumstances under which a court is likely to 
find that an agency acted arbitrarily. An agency action is generally 
considered to be arbitrary when:
    1. It relies on factors that Congress did not intend it to 
consider;
    2. It fails to consider entirely an important aspect of the problem 
that it was solving;
    3. It offers an explanation for its decision that runs counter to 
the evidence presented before it;
    4. It issues a decision that is so implausible that it cannot be 
explained as a product of agency expertise or a difference of 
viewpoint;
    5. It fails to examine the data and articulate a satisfactory 
explanation for its action including a rational connection between the 
facts found and the choice made; and
    6. Its action entails the unexplained discrimination or disparate 
treatment of similarly situated parties.

Motor Vehicle Mfrs. Ass'n. State Farm Mutual Auto. Insurance Co., 463 
U.S. 29 (1983); Celcom Communications Corp. v. FCC, 789 F.2d 67 (D.C. 
Cir. 1986); Airmark Corp. v. FAA, 758 F.2d 685 (D.C. Cir. 1985).
    In reviewing the CARP's decision, the Librarian has been guided by 
these principles and the prior decisions of the District of Columbia 
Circuit in which the court applied the ``arbitrary and capricious'' 
standard of 5 U.S.C. 706(2)(A) to the determinations of the former 
Copyright Royalty Tribunal (hereinafter ``CRT or Tribunal''). See, e.g, 
National Cable Tele. Ass'n v. CRT, 724 F.2d 176 (D.C. Cir. 1983) 
(applying the Administrative Procedure Act's standard authorizing 
courts to set aside agency action found to be arbitrary, capricious, 
and abuse of discretion, or otherwise in accordance with law.''); see 
also, Recording Industry Ass'n of America v. CRT, 662 F.2d 1, 7-9 (D.C. 
Cir. 1981); Amusement and Music Operators Ass'n v. CRT, 676 F.2d 1144, 
1149-52 (7th Cir.), cert denied, 459 U.S. 907 (1982); National Ass'n of 
Broadcasters v. CRT, 675 F.2d 367, 375 n. 8 (D.C. Cir. 1982).
    Review of judicial decisions regarding Tribunal actions reveals a 
consistent theme; while the Tribunal was granted a relatively wide 
``zone of reasonableness,'' it was required to articulate clearly the 
rationale for its award of royalties to each claimant. See National 
Ass'n of Broadcasters v. CRT, 772 F.2d 922 (D.C. Cir. 1985), cert. 
denied, 475 U.S. 1035 (1986) (NAB v. CRT); Christian Broadcasting 
Network v.

[[Page 45243]]

CRT, 720 F.2d 1295 (D.C. Cir. 1983) (Christian Broadcasting v. CRT); 
National Cable Television Ass'n v. CRT, 689 F.2d 1077 (D.C. Cir. 1982) 
(NCTA v. CRT); Recording Indus. Ass'n of America v. CRT, 662 F.2d 1 
(D.C. Cir. 1981) (RIAA v. CRT). As the D.C. Circuit succinctly noted:

    We wish to emphasize * * * that precisely because of the 
technical and discretionary nature of the Tribunal's work, we must 
especially insist that it weigh all the relevant considerations and 
that it set out its conclusions in a form that permits us to 
determine whether it has exercised its responsibilities lawfully. * 
* *

    Christian Broadcasting v. CRT, 720 F.2d at 1319 (D.C. Cir. 1983), 
quoting NCTA v. CRT, 689 F.2d at 1091 (D.C. Cir. 1982).
    Because the Librarian is reviewing the CARP decision under the same 
``arbitrary'' standard used by the courts to review the Tribunal, he 
must be presented by the CARP with a rational analysis of its decision, 
setting forth specific findings of fact and conclusions of law. This 
requirement of every CARP report is confirmed by the legislative 
history of the Reform Act which notes that a ``clear report setting 
forth the panel's reasoning and findings will greatly assist the 
Librarian of Congress.'' H.R. Rep. No. 103-286, at 13 (1993). This goal 
cannot be reached by ``attempt[ing] to distinguish apparently 
inconsistent awards with simple, undifferentiated allusions to a 10,000 
page record.'' Christian Broadcasting v. CRT, 720 F.2d at 1319.
    It is the task of the Register to review the report and make her 
recommendation to the Librarian as to whether it is arbitrary or 
contrary to the provisions of the Copyright Act and, if so, whether, 
and in what manner, the Librarian should substitute his own 
determination. 17 U.S.C. 802(f).

IV. The CARP Report: Review and Recommendation of the Register of 
Copyrights

    The law gives the Register the responsibility to review the CARP 
report and make recommendations to the Librarian whether to adopt or 
reject the Panel's determination. In doing so, she reviews the Panel's 
report, the parties' post-panel submissions, and the record evidence.
    After carefully considering the Panel's report and the record in 
this proceeding, the Register has concluded that the rates proposed by 
the Panel for use of the webcasting license do not reflect the rates 
that a willing buyer and willing seller would agree upon in the 
marketplace. Therefore, the Register has made a recommendation that the 
Librarian reject the proposed rates ($0.14 per performance for 
Internet-only transmissions and $0.07 per performance for radio 
retransmissions) for the section 114 license and substitute his own 
determination (0.07c per performance for both types of transmissions), 
based upon the Panel's analysis of the hypothetical marketplace, and 
its reliance upon contractual agreements negotiated in the marketplace.
    These changes necessitate an adjustment to the proposed rates for 
non-CPB, noncommercial broadcasters \12\ for Internet-only 
transmissions as well. The adjusted rate for archived programming 
subsequently transmitted over the Internet, substituted programming and 
up to two side channels is 0.02[cent], reflecting a downward adjustment 
from the 0.05[cent] rate proposed by the Panel. The new rate for all 
other transmissions made by non-CPB, noncommercial broadcasters is 
0.07[cent] per performance per listener. Using this methodology, the 
Register recommends that the Librarian also reject the Panel's 
determination of a rate for the making of ephemeral recordings by those 
Licensees operating under the webcasting license. Because the Panel had 
made an earlier determination not to consider 25 of the 26 contracts 
submitted by RIAA for the purpose of setting a rate for the webcasting 
license, it was arbitrary for the Panel to use these same rejected 
licenses to set the Ephemeral License Fee. See section IV.13 herein for 
discussion. Consequently, the Register proposes a downward adjustment--
from 9% of the performance royalties paid to 8.8%--to the Ephemeral 
License Fee to remove the effect of the discarded licenses.
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    \12\ A non-CPB, noncommercial broadcaster is a Public 
Broadcasting Entity as defined in 17 U.S.C. 118(g) that is not 
qualified to receive funding from the Corporation for Public 
Broadcasting pursuant to the criteria set forth in 47 U.S.C. 396.
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    In determining the Ephemeral License Fee for Business Establishment 
Services operating under an exemption to the digital performance right, 
the CARP considered separate licenses negotiated in the marketplace 
between individual record companies and these services. Its reliance on 
these agreements as an adequate benchmark for purposes of setting the 
rate for the section 112 license was well-founded and supported by the 
record. Therefore, the Register recommends adopting the Panel's 
proposal of setting the Ephemeral License Fee for Business 
Establishment Services at 10% of the service's gross proceeds. However, 
the Register cannot support the Panel's recommendation to set the 
minimum fee applicable to these services for its use of the ephemeral 
license at $500 when clear evidence exists in the contractual 
agreements to establish a much higher range of values for setting the 
minimum fee. Consequently, the Register evaluated the contracts and 
proposed a minimum fee consistent with the record evidence. The result 
is a minimum fee of $10,000 per license pro rated on a monthly basis.
    Section 802(f) states that ``[i]f the Librarian rejects the 
determination of the arbitration panel, the Librarian shall, before the 
end of that 90-day period, and after full examination of the record 
created in the arbitration proceeding, issue an order setting the 
royalty fee or distribution of fees, as the case may be.'' During that 
90-day period, the Register reviewed the Panel's report and made a 
recommendation to the Librarian to accept in part and reject in part 
the Panel's report, for the reasons cited herein. The Librarian 
accepted this recommendation and, on May 21, 2002, he issued an order 
rejecting the Panel's determination proposing rates and terms for the 
webcasting license and the ephemeral recording license. See Order, 
Docket No. 2000-9 CARP DTRA 1&2 (dated May 21, 2002).
    The full review of the Register and her corresponding 
recommendations are presented herein. Within the limited scope of the 
Librarian's review of this proceeding, ``the Librarian will not second 
guess a CARP's balance and consideration of the evidence, unless its 
decision runs completely counter to the evidence presented to it.'' 
Rate Adjustment for the Satellite Carrier Compulsory License, 62 FR 
55757 (1997), citing 61 FR 55663 (October 28, 1996) (Distribution of 
1990, 1991 and 1992 Cable Royalties). Accordingly, the Register accepts 
the Panel's weighing of the evidence and will not question findings and 
conclusions which proceed directly from the arbitrators' consideration 
of factual evidence. The Register, however, may reject a finding of the 
Panel where it is clear that its determination is not supported by the 
evidence in the record.

A. Establishing Appropriate Rates

1. The ``Willing Buyer/Willing Seller Standard''
    Sections 112(e)(4) and 114(f)(2)(B), of title 17 of the U.S.C., 
provide that ``the copyright arbitration royalty panel shall establish 
rates and terms that most clearly represent the rates and terms that 
would have been negotiated in the marketplace between a willing buyer 
and a willing seller,'' and enumerate two factors that the panel shall 
consider in making its decisions: (1) The effect of

[[Page 45244]]

the use of the sound recordings on the sale of phonorecords, and (2) 
the relative contributions made by both industries in bringing these 
works to the public. In applying this standard, the Panel determined 
that it was to consider the enumerated factors along with all other 
relevant factors identified by the parties, but that it was not to 
accord the listed factors special consideration. Report at 21; see also 
Final Rule and Order, Rate Adjustment for the Satellite Carrier 
Compulsory License, Docket No. 96-3 CARP SRA, 62 FR 55742, 55746 
(October 28, 1997).
    Nevertheless, when the Panel considered the record evidence offered 
to establish a marketplace rate, it paid close attention to the two 
factors set forth in the statute. In analyzing the first factor, which 
focuses on the interplay between webcasting and sales of phonorecords, 
the panel found that the evidence offered during the proceeding was 
insufficient to demonstrate whether webcasting promoted or displaced 
sales of sound recordings. RIAA's evidence to demonstrate that 
performances of their sound recordings over the Internet displace 
record sales consisted of unsupported opinion testimony and 
consequently, the Panel afforded it no weight. Report at 33. Similarly, 
the Panel rejected the Webcasters' contention that webcasting promoted 
sales, affording little weight to its empirical studies. It concluded 
that the Sounddata survey \13\ was not useful for purposes of this 
proceeding because it focused on the promotional value of traditional 
radio broadcasts and not the promotional value of webcasting. Id. 
Likewise, the Panel rejected a study by Professor Michael Mazis \14\ 
because the response rates in the survey study fell below generally 
acceptable standards. All in all, the evidence on either side was not 
persuasive. Consequently, the Panel concluded that, for the time period 
under consideration, ``the net impact of Internet webcasting on record 
sales [was] indeterminate.'' Id. at 34.
---------------------------------------------------------------------------

    \13\ Michael Fine is an expert witness for the Webcasters and 
Broadcasters. He was the chief executive officer to Soundata, 
SoundScan and Broadcast Data Systems until December 31, 2000, and is 
now a management consultant to the firms operating these services. 
He analyzed data collected by these services to determine the 
promotional effect upon record sales from radio retransmissions and 
Internet-only transmissions and the displacement effect of record 
sales due to copying of sound recordings from Internet 
transmissions. Fine's W.D.T. at 1.
    \14\ Professor Mazis is a Professor in the Kogod School of 
Business, American University, who testified on behalf of the 
Webcasters and Broadcasters. He designed a survey study to analyze 
usage patterns of people who listen to simulcast of a radio 
station's over-the-air broadcast programming and transmissions made 
by services transmitting solely over the Internet. Specifically, the 
study was designed to measure:
    a. The effect listening to transmissions over the Internet had 
on a listener's music purchases;
    b. the extent to which listeners to radio retransmissions are 
either listeners from the broadcaster's local market or non-local 
listeners;
    c. the amount of time spent listening to programming on the 
Internet and the proportion of that time spent listening to music 
programming versus non-music programming; and
    d. the reasons why people visit radio station websites and the 
activities they engage in when they visit these sites. Mazis' W.D.T. 
at 1-2.
---------------------------------------------------------------------------

    Broadcasters, however, disagree with the Panel's conclusions. They 
argue that the Panel should have made an adjustment for the promotional 
value of the transmissions, noting that the statute singled out this 
factor for consideration when setting the rates. Broadcasters Petition 
at 38. They further contend that the record demonstrates that ``the 
promotional value of radio play should be far and away the most 
significant factor in determining the fair market value of broadcasters 
simulcast rates.'' Id. at 39-40. But all the evidence cited in the 
record references the interrelationship between radio stations and 
record companies in the analog world. As noted above, the Panel 
considered the evidence but did not find it persuasive.
    Where the Panel makes a decision based upon its weighing of the 
evidence, the Register will not disturb its findings and conclusions 
that proceed directly from the Panel's consideration of the factual 
evidence. Thus, the Register accepts the Panel's conclusion that 
performances of sound recordings over the Internet did not 
significantly stimulate record sales. More importantly, though, the 
Panel correctly found that promotional value is a factor to be 
considered in determining rates under the willing buyer/willing seller 
model, and does not constitute an additional standard or policy 
consideration to be used after rates are set to adjust a base rate 
upwards or downwards. Report at 21. Therefore, the effect of any 
promotional value attributable to a radio retransmission would already 
be reflected in the rates for these transmissions reached through arms-
length negotiations in the marketplace.
    As for the second factor, the Panel found that both copyright 
owners and licensees made significant creative, technological and 
financial contributions. It concluded, however, that it was not 
necessary to gauge with specificity the value of these contributions in 
the case where actual agreements voluntarily negotiated in the 
marketplace existed, since such considerations, including any 
significant promotional value of the transmissions, would already have 
been factored into the agreed upon price. Id. at 35-36. This is not a 
contested finding.
    It is also important at the outset of this review to distinguish 
the willing buyer/willing seller standard to be used in this proceeding 
from the standard that applies when setting rates for subscription 
services that operated under the section 114 license. They are not the 
same. Section 114(f)(1)(B), governing subscription services, requires a 
CARP to consider the objectives set forth in section 801(b)(1), as well 
as rates and terms for comparable types of digital audio transmission 
services established through voluntary negotiations. See Final Rule and 
Order, 63 FR 25394, 25399 (May 8, 1998). This standard for setting 
rates for the subscription services is policy-driven, whereas the 
standard for setting rates for nonsubscription services set forth in 
section 114(f)(2)(B) is strictly fair market value--willing buyer/
willing seller. Thus, any argument that the two rates should be equal 
as a matter of law is without merit. See, e.g., Webcasters Petition at 
4 (comparing rates set for preexisting subscription services under the 
policy driven standard with the proposed marketplace rates for 
nonsubscription services and inferring that the rates should be 
similar).
2. Hypothetical Marketplace/Actual Marketplace
    To set rates based on a willing buyer/willing seller standard, the 
CARP first had to define the relevant marketplace in which such rates 
would be set. It determined, and the parties agreed, that the rates 
should be those that a willing buyer and willing seller would have 
agreed upon in a hypothetical marketplace that was not constrained by a 
compulsory license. The CARP then had to define the parameters of the 
marketplace: the buyers, the sellers, and the product.
    In this configuration of the marketplace, the willing buyers are 
the services which may operate under the webcasting license (DMCA-
compliant services), the willing sellers are record companies, and the 
product consists of a blanket license from each record company which 
allows use of that company's complete repertoire of sound recordings. 
Report at 24. Because of the diversity among the buyers and the 
sellers, the CARP noted that one would expect ``a range of negotiated 
rates,'' and so interpreted the statutory standard as ``the rates to 
which, absent special circumstances, most willing buyers and

[[Page 45245]]

willing sellers would agree'' in a competitive marketplace.\15\ Id. at 
25.
---------------------------------------------------------------------------

    \15\ The panel used the same analysis for setting the rates for 
the ephemeral recording license because the statutory language 
defining the standard for setting rates for the ephemeral recording 
license is nearly identical to the standard set forth in section 
114.
---------------------------------------------------------------------------

    The Services take issue with the Panel's analysis of the 
hypothetical marketplace. They argue that the willing sellers should be 
considered as a group of hypothetical ``competing collectives each 
offering access to the range of sound recordings required by the 
Services,'' and not, as the Panel contends, viewed as individual record 
companies. Broadcasters Petition at 9; Webcasters Petition at 9-10. It 
is hard to see, however, how competition would be stimulated in a 
marketplace where every seller offers the exact same product and where 
more likely than not, the sellers would act in concert to extract 
monopolistic prices. Possibly sellers would choose to undercut each 
other, but at some point the price would stabilize. In any event, the 
Services failed to explain how such collectives would operate in a 
competitive marketplace. Consequently, the Register rejects the 
Webcasters' challenge to the Panel's definition on this point and 
adopts the Panel's characterization of the relevant marketplace, 
recognizing that for purposes of this proceeding, the major record 
companies are represented by a single entity, the RIAA.
    Turning next to the actual marketplace in which RIAA negotiated 
agreements with individual services, the Services voice a number of 
objections to the Panel's decision to rely on the 26 voluntary 
agreements offered into evidence by RIAA. Specifically, the Services 
object to the use of the voluntary agreements because they fail to 
exhibit a range of negotiated rates among diverse buyers and sellers. 
Broadcasters Petition at 10; Webcasters Petition at 10. They also 
question the validity of relying on agreements negotiated during the 
early stages of a newly emerging industry, noting the Panel's 
admonition to approach such agreements with caution. Report at 47. The 
reason for the warning was Dr. Jaffe's \16\ stated concern that such 
licenses ``may not reflect fully educated assessments of the nascent 
businesses'' long-term prospects.''
---------------------------------------------------------------------------

    \16\ Adam Jaffe is a Professor of Economics at Brandeis 
University. He is also the Chair of the Department of Economics and 
the Chair of the University Intellectual Property Policy Committee. 
He testified on behalf of the Webcasters and the Broadcasters.
---------------------------------------------------------------------------

    The Services also argue that the existence of the antitrust 
exemption in the statutory license gave RIAA an unfair bargaining 
advantage over the Services because RIAA represented the five major 
record companies who together owned most of the works. They contend 
that RIAA used its superior market power to negotiate supra-competitive 
prices with Services who could not match either RIAA's power in the 
marketplace or its sophistication in negotiating contracts. Moreover, 
they utterly reject the Panel's determination that RIAA's perceived 
market power was tempered by the existence of the statutory license, 
which, for purposes of negotiating a fair rate for use of sound 
recordings, leveled the playing field. Webcasters Petition at 12.
    Not surprisingly, RIAA agrees with the Panel on this issue. It 
maintains that the statutory license offers the Services two clear 
advantages which more than offset any perceived advantage the RIAA may 
have had in negotiating a voluntary agreement. First, the license 
eliminates the usual transaction costs associated with negotiating 
separate licenses with each of the copyright owners. Second, services 
may avoid litigation costs associated with setting the rates for a 
statutory license provided they choose not to participate in the CARP 
process. RIAA reply at 12.
    In essence, both sides articulate valid positions which are 
supported by the record. RIAA is clearly an established market force 
with extensive resources and sophistication. In fact, the Panel found 
that when RIAA negotiated with less sophisticated buyers who could not 
wait for the outcome of this proceeding, the rates were above-market 
value, and therefore, not considered by this CARP. Report at 54-56. 
Nevertheless, it would make no sense for RIAA to take any other 
position in a marketplace negotiation. Sellers expect to make a profit 
and will extract from the market what they can, just as buyers will do 
everything in their power to get the product at the lowest possible 
price. These are the fundamental principles guiding marketplace 
negotiations.
    Such negotiations, however, were few. For the most part, webcasters 
chose not to enter into negotiations for voluntary agreements, knowing 
that they could continue to operate and wait for the CARP to establish 
a rate. Such actions on the part of the users clearly impeded serious 
negotiations in the marketplace and support the CARP's observation that 
the statutory license had a countervailing effect on the negotiation 
process and limited the ability of RIAA to exert undue marketplace 
power. See Tr. 9075-77, 9490-94 (Marks) (explaining the difficulties of 
bringing webcasters to the negotiating table due to the statutory 
license). Thus, the CARP could only consider negotiated rates for the 
rights covered by the statutory license that were contained in an 
agreement between RIAA and a Service with comparable resources and 
market power.
    The only agreement that met these criteria was the Yahoo!\17\ 
agreement. The Panel found that both parties to that agreement entered 
into negotiations in good faith and on equal footing. Moreover, RIAA's 
negotiating advantage disappeared. RIAA could not extract super-
competitive rates because Yahoo! brought comparable resources, 
sophistication, and market power to the negotiating table.
---------------------------------------------------------------------------

    \17\ Yahoo! is a streaming service which provides a 
retransmissions of AM/FM radio stations and programming from other 
webcaster sites. Report at 61. Yahoo! is also a global Internet 
communications, commerce and media company, offering comprehensive 
services to more than 200 million users each month. Content for its 
features like Yahoo! Finance, Yahoo! News, and Yahoo! Sports, are 
typically licensed from third parties. Mandelbrot W.D.T. ] 3-5.
    The Panel was well aware of the many faces of Yahoo! 
Nevertheless, it found no reason to reject the Yahoo! agreement 
merely because it offered other business services. See Report at 76, 
in 53.
---------------------------------------------------------------------------

    Moreover, Yahoo! could have continued to operate under the license 
and wait for the outcome of this proceeding. Yet, Yahoo!, unlike most 
of the other Services, did not take this course of action. It wanted a 
negotiated agreement so that it could fully develop its business model 
based on certainty as to the costs of the use of the sound recordings. 
Consequently, it had every incentive to negotiate a rate that reflected 
its perception of the value of the digital performance right in light 
of its needs and position in the marketplace. Had RIAA insisted upon a 
super competitive rate, Yahoo! could have walked away and waited for 
the CARP to set the rates. RIAA Reply at 13. Thus, it was not arbitrary 
for the Panel to consider the negotiated agreement between Yahoo! and 
RIAA. It met all the criteria identified by the CARP (discussed above) 
that characterized the hypothetical marketplace: Yahoo! was a DMCA-
compliant Service; RIAA represented the interests of five independent 
record companies, and the license granted the same rights as those 
offered under the webcasting and the ephemeral recording licenses.
    The Webcasters make one final argument concerning use of licenses 
negotiated in the marketplace. They fault the Panel for its reliance on 
a contract for which there was no prior marketplace precedent for 
setting a rate. Webcasters Petition at 15. Yet, that alone cannot be a 
reason to reject

[[Page 45246]]

consideration of agreements negotiated in the marketplace, albeit at an 
early stage in the development of the industry. At some point, rates 
must be set. Such rates then become the baseline for future market 
negotiations. RIAA recognized an opportunity to participate in this 
initial phase and moved forward to negotiate contracts with users with 
the intention of using these contracts to indicate what a willing buyer 
would pay in the marketplace. However, that was easier said than done. 
As discussed above, most Webcasters chose not to enter into marketplace 
agreements, preferring to wait for the outcome of the CARP proceeding 
in the hope of getting a low rate. Clearly, such resistance to enter 
into good faith negotiations made it difficult for the copyright owners 
to gauge the market accurately and find out just what a willing buyer 
would be willing to pay for the right to transmit a sound recording 
over the Internet.
3. Benchmarks for Setting Market Rates: Voluntary Agreements vs. 
Musical Works Fees
    The parties offer two very different methods for setting the 
webcasting rates. RIAA argued that the best evidence of the value of 
the digital performance right is the actual rates individual services 
agreed to pay for the right to transmit sound recordings over the 
Internet. In support of its position, it offered into evidence 26 
separate agreements it had negotiated in the marketplace prior to the 
initiation of the CARP proceeding. The Services take a different 
approach. They dispute the validity of the contracts as a bases for 
marketplace rates and offer in their place a theoretical model (the 
``Jaffe model'') predicated on the fees commercial broadcasters pay to 
use musical works in their over-the-air AM/FM broadcast programs.
    The Jaffe model builds on the premise that in the hypothetical 
marketplace, copyright owners would license their digital performance 
rights and ephemeral recording rights at a rate no higher than the 
rates music publishers currently charge over-the-air radio broadcasters 
for the right to publicly perform their musical works.\18\ Report at 
28, citing Webcasters PFFCL ]] 276-78; Jaffe W.D.T. 16-19. To find the 
rate copyright owners would charge under this model, Webcasters 
calculated a per performance and a per hour rate by using the aggregate 
fees that 872 over-the-air radio stations paid in 2000 to the 
performing rights organizations BMI, ASCAP, and SESAC.\19\ It combined 
the fee data with data on listening audiences obtained from Arbitron to 
generate an average fee paid by an over-the-air broadcaster per 
``listening hour.'' From this value, Webcasters calculated a per 
performance fee by dividing the ``listener hour'' fee by the average 
number of songs played per hour by music-intensive format stations. Id. 
These calculations yielded a per song fee of 0.02[cent] or, in the 
alternative, a per listener hour fee of 0.22[cent]. For purposes of 
webcasting, these values were adjusted upward to reflect the fact that, 
on average, webcasters play 15 songs per hour, as compared to the 11 
per-hour played on over-the-air radio. The webcaster per hour rate 
works out to be 0.3 instead of 0.2[cent] per hour.
---------------------------------------------------------------------------

    \18\ A ``musical work'' is a musical composition, including any 
words accompanying the music. A ``sound recording'' is a work that 
results from the fixation of a series of musical, spoken, or other 
sounds, other than those accompanying a motion picture or other 
audiovisual work.
    \19\ BMI, Inc., American Society for Composers, Authors and 
Publishers, and SESAC, Inc. are performing rights organizations that 
represent songwriters, composers and music publisehrs in all genres 
of music. These societies offer licenses and collect and distribute 
royalty fees for the non-dramatic public performances of the 
copyrighted works of their members.
---------------------------------------------------------------------------

    After carefully considering both approaches, the Panel chose to 
focus on the RIAA agreements. In rejecting Dr. Jaffe's theoretical 
model, the panel cited three reasons for its conclusion. First, the 
Panel expressed strong concern regarding the construct of the model, 
including: 1. The difficulty in identifying all the factors that must 
be considered in setting a price, and 2. The inherent error associated 
with predicating a prediction on a ``string of assumptions,'' 
especially where the level of confidence in many of the assumptions is 
not high. Second, the Panel was wary of analogizing the market for the 
performance of musical works with the market for the performance of 
sound recordings, finding instead that the two marketplaces are 
distinct based upon the difference in cost and demand characteristics. 
And finally, the Panel determined that the Jaffe model was basically 
unreliable. It could not be used to predict accurately the amount of 
royalty fees owed to the performing rights societies by a particular 
radio station. It came to this conclusion after using the model to 
predict the royalty fees owed by a particular station and comparing 
that figure to the amount the radio station actually paid. For some 
radio stations, the model severely underestimated the amount owed to 
the performing rights societies, thus, drawing into serious question 
the reliability of the model. Report at 42.
    a. Fees paid for use of musical works. The Broadcasters and the 
Webcasters fault the Panel for disregarding the fees paid for musical 
works as a viable benchmark. Webcasters Petition at 15, 47. They 
maintain that Dr. Jaffe's analysis proves that the value of the 
performance of the sound recording is no higher than the value of the 
performance of the musical work. Webcasters argue that the fees for 
musical works constitute a valid benchmark because these rates are the 
result of transactions between willing buyers and willing sellers over 
a long period of time, in a marketplace that shares economic 
characteristics with the marketplace for sound recordings. Webcasters 
Petition at 48. The Broadcasters agree. They maintain that even under 
the willing buyer/willing seller standard, ``the over-the-air musical 
works license experience * * * has resulted in fees `to which most 
willing buyers and willing sellers [have] agree[d]' and constitute 
`comparable agreements negotiated over a longer period, which ha[ve] 
withstood `the test of time.' '' Broadcasters Petition at 45-46, citing 
Report at 25, 47.
    Broadcasters and Webcasters also object to the Panel's 
characterization of its proposed benchmark as merely a theoretical 
model. Webcasters Petition at 51. They maintain that Dr. Jaffe's model 
was much more than a theoretical model because it used actual data from 
the musical works marketplace to calculate an analogous rate for use of 
sound recordings in the digital marketplace. Consequently, these 
Services contend that the Panel gave inadequate consideration to their 
proposed benchmark and rejected the model out of hand because it was 
purported to be only a theoretical model based upon a number of 
untested assumptions. Broadcasters Petition at 18-19; Webcasters 
Petition at 18-20, 52.
    Finally, the Services argue that the statute does not compel the 
Panel to consider only negotiated agreements. They also contend, that 
the reliance on the fees paid for use of the musical works in a prior 
CARP proceeding to establish rates for subscription services operating 
under the same license required the panel to give more consideration to 
the musical works benchmark. Broadcaster's Petition at 1-2; Webcasters 
Petition at 1-2, 15, 17, 47. Webcasters find support for this last 
argument in an Order of the Copyright Office issued in this proceeding, 
dated July 18, 2001.
    In that order, the Office acknowledged that in 1998 it had adopted 
the rates paid for musical works fees as a relevant benchmark for 
setting rates for

[[Page 45247]]

subscription services. It stated, however, that the evidence in that 
case did not support a conclusion that the value of the sound recording 
exceeded the value of the musical work. Moreover, and directly to the 
point, the Register's recommendation in the earlier proceeding 
concurred with the earlier Panel's determination that the musical works 
benchmark is NOT determinative of the marketplace value of the 
performance right in sound recordings. The relevant passage states: 
``The question, however, is whether this reference point (the musical 
works benchmark) is determinative of the marketplace value of the 
performance in sound recordings; and, as the Panel determined, the 
answer is no.'' 63 FR 25394, 25404 (May 8, 1998).
    The July 18 Order went on to note that in the subscription service 
proceeding, ``[h]ad there been record evidence to support the opposite 
conclusion, [namely, that the value of sound recordings exceeds the 
value of musical works], the outcome might have been different.'' This 
statement was an invitation to the parties to provide whatever evidence 
they could adduce in this proceeding to establish the value of the 
sound recording. It was not to be read as an absolute determination, 
that the value of the sound recording in a marketplace unconstrained by 
a compulsory license is less than the value of the underlying musical 
work. Instead, the Order stated that ``the musical work fees benchmark 
identified in a previous rate adjustment proceeding as the upper limit 
on the value of the performance of a sound recording may or may not be 
adopted as the outer boundary of the ``zone of reasonableness'' in this 
proceeding. This is a factual determination to be made by the CARP 
based upon its analysis of the record evidence in this proceeding.''
    It is also important to note that in the prior proceeding, the only 
reason the Register and the Librarian focused on the musical works 
benchmark was because it was the only evidence that remained probative 
after an analysis of the Panel's decision. Each of the other benchmarks 
possessed at least one fatal deficiency and, consequently, each was 
rejected as a reliable indicator of the value of the performance of a 
sound recording by a subscription service. Of equal importance is the 
fact that the musical works benchmark had never been fully developed in 
the record, nor had any party relied on it to any great extent in 
making its case to that Panel. Consequently, it was not arbitrary for 
the Panel to reject the Services' invitation to anchor its decision for 
setting rates for nonsubscription services on the prior decision 
setting rates for preexisting subscription services.
    Moreover, the Panel is not required to justify why the rates it 
ultimately recommended here are greater than the rates preexisting 
subscription services pay for use of the musical works. That is merely 
the result of the analysis of the written record before this Panel, and 
its decision flows naturally from its reliance upon contractual 
agreements negotiated in the relevant marketplace for the right at 
issue. This difference in the rates is also attributable to the 
different standards that govern each rate setting proceeding. As 
discussed previously in section IV.1, the standard for setting rates 
for subscription services is policy based and not dependent upon market 
rates. Consequently, it is more likely that the rates set under the 
different standards will vary markedly, especially when rates are being 
set for a new right in a nascent industry.
    Nevertheless, the Register agrees with the Services on a number of 
theoretical points. Certainly, the Panel could have utilized Dr. 
Jaffe's model in making its decision, either alone or in conjunction 
with the voluntary agreements, provided that it considered the model's 
deficiencies, and made appropriate adjustments for the fact that the 
model required reliance on a string of assumptions to perform the 
conversion of a rate for the public performance of a musical work in an 
analog environment, into a comparable rate for the public performance 
of a sound recording in a digital format. See AMOA v. CRT, 676 F2d 1144 
(7th Cir. 1982). But the fact remains that it was not required by law 
to do so. The Panel was free to choose any of the benchmarks offered 
into the record or to rely on each of them to the degree they aided the 
Panel in reaching its decision. See, e.g., Use of Certain Copyrighted 
Works in Connection with Noncommercial Broadcasting, 43 FR 25068-69 
(CRT found voluntary license between BMI, Inc., and the public 
broadcasters, Public Broadcasting System and National Public Radio, of 
no assistance in setting rates for use of ASCAP repertoire).
    The Register also rejects the Services' contentions that the Panel 
failed to consider fully Dr. Jaffe's model. See Webcasters Petition at 
20, 52. The Panel did consider Jaffe's model and concluded that it need 
not consider alternative benchmarks that are at best analogous when it 
had actual evidence of marketplace value of the performance of the 
sound recordings in the record. Report at 42. It also rejected the 
offer to utilize the model because the underlying assumptions were in 
many instances questionable. For example, the Panel did not accept the 
assumptions that a percentage of revenue model could be converted 
accurately to a per performance metric, or that the buyers and sellers 
in the two marketplaces are analogous.
    Broadcasters assert that they had established that the value of the 
musical work is higher than the comparable right for sound recording 
based on the fees paid for use of these works in movies and television 
programs. Broadcasters Petition at 24. In addition, they offered a 
study of the fees paid for these rights in twelve foreign countries 
where the Services claim these rights are valued more or less equally. 
Id. at 24, 49. Because the Panel failed to analyze this information, 
the Services argue, the Panel's rejection of the musical benchmark was 
arbitrary.
    RIAA responds that the information offered on the fees paid for the 
public performance of sound recordings fails to establish that in these 
countries sound recordings are valued according to a ``willing buyer/
willing seller'' standard. RIAA Reply at 20, fn 36. In fact, many of 
the countries surveyed evidently use an ``equitable remuneration'' 
standard, which courts have held not to be equivalent to a fair market 
value. Because it is not possible to ascertain whether any of the rates 
offered in the survey of foreign countries represented a fair market 
rate, or that the rights in these countries are equivalent to the 
rights under U.S. law, the Panel was not arbitrary in its decision to 
disregard this evidence. The Register also concludes that the Panel's 
decision not to consider master use and synchronization licenses for 
use of musical works and sound recordings in motion pictures and 
television was not arbitrary. At best, these licenses offered potential 
benchmarks for evaluating the digital performance right for sound 
recordings, and they may well have been useful had not actual evidence 
of marketplace value of the sound recordings existed. In any event, 
they did not represent better evidence than the voluntary agreements 
negotiated in the marketplace for the sound recording digital 
performance right.
    b. Voluntary agreements. On the other hand, the Panel articulated 
two affirmative reasons for its focus on the negotiated agreements. 
First, the statute invites the CARP to consider rates and terms 
negotiated in the marketplace. Second, the Panel accepted the premise 
that the existence of actual marketplace agreements pertaining to the 
same rights for comparable services offers the best evidence of the 
going rate. Report at 43, citing Jaffe Tr. at 6618.

[[Page 45248]]

    But in choosing this approach, the Panel did not accept the 26 
voluntary agreements at face value. It evaluated the relative 
bargaining power of the buyers and sellers, scrutinized the negotiating 
strategy of the parties, considered the timing of the agreements, 
discounted any agreement that was not implemented, eliminated those 
where the Service paid little or no royalties or the Service went out 
of business, and evaluated the effect of a Service's immediate need for 
the license on the negotiated rate. See Report at 45-59.\20\ 
Ultimately, it gave little weight to 25 of the 26 agreements for these 
reasons and because the record demonstrated that the rates in these 
licenses reflect above-marketplace rates due to the superior bargaining 
position of RIAA or the licensee's immediate need for a license due to 
unique circumstances. At best, the Panel concluded that the rates 
included in these agreements establish an upper limit on the price of 
the digital performance right, and where included, the right to make 
ephemeral copies. Report at 59.
---------------------------------------------------------------------------

    \20\ The Panel also considered, and ultimately rejected three 
offers of corroborating evidence made by RIAA in support of its 
position that all 26 agreements should be used in setting the 
royalty rates: (1) License agreements for making [material redacted 
subject to Protective Order]; (2) prior case law articulating a 
method for assessing damages in patent infringement cases; and (3) a 
pricing strategy analysis.
---------------------------------------------------------------------------

    RIAA objects to the Panel's decision to reject 25 of the 26 
agreements on the grounds that the Panel's criticisms were overbroad. 
RIAA Petition at 34. Specifically, it claims that the Panel 
mischaracterized its agreement with www.com/OnAir (``OnAir''), arguing 
that this Licensee paid substantial royalties and its decision to enter 
into the agreement was not motivated by special circumstances as the 
CARP claimed. Id. at 31. This observation, however, is not sufficient 
to overcome the Panel's conclusion in regard to this agreement, 
especially in light of the testimony of RIAA's own expert witness, Dr. 
Nagle, who testified the Panel should give no consideration to any 
agreement with a licensee who cannot survive in the marketplace. Report 
at 24. Had OnAir continued to operate in the marketplace and renew its 
license with RIAA, the Panel might have given it more serious 
consideration. But again, it was not required to do so, especially when 
the Panel found more probative evidence in the record upon which to 
rely.
    Likewise, RIAA objected to the Panel's decision not to give any 
weight to the MusicMusicMusic (``MMM'') agreement, arguing in this case 
that the Panel assumed MMM had renewed its agreement in 2001 for the 
same reasons that led it to accept a higher than market value rate in 
1999. RIAA Petition at 32. Webcasters respond that RIAA misrepresents 
the facts of the renewal. They maintain that MMM renewed the agreement 
in 2001 based on ``many of the same motivating factors'' that led to 
the initial agreement, including its concerns about its long-term 
relationship with RIAA in other areas. Webcasters Reply at 29. Because 
the evidence supports a rationale for MMM to accept a higher than 
marketplace rate, it was not arbitrary for the Panel to decide not to 
adopt it as an adequate benchmark. The Panel need not rely on the MMM 
agreement when it had another agreement negotiated in the marketplace 
that did not suffer from the same perceived shortcomings.
    Specifically, the Panel gave significant weight to the one 
remaining agreement negotiated--the RIAA-Yahoo! agreement--and used it 
as a starting point for setting the rates for the webcasting license 
and the ephemeral recordings license. The Panel found this agreement 
particularly reliable and probative because: (1) Yahoo! was a 
successful and sophisticated business which, to date, had made well 
over half of all DMCA-compliant performances; (2) it had comparable 
resources and bargaining power to those RIAA brought to the table; and 
(3) the agreement provided for different rates for different types of 
transmissions. See Report at 64-67; 70. While the first two reasons 
offer strong support for the Panel's decision to rely upon the Yahoo! 
agreement, the third reason is questionable in the context of the 
Yahoo! agreement because the different rates do not actually represent 
the parties' understanding of the value of the performance right for 
these types of transmissions. See discussion infra, section IV.5.
    Webcasters, however, argue that the Panel's reliance on the Yahoo! 
agreement was fatal because it selected a single term out of a 
multifaceted contract. Webcasters at 22-23. Specifically, they maintain 
that the webcasting rate did not reflect merely the value of the sound 
recording, but an abundance of trade-offs that met the needs of RIAA 
and Yahoo!. Id. at 24. Webcasters make this argument because, in a 
prior CARP proceeding, the Register had refused to adopt a complicated 
partnership agreement that purportedly included a rate for the digital 
performance right as a benchmark for setting the statutory rate. See, 
Rate Setting Proceeding for Subscription Services, 63 FR 25394 (May 8, 
1998). Specifically, the Register concluded that ``it was arbitrary for 
the Panel to rely on a single provision extracted from a complex 
agreement where the evidence demonstrates that the [rate] provision 
would not exist but for the entire agreement.'' Id. at 25402.
    The two agreements, however, are not analogous. The primary purpose 
of the Yahoo! agreement was to set a rate for use of sound recordings 
over the Internet. Thus, the noted trade-offs in this agreement were 
all directly tied to considerations relating to the value of the 
performance right, and did not affect its validity as a benchmark. Such 
was not the case with the subscription services agreement offered into 
evidence in the prior proceeding, where the performance right component 
was merely ``one of eleven interdependent co-equal agreements which 
together constituted the partnership agreement between [Digital Cable 
Radio Associates (``DCR'')] and the record companies.'' Id.
    Along these same lines, the Services challenge the Panel's 
dependence upon a single contract negotiated between a single seller 
(RIAA) and a single buyer (Yahoo!), especially in light of the Panel's 
construct of the hypothetical marketplace. Broadcasters Petition at 14; 
Live365 Petition at 5; Webcasters Petition at 9, 14. These parties 
argue that under 17 U.S.C. 114(f)(2)(B), the Panel had discretion to 
consider negotiated agreements only when the agreements were for 
comparable types of services in comparable circumstances. Webcasters, 
including Live365, maintain that Yahoo! had a unique position among 
webcasters and argue that it was manifestly arbitrary for the Panel to 
set rates based solely on the rates paid by this one webcaster which by 
its own admissions was not similarly situated with other webcasters. 
Live365 Petition at 11; Webcasters Petition at 27. Specifically, they 
contend that Yahoo! had little concern about getting a reasonable rate 
for Internet-only transmissions so long as the rate for RR 
transmissions was favorable and it could continue to grow in this 
arena. Webcasters note that Yahoo!'s main business was the 
retransmission of radio re-broadcasts, and that over 90% of all 
transmissions made by Yahoo! fall within this category. Id. at 28. 
Consequently, Webcasters maintain that the rates set for Internet-only 
transmissions in the Yahoo! agreement cannot be fairly applicable to 
Webcasters at large. Id. at 29.
    Broadcasters have other complaints with the Panel's approach. 
First, they object to the use of the Yahoo! contract to set rates for 
broadcasters when the buyer in that case was not a broadcaster

[[Page 45249]]

but a third-party aggregator--a completely different type of business. 
Second, they fault the Panel for its failure to follow its own dictate 
to proceed cautiously when viewing contracts negotiated in a nascent 
industry for newly created rights. Broadcaster Petition at 14. 
Similarly, Webcasters fault the Panel for relying exclusively on the 
Yahoo! agreement because it offers only a single, uniform rate for each 
type of transmission, in contrast to the ``range of rates,'' involving 
``diverse buyers and sellers,'' that the Panel identified as the 
hallmark of a willing buyer/willing seller marketplace.'' Webcasters 
Petition at 14. Webcasters also contend that the Yahoo! agreement 
should not have been considered because it, like the Lomasoft-RIAA 
agreement, had not been renewed. Webcasters Petition at 41.
    Moreover, Live365 questions the Panel's reliance on the Yahoo! 
contract when it had rejected use of a second similar agreement between 
MusicMatch (``MM'') and RIAA because MM had accepted higher than 
marketplace rates for nearly identical reasons to those that account 
for the inflation in the Yahoo! rates. MM had wished to settle 
litigation with RIAA and it received a benefit from the inclusion of a 
Most Favored Nations (MFN) clause in the contract. Yet, in spite of the 
similarities, the Panel relied on the Yahoo! agreement and disregarded 
the second one. Such disparate treatment of similarly situated services 
is arguably arbitrary. Live365 Petition at 13. A closer examination of 
the agreements, however, reveals a significant difference between the 
two contracts which allowed the Panel to disregard the MM agreement for 
further consideration. Most importantly, the MM agreement contained a 
MFN clause that [material redacted subject to a protective order]. The 
Panel reasoned that this provision undermined the usefulness of the 
agreement to establish a marketplace rate because [material redacted 
subject to a protective order]. Report at 56-57. Such was not the case 
with the Yahoo! agreement since the MFN clause only allowed Yahoo! to 
receive a partial benefit commensurate with [material redacted subject 
to a protective order]. Report at 62.
    The Register concurs and agrees with the Panel's observation that 
it would be unsound to establish a rate for the statutory license using 
a rate that itself is subject to change based on the outcome of this 
proceeding.
    The Register also finds the other arguments by the parties 
unavailing. In spite of their objections, the Services' own expert, Dr. 
Jaffe, agreed in principle with the Panel's approach. In his testimony, 
he acknowledged that voluntary agreements between a willing buyer and a 
willing seller would constitute the best evidence of reasonable 
marketplace value if such agreements were between parties comparable to 
those using the webcasting license. Tr. 6618 (Jaffe). The Services' 
argument, of course, is that the Yahoo! agreement is not a comparable 
agreement for purposes of setting rates for all webcasters, and this 
appears to be a valid point. Yahoo!'s business model is somewhat 
unique. Unlike webcasters that create their own programming, Yahoo! 
merely offers programming by AM/FM radio stations and other webcasters.
    Nevertheless, RIAA offers record evidence that contradicts the 
Webcasters' assertion that Yahoo! is not a comparable service for 
purposes of this proceeding, noting that many webcasters affirmatively 
stated that Yahoo! is a competitor. Moreover, RIAA asserts that the 
number of the performances made by Yahoo! on its Internet-only channels 
is roughly equivalent to the number of performances made by the other 
webcasters in this proceeding and, therefore, Yahoo!'s interest in 
getting a reasonable rate for its Internet-only stations should be 
comparable to those of the Webcasters in this proceeding. RIAA reply at 
33-34.
    Because Yahoo! is engaged in both types of transmissions, it is 
reasonable to accept this agreement as a basis for setting rates for 
both types of transmissions. Yahoo! has developed a significant 
business presence in the marketplace for Internet-only transmissions 
and understands the marketing and business of Internet-only webcasters. 
Consequently, allegations that Yahoo! has only a de minimis interest in 
the webcasting field and is thus less interested in getting a 
reasonable rate for the right to make digital transmissions are without 
merit. The question, however, is whether each rate in the Yahoo! 
agreement reflects the actual value of the particular transmission or 
whether one must consider both rates in concert to understand the 
valuation process. For a more detailed discussion on this point, see 
section IV.5 infra.
4. Alternative Methodology: Percentage-of-Revenue
    The Panel also carefully considered and rejected a percentage-of-
revenue model for assessing fees and determined that a per performance 
metric was preferable to a percentage-of-revenue model. A key reason 
for rejecting the percentage-of-revenue approach was the Panel's 
determination that a per performance fee is directly tied to the right 
being licensed. The Panel also found that it was difficult to establish 
the proper percentage because business models varied widely in the 
industry, such that some services made extensive music offerings while 
others made minimal use of the sound recordings. Report at 37. The 
final reason and perhaps the most critical one for rejecting this model 
was the fact that many webcasters generate little revenue under their 
current business models. As the Panel noted, copyright owners should 
not be ``forced to allow extensive use of their property with little or 
no compensation.'' Id, citing H.R. Rep. 105-796, at 85-86. Thus, it 
seemed illogical to set a rate for the statutory license on a 
percentage-of-revenue basis when in fact a large proportion of the 
services admit they generate very little revenue, and, therefore, would 
generate meager royalties even for substantial uses of copyrighted 
works. Moreover, it is highly unlikely that a willing seller, who 
negotiates an agreement in the marketplace, would agree to a payment 
model which itself could not provide adequate compensation for the use 
of its sound recordings.
    Nevertheless, Webcasters and Live365 assert that the Panel acted 
arbitrarily when it failed to provide a revenue-based royalty option. 
Webcasters at 54. They maintain that both sides advocated adoption of a 
percentage-of-revenue option, see RIAA PFFCL, Appendix C; Webcasters 
PFFCL ]] 283-296, and that it was arbitrary for the Panel to refuse to 
adopt this approach. See Live365 Petition at 10; see also pg. 11, fn 6. 
Webcasters also assert that they had made clear that in the event the 
Panel rejected Jaffe's model, a revenue-based alternative license 
proposal would be necessary to avoid putting certain webcasters out of 
business. Webcasters Petition at 56, 60. Moreover, Webcasters reject 
the Panel's conclusion that the Services' revenue-based fee proposal 
was untimely. Id.. at 57-60. They maintain that under Sec. 251.43(d) 
they were allowed to revise their claim or their requested rate ``at 
any time during the proceeding up to the filing of the proposed 
findings of fact and conclusions of law,'' and that the Panel had no 
authority to alter this provision by order under Sec. 251.50.\21\
---------------------------------------------------------------------------

    \21\ Section 251.50 of the 37 CFR provides that:
    In accordance with 5 U.S.C., subchapter II, a Copyright 
Arbitration Royalty Panel may issue rulings or orders, either on its 
own motion or that of an interested party, necessary to the 
resolution of issues contained in the proceeding before it; 
Provided, that no such rules or orders shall amend, supplement or 
supersede the rules and regulations contained in this subchapter. 
See Sec. 251.7.

---------------------------------------------------------------------------

[[Page 45250]]

    In reply, RIAA notes that the Webcasters cite no evidence for their 
assertion that they reasonably believed the Panel would offer a 
percentage-of-revenue option and counters their timeliness argument by 
setting forth the timeline regarding the parties's submissions 
concerning the rates. RIAA Reply at 62. Evidently at the request of the 
Webcasters, the Panel issued an order setting November 2 as the 
deadline for submitting revised or new rate proposals, so that parties 
were fully aware of each other's position and could style their 
findings of fact and conclusions of law accordingly. Consequently, the 
Panel found that the Services' later submission including a proposed 
rate based on percentage-of-revenue in their PFFCL was untimely. Report 
at 31, citing Order of November 3, 2001.
    After considering the arguments now advanced by the Services 
concerning the Panel's authority to require final submissions on rates 
prior to the filing of the PFFCLs, the Register finds that the Panel 
acted in a lawful manner and within its authority. As RIAA points out 
in its reply, the Panel has authority pursuant to 37 CFR 251.42 to 
waive or suspend any procedural rule in this proceeding, including the 
time by which parties must make final submissions regarding proposed 
rates. What the Panel cannot do is engage in a rulemaking proceeding to 
amend, supplement, or supersede any of the rules and regulations 
governing the CARP procedures. See 37 CFR 251.7. Moreover, the language 
in Sec. 251.43 is somewhat ambiguous as to when a party can make its 
final rate proposal, lending itself to two interpretations. For this 
reason alone, it was prudent for the Panel to issue an order clarifying 
the application of the rule for purposes of this proceeding. In fact, 
Webcasters had asked for this ruling and cannot be heard at the end of 
the process to argue against a ruling that they sought and to which 
they never objected. Consequently, the Panel was not arbitrary when it 
found the Webcasters' request for a percentage-of-revenue fee structure 
untimely.
    Moreover, the Panel was not arbitrary for failing to adopt a 
percentage-of-revenues model merely because some parties voiced an 
expectation that the Panel would offer such a model as an alternative 
means of payment. This complaint of unmet expectations is not a 
substantive argument for finding the Panel's decision arbitrary and, 
consequently, it will not be considered further.
    On the other hand, Live365 does make a substantive argument 
concerning the Panel's decision not to adopt a percentage-of-revenue 
model. It notes that the current marketplace uses two types of rate 
structures, a revenue based model and a performance rate structure, and 
that the revenue based model is better for start-up and smaller 
webcasters. Live365 Petition at 8. In fact, Live365 points out that 
many of the agreements that RIAA negotiated with webcasters 
incorporated this model. Moreover, Live365 maintains that it was 
arbitrary for the Panel to propose rates that ``had the effect of 
rendering sound recordings substantially more valuable than musical 
works, even though the CARP acknowledged that it was rendering no 
opinion on this issue.'' Live365 Petition at 5, 14-15. In its opinion, 
this result was arbitrary based upon Yahoo!'s stated perception that 
the value of the performance right for the musical work is comparable 
to the value of the performance right for the sound recording. Finally, 
Live365 argues that rates based upon mere perception, as those 
negotiated in the Yahoo! agreement, are by their very nature arbitrary 
and should be disregarded. Id. at 15.
    RIAA refutes the Services' claim that the Panel was arbitrary 
because it failed to offer a percentage-of-revenue model. It argues 
that the record supports the Panel's conclusion that a percentage-of-
revenue model would have been difficult to implement because Services 
use sound recordings to different degrees--a position taken by the 
Webcasters' own witness. Specifically, Jaffe questioned the 
appropriateness of using a percentage-of-revenue model where those 
percentages were based on the economics driving over-the-air 
broadcasts. RIAA Reply Petition at 52, citing Tr. 6487, 6488, 12582 
(Jaffe). Jaffe also acknowledged that it was difficult to assess what 
the revenue base should be for such a model given the variation of the 
business models utilized by the webcasters. RIAA also notes that 
section 114(f)(2)(B) requires the Panel to consider the quantity and 
nature of the use of the sound recording and argues that a per 
performance metric automatically accounts for the amount of use by the 
various services. RIAA Reply at 59.
    RIAA also argues that a basic percentage-of-revenue fee structure 
would frustrate the purpose of the law because it would deny copyright 
owners fair compensation for use of their works in those situations 
where a service generates little or no revenue. Certainly, the record 
contains evidence that a number of webcasters do not expect or intend 
to earn revenues from their webcasts, see Report at 37; see, e.g., 
Live365 Petition at 7, maintaining that their use is designed primarily 
to maintain their over-the-air audience. Because certain Services take 
this approach, when RIAA did consider using a percentage-of-revenue 
model, it included a substantial minimum fee proposal in conjunction 
with the percentage of fee proposal to address the problems associated 
with low revenue generating businesses. Specifically, the RIAA proposal 
required that a Service pay either 15% of revenues or $5,000 per 
$100,000 of a webcasters' operating costs, whichever is greater. RIAA 
Reply at 61. In this way, RIAA sought to avoid the anomaly of allowing 
a business unfettered use of the sound recordings without reasonable 
compensation to the copyright owners. Id. at 54, 61. This formulation, 
however, would not have given the webcasters the relief they seek 
through the adoption of a rate based on a percentage-of-revenues. In 
fact, under RIAA's percentage-of-revenue formulation, many webcasters, 
including Live365, would have paid more than they will under the 
Panel's per performance rate structure.
    The Register finds that the Panel's decision not to set a 
percentage-of-revenue fee option was not arbitrary in light of the 
record evidence. First, it is clear that the Services' primary position 
was to seek adoption of a fee based upon performances and not a 
percentage-of-revenue. Indeed, Dr. Jaffe's model proposed a fee model 
based on listener hours or number of listener songs, and not a rate 
based upon percentage-of-revenues, because a royalty based upon actual 
performances would be directly tied to the nature of the right being 
licensed. Report at 37; Jaffe W.R.T. at 31. Moreover, because they took 
this position, Services argued for a low minimum rate that would only 
cover administrative costs and not the value of the performances 
themselves--an approach the CARP adopted in its Report.
    Moreover, the statute does not require the CARP to offer 
alternative fee structures, and the Services should not have expected 
the Panel to do so, especially when the Webcasters never advanced a 
percentage-of-revenues option in their own case. In fact, there is no 
precedent in the statutory licensing scheme anywhere in the Copyright 
Act that would support alternative rates for the same right. Clearly, 
it cannot be arbitrary for the Panel to choose not to deviate from the

[[Page 45251]]

longstanding practice of establishing only one rate schedule for a 
license.
5. The Yahoo! Rates--Evidence of a Unitary Marketplace Value
    The starting point for setting the rates for the webcasting license 
is the Yahoo! agreement. In that agreement, rates were set for two 
different time periods. For the initial time period covering the first 
1.5 billion performances, Yahoo! agreed to pay one lump sum of $1.25 
million. From this information, the Panel calculated a ``blended,'' per 
performance rate of 0.083[cent]. This value represents the actual price 
that Yahoo! paid for each of the first 1.5 billion transmissions 
without regard to which type of service made the transmission. For the 
second time period, Yahoo! and RIAA agreed to a differential rate 
structure. One rate was set for performances in radio retransmissions 
(RR) (0.05[cent] per performance) and another rate was set for 
transmissions in Internet-only (IO) programming (0.2[cent] per 
performance). These rates were first used in early 2000 and do not 
apply to the first 1.5 billion performances.
    However, the CARP did not accept these differentiated rates at face 
value. The Panel engaged in a far-ranging inquiry to determine how the 
parties established the negotiated rates. What it found was that Yahoo! 
agreed to a higher rate for the IO transmissions in exchange for a 
lower rate for the RR because this arrangement addressed specific 
concerns of both parties. In particular, RIAA wished to establish a 
marketplace precedent for IO transmissions in line with rates it had 
negotiated in earlier agreements, while Yahoo! sought to negotiate 
rates which, in the aggregate, yielded a rate it could accept. 
Consequently, the Panel found the rate for the IO transmissions to be 
artificially high and, conversely, the rates for the RR to be 
artificially low. For this reason, it made a downward adjustment to the 
IO rates and an upward adjustment to the RR rates.
    Before making this adjustment, though, the Panel had to consider 
whether it was reasonable to establish separate rates for the two 
categories of transmissions. In reaching its decision, the Panel 
considered two facts, the fact that the Yahoo! agreement provided for 
two separate rates, and the fact that all parties agreed that 
performances of sound recordings in over-the-air radio broadcasts 
promote the sale of records. Report at 74. Based on this finding, the 
Panel concluded that a willing buyer and a willing seller would agree 
that the value of the performance right for RR would be considerably 
lower than for IO transmissions. Moreover, it attributed the existence 
of the rate differential in the Yahoo! agreement to the promotional 
value enjoyed by the copyright owners from the performance of the sound 
recordings by broadcasters in their over-the-air programs, and not to 
promotional value attributable to transmissions made over the Internet. 
Report at 74-75. Specifically, the Panel found that, ``to the extent 
that Internet simulcasting of over-the-air broadcasts reaches the same 
local audience with the same songs and the same DJ support, there is no 
record basis to conclude that the promotional effect is any less.'' 
Report at 75.
    This finding, however, did not prompt the Panel to make any further 
adjustment for promotional value, finding instead that the differential 
rates in the Yahoo! agreement already reflect ``marketplace assessment 
of the various promotion and substitution effects, along with a myriad 
of other factors.'' Report at 87. Primary among these factors were the 
Most Favored Nations (MFN) clause \22\ and the cost savings to Yahoo! 
in avoiding CARP litigation. The Panel reasoned that Yahoo! was willing 
to accept somewhat inflated royalty rates in exchange for the costs it 
saved by not participating in the CARP proceeding, and for the MFN 
clause which had some indeterminate value for Yahoo!.
---------------------------------------------------------------------------

    \22\ The MFN clause in the Yahoo! agreement is discussed in 
detail in section IV.3, pg. 27.
---------------------------------------------------------------------------

    RIAA disagrees with the Panel's analysis and these findings. As an 
initial matter, it maintains that there was no record evidence to 
support a separate rate for commercial broadcasters. RIAA Broadcaster 
PFOF 24-52. Second, it argues that the Panel adopted a two-tier rate 
structure for RR and IO transmissions based on the different rates in 
the Yahoo! agreement, and its mistaken view of the significance of an 
exemption in the law for a retransmission of a radio station's 
broadcast transmission within a 150 mile radius of the radio broadcast 
transmitter in setting the rate for radio retransmissions.\23\ See 17 
U.S.C. 114(d)(1)(B).
---------------------------------------------------------------------------

    \23\ Section 114(d)(1)(B)(i) of the Copyright Act provides an 
exemption from the digital performance right for ``a retransmission 
of a nonsubscription broadcast transmission: Provided, That in the 
case of a retransmission of a radio station's broadcast 
transmission--(i) the radio station's broadcast transmission is not 
willfully or repeatedly retransmitted more than a radius of 150 
miles from the site of the radio broadcast transmitter.''
---------------------------------------------------------------------------

    Although RIAA maintains that in its negotiations with Yahoo! it had 
argued that the value of the radio retransmission should not be based 
on the location of the original radio broadcast transmitter, it claims 
that it was nervous about the application of the 150-mile radius 
exemption to retransmissions made by third-party aggregators, like 
Yahoo!. Consequently, RIAA maintains that it agreed to a lower rate for 
radio retransmissions, knowing that its arguments for not exempting 
these transmissions were weak, and because Yahoo! agreed to pay for 
each transmission without regard to the exemption. The resulting 
adjustment for the 150-mile exemption consisted of a reduction to the 
base rate, 0.2[cent], and reflects the fact that about 70% of all radio 
retransmissions fall within the 150-mile zone.\24\ In addition, RIAA 
agreed to a further reduction to compensate Yahoo! for any 
``competitive disadvantage'' it faced if commercial broadcasters were 
found to be totally exempt from the digital performance right under a 
separate exemption.\25\
---------------------------------------------------------------------------

    \24\ At the insistence of RIAA, the Yahoo! agreement includes a 
``whereas'' clause which states that approximately 70 percent of 
Yahoo!'s radio retransmissions are within a 150-mile radius of the 
originating radio station.
    \25\ Section 114(d)(1)(A) exempts a ``nonsubscription broadcast 
transmission.'' Following a lengthy rulemaking proceeding to 
determine the scope of this exemption, the Copyright Office 
concluded that the exemption applies only to over-the-air broadcast 
transmissions and does not include radio retransmissions made over 
the Internet. 65 FR 77292, December 11, 2000. This decision was 
upheld when challenged in the United States District Court for the 
Eastern District of Pennsylvania. See Bonneville Int'l, et al. v. 
Peters, 153 Supp. 2d 763 (E.D. Pa. 2001). The case is now on appeal 
to the United States Court of Appeals, Third Circuit.
    However, during the negotiation period and prior to the 
Copyright Office's rulemaking decision and the court's decision, 
Yahoo! had argued that it would be at a competitive disadvantage if 
the courts adopted the broadcasters interpretation of section 
114(d)(1)(A) and found all transmissions made by FCC-licensed 
broadcasters (those made over-the-air and those made over the 
Internet) to be exempt from the digital performance right.
---------------------------------------------------------------------------

    The Panel, however, did not credit RIAA's explanation and concluded 
that this concern over the exemptions, especially the 150-mile 
exemption, had no bearing on Yahoo!'s negotiations. The Panel 
steadfastly maintained throughout its report that Yahoo!'s only aim in 
the negotiation process was to achieve a rate that translated into an 
acceptable overall level of payment, and that it did not concern itself 
with the legal consequences of the 150-mile exemption. Report at 66-67. 
Thus, the Panel characterized RIAA's arguments in regard to the 150-
mile exemption to be nothing more than a ``red herring'' and without 
effect in the negotiation process. Id. at 85. Consequently, the Panel 
found that Yahoo! willingly granted RIAA's request for the ``whereas 
clause,'' relating to the transmissions within the 150-mile radius, 
because it

[[Page 45252]]

cost Yahoo! nothing. Yahoo!'s perception of the clause, however, did 
not alter the significance of the ``whereas clause'' to RIAA, who 
wanted the provision included in the agreement because it would allow 
RIAA to argue before this CARP that the 0.05[cent] rate for radio 
retransmissions represents a real rate of 0.2[cent], which was 
discounted to account for the legal uncertainties at the time of the 
negotiation. Report at 67.
    Webcasters had problems with the Panel's analysis, too. It found 
fault with the Panel's approach to setting rates for webcasting based 
on the rates in the Yahoo! agreement. Webcasters object to the 
methodology used by the Panel in calculating the proposed rates, 
especially the use of an inflated rate as a starting point for setting 
the rates for IO transmissions. Moreover, they contest the use of any 
rate for IO transmissions contained in the Yahoo! agreement because 
Yahoo! had less interest in negotiating a favorable rate for these 
transmissions, which constituted only 10% of its business. Webcasters 
Petition at 30-40. Instead, Webcasters argue that Yahoo! agreed to the 
0.2[cent] rate for IO transmissions only because it obtained a 
significantly lower rate for its radio retransmissions, and that any 
number of possible combinations of rates could have been set to achieve 
Yahoo!'s targeted rate. Because of this, Webcasters argue that the 
endpoints settled upon in the agreement were patently arbitrary. The 
Register concurs with the Webcasters' analysis on this point and finds 
that the Panel's use of the IO rate was arbitrary because of the IO 
rate, which, in and of itself, did not reflect what the willing buyers 
and willing sellers had agreed to in the Yahoo! deal.
    Another flaw in the Panel's reasoning, according to Webcasters, was 
its reliance on the 0.083[cent] ``blended rate'' as the lower end of 
the acceptable range of IO rates. They argue that this rate should not 
even be considered because it was never negotiated as a performance 
rate at all. This observation, however, overlooks the fact that Yahoo! 
actually paid this rate for 1.5 billion performances without regard to 
the nature of the performances. The fact that the rate was not 
negotiated as a separate rate for Internet-only transmissions does not 
diminish its usefulness for purposes of this proceeding. As the Panel 
asserted throughout this proceeding, it is hard to find better evidence 
of marketplace value than the price actually paid by a willing buyer in 
the marketplace.
    The question, however, is whether the rates in the Yahoo! agreement 
represent distinct valuations of Internet-only transmissions and radio 
retransmissions. Ultimately, the Register concludes that they do not 
and, therefore, the Panel's reliance on these specific rates for IO 
transmissions and radio retransmissions as a tool for setting the 
statutory rates is arbitrary. The fundamental flaw in the Panel's 
analysis, though, is not its acceptance of the Yahoo! agreement as a 
starting point. Rather, it is the Panel's determination that the 
differential rate structure reflects a true distinction in value 
between Internet-only transmissions and radio retransmissions based 
upon the promotional value to the record companies and performers due 
to airplay of their music by local radio stations. The Panel reached 
this conclusion in spite of the fact that nothing in the record 
indicates that the parties considered the promotional value of radio 
retransmissions over the Internet when they negotiated these rates.
    RIAA maintains, and the Broadcasters concur, that no evidence 
exists to support the Panel's determination that Yahoo! and RIAA 
considered and made adjustments for the promotional value of radio 
retransmissions. RIAA Reply at 48; Broadcasters Petition at 39. In 
fact, the Broadcasters argue that it was `` `patently' arbitrary for 
the Panel to conclude that promotional value was a ``likely influence'' 
on Yahoo!'s RR rate when the record evidence showed that neither party 
had ever suggested anything of the kind.'' Broadcasters Petition at 39. 
The Register agrees and finds that the Panel's reliance on promotional 
value to justify the price differential for IO transmissions and radio 
retransmissions was arbitrary. The Panel's speculative conclusion that 
``this factor was likely considered by RIAA and Yahoo!, and is 
evidently reflected in the resulting difference between RR and IO 
negotiated rates,'' only serves to undermine the validity of the 
Panel's final analysis on this point. See Report at 75.
    Moreover, the Panel's own earlier findings with regard to the 
studies offered to show that the Internet has a promotional effect 
contradicts its later finding concerning the promotional effect derived 
from radio retransmissions over the Internet. After considering the two 
studies offered into evidence by the Services, the Panel categorically 
stated that it ``could not conclude with any confidence whether any 
webcasting service causes a net substitution or net promotion of the 
sales of phonorecords, or in any way significantly affects the 
copyright owners' revenue streams.'' Report at 33-34. It noted that 
``the Soundata survey presented by Mr. Fine evinced a net promotional 
effect of radio broadcasts, but said little about the net promotional 
effect of the Internet--and nothing about the net promotional effect of 
webcasting.'' Id. at 33. It went on to say that ``for the time period 
this CARP is addressing, the net impact of Internet webcasting on 
record sales is indeterminate. Id. at 34. These observations do not 
support a conclusion that radio retransmissions have a greater impact 
than IO transmissions on record sales or that either form of 
transmission has any impact on record sales.
    However, the CARP did conclude that ``to the extent promotional 
value influences the rates that willing buyers and willing sellers 
would agree to, it will be reflected in the agreements that result from 
those negotiations.'' Id. But therein lies the problem. As discussed 
above, RIAA and Yahoo! did not consider promotional value when 
negotiating the Yahoo! agreement, therefore, its effect cannot be 
reflected in the IO and RR rates set forth in the Yahoo! agreement.
    However, rejection of the CARP's conclusion on this point does not 
nullify the usefulness of the Yahoo! agreement. The Register accepts 
the Panel's determination that the Yahoo! agreement yields valuable 
information about the marketplace rate for transmissions of sound 
recordings over the Internet, and is a suitable benchmark for setting 
rates for all the reasons discussed in section IV.3, supra. Moreover, a 
careful review of the record support's the Panel's further finding that 
in effect, the real agreement between Yahoo! and RIAA was for a single, 
unitary rate for the digital performance of a sound recording and not 
the two separate rates set forth in the agreement--rates, which the 
Panel found were artificially high (for IO transmissions) and low (for 
RR).
    The Register accepts the CARP's conclusion that the differential 
rate structure was developed to effectuate particular objectives of the 
parties, distinct and apart from establishing an actual valuation of 
the performances. Specifically, the Panel found that RIAA obtained an 
artificially high IO rate in an attempt to protect its targeted 
valuation of IO transmissions for use in this proceeding and Yahoo! 
received an ``effective rate'' it could accept. Because the record 
evidence supports this finding, Report at 65, referring to Tr. 11256-
57; 11281 (Mandelbrot); Panel Rebuttal Hearing Exhibit 1 at 4; Tr. 
11279-81, 11395-96 (Mandelbrot); Tr. 10237-38 (Marks), it was not 
arbitrary for the Panel to reach this conclusion. Report at 64-65 
(noting that ``Yahoo!'s

[[Page 45253]]

primary concern, as characterized by its negotiator, was to negotiate a 
license agreement under which it would pay `the lowest amount 
possible', that ``Yahoo! was willing to accept a higher IO rate in 
exchange for a lower RR rate in order to achieve the lowest overall 
effective rate for all its transmissions'' (emphasis added), and that 
Yahoo! was pleased to achieve the lowest possible overall rate.''); 
(noting that ``the bottom line'' combined rate was of paramount 
importance to Yahoo!). Report at 74. Moreover, Yahoo! maintains that it 
would not have paid the 0.2 cent rate for the IO transmissions but for 
the rate it received for radio retransmissions because the two rates, 
when considered together, yielded an acceptable ``effective rate'' for 
all transmissions. The testimony of David Mandelbrot, the Yahoo! 
representative, is particularly informative on this point.
    Question: When you entered into the agreement with the RIAA, just 
looking at the 0.2 cents per performance rate for Internet-only 
broadcasting, you didn't consider that an unfair rate, did you?
    Answer: Mandelbrot: We considered it a higher rate than we would 
have paid if we were just negotiating an Internet-only rate. I would 
say we did not consider it an unfair rate in the totality of the entire 
agreement, which was that we were getting the 0.05 cent rate for the 
radio retransmissions.
    Mandelbrot Tr. at 11347-11348. This statement supports a finding 
that Yahoo!, the willing buyer in this case, did not accept the stated 
IO rate as an accurate reflection of what it would be willing to pay 
for the right to make those transmissions.
    There is also scant evidence to indicate that Yahoo! gave any 
serious consideration to the effect of the 150-mile exemption for 
certain radio retransmissions when negotiating the IO and RR rates. 
Mandelbrot maintained that the exemptions were of little significance 
to Yahoo!, since it was ``looking to use whatever [it] could to get as 
low a rate as possible.'' Id. at 11381; see also 11331 (Mandelbrot 
admits using the ambiguities in the law, even though they thought the 
arguments in their favor were weak, solely for the purpose of getting 
``an effective rate that we could live with''). Again it is clear that 
Yahoo!'s focus was the negotiation of a rate at the lowest possible 
level that would allow it to conduct business without concerns about 
copyright violations.
    Where such determinations are based on the testimony and evidence 
found in the record, the Register and the Librarian must accept the 
Panel's weighing of the evidence and its determination regarding the 
credibility of a witness. Likewise, the Register and the Librarian may 
not question findings and conclusions that proceed directly from the 
arbitrators' consideration of factual evidence in the record. In this 
instance, the Panel credited Mandelbrot's testimony and his 
characterization of the negotiation process, specifically concluding 
that his testimony was credible, and that Yahoo! understood the 
argument based on the 150-mile exemption had no significant impact on 
the rates ultimately negotiated.\26\ Report at 67. Consequently, we 
must accept the Panel's assessment on this point, which leads to the 
conclusion that the ``effective rate'' achieved through the unique rate 
structure represents the value these parties placed on the performance 
of a sound recording, without regard to origin of or the entity making 
the transmission.
---------------------------------------------------------------------------

    \26\ The Register finds that RIAA's explanation for the rate 
structure is equally plausible. Certainly, at the time the Yahoo! 
agreement was being negotiated, the application of the general 
exemption for a nonsubscription broadcast transmission, 17 U.S.C. 
114(d)(1)(A), and the more specialized exemption for radio 
retransmissions within 150 miles of the radio broadcast transmitter, 
17 U.S.C. 114 (d)(1)(B)(I), was in dispute. Thus, it would have been 
totally rational for the parties to fashion a rate structure that 
accounted for possibly exempt transmissions. It would have been 
logical to achieve this end by discounting the unitary rate to 
reflect the number of exempt transmissions which, in this case, was 
approximately 70% of all the radio retransmissions.
    However, it is not for the Register or the Librarian to choose 
between two equally plausible explanations of the facts. The law 
requires that the Librarian accept the Panel's determination unless 
its conclusions are unsupported by the record. Thus, having found 
record support for the Panel's conclusion that the 150-mile 
exemption played no role in the final determination of the 
negotiated rates, we must accept its finding on this point.
---------------------------------------------------------------------------

    Based upon a modification to the Panel's approach for calculating 
rates for making transmissions of sound recordings under statutory 
license that accepts as much of the Panel's reasoning as possible, the 
base rate for each performance is 0.07[cent] (rounded to the nearest 
hundredth). The methodology for calculating this rate is presented and 
discussed in full in section IV.8.
6. Are Rates Based on the Yahoo! Agreement Indicative of Marketplace 
Rates?
    Many webcasters, including Live365, maintain that the proposed 
rates derived from the Yahoo! rates do not reflect what a willing buyer 
would pay in the marketplace for the right to make these transmissions. 
Live365 maintains that the Panel incorrectly analyzed the evidence in 
the record. First, it notes that the Panel itself found that many of 
the rates in the voluntary agreements were prohibitively high, 
including a revenue-based royalty set at 15% of a webcaster's gross 
revenue. Live 365 Petition at 16. It then argues that it was arbitrary 
for the Panel to make this finding and then propose rates that exceed 
the rates it deemed to be excessive, and more than the market could 
bear. Id. To make its point, Live365 uses the Panel's per performance 
rate and calculates how much certain services would pay for the digital 
performance right and translates that amount into a percentage of 
revenue metric. In each of the cited examples, the amount to be paid 
based on the proposed per performance rate (as expressed as a 
percentage of revenues) is considerably higher than that that would be 
required under any of the percentage-of-revenue models proposed by any 
party at any time. For example, under the Panel's proposed rates, one 
service would purportedly pay 21% of its gross revenue, a figure which 
is considerably higher than the 15% of gross revenues contained in many 
of the voluntary agreements ultimately rejected by the Panel. Based on 
this observation, Live365 contends that the Panel's proposal runs 
counter to the evidence and, therefore, it is arbitrary. Id. at 18.
    Moreover, Live365 argues that the Panel failed to account for 
relevant market factors, including how much a webcaster can pay. Id. at 
19. Webcasters voice similar concerns, arguing that the adoption of a 
per performance rate will cause ruin to many webcasters who to date 
have yet to generate a viable income stream. Webcasters Petition at 60. 
In place of this structure, webcasters assert that a percentage-of-
revenue model must be adopted in order to address the economic 
situation facing small, independent webcasters. They maintain that 
those Services that entered into voluntary agreements based on a 
percentage-of-revenue will remain in business while those operating 
under the statutory license with its per performance royalties will 
not. Webcasters Petition at 62-63. In the eyes of the Webcasters, such 
a result reflects unexplained disparate treatment of similarly situated 
parties, and requires an adjustment to eliminate this unjust and 
arbitrary result. Webcasters also argue that the Panel failed to 
articulate a rational basis for failing to offer an alternative rate 
structure based on percentage-of-revenue.
    In addition, Live365 argues, as do the Broadcasters, that Yahoo! is 
a substantially different type of business from small start-up 
webcasters who would be unwilling to pay the same rates as Yahoo! for 
the use of sound

[[Page 45254]]

recordings. Thus, it contends that the Yahoo! rates do not reflect what 
these buyers would be willing to pay in the marketplace. The 
implication is that these businesses have expended significant monies 
on start-up costs, including software, infrastructure development, and 
bandwidth, and having not yet established substantial revenue streams 
would be unable or unwilling to pay the same rates. Live365 Petition at 
7, 11. Moreover, Live365 argues that the rates set by the Panel thwart 
Congressional intent ``by making Internet performances of sound 
recordings economically unviable for many webcasters.'' Live365 
Petition at 21.
    RIAA takes exception with the Webcasters and Live365 on these 
issues. It analyzes how much certain webcasters and Live365 pay, as a 
percentage-of-revenue, for sales and marketing cost, personnel cost and 
bandwidth. The results show that a company's costs for these services 
can amount to more than 100 times the amount of a company's revenue, 
whereas the projected costs of the royalties for transmitting sound 
recordings for the same time period are no more than 2 times the amount 
of a company's revenue. RIAA Reply at 57. In all cases, these costs 
reflect the start up nature of the industry, and not the ultimate make 
or break point of the business. Thus, a proposed fee that results in 
royalty payments above the current revenue stream for a webcaster is 
not atypical or unexpected. Certainly, if that were the measure of the 
value of these services, then the costs for employment, hardware, and 
marketing--so essential to establishing and maintaining the business--
must also be viewed as excessive and above the fair market value for 
each of these services. Clearly, that is not the case, nor can one 
rationally conclude that it should be the case.
    Moreover, RIAA notes that the courts have historically upheld rates 
set by the CRT, even when users have argued that the rates would cause 
the business to cease certain operations. Where the intent of Congress 
is to set a rate at fair market value, as in this proceeding, the Panel 
is not required to consider potential failure of those businesses that 
cannot compete in the marketplace. See National Cable Television Ass'n. 
v. CRT, 724 F.2d 176 (D.C. Cir. 1983) (holding that rates set at fair 
market value were proper even though cable operators argued that the 
rates were prohibitively high and would cause them to cease 
transmission of the distant signals at issue.).
    The law requires only that the Panel set rates that would have been 
negotiated in the marketplace between a willing buyer and a willing 
seller. It is silent on what effect these rates should have on 
particular individual services who wish to operate under the license. 
Thus, the Panel had no obligation to consider the financial health of 
any particular service when it proposed the rates. It only needed to 
assure itself that the benchmarks it adopted were indicative of 
marketplace rates.
7. Should a Different Rate be Established for Commercial Broadcasters 
Streaming Their Own AM/FM Programming?
    Although RIAA had argued that the rate for commercial broadcasters 
should be the same as the rate for Internet-only webcasters, the Panel 
did not agree. It did agree, however, that the rate for commercial 
broadcasters should be the same as the rate adopted for radio 
retransmissions and that these rates should be based on the Yahoo! 
agreement.
    It noted that the Yahoo! agreement established rates for 
retransmissions of the same types of radio station signals as those 
directly streamed by commercial broadcasters. Consequently, it put the 
burden of proof on the broadcasters to present evidence to distinguish 
between the direct transmission of their programs over the Internet and 
the retransmission of the same programming made by a third-party. 
Broadcasters were unable to offer any compelling evidence on this 
point. Thus, in the end, the Panel was unable to distinguish between 
commercial broadcasters and radio retransmisions, stating that ``the 
record was utterly devoid of evidence implying a higher rate [for 
commercial broadcasters] and insufficient [evidence] to warrant a lower 
rate.'' Report at 84-85. (emphasis in the original).
    Nevertheless, Broadcasters are troubled by the Panel's use of the 
Yahoo! agreement to set rates for broadcasters for two main reasons. 
First, they argue that Yahoo! represents a substantially different type 
of business. Second, they maintain that the Panel must make affirmative 
findings that the businesses are comparable before applying the same 
rates to both Services. Broadcasters Petition at 26-27.
    Indeed, Yahoo! offers a plethora of services, making available 
hundreds of radio stations, local television stations, video networks, 
concerts, CD listening programs, Internet-only music channels and 
educational and entertainment video programs. Id. at 28. Nevertheless, 
an examination of the record clearly shows that both business models 
are fundamentally comparable in at least one all-important way: they 
simulcast AM/FM programs over the Internet to anyone anywhere in the 
world who chooses to listen. Even accepting the fact that Broadcasters 
say their fundamental business is to provide programming to their local 
audiences, the potential for reaching a wider audience cannot be 
denied. Given that the record indicates that 70% of Yahoo!'s radio 
retransmissions are to listeners within 150 miles of the originating 
radio station's transmitter, Yahoo!'s business with respect to radio 
retransmissions seems to be very similar. Moreover, the fact that 
Yahoo! offers many additional services is not relevant to this 
proceeding because the Yahoo! agreement only addressed the rates Yahoo! 
paid for streaming sound recordings over the Internet. Had the contract 
been tied to other services offered by Yahoo!, it might well have been 
inappropriate to use this contract in this context. That is not the 
case and so it was not arbitrary for the Panel to rely on the Yahoo! 
contract to set the rate for broadcasters who stream their own 
programming over the Internet.
    Commercial broadcasters then take another approach and argue that 
they never would have agreed to the rates that Yahoo! paid because 
their purposes for streaming differ from Yahoo!'s purposes. Commercial 
broadcasters assert that they began streaming in order to have a 
presence ``in the online world, to maintain the local radio brand, and 
as a convenience to their regular over-the-air listeners.'' 
Broadcasters Petition at 29. They then note that many commercial 
broadcasters have already ceased streaming because of an increase in 
costs. They cite this fact as evidence of their assertion that they 
would only be willing to pay a significantly lower rate than a third-
party aggregator like Yahoo! See Broadcasters Petition at 31, fn 25 
(offering examples of decisions made by radio stations to cease their 
streaming operations because of bandwidth fees and dispute over royalty 
fees between AFTRA and the advertising agencies). They also cite the 
testimony of David Mandelbrot, who testified that Yahoo! feared 
broadcasters would be unwilling to absorb the rates Yahoo! negotiated 
for streaming AM/FM programming. Id. at 32. Based upon this evidence, 
the Broadcasters and Live365 conclude that the Panel acted in an 
arbitrary manner in setting the rates that will put many services out 
of business. Live365 Petition at 15, 18.
    However, the Panel did consider the differences between the two 
business models, speculating that it was entirely

[[Page 45255]]

possible that the cost to stream AM/FM programming would be lower for 
broadcasters than for third-party aggregators like Yahoo! Id. at 84-85. 
Had Broadcasters made that argument or similar ones to show that Yahoo! 
received greater value from its streaming activities, the Panel may 
well have set a lower rate for Broadcasters who stream their own 
programming. Id. at 85. But as the Panel observed, it cannot make 
adjustments based on mere speculation. So when the Panel found no 
record evidence to distinguish these services, it had no reason to 
offer a separate rate for commercial broadcasters who stream their own 
AM/FM signal over the Internet. Id. at 84.
    Moreover, RIAA points out that Yahoo! never even tried to pass 
along the costs of the transmissions to the radio stations. Thus, no 
determination could be made as to whether the broadcasters would have 
accepted the rate and paid it, or rejected it out of hand. RIAA Reply 
at 45. RIAA's observation is persuasive, as is the Panel's general 
observation that the record did not contain any evidence to support a 
different rate for commercial broadcasters. Thus, the Panel's decision 
not to set a different rate for commercial broadcasters was not 
arbitrary.
    For these reasons, the Register accepts the Panel's decision not to 
differentiate between simulcasts made by commercial broadcasters and 
simulcasts of the same programming made by a third-party aggregator. 
Accordingly, the rate for commercial broadcasters streaming their over-
the-air radio programs on the Internet is the unitary rate gleaned from 
the Yahoo! agreement.
8. Methodology for Calculating the Statutory Rates for the Webcasting 
License
    a. Calculation of the unitary rate. In section IV.5, the Register 
rejected the Panel's determination that the Yahoo! agreement provided a 
basis for establishing different rates for Internet-only transmissions 
and radio retransmissions. Instead, a determination was made that the 
Yahoo! agreement justified only a single rate applicable to all 
transmissions, without regard to the source of the transmission. To 
calculate this unitary rate, it is necessary to determine what Yahoo! 
paid for the initial 1.5 billion performances, based on the lump sum 
payment, and what it expected to pay for transmissions after that time.
    The first calculation was actually done by the Panel based upon 
Yahoo!'s agreement to pay RIAA $1.25 million for the first 1.5 billion 
transmissions made by Yahoo!. It divided the amount paid by the number 
of performances ($1.25 million/1.5 billion performances) to get a 
``blended'' rate of 0.083[cent] per performance. Report at 63. To 
determine the ``effective rate'' for the second period, a calculation 
must be made to account for the differential IO and RR rates, 0.2[cent] 
and 0.05[cent], respectively, set forth in the agreement and the 
relative proportion of Internet-only transmissions to radio 
retransmissions. This is a simple arithmetic calculation and one that 
Yahoo! had already performed in order to gauge the actual costs of the 
performances under the differentiated rate structure. This calculation 
yielded an ``effective'' or ``blended'' rate of 0.065[cent] per 
performance based upon Yahoo!'s expectation that 90% of its 
transmissions would continue to be radio retransmissions with the 
remaining 10% being Internet-only transmissions [((9 x 0.05[cent]) + (1 
x 0.2[cent]))/10]. Report at 63, citing Tr. 11279, 11292 (Mandelbrot), 
Panel Rebuttal Hearing Exhibit 1 at 7.
    Now the question is how to reconcile these values to determine the 
unitary rate. Although an argument can be made for adopting either 
value, it makes more sense to use both values and take the average of 
the two. In this way, the final unitary rate captures the actual value 
of the performances made in the initial period (for which Yahoo! paid a 
lump sum for the first 1.5 billion performances) and the projected 
value of the transmissions at the agreed upon rates for the remainder 
of the license period; and it falls within the range of acknowledged 
values of these transmissions. Courts have long acknowledged that rate 
setting is not an exact science, and all that is necessary is that the 
rates lie within a ``zone of reasonableness.'' See National Cable 
Television Assoc. Inc. v. CRT, 724 F.2d 176, 182 (D.C. Cir. 1983) 
(``Ratemaking generally ``is an intensely practical affair. The 
Tribunal's work particularly, in both ratemaking and royalty 
distributions, necessarily involves estimates and approximations. There 
has never been any pretense that the CRT's rulings rest on precise 
mathematical calculations; it suffices that they lie within a ``zone of 
reasonableness'''). Thus, the record here supports a ``zone of 
reasonableness'' between 0.083[cent] and 0.065[cent].
    Accordingly, the Register recommends that the rate for making an 
eligible nonsubscription transmission of a sound recording over the 
Internet under section 114 be set at 0.07 cents per performance, per 
listener, the midpoint of the ``zone of reasonableness.''
    Determination of this rate, however, is not necessarily the end of 
the rate-setting process. Webcasters had argued for a downward 
adjustment to the rates proposed by the Panel to compensate for 
litigation cost savings and added value due to MFN clause. Such 
arguments apply with equal force to the unitary rate proposed by the 
Register. Webcasters Petition at 42-43. The Webcasters' argument is 
well taken and, based on the record evidence, it is reasonable to 
assume that the rates in the Yahoo! agreement are slightly higher to 
account for these two factors. See Report at 68-69. However, there is a 
problem in making an adjustment to the proposed rate where the record 
contains no information quantifying the added value of the factors that 
purportedly resulted in inflated rates. See Report at 29 (discussing 
lack of record evidence quantifying value of any factor, other than 
promotional value, that allegedly influenced the negotiated rates). The 
potential (but apparently unquantifiable) added value attributable to 
these 2 factors might present a problem if the Register were proposing 
a rate at the high end of the 0.065[cent]-0.083[cent] range, but 
because the Register is recommending a rate in middle of the ``zone of 
reasonableness,'' it is safe to conclude that the recommended rate 
falls into that zone of reasonableness even taking these factors into 
account.
    Similarly, Broadcasters argued for a downward adjustment of the 
simulcast rate to account for the promotional value associated with 
over-the-air broadcasts. Broadcasters Petition at 41. The record, 
however, does not support this suggestion. Indeed, the Panel did 
acknowledge that over-the-air radio retransmissions had promotional 
value, but it concluded that ``the net impact of Internet webcasting on 
record sales is indeterminate.'' Report at 34. This is not to say that 
webcasting, including simulcasting of over-the-air radio programming, 
has no promotional value. It only means that the record companies gain 
similar benefits from both types of transmissions. Consequently, no 
adjustment is necessary.
    b. The 150-mile exemption. Under section 114(d)(1)(B)(I), any 
retransmission of a nonsubscription broadcast transmission is exempt, 
as a matter of law, from the digital performance right, provided that 
``the radio station's broadcast transmission is not willfully or 
repeatedly retransmitted more than a radius of 150 miles from the site 
of the radio broadcast transmitter.'' During the course of the 
negotiations between RIAA and Yahoo!, there was a great deal of 
uncertainty regarding this

[[Page 45256]]

provision and whether it applied to transmissions made over the 
Internet. See discussion above, section IV.a.5.
    As noted above (section IV.a.5.), in its Petition, RIAA argued that 
during the course of the negotiations between RIAA and Yahoo!, there 
was a great deal of uncertainly regarding this provision and whether it 
applied to transmissions made over the Internet. RIAA argued that 
because of this uncertainty, it had been willing to agree to a lower 
radio retransmission rate. In fact, RIAA pointed out that its chief 
negotiator had advised its negotiating committee that RIAA's arguments 
against application of the 150-mile exemption to a retransmitter such 
as Yahoo! ``are not particularly strong.'' RIAA Petition at 20.
    Confronted with the assertions made in RIAA's petition which 
indicated that RIAA itself had had considerable doubts on the subject 
at the time of the negotiations, the Register felt compelled to 
determine whether radio retransmissions over the Internet to recipients 
within 150 miles of the radio transmitter are, in fact, eligible for 
the section 114(d)(1)(B) exemption.\27\ The Register issued an order on 
June 5, 2002, asking the parties to brief two legal questions 
concerning the 150-mile exemption. The first question asked whether a 
retransmission over the Internet of a radio station's broadcast 
transmission to a recipient located within 150 miles of the site of the 
radio broadcast transmitter is an exempt transmission pursuant to 17 
U.S.C. 114(d)(1)(B). The second question then queried whether the 
exemption would still apply to radio retransmissions made within the 
150-mile radius by a Licensee, in the case where that same service is 
simultaneously retransmitting the radio station's broadcast 
transmission of one or more recipients, located more than 150 miles 
from the site of the radio broadcaster's transmitter.
---------------------------------------------------------------------------

    \27\ If the Register had concluded that Internet retransmissions 
to recipients located within the 150-mile radius are exempt, she 
most likely would have recommended an adjustment of the 0.07[cent] 
per performance rate as applied to radio retransmissions to take 
into account the record evidence that approximately 70% of radio 
retransmissions are to recipients located within 150 miles of the 
radio transmitter. The result would have been a radio retransmission 
rate of .02[cent] per performance, and correspondingly lower rates 
for radio retransmissions by non-CPB, noncommercial broadcasters.
---------------------------------------------------------------------------

    Section 114 could be read as allowing a Licensee to take advantage 
of the exemption for all Internet retransmissions of a radio broadcast 
to recipients within a 150 mile radius of that radio station's 
transmitter. The statutory language, however, does not make clear 
whether that same Licensee would retain the benefit of the exemption 
for those transmissions if additional retransmissions of the radio 
broadcast signal were also made ``willfully'' or ``repeatedly'' outside 
the 150-mile radius.
    A critical piece in the analysis is the meaning of the word 
``retransmission.'' Each retransmission of a radio signal over the 
Internet may be viewed as a discrete, point-to-point transaction to be 
considered on its own merit without reference to further 
retransmissions made by the Licensee. Alternatively, the reference to 
``willful and repeated'' may require consideration of each 
retransmission, together with all other retransmissions, made by the 
Licensee to multiple listeners over a period of time, both inside and 
outside the 150-mile radius.
    Having considered the parties' responses, the statutory language 
and its relationship to section 112, the Register now concludes that 
the exemption is not applicable to radio retransmissions made over the 
Internet. While Copyright Owners and Performers offer many arguments in 
support of their position that radio retransmissions within 150 miles 
of the radio station's transmitter are not exempt, and while 
Broadcasters offer many arguments to the contrary, the critical piece 
of the analysis--and the argument that the Register finds persuasive--
is found in the text of section 112(e). This section provides a 
statutory license for making ephemeral recordings only to ``a 
transmitting organization entitled to transmit to the public a 
performance of a sound recording under the limitation on exclusive 
rights specified by section 114(d)(1)(C)(iv) or under a statutory 
license in accordance with section 114(f).'' 17 U.S.C. 112(e)(1).
    The statutory license for ephemeral recordings in section 112(e) 
was enacted as part of the same section of the DMCA--section 104--that 
expanded the section 114 statutory license to include webcasting. The 
purpose of this ephemeral recording statutory license was to enable 
business establishment services and services using the new section 114 
statutory license for webcasting to make the ephemeral recordings they 
need to make in order to facilitate their licensed transmissions, and 
in recognition of the fact that the exemption in section 112(a) 
permitting the making of a single ephemeral recording might not be 
adequate. See H.R. Rep. 105-796, at 89-90.
    Congress expressly provided in the DMCA amendments that business 
establishment services operating under the section 114(d)(1)(C)(iv) 
exemption are eligible for the section 112(e) statutory license for 
ephemeral recordings in order to facilitate Internet transmissions by 
business transmission services. Congress's failure to do the same for 
services operating under the section 114(d)(1)(B) exemption 
demonstrates that Congress did not contemplate that that exemption 
would be available to services making retransmissions via the Internet.
    Moreover, if section 114(d)(1)(B) were interpreted as providing an 
exemption for a radio retransmission over the Internet, when that 
retransmission is to a recipient located within 150 miles of the radio 
station's transmitter, the Licensee could not make ephemeral recordings 
to facilitate such an exempt retransmission. This interpretation would 
put the Licensee in the illogical position of having a right to 
retransmit the radio signal, but no means of accomplishing the 
retransmission without negotiating private licenses to make ephemeral 
recordings to facilitate the exempt transmissions. At the same time, 
the Licensee could operate under a statutory license for making the 
ephemeral recordings to facilitate its non-exempt transmissions beyond 
the 150-mile radius made pursuant to the section 114(f) statutory 
license. As RIAA points out in its response to the June 5 Order: ``Such 
a result is inconsistent with one of the purposes of the DMCA statutory 
licenses to create efficient licensing mechanisms for copyright owners 
and webcasters,'' citing H.R. Rep. 105-796, at 79-80 (1998). 
Consequently, the better interpretation of the section 114(d)(1)(B) 
exemption is to consider all retransmissions of a License in the 
aggregate, which logically means that no Internet retransmissions are 
exempt under section 114(d)(1)(B).
    Based on the interplay between sections 112 and 114, the better 
interpretation of the law is that the exemption does not apply to radio 
retransmissions made over the Internet.\28\
---------------------------------------------------------------------------

    \28\ Copyright Owners argue that the Copyright Office had 
already decided this issue twice before: (1) In its decision in a 
rulemaking announced December 11, 2000 that transmissions of a 
broadcast signal over a digital communications network, such as the 
Internet, are not exempt from copyright liability under section 
114(d)(1)(A), Public Performance of Sound Recordings: Definition of 
a Service, 65 FR 77292; and (2) in an Order issued July 16, 2001, in 
which the Office stated that the ``Panel must use the ``willing 
seller/willing buyer'' standard to set rates for all non-
interactive, nonsubscription transmissions made under the section 
114 license, including those within 150 miles of the broadcaster's 
transmitter.'' (Emphasis added.) The Register made no such decision 
on either occasion.
    The scope of section 114(d)(1)(B) was not at issue in the 
December 2000 rulemaking on the status of broadcasters. Likewise, 
the July 16 Order was in response to Copyright Owners' Motion for 
Declaratory Ruling Concerning Statutory Standard, in which Copyright 
Owners argued that one of the Services' witnesses was ``in effect'' 
arguing for ``an exemption for AM/FM Webcasts within the 150-mile 
area.'' However, the testimony in question actually was arguing only 
that in determining the radio retransmission rate, the CARP should 
take into account that no royalty is payable on non-Internet radio 
retransmissions within the 150-mile radius because of the 
promotional value those retransmissions have on record sales. The 
witness asserted that because ``local distribution of exactly the 
same material via the Internet has identical economic effects,'' the 
Panel should exclude from its calculations ``recipients of those 
transmissions who lie within 150 miles of the station's 
transmitter.'' Fisher Testimony at ] 52. In their opposition to the 
motion, the Services made no argument that Internet retransmissions 
are exempt under section 114(d)(1)(B), and the Office made no ruling 
with respect to the exemption. Thus, until the responses to the June 
5, 2002 order were filed, the issue had never been joined, much less 
decided, on whether radio retransmissions within the 150-mile radius 
are exempt, and the issue had never been decided.

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[[Page 45257]]

9. Rates for Other Webcasting Services and Programming
    a. Business to business webcasting services. Some Services provide 
specialized Internet radio-like stations to businesses rather than 
directly to consumers. These business-to-business webcasting services 
(B2B) are in many respects analogous to business establishment music 
services \29\ and can provide programming customized to the 
demographics of the customers of a particular business. Report at 78. 
For this reason, RIAA had proposed setting a higher rate for business 
to business webcasting services than for business to consumer (B2C) 
services. The Panel, however, rejected this suggestion, finding that 
the evidence did not support a higher rate for B2B services. It found 
that most of the agreements for such services had rates near or below 
the predominant rate set for standard Internet-only transmissions. 
Report at 79. Thus, the Panel concluded that it had ``found 
insufficient evidence to support a separate rate for syndicator 
services'', and set the rate accordingly at 0.14[cent] per performance, 
just as it had for Internet-only performances. Id.
---------------------------------------------------------------------------

    \29\ See footnote 6, supra, for a description of a Business 
Establishment Service.
---------------------------------------------------------------------------

    RIAA argues for a premium rate for these Services, because they 
syndicate their programming through third-party non-entertainment 
websites. RIAA maintains that these transmissions are outside the scope 
of the webcasting license, and consequently, services should pay a 
premium when they make transmissions through non-entertainment 
websites. RIAA Petition at 50-52. In response, Webcasters argue that 
the ``value of the performance does not change merely because of the 
technology of the webcaster or the fact that the sound recording is 
heard when it is accessed at a third-party website rather than the 
originating webcaster's website.'' Webcasters Reply at 57. Moreover, 
they maintain that RIAA offered no evidence to demonstrate that these 
transmissions should be valued at a higher rate. In fact, the record 
indicates the opposite. Most of the RIAA voluntary agreements which 
permit the licensee to distribute its webcasts to third-party websites 
contain no premium for this practice. Id. at 59.
    Thus, based on the weight of the evidence, it was not arbitrary for 
the Panel to conclude that a separate rate should not be set for 
syndication services. The Panel is responsible for weighing the 
evidence and so long as the record supports its decision, the Register 
will not second-guess the Panel's finding of fact. Nevertheless, this 
determination does not end the inquiry. RIAA correctly cites section 
114(j)(6) of the Copyright Act for the proposition that an eligible 
nonsubscription transmission does not include those made by a service 
whose primary purpose is to sell, advertise, or promote particular 
products or services other than sound recordings, live concerts, or 
other music-related events. Thus, in any given case a determination 
would have to be made to ascertain whether such transmissions are 
covered under the statutory license. This proceeding, however, is not 
the appropriate vehicle for such a fact-specific determination. If a 
court determines that the transmissions made by a particular business-
to-business service fall outside the scope of the webcasting license, 
then those transmissions are acts of copyright infringement unless the 
service obtains licenses from the copyright owners. In such cases, an 
infringement action would be the appropriate course of action, rather 
than the imposition of a premium rate for such transmissions as 
suggested by RIAA. No rate--premium or otherwise--can be set for a 
transmission that does not comply with the terms of the license.
    b. Listener-influenced services. There was also much discussion 
about listener-influenced services that allow the listener some control 
over the programming through on-line ratings and skip-through features. 
RIAA's position first and foremost is that these services do not 
qualify for the webcasting license. However, RIAA also proposed a much 
higher rate for these services in the event the Panel discerned a need 
to set a separate rate for these services. Again, the Panel found no 
record support for setting a separate and higher rate for listener-
influenced services. It rejected the agreements between RIAA and non-
DMCA compliant services because the rates in those agreements were for 
rights beyond those granted under the statutory license. Nor could the 
Panel discern from the record evidence which services would be subject 
to the basic webcasting rate as distinguished from the rate for 
listener-influenced services. Consequently, the Panel decided ``that so 
long as a service complies with, and is deemed eligible for the 
statutory license, it should not pay a separate rate based upon 
listener influence.'' Report at 81.
    The Register finds the Panel's analysis to be consistent with the 
law, and thus accepts the Panel's decision not to set a separate rate 
for transmissions which might not come within the scope of the license. 
Again, if transmissions made by a listener-influenced service are 
determined to be outside the scope of the statutory license, the proper 
course of action would be for the parties to negotiate a voluntary 
agreement for these transmissions, or for the copyright owner to file a 
copyright infringement suit against the service. The Panel has no 
authority to propose a rate for any transmission which cannot be made 
lawfully under the statutory license.
    c. Other types of transmissions. A broadcaster may stream three 
different types of programming in addition to a simulcast of its AM/FM 
radio signal: (1) ``Archived'' (previously aired) radio programming; 
(2) ``side channels'' (Internet-only programming); and (3) 
``substituted programming'' (programming that replaces over-the-air 
programming that has not been licensed for simulcast over the 
Internet). The question for the Panel was whether such programming is 
the same or substantially similar to radio retransmissions or Internet-
only programming.
    In making its decision, the Panel first considered the definition 
of a ``radio retransmission performance.'' It found that the record 
failed to provide a coherent and workable definition, rejecting both 
the definition set forth in the Yahoo! agreement and the one that was 
included in the defunct settlement agreement between RIAA and the 
commercial broadcasters. Instead, it adopted the definition of the term 
provided by Congress in the statute which defines the term as ``a 
further transmission of an initial transmission * * * if it is 
simultaneous with the initial transmission.'' See 17 U.S.C. 114(j)(12). 
Based on this definition, the

[[Page 45258]]

Panel concluded that a transmission made as part of archived 
programming, side channels or substituted programming was something 
other than a radio retransmission and, therefore, not entitled to the 
lower rate proposed for radio retransmissions. Instead, it agreed with 
RIAA that the programming was essentially the same as Internet-only 
programming, and without any record evidence to substantiate a 
different rate, should be subject to the 0.14[cent] IO rate.
    Broadcasters do not contest the Panel's determination with respect 
to side channels, and they recommend that the Librarian provide that 
the side channel rate be set at the webcaster rate expressly without 
prejudice to reconsideration in a subsequent CARP proceeding. 
Broadcasters Petition at 56. They do, however, object to the imposition 
of the rate for IO transmissions on the performances of sound 
recordings made during the transmission of an archived program or a 
substituted program. Id. at 55. Broadcasters' arguments no longer have 
any relevance under the statutory rate structure proposed by the 
Register, which proposes a single, unitary rate for all transmission. 
This fact in conjunction with the Panel's observation that the Yahoo! 
agreement did not differentiate or even recognize these alternative 
categories supports a determination that no separate rate should be set 
for these transmissions.
10. Rates for Transmissions Made by Non-CPB, Noncommercial Stations
    National Public Radio (``NPR'') and the National Religious 
Broadcasters Music License Committee (``NRBMLC'') were the only two 
representatives of non-commercial stations participating in this 
proceeding. NPR reached a private settlement with the Copyright Owners 
during the proceeding and withdrew. In considering what the rate should 
be for the stations represented by NRBMLC and any other noncommercial 
station operating under the statutory license, the panel first 
considered past CARP decisions involving the statutory licenses. It 
found that a prior CARP had considered and distinguished commercial 
stations and noncommercial stations on the basis of their financial 
resources, noting that noncommercial stations depend upon funding from 
the government, business, and viewers, whereas commercial broadcasters 
generate a revenue stream through advertising. Report at 89, citing 
CARP report adopted by Librarian on September 18, 1998, Noncommercial 
Education Broadcasting Rate Adjustment Proceeding, 63 FR 49823. 
Moreover, the earlier Panel determined that a rate set for a commercial 
station is an inappropriate benchmark to use when setting a rate for 
the same right for noncommercial stations because of these economic 
differences between these businesses. Specifically, it acknowledged 
that use of a rate set for a commercial broadcaster would overstate the 
market value of the performance for a noncommercial station.
    Next, the Panel examined RIAA's approach, which focused on the 
amount the performing rights organizations (``PROs'') were awarded in 
the 1998 Noncommercial Education Broadcasting Rate Adjustment 
Proceeding for use of their works by noncommercial stations. It adduced 
that they received \1/3\ the amount of the fees paid by the commercial 
stations. Based on this precedent, RIAA offered the noncommercial 
stations a rate that corresponds to \1/3\ the rate to be paid by 
commercial broadcasters.\30\ The Panel, finding no other evidence in 
the record to support a different rate, adopted the RIAA proposal for 
radio retransmissions, and proposed a rate of 0.02[cent] per-
performance (one-third of the 0.07[cent] per performance rate, rounded 
to the nearest hundredth of a cent) for these transmissions only. Just 
as with the commercial broadcasters, the Panel found that archived 
programming subsequently transmitted over the Internet, transmissions 
of substituted programming, and transmissions of side channels 
constitute a transmission more akin to an Internet-only event. 
Consequently, it proposed a per performance rate for noncommercial 
broadcasters of 0.05[cent] (one-third the rate paid by commercial 
broadcasters and webcasters for IO transmissions) for each sound 
recording included in these transmissions. This rate, however, is meant 
to apply only to the first two side channels--and not to additional 
side channels--in order to avoid the possibility of a noncommercial 
broadcaster gaining a competitive advantage over the commercial 
broadcasters and webcasters who initiate Internet-only programs and do 
so at a higher cost.
---------------------------------------------------------------------------

    \30\ RIAA stated that ``the Noncommercial Broadcasters should 
pay the same royalty rates that apply to Webcasters and commercial 
broadcasters, which are based on a benchmark derived from 
marketplace agreements for the same and closely related rights.'' 
RIAA PFFCL concerning the Broadcaster Royalty Rate (Jan. 25, 2002) 
at ] 44; but see, Reply of Copyright Owners and Performers to Non-
CPB Entities (Dec. 18, 2001) at 3 (``Copyright Owners are willing to 
accept a rate for Noncommercial Broadcasters that is no less than 
one-third of the rate paid for commercial broadcasters.'').
---------------------------------------------------------------------------

    Non-CBP broadcasters argue in their petition to set aside the CARP 
report, that the Panel failed to set the appropriate rates in two ways. 
They contend that the Panel ignored the record evidence which clearly 
established that the noncommercial stations are fundamentally different 
from commercial broadcasters and webcasters, and less viable 
economically, thus requiring the Panel to establish a lower rate for 
these stations. They also dispute, like the Webcasters and the 
commercial broadcasters, the Panel's decision to reject, as a 
benchmark, the amount of royalty fees these services pay for the use of 
the underlying musical works in an analog market under a separate 
compulsory license. Non-CPB Petition at 4. They then calculate a ratio 
between what a commercial broadcast station pays for use of the musical 
works in the analog world and what on average the non-CPB stations pay 
in the same market, based on an estimation of the number of stations, 
and the amount of royalties the stations paid for use of musical works 
in their over-the-air broadcasts. From these calculations, they suggest 
that a noncommercial broadcaster, on average, pays only \1/34\th the 
amount of royalties that a commercial station pays for use of the same 
musical works and argue for a rate equal to \1/34\th the amount that 
commercial broadcasters will pay. Alternatively, they request a flat 
rate of $100 per station, see Non-CPB, Noncommercial Broadcasters Reply 
Petition at 5, and argue that in no case should the rate exceed \1/3\ 
the rate adopted for commercial broadcasters. Non-CPB, Noncommercial 
Broadcasters Petition at 9.
    NRBMLC also turned to the rates for the statutory noncommercial 
broadcasting license and argued that the rates for the webcasting 
license should be based upon the rates currently paid to performing 
rights organizations for use of the musical works in over-the-air 
programs under this license. The Panel rejected this proposal on a 
number of grounds. First, it noted that those rates were the subject of 
prior settlements which stated that the negotiated rates for the 
noncommercial license were to have no precedential value for future 
rate setting proceedings for the noncommercial license. In light of 
this term, the Panel found the rates for the statutory noncommercial 
license had no relevance to the current proceeding. Not only were the 
rates for a totally different right, but they apparently have no 
precedential value for considering

[[Page 45259]]

future statutory noncommercial rates for use of the musical works. 
Report at 90. Second, the panel considered rates proposed by Dr. 
Murdoch, the expert witness for NPR, who at the request of the Panel 
made an attempt to identify an appropriate rate for noncommercial 
stations based on the fees currently paid to the PROs. Although she 
complied with the request of the Panel, she expressed severe 
reservations about her own conclusions, citing numerous problems with 
her own calculations. Report at 91. For these reasons, the Panel 
rejected Murdoch's proposed rates.
    RIAA supports the Panel's decision, noting that the non-CPB, 
noncommercial broadcasters failed to offer any differential rate for 
this type of service in its direct case or an expert witness who could 
support their ultimate request for a $100 flat rate. The only witness 
who testified on behalf of this group was Joe Davis, who works for a 
commercial broadcaster, and had only anecdotal information concerning 
noncommercial stations. Because of his lack of expertise in this area, 
the Panel did not credit his testimony. Such action on the part of the 
panel is not arbitrary.
    Nor was it arbitrary for the Panel to decide not to rely on the 
statutory rates set for use of the musical works by noncommercial 
broadcasters. The arbitrators rejected the non-CPB, commercial 
broadcasters' request to look to these rates because the agreements, at 
the insistence of the parties to the agreements, are not even 
considered precedent for setting future rates for the use of the 
musical works. If anything, it would be arbitrary to rely on these 
values as a benchmark for setting rates for a completely different 
category of works when they had no acknowledged value for readjusting 
the rates for the works to which they do apply. Had the Panel wished to 
use these rates, it needed at the very least an opportunity to examine 
the circumstances surrounding the adoption of the ``no precedent'' 
clause. It would have also required record evidence to substantiate 
such bold assertions on the part of the users as the notion that these 
rates were set at a rate higher than what would have been negotiated in 
the marketplace. Non-CPB Broadcasters Reply Petition at 7; RIAA Reply 
at 11. Because of these infirmities, the Register finds the Panel did 
not act arbitrarily in rejecting the rates set for the section 118 
license as a benchmark.
    Thus, in the end, the Panel accepted RIAA's proposal to set the 
rate for noncommercial broadcasters at one-third the rate established 
for commercial broadcasters. The Panel also provided a separate rate 
for archived programming subsequently transmitted over the Internet, 
substituted programming and up to 2 side channels set at one-third the 
rate established for Internet-only transmissions. The Panel made this 
adjustment based on its determination that a noncommercial broadcaster 
should not be subject to commercial rates when streaming programming 
consistent with the educational mission of the station, over the 
Internet. Report at 94. However, the Panel imposed a limitation on the 
use of this reduced rate for Internet-only transmissions to avoid the 
possibility that a non-CPB broadcaster could use its unique position to 
essentially become a commercial webcaster.
    The Register accepts the Panel's methodology for setting the rate 
for noncommercial broadcasters. The rates proposed by the Panel, 
however, must be adjusted to reflect the Register's recommendation to 
set a unitary rate for both commercial broadcasters and webcasters. 
Using the proposed base rate of 0.07[cent] and reducing this value by 
two-thirds, the adjusted rate for non-CPB, noncommercial broadcasters 
is 0.02[cent] (one-third of 0.07[cent], the base rate for all 
transmissions, rounded to the nearest hundredth) per performance, per 
listener. This rate shall apply to a simultaneous retransmission of the 
non-CPB, noncommercial over-the-air radio programming, archiving 
programming subsequently transmitted over the Internet, substituted 
programming, and up to two side channels. The rate for all other 
Internet-only transmissions is 0.07[cent].
    One last disputed issue raised by the non-CPB, noncommercial 
broadcasters is the imposition of the same $500 minimum fee that the 
CARP set for all other licensees. They argue that a $500 minimum fee 
far exceeds any reasonable rate that should be imposed on this category 
of users in light of the financial considerations that distinguish them 
from the other services. Non-CPB Broadcasters Reply Petition at 10. In 
support of this position, the users cite Dr. Murdoch's testimony to 
illustrate that the Internet license for use of SESAC's repertoire is 
less than $100. But this is not the total amount that a noncommercial 
station would pay; it would also have to pay fees to BMI and ASCAP in 
order to license all the works included in the sound recordings covered 
by the section 114 license. The minimal amount that a webcaster must 
pay to cover the combined works administered by the three PROs is $673, 
more than the proposed minimum rate to operate under the section 114 
license. Webcasters PFFCL ] 363. In any event, the Panel set the rate 
at $500 to cover administrative costs to the copyright owners and 
access to the sound recordings. It was not arbitrary to impose a 
minimum fee on the Non-CPB, noncommercial broadcasters that merely 
covers costs for these rudimentary purposes nor can it be deemed 
excessive in light of what these entities pay the PROs for the public 
performance of musical works.
11. Consideration of Request for Diminished Rates and Long Song 
Surcharge
    RIAA requested a surcharge for songs longer than five minutes. RIAA 
PFFCL ] 210. Its request was denied because the Panel did not find that 
such a charge was included in most of the relevant license agreements. 
Report at 105. RIAA, however, argues that the Panel misread the Yahoo! 
agreement. RIAA Petition at 42. It notes that Yahoo! could estimate the 
number of performances it made by multiplying its listening hours by a 
fixed number of performances and that when it did so, the record 
companies received compensation for [material redacted subject to a 
protective order] performances, even though Yahoo! may have only 
played, for example, 5 12-minute classical recordings in an hour. Id. 
The Yahoo! agreement, however, does not require that it employ the 
estimation methodology; it merely states that Yahoo! may make this 
calculation. Thus, there was no probative evidence that the marketplace 
valued a classical sound recording, or similar sound recordings of 
longer than average duration, at a different rate. Consequently, it was 
not arbitrary for the Panel to reject RIAA's suggestion to impose a 
``long song'' surcharge. In any event, it is highly likely that this 
concern will be addressed for the time period to which these rates 
apply, since most services will be using the estimation formula for 
calculating the number of performances which assumes 15 performances 
for each aggregate tuning hour.\31\ See section IV.11, infra.
---------------------------------------------------------------------------

    \31\ Nevertheless, RIAA has raised a valid point and future 
CARPs should carefully consider how to value performances of longer 
recordings, such as classical music, to ensure that the copyright 
owner is fully compensated. That being said, no party should assume 
that a particular approach to the problem is being advocated by the 
Register for adoption by a future CARP.
---------------------------------------------------------------------------

    On the other side, webcasters asked that there be no royalty fee 
for songs that are less than thirty seconds long, citing technology 
problems or the use of song-skip functions. Webcasters Petition at 71. 
The Panel disagreed and saw no

[[Page 45260]]

need to make any adjustment. It noted that the use of the blended rate 
from which it calculated the proposed rates was itself based upon 
figures which already took into account problem performances that had 
occurred during the initial period. This adjustment was expressly made 
for the first 1.5 billion transmissions only. Report at 106-107. The 
Panel chose not to make a similar adjustment for subsequent 
performances because the Yahoo! agreement did not provide for such an 
adjustment.
    Likewise, the Panel determined that the use of the skip function 
provides a benefit to webcasters and it saw no need to penalize 
copyright owners for the benefit that flowed to the users through a 
conscious use of a function provided by the service. Moreover, none of 
the negotiated agreements provided for any reduction in rate for 
skipped songs. Report at 107. Consequently, the Panel did not provide a 
lower rate or exemption for truncated performances resulting from use 
of the skip song function.
    The Webcasters object to the Panel's conclusion, maintaining that 
the Panel failed to adequately explain its decision and consider 
relevant evidence. See Webccasters Petition at 71. They contend that 
the Panel should have given more weight to three of the 26 agreements, 
which provided an exemption for performances less than thirty seconds 
in duration. Such action, would itself, have been arbitrary. Clearly, 
the Panel could not rely on these agreements when it had already 
disregarded them for purposes of establishing the royalty rates.
    Moreover, RIAA makes a number of arguments in support of the 
Panel's decision. First, it notes that the performance of even a 
portion of a sound recording without a license is an infringement of a 
copyright owner's rights. As such, there is no a priori reason for 
making 30-seconds-or-fewer performances exempt from royalty 
obligations. Second, RIAA cites 17 U.S.C. 114(h)(2)(B) to demonstrate 
that Congress recognized the value of performances of limited duration 
and the right to license such performances. Specifically, this section 
exempts copyright owners licensing public performances of sound 
recordings from the requirement to make these sound recordings 
available on no less favorable terms or conditions to all bona fide 
entities, when they are licensing promotional performances of up to 45 
seconds in duration. RIAA Reply at 71-75. These arguments support the 
Panel's decision not to exempt performances of thirty seconds or less, 
and as such, its decision is neither arbitrary nor contrary to law.
    The Panel did, however, grant the users an exemption for incidental 
performances, citing the existence of a similar term in the Yahoo! 
agreement as the basis for its decision. Specifically, the Panel 
``exclude[d] transmissions or retransmissions that make no more than 
incidental use of sound recordings, including but not limited to, 
certain performances of brief musical transitions, brief performances 
during news, talk and sports programming, commercial jingles, and 
certain background music.'' Report at 108. This is not a disputed 
provision.
    With the agreement of the parties, the Panel also exempted 
performances of sound recordings made pursuant to a private license 
agreement. Id.
    The Register notes, however, that the Webcasters' concerns 
regarding the Panel's determination not to grant its request to impose 
no royalty on songs less than 30 seconds in duration are ameliorated 
for the current licensing period. Under the proposed terms of payment, 
a service may estimate the number of performances for purposes of 
determining the extent of copyright liability on an ``Aggregate Tuning 
Hour'' basis, which calculates payment on the basis of 15 performances 
per hour.\32\ This approach alleviates a Licensee's obligation to 
account for and pay for each performance, including those that are less 
than 30 seconds in duration.
---------------------------------------------------------------------------

    \32\ The Webcasters had advocated the use of ``Aggregated Tuning 
Hours'' as a way to address their concerns regarding the Panel's 
decision not to provide a lower rate for partial performances. 
Webcasters Petition at 71-72. Their argument, however, is not the 
bases for the Register's recommendation to provide for use of the 
estimation methodology throughout the license period.
    The Register is proposing this course of action in the short 
term merely to address separate concerns of the Register regarding 
the logistics involved in reporting the number of performances of 
sound recordings. This recommendation on the part of the Register 
should in no way be construed as undermining the Panel's decision 
that transmissions of sound recordings of less than 30 seconds are 
compensable.
---------------------------------------------------------------------------

12. Methodology for Estimating the Number of Performances
    Until each service can account for each performance, and is 
required to do so, there is a need for a methodology that will allow a 
service to make a reasonable estimate of the number of performances. 
Accordingly, the Panel proposes the following procedure:

    For the period up to the effective date of the rates and terms 
prescribed herein, and for 30 days thereafter, the statutory 
licensee may estimate its total number of performances if the actual 
number is not available. Such estimation shall be based on 
multiplying the licensee's total number of Aggregate Tuning Hours by 
15 performances per hour (1 performance per hour in the case of 
retransmissions of AM and FM radio stations reasonably classified as 
news, business, talk or sports stations, and 12 performances per 
hour in the case of all other AM and FM radio stations).

Report at 110.
    The Broadcasters object to the Panel's formulation for estimating 
the number of performances, arguing that for many program formats, 
e.g., news, business, talk, or sports stations, the estimate would 
likely significantly overstate the use of music by these stations. 
Broadcasters Petition at 57. However, they do not offer an alternative 
methodology for calculating these performances. Moreover, a mere 
likelihood of overstating the values in some cases is not enough to 
undo the Panel's formulation.
    Likewise, Webcasters argue that the 30-day cutoff period for using 
the methodology for estimating the number of performances is arbitrary 
because there is no record support for this determination. Webcasters 
Petition at 72. Instead, they propose allowing the Services to employ 
this methodology through the remainder of the current licensing period, 
which ends December 31, 2002, since it will be used, in any event, by 
most Services for purposes of calculating their liability for their 
past usage of the sound recordings. Id.
    What is troubling about this provision is the Panel's determination 
to require a full accounting of each performance beginning 30 days 
after the effective date of the order setting the rates and terms. The 
Report documents that many services are not currently equipped to track 
or accurately account for each performance, and the Register agrees. In 
fact, until the issuance of final rules regarding Records of Use, there 
are no requirements for tracking these performances. Because the Office 
has yet to establish just how a service will account for its use of the 
sound recordings, the Register determines that the proposed timeframe 
for requiring a strict accounting is arbitrary. Instead, the rule shall 
require that a Service begin accounting for each performance in 
accordance with the rules and regulations regarding Records of Use 30 
days after the effective date of final rules. These rules shall 
determine what information needs to be calculated to determine which 
sound recordings have been performed, how many of such performances 
occurred, and when and how often such information shall be collected by 
the Services. Meanwhile, interim rules are being promulgated that

[[Page 45261]]

will, for the immediate future, impose more modest reporting 
requirements on Services.
    In the meantime, for the remainder of the period covered by this 
proceeding (i.e., through December 31, 2002), Services may estimate the 
number of performances in accordance with the Panel's formulation. 
While this is not the perfect solution, it represents a reasonable 
approximation of the number of performances. And in those cases where a 
Service believes the formulation overestimates the use of the sound 
recordings, it has the option of actually counting the number of 
performances and calculating the royalties accordingly. Certainly, it 
cannot be seriously argued that a Service would be unduly burdened by 
undertaking this task. Conversely, if after accounting for each of the 
performances in the programs which are allowed to use the one 
performance per hour estimate, the Service finds its programming 
performs more sound recordings than the approximation, a Service 
benefits from use of the Panel's methodology.
13. Discount for Promotion and Security
    RIAA proposed a 25% discount to any service that includes 
promotional and security features beyond those required under either 
the webcasting license or the ephemeral recording license. Because that 
proposal would exceed the scope of the terms set forth in the law, the 
Panel declined RIAA's invitation to provide for such discounts within 
the context of the statutory license. Report at 110. It is clear that 
the Panel may reject such a proposal, as it did here, because the 
statutory license does not expressly require that such a rate be 
established. No party contested the Panel's determination on this 
issue. Therefore, the Register sees no reason to question the Panel's 
decision.
14. Ephemeral Recordings for Services Operating Under the Section 114 
License
    A transmitting organization entitled to make transmissions of sound 
recordings under the webcasting license may also make a single 
ephemeral copy of each work to facilitate the transmission under an 
exemption in the law or it may make multiple copies of these works 
pursuant to a statutory license. See 17 U.S.C. 112(a) and (e), 
respectively. In addition to setting rates and terms for the webcasting 
license, the Panel in this proceeding had the responsibility for 
setting the rates for the ephemeral recordings. The Office combined 
these section 112 and section 114 proceedings because the licenses are 
interrelated and the beneficiaries of the license, just as the users, 
are in most instances the same for both the webcasting license and the 
ephemeral recording license. However, there is one group of users of 
the ephemeral recording license that is exempt from the digital 
performance right--services which provide transmissions to a business 
establishment for use by the business establishment within the normal 
course of its business (``business establishment services'').\33\ 17 
U.S.C. 114(d)(1)(C)(iv).
---------------------------------------------------------------------------

    \33\ Business establishment services deliver sound recordings to 
business establishments for the enjoyment of the establishments' 
customers. Two such services, AEI, Music Network, Inc. and DMX 
Music, Inc., participated in these proceedings. These companies 
merged into a single company during the course of this proceeding. 
AEI/DMX provides music to more than 120,000 businesses, including 
Pottery Barn, Abercrombie & Fitch, Red Lobster, and Nordstrom. The 
rate setting process as it pertains to the business establishment 
services is discussed in Section IV.14.
---------------------------------------------------------------------------

    During the proceeding, the Services argued that these ``ephemeral'' 
copies have no economic value apart from the value of the performance 
they facilitate. Webcasters Petition at 67; Broadcasters Petition at 
50. In support of this position, the Services cite with approval a 
Copyright Office Report which stated that the Office found no rationale 
for ``the imposition of a royalty obligation under a statutory license 
to make copies that have no independent economic value, and are made 
solely to enable another use that is permitted under a separate 
license.'' Report at 98, citing U.S. Copyright Office, DMCA Section 104 
Report at 114, fn 434 (August 2001). The Panel also contended that 
experts on both sides took this view. Webcasters Petition at 66, citing 
Jaffe W.D.T. 52-54; Tr. at 6556; Tr. at 2632 (Nagle). Had there been 
nothing more, the Panel might have agreed with the Services and adopted 
the Office's position. In construing the statute, however, the Panel 
found that Congress did not share the Copyright Office's view. Instead, 
the Panel found that Congress required that a rate be set for the 
making of ephemeral copies in accordance with the willing buyer/willing 
seller standard.\34\ Report at 98-99.
---------------------------------------------------------------------------

    \34\ The Panel and the Services note that the Register has 
adopted a policy position regarding the making of ephemeral 
recordings which attributes no economic value to the making of such 
recordings when ``made solely to enable another use that is 
permitted under a separate compulsory license.'' U.S. Copyright 
Office, DMCA Section 104 Report at 144, fn.434. (August 2001). This 
statement was made in a different context and has no relevance to 
the current proceeding. The task of the Register in this proceeding 
is to determine whether the Panel's determination is arbitrary or 
contrary to law without regard to the Office's own views on how the 
law should read to implement policy objectives.
---------------------------------------------------------------------------

    The Panel utilized the same approach in setting rates for the 
ephemeral recording license as it had in setting the rates for the 
webcasting license. Report at 104. It first examined the 26 RIAA 
agreements for evidence that market participants paid a fee to make 
ephemeral copies and how much they paid. Of the 26 agreements, fifteen 
did not contain any rate for the ephemeral license and did not purport 
to convey this right; two used a percentage of overall revenues; eight 
used a percentage (calculable to 10%) of the performance royalty fees 
paid; and one paid a flat rate per use of the license for a year 
(calculable to 8.8% of the performance royalty fees paid). Id. From 
this, the Panel identified a range of rates between 8.8% and 10% of the 
performance fees paid.\35\ It then chose to place significant weight on 
the 8.8% value because it was derived from the information in the 
Yahoo! agreement to which the Panel has given considerable weight 
throughout this proceeding. Id. However, the Panel did not rely solely 
on the Yahoo! agreement in this instance, choosing instead to give 
minimal weight to the eight other agreements that set the ephemeral 
rate at 10% of the performance rate, and so rounded the 8.8% value up 
to 9.0%. Id. Both Webcasters and Broadcasters filed Petitions to Modify 
in which they object to the Panel's approach to setting the ephemeral 
rate. They argue that the evidence supports their position that the 
ephemeral copies have no independent economic value apart from the 
performances they facilitate. In the alternative, they maintain that 
the value of the ephemeral copies is included in the royalty fee for 
the performance of the sound recording. Consequently, they contend that 
the appropriate way to set the ephemeral rate would be to determine the 
economic value of the ephemeral copies and reduce the performance rate 
by that amount. Webcasters Petition at 67; Broadcasters Petition at 51.
---------------------------------------------------------------------------

    \35\ Most of the original 26 license agreements did not grant 
the right to make ephemeral copies, either because the Service did 
not realize it needed this right or because the Service had assumed 
the negotiated rate covered all rights needed to make the digital 
transmissions. However, that trend did not continue. Licenses that 
were renewed expressly granted the right to make ephemeral copies 
for a fee. Report at 58, fn 39.
---------------------------------------------------------------------------

    Moreover, the Services disagree with the Panel's use and analysis 
of the voluntary agreements for setting this rate. Specifically, they 
cite the lack of an ephemeral rate in 15 of the 26 agreements, even 
though it is clear that these recordings are necessary to effectuate a 
performance, as evidence of RIAA's view that the making of ephemeral 
copies had only a de minimis

[[Page 45262]]

value. Broadcasters Petition at 52. For this reason, webcasters and 
broadcasters argue that RIAA placed little value on these copies and 
implicitly acknowledged that the value of these recordings is at best 
de minimis. They then criticize the Panel's methodology, asserting that 
the calculation of the ephemeral rate based upon the rates derived from 
the Yahoo! agreement for a per performance model, totally ignored the 
fact that Yahoo! agreed to pay a flat fee once it began making payments 
on a per performance basis, without regard to the number of 
performances. Webcasters Petition at 69; Broadcasters Petition at 53. 
Finally, Webcasters object to any use of the non-Yahoo! agreements in 
calculating this rate because the Panel had already found these 
agreements to be unreliable for purposes of setting the marketplace 
rates. Similarly, the Broadcasters question the Panel's reliance on 
eight of the agreements that it had rejected earlier as ``unreliable 
benchmarks.'' Id. at 54.
    The non-CPB, noncommercial broadcasters adopt the objections to 
ephemeral recording rate put forth by the commercial broadcasters. 
Noncommercial Broadcasters Petition at 11.
    On the other hand, RIAA supports the Panel's determination in 
general, noting that the CARP relied primarily on the Yahoo! agreement 
to calculate the ephemeral rate for webcasters. It maintains, however, 
that the Panel should have afforded the 25 voluntary agreements more 
weight and set the rate at 10% of the performance rate in deference to 
the fact that many RIAA licensees had agreed to a negotiated or 
effective ephemeral rate of 10%. RIAA Reply at 68. RIAA also challenges 
the Services' complaints in general, noting that in spite of all the 
objections to the Panel's determination, the Services fail to offer any 
evidence regarding an alternative rate.
    The Panel's approach in setting the ephemeral rate was not 
arbitrary. It calculated the rate based on the fees Yahoo! actually 
paid to RIAA for the right to make ephemeral reproductions. Use of the 
Yahoo! agreement for this purpose was perfectly logical, and consistent 
with the general approach taken by the Panel in determining rates for 
webcasting. What causes concern, however, is the Panel's reliance, even 
to a small degree, on the ephemeral rates set forth in eight of the 25 
voluntary agreements it had previously repudiated. Such action is 
arbitrary unless the Panel can offer a clear explanation for its 
actions. It did not do so and, in fact, it stated that its review of 
the 26 licenses ``reveals an inconsistent, rather than a consistent, 
pattern.'' Report at 100. Moreover, the Panel conceded that these 
agreements ``do not represent evidence which establishes RIAA's 
proposed rate.'' Id. at 104. Nevertheless, the Panel granted ``very 
modest effect'' to those agreements which have ephemeral rates around 
10% to justify its decision to round the 8.8% effective rate up to 9%. 
Considering those agreements is clearly arbitrary and, consequently, to 
the extent the Panel gave any weight to any license agreement other 
than the Yahoo! agreement, it acted in an arbitrary manner. 
Accordingly, the rate for the ephemeral license for licensees operating 
under section 114 should be set at 8.8% of the performance rate.
15. Minimum Fees
    The Panel established a minimum fee of $500 for each licensee for 
use of the webcasting license and the ephemeral recording license. 
These rates are in line with those negotiated by RIAA and the 26 
services with which it reached an agreement. The Panel determined that 
RIAA would not have negotiated a minimum fee that failed to cover at 
least its administrative costs and the value of access to all the works 
up to the cost of the minimum fee. Report at 95. The adoption of the 
$500 minimum, however, is predicated on the adoption of a per 
performance rate and not a percentage-of-revenues. The Panel implied 
that had it decided to adopt a percentage-of-revenue model, the minimum 
fee would have been more substantial because the Panel would have had 
to consider more carefully the impact of start-up services with little 
revenue. Report at 95.
    Because the minimum rate is calculated to cover at least the 
administrative costs of the copyright owners in administering the 
license and access to the sound recordings, the Panel applied the rate 
to all webcasting services and made it payable as a non-refundable 
advance against future royalty fees to be paid during that year, due 
upon the first monthly payment of each year. Moreover, the Panel 
offered no proration of the fee, making it due in full for any calendar 
year in which a service operates under the statutory license. Report at 
96.
    RIAA objects to the low value for the minimum fee set by the Panel 
because it fails to take into account the broad range of rates 
established in the licenses RIAA negotiated in the marketplace.\36\ 
Moreover, as a policy matter, RIAA contends that use of the lowest 
value set forth in a single agreement discourages copyright owners from 
adopting a low minimum fee in a single instance to accommodate special 
circumstances for a particular service. RIAA Petition at 44-45. 
Finally, RIAA faults the Panel for justifying its choice by comparing 
the $500 minimum fee to the amount that the Services pay the performing 
rights organizations (PROs) under a blanket license. RIAA rejects this 
rationale on two fronts. First, the minimum fee does not approximate 
the amounts that are paid to the PROs, and second, use of the musical 
works benchmark has been found by the CARP to be an inappropriate 
measure for establishing fees in this proceeding.
---------------------------------------------------------------------------

    \36\ According to RIAA, a $5,000 minimum fee is the typical 
amount paid by users in the marketplace, without regard to whether 
the royalties are paid on a percentage of revenue base or in 
accordance with a per performance metric. RIAA Petition at 43.
---------------------------------------------------------------------------

    In response, Broadcasters first note that RIAA never disputed the 
Panel's understanding for the existence of a minimum fee, or claimed 
that a higher fee is necessary to achieve the stated purposes of the 
minimum fee. Namely, the minimum fee is meant to cover the costs of 
incremental licensing, i.e., the cost to the license administrator of 
adding another license to the system without regard to the number of 
performances made by the Licensee, see Webcasters PFFCL ] 361, and 
access to the entire repertoire of sound recordings. Broadcasters Reply 
at 12-13; Webcasters Reply at 52-53. Moreover, they claim that the 
minimum fee is in line with the fees paid to the performing rights 
organizations which can serve as a benchmark for the minimum because 
``they serve the same purposes that the CARP identified in setting the 
minimum fees for the statutory license at issue.'' Broadcasters Reply 
at 14; Webcasters Reply at 52, 55. The Services, however, do not 
blindly accept the Panel's proposed fee, arguing first that the record 
supports a much lower minimum fee. They also strenuously object to 
RIAA's request for a $5,000 minimum, arguing that such a high minimum 
would be confiscatory for most users of the license, especially for 
those radio stations that play little featured music. Broadcasters 
Reply at 16; Webcasters Reply at 56.
    None of these arguments compel the Librarian to reject the proposed 
$500 minimum. The Panel set a minimum rate to accomplish two purposes, 
and none of the parties argue that the $500 fee falls outside the 
``zone of reasonableness'' for such rates. If anything, the fee may be 
viewed as too low, if one takes into account the

[[Page 45263]]

minimum amounts paid to the performing rights organizations for the 
blanket license for performing musical works. Together each Service 
must pay, at the very least, a total of $673 to the three performing 
rights organizations to cover access to the musical works for use over 
the Internet and the incremental cost of licensing--the very purposes 
for which the minimum fee is being set in this proceeding.
    Whether to utilize the musical works benchmark was a decision for 
the Panel and it chose not to do so. This approach was not arbitrary. 
As it had done throughout this proceeding, the Panel could choose, as 
it did, to rely on agreements negotiated in the marketplace between 
willing buyers and willing sellers. Moreover, the Panel could propose 
any rate consistent with the agreements so long as the proposed rate 
would cover costs for administering the license and access to the 
works.\37\ For this reason, the Panel examined the agreements offered 
into evidence by the RIAA and chose the lowest value that RIAA had 
accepted in a prior agreement. It did so because it assumed that an 
entity would not agree to a minimum rate that would result in a loss. 
Had RIAA truly believed that the $500 minimum fee was inadequate to 
cover at least the administrative costs and the value of access, the 
Panel reasoned that it would have required a higher fee. This approach 
is not arbitrary and, consequently, the proposed minimum fee is adopted 
for the period covered by this proceeding.
---------------------------------------------------------------------------

    \37\ Had the Panel recommended a royalty based on a percentage-
of-revenues, its recommended minimum fee also would have had to 
serve the function of ensuring that copyright owners receive 
adequate compensation in cases where a service makes substantial use 
of copyrighted works but generates little or no revenue.
---------------------------------------------------------------------------

16. Ephemeral Recordings for Business Establishment Services (``BES'')
    a. Rates for use of the statutory license. Business establishment 
services are well-established businesses, which have offered their 
services for many years. Among the established businesses in this group 
are AEI Music Network, Inc.,\38\ DMX Music, Inc., Muzak, Inc., 
PlayNetwork, Inc. and Radio Programming and Management Inc. Two of the 
old guard, AEI and DMX, and one new service, Music Choice, participated 
in this proceeding. At an early stage of this proceeding, but after 
filing a direct case, Music Choice withdrew from the proceeding.
---------------------------------------------------------------------------

    \38\ AEI and DMX were separate business entities at the 
beginning of this proceeding. During the course of this proceeding, 
they merged into a single company.
---------------------------------------------------------------------------

    Of the services offered by AEI and DMX only those services that 
transmit musical programs to their customers via cable or satellite in 
a digital format are eligible for the ephemeral recording license. The 
Panel referred to this aspect of the business as the ``broadcast 
model'' of the service. Through this process, these services make 
hundreds of thousands, if not millions, of copies of the sound 
recordings. The law allows these services to perform sound recordings 
publicly by means of a digital transmission under an exemption in 
section 114.\39\ However, Congress did not exempt these services from 
copyright liability when making copies of these works in the normal 
course of their business. Rather, Congress created a statutory license 
to cover the making of ephemeral recordings by these services. In its 
proposed findings of fact and conclusions of law, DMX and AEI proposed 
a flat fee of $10,000 per year \40\ for each company for the making of 
buffer and cache copies, but argued in the alternative for a zero rate. 
See DMX/AEI PFFCL ] 44. In support of the alternative position, DMX/AEI 
argued that Congress had only envisioned a minimal rate to compensate 
the copyright owners for the use of ephemeral copies. It also cited the 
Copyright Office's Section 104 DMCA Study for the proposition that 
ephemeral recordings have no independent economic value apart from its 
use to facilitate transmissions. However, as RIAA points out, these 
businesses have always paid for such copies. Report at 115-116, citing 
RIAA Reply to DMX/AEI PFFCL ]] 8-12. RIAA asked that rate be set at 10% 
of gross revenues with a minimum fee of $50,000 a year and asked the 
Panel to refrain from setting rates tailored to the needs of specific 
companies. RIAA made the later request because AEI/DMX asserted that 
its digital database is already covered by preexisting licenses and 
therefore, it does not need an ephemeral license in order to make these 
phonorecords. Consequently, AEI/DMX asked the Panel to set a rate to 
cover only the cache and buffer copies it needed to facilitate its 
transmissions and to exclude the value of the database copies when 
setting the rate for the ephemeral license. In fact, AEI/DMX contends 
that it was arbitrary for the Panel to set a rate ``for all ephemeral 
copies which may be utilized in the operation of a broadcast service'' 
when it had received evidence for setting a rate only for buffer and 
cache copies. DMX/AEI Petition at 4. It also maintains that the statute 
contemplates that the Panel set rates according to the needs and 
desires of the parties. Id. at 8-10.
---------------------------------------------------------------------------

    \39\ Section 114(d)(1)(iv) provides that:
    (d) Limitations on Exclusive Right.--Notwithstanding the 
provisions of section 106(6)--
    (1) Exempt transmissions and retransmission.--The performance of 
a sound recording publicly by means of a digital audio transmission, 
other than as a part of an interactive service, is not an 
infringement of section 106(6) if the performance is part of--
    (C) a transmission that comes within any of the following 
categories--
    (iv) a transmission to a business establishment for use in the 
ordinary course of its business: Provided, That the business 
recipient does not retransmit the transmission outside of its 
premises or the immediately surrounding vicinity, and that the 
transmission does not exceed the second recording performance 
complement. Nothing in this clause shall limit the scope of the 
exemption. Nothing in this clause shall limit the scope of the 
exemption in Clause (ii).
    \40\ At the beginning of this proceeding, DMX and AEI each filed 
a separate direct cause in which each company proposed a flat rate 
of $25,000 for each year (prorated for the October-December 1998 
period) covered by these proceedings for use of the section 112 
license. Knittel W.D.T. 19; Troxel W.D.T. 15.
---------------------------------------------------------------------------

    RIAA disagreed with this approach, asking the panel to establish a 
technology-neutral rate to cover the making of all copies that a 
business establishment service may need to make under the license. It 
also proposed that the CARP rely on license agreements between the 
copyright owners and Business Establishment Services when fashioning 
the appropriate rate and not the 26 voluntary licenses considered when 
setting the webcasting rates.
    As an initial matter, the Panel had first to decide which copies 
and how many are covered by the ephemeral recording license. This is a 
necessary step in the process, because the statutory license allows a 
transmitting organization to make and retain no more than a single 
phonorecord of a sound recording, except as provided ``under the terms 
and conditions as negotiated or arbitrated under the statutory 
license.'' Section-by-section analysis of the H.R. 2281 as passed by 
the United States House of Representatives on August 4, 1998, Committee 
Print, Serial No. 6, 105th Cong., 2d Sess., p. 61.
    Thus, the Panel considered and ultimately rejected DMX/AEI's 
request for a rate that only covered certain types of ephemeral copies. 
It did so in large part because it determined that Congress had 
``intended to create blanket licenses which would afford each licensee 
all the rights necessary to operate such a service,'' and noted that in 
this case, that would include ``the right to make any and all ephemeral 
copies utilized in a broadcast background music service.'' Report at 
118. This interpretation of the law is consistent with the purpose of 
the section 112 license.
    In creating the ephemeral recording license, Congress sought to 
provide a

[[Page 45264]]

way for any licensee or business establishment service to clear all the 
reproduction rights involved in making digital transmissions of sound 
recordings under section 114. Congress ``intended [this provision] to 
facilitate efficient transmission technologies, such as the use of 
phonorecords encoded for optimal performance at different transmission 
rates or use of different software programs to receive the 
transmissions.'' H.R. Rep. No. 105-796, at 90 (1998). These copies are 
known as ``ephemeral recordings.'' ``The term ``ephemeral recording'' 
is a term of art referring to certain phonorecords made for the purpose 
of facilitating certain transmissions of sound recordings, the 
reproduction of which phonorecords is privileged by the provisions of 
section 112.'' Id. Because the purpose of the license is to facilitate 
a lawful transmission of a sound recording under a statutory license or 
exemption, it would appear that the license covers not only the first 
reproduction of the sound recording on a company's server, but also all 
intermediate copies needed to facilitate the digital transmission of 
the sound recording.
    The mere fact that the license covers different ephemeral 
recordings that may be catalogued in different ways does not mean that 
a separate rate must be set for each category. Had the record supported 
different rates for different categories of ephemeral recordings, or 
for different types of business establishment services, it is 
conceivable that the Panel might have chosen to differentiate among 
these categories or types of businesses by assigning different rates to 
each one.\41\ See also Order (dated July 16, 2001) (advising Panel that 
it could set different rates for different business models, provided 
that the record supported such a decision). Whether such an approach 
would have been arbitrary would depend upon the findings of the Panel 
in light of the record evidence and, more importantly, upon whether the 
proposed rates covered the making of all ephemeral copies needed to 
facilitate the digital transmission of a sound recording under the 
section 114 business to business exemption.
---------------------------------------------------------------------------

    \41\ As RIAA points out, insufficient evidence exited to support 
his approach and accommodate DMX/AEI's proposal. RIAA reply at 15, 
citing Panel report at 118-10/9.
---------------------------------------------------------------------------

    The section 112 license is without question for the benefit of all 
services operating under the business to business exemption and not 
just DMX/AEI. A rate tailored only to meet the specific needs of a 
single service would by its very nature be arbitrary if the rate failed 
to cover the entire scope of the license. The fact that DMX/AEI has 
chosen to license the copies in its database through a private 
agreement and use the statutory license to cover the remaining 
ephemeral copies would not relieve the Panel of its responsibility to 
set rates for all ephemeral copies which fall within the scope of the 
license, including those copies in a DMCA compliant database. Other 
business establishment services using a DMCA-compliant database exist 
and may choose to meet their copyright liability by operating under the 
statutory license. See RIAA reply at 18; Report at 116. It is without 
question that such a service may take advantage of the statutory 
license without participating in a CARP proceeding.
    Once these rates are set, a Service can either operate entirely 
under the statutory license or, alternatively, the Service may choose 
to make some ephemeral copies under the statutory license and others 
under a private agreement. These choices, however, have no bearing on 
the responsibility of the Panel to establish a rate, or a schedule of 
rates, that would allow a Service to utilize the license to the full 
extent of the law.
    In fashioning the rate, the Panel considered the arguments put 
forth by the parties and ultimately rejected DMX/AEI's basic premise 
that Congress had contemplated a de minimis rate to compensate for 
``leakage'' (use of ephemeral copies to make phonorecords for sale) 
and, its interpretation of what it characterized as the Copyright 
Office's view that such copies have no independent economic value. This 
decision was reached after examining the statute and its legislative 
history and finding nothing that directly supported the ``leakage'' 
theory.\42\ Moreover, the Panel had already determined that its 
responsibility was not to give effect to the Copyright Office's view on 
how the law should change. Instead, it determined that its duty was 
``to follow the current Congressional mandate set forth in section 
112(e)(4) and determine a separate rate for ephemeral copies' based 
upon the willing buyer/willing seller standard. Report at 98-99. Thus, 
the Panel rejected AEI/DMX's proposal to set a low rate based upon its 
finding that these entities have always paid substantial royalties to 
record companies in exchange for the use of its complete catalogue. 
Report at 119.
---------------------------------------------------------------------------

    \42\ RIAA supports the Panel's determinatin, nothing tha the 
legislative history makes clear that the purpsoe of the license is 
``to create fir and efficient licensing mechanisms.'' RIAA Reply at 
20, citing H.R. Conf. Rep. 105-796 at 79-80 (1998).
---------------------------------------------------------------------------

    In any case, the starting point for setting the rates for the 
ephemeral recording license as it applies to business establishment 
services is the statute. It provides that, as with the rates for the 
webcasting license, the rates should be those that ``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). 
Thus, the Panel turned to actual agreements that have been negotiated 
in the marketplace to discover how the market values these rights. As 
discussed previously, the use of rates negotiated in the marketplace is 
not arbitrary. It eliminates the need to try to value specific 
economic, competitive, and programming factors because the parties 
would have already accounted for these considerations during the 
negotiation process and their impact would be reflected in the 
negotiated rates.
    Both sides seem to agree with the Panel's approach. RIAA had no 
complaint with the Panel's use of voluntarily negotiated licenses in 
setting the ephemeral rates for business establishment services. 
Moreover, DMX/AEI's own counsel acknowledged that marketplace 
agreements were appropriate benchmarks for establishing the rates for 
the rate for the section 112 license and conceded that the agreements 
relied upon were worthy of consideration. Tr. 9577-78 (Sept. 12, 2001). 
Nevertheless, DMX/AEI did argue that the proposed rate constitutes an 
undue financial burden that thwarts Congress' intent to facilitate the 
adoption of new technologies. DMX/AEI Petition at 11.
    The question is which agreements should be considered when setting 
the rates for the ephemeral reproductions. Having found that the 
business establishment services offer a completely different type of 
service from webcasting, the Panel rejected DMX/AEI's invitation to use 
the ephemeral rates negotiated by the webcasters. Report at 121. 
Instead, the Panel opted to use the license agreements that had been 
negotiated between individual record companies and background music 
services \43\ as a benchmark for setting the relevant section 112 rates 
even though, in some instances, the license conveyed some

[[Page 45265]]

rights to the licensee beyond the reproduction and distribution of the 
sound recording. The Panel was not troubled by this observation, 
however, because it found that in all cases the right to copy and 
distribute the works was by far the most important right for which the 
licensee paid royalties. Moreover, it noted that the rates did not 
fluctuate through the year even when a service altered its method for 
delivering music. Thus, the Panel used the rates reflected in these 
licenses to establish a range of rates (10-15% of gross proceeds) for 
consideration. See Report at 117; see e.g., RIAA Reply to AEI/DMX at 2. 
From this data, it found that ``background music companies and record 
companies would agree to a royalty of at least 10% of gross proceeds,'' 
and set the rate accordingly. Report at 126.
---------------------------------------------------------------------------

    \43\ A background music service is a type of Business 
Establishment Service that complies and delivers music to business 
establishments who play the music for the enjoyment of their 
customers. Among the license agreements considered by the Panel were 
those negotiated between the major record labels and AEI, DMX, 
Muzak, Play Network, Inc., and Radio Programming and Management Inc. 
Report at 123-124.
---------------------------------------------------------------------------

    RIAA agrees with the Panel's approach, and that it was appropriate 
for the Panel not to consider contracts for ephemerals made in the 
course of webcasting because these businesses are not comparable with 
Business Establishment Services. They serve different customers and 
operate under different economic business models with different 
delivery methods. For example, Business Establishment Services make 
reproductions of sound recordings and deliver them via cable or 
satellite for use by the establishment for the enjoyment of their 
customers. These differences are further underscored by transactions in 
the marketplace. RIAA notes that within a single license with one 
business entity, it negotiated a separate rate for webcasting ephemeral 
copies and a separate rate for ephemeral copies used by the Business 
Establishment Service. RIAA reply at 24-25. The fact that RIAA 
negotiated separate rates for the making of ephemeral recordings for 
different services supports a finding that the businesses are not 
comparable. Therefore, it was not arbitrary for the Panel to decline to 
consider the ephemeral rates set forth in the licenses between the 
webcasters and the record companies when establishing a rate for 
Business Establishment Services.
    Moreover, an examination of the record evidence clearly shows that 
the 10% of revenues rate set by the Panel is not an arbitrary figure. 
RIAA Exhibits 9 DR, 10 DR, 11 DR, 12 DR, 13 DR, 14 DR, 26 DR, 27 DR, 28 
DR, 60-A DR, 66 DR-X, Knittel Rebuttal Ex. 22; Knittel W.D.T. 14-15. It 
represents the low end of the range of rates set forth in the 
agreements between the major record labels and Business Establishment 
Services. The fact that two agreements, negotiated during a period of 
uncertainty whether there was a legal obligation to pay anything for 
the satellite transmissions they covered, reflect a lower rate does not 
change the outcome. See Report at 124. As RIAA points out, the rate in 
one of these agreements was reset at a substantially higher rate once 
the initial contract with the lower rate expired. RIAA Reply to AEI/DMX 
at 25, fn 25. Nor is there any reason to reject the Panel's 
determination, as DMX/AEI contends, because the Panel failed to adjust 
for the promotional value to the record companies or bring these rates 
into line with those set for Subscription Services in the previous 
proceeding. As the Panel stated on several occasions, it is unnecessary 
to adjust a marketplace-negotiated rate for the promotional value that 
flows to the record companies because that benefit would already be 
reflected in the contract price, if it were important to the parties.
    Likewise, DMX/AEI's second premise for rejecting the Panel's 
determination must also be discarded. It argued that the Panel set an 
arbitrarily high rate for Business Establishment Services when compared 
to the rate set for Subscription Services in an earlier proceeding. 
DMX/AEI Petition at 19-20. As discussed in a previous section, see 
section IV.3, rates set for Subscription Services in a prior proceeding 
are just not comparable to rates under consideration in this 
proceeding. Marketplace rates for making reproductions of sound 
recordings for use by a Business Establishment Service have no 
established relationship to rates set under a totally different 
standard for the public performance of sound recordings by Subscription 
Services. There is no established nexus between the industries, the 
marketplaces in which they operate, or the rights for which the rates 
are set. To make any adjustments to the ephemeral rate based on the 
rate for the digital performance rate adopted for the Subscription 
Services in a previous proceeding would itself be patently arbitrary.
    b. Minimum fee. The statute also requires the Panel to set a 
minimum fee for use of the license. Using the same licenses, it 
determined that the minimum fee should be $500 a year based on its 
observation that most, although not all, willing buyers have not agreed 
to a fee approaching RIAA's proposed rate of $50,000 a year and that 
some agreements include no minimum fee at all. Because there is no 
discernable trend in the licenses, the Panel chose to adopt the same 
fee it proposed for the webcasting licenses because it is calculated to 
cover at least the administrative costs of the license.
    RIAA argues that a $500 minimum is too low and contradicts the 
record evidence, citing the existence of significantly higher rates in 
many of the industry agreements and the lack of any agreement with a 
minimum as low as $500. RIAA Petition at 46-47. RIAA further contends 
that the CARP by its own reasoning should set a significantly higher 
minimum fee where, as here, the ephemeral rate is based on a 
percentage-of-revenue model. Id. at 49. The Copyright Owners are 
concerned that a low minimum rate will increase ``the risk that a 
service, especially a new one, will make a large number of ephemeral 
copies and not generate revenues, effectively giving the service a 
blanket license for free.'' Id. Consequently, the Copyright Owners ask 
the Librarian to adopt their proposal and set the minimum fee for use 
of the ephemeral license at rate no lower than $50,000.
    DMX/AEI objects to RIAA's request for a higher minimum fee. It 
maintains that RIAA requested rate is inconsistent with record 
evidence, which establishes that either DMX/AEI currently pays 
[material redacted subject to a protective order] in its direct 
licensing agreements with the major labels for On-Premises services or 
that it is disproportionately high when compared with the minimum fees 
paid by other members of the background music service industry. DMX/AEI 
Reply at 7. Accordingly, AEI/DMX urges the Librarian not to entertain 
the RIAA's request.
    An examination of the relevant agreements reveals that almost all 
of these agreements have a substantial minimum fee for the making of 
ephemeral recordings and that all of those minimum fees are 
considerably greater than the $500 minimum proposed by the CARP. 
Consequently, the Panel's decision to adopt a $500 minimum fee when no 
contract considered by the Panel contained a minimum fee as low as $500 
is arbitrary. The minimum fees in the agreements before the CARP were 
by and large significantly higher than the $500 fee proposed by the 
CARP and should have served as the guiding principle in setting the 
minimum fee for the Business Establishment Services, especially in 
light of the Panel's earlier observation that a percentage of revenue 
fee requires the establishment of a substantial minimum fee to offset 
the risk that a start-up Service with little revenue could operate 
without paying adequate royalty fees for use of the license. Moreover, 
RIAA notes that each contract before the CARP was between a Business 
Establishment Service and a single record label. It then makes the 
argument that ``[i]f a business

[[Page 45266]]

establishment service is willing to pay a minimum fee [significantly 
higher than the minimum fee proposed by the Register] for access to 
just one label's sound recordings, the value of the blanket license to 
all copyrighted recordings must be higher.'' RIAA Petition at 46. Based 
on this evidence, the Panel should have set the minimum fee for the 
section 112 license as it applies to Business Service Establishments at 
a significantly higher level, and it was arbitrary not to have done so.
    The Register notes that minimum fees have been as low as $5,000 and 
as high as the $50,000 minimum proposed by RIAA. The purposes of the 
minimum fee, however, are to cover the costs of administration and 
insure an adequate return to the copyright owners based upon the value 
of the right with respect to the overall fee for use of the license. 
For these reasons, the Register proposes a minimum fee of $10,000 per 
Licensee. The fee is at the low end of the range of negotiated minimum 
fees and is in line with DMX/AEI's own valuation of the license at 
$10,000 per year. Admittedly this fee appears high when compared with 
the minimum fee for the eligible nonsubscription services, but it 
serves to balance the risk associated with setting a statutory fee 
based upon a percentage of revenues instead of a fee that would charge 
a specific fee for each reproduction.
17. Effective Period for Proposed Rates
    The rates and terms proposed by the parties were the same for each 
time period under consideration by the Panel. Consequently, the Panel 
proposed, and the parties agreed, that the same rates and terms would 
apply to both periods: (1) October 28, 1998 (the effective date of the 
DMCA) through December 31, 2000; and (2) January 1, 2001, through 
December 31, 2002. The Register finds that it was not arbitrary for the 
Panel to propose the same rates and terms for both periods under 
consideration.

B. Terms

    Sections 112(e)(4) and 114((f)(2)(B) require that the CARP propose 
and the Librarian adopt terms for administering payment for the two 
statutory licenses. The Panel stated that, as with rates, the standard 
for setting these terms is what the willing seller and the willing 
buyer would have negotiated in the marketplace. The Panel did not 
interpret the standard to include necessarily setting terms that 
``represent the optimum alternative from the standpoint of 
administrative convenience and workability.'' It reasoned that such 
considerations were ``not part of the governing standard for the Panel, 
nor [were they] a matter on which [the Panel] would have either record 
evidence or institutional expertise.'' Consequently, the Panel made no 
determination pertaining to administrative efficiency, choosing instead 
to defer to the expertise of the Librarian. Report at 129.
    For the most part, the terms proposed by the Panel are those to 
which all parties to the CARP proceeding have agreed in negotiations. 
For this reason, the Panel accepted all terms on which the parties 
agreed, finding that where there was agreement, the terms meet the 
statutory standard under which these terms must be set. Moreover, the 
Panel found that there was evidence in the record to support adoption 
of most of these terms.
    The Register is skeptical of the proposition that terms negotiated 
by parties in the context of a CARP proceeding are necessarily evidence 
of terms that a willing buyer and a willing seller would have 
negotiated in the marketplace. Especially when those terms relate to 
administration of the receipt and distribution of royalties by 
collectives that are artificial (but necessary) creations of the 
statutory license process, rather than entities likely to be created in 
an agreement between a copyright owner and a licensee, the fiction that 
those terms reflect the reality of the marketplace is difficult to 
accept.
    Not all of the terms recommended by the Panel are terms that the 
Register would have adopted if her task were to determine the most 
reasonable terms governing payment of royalties. However, in light of 
the standard of review, the Register recommends accepting the terms 
adopted by the Panel except in the relatively few instances where the 
Panel's decision was either arbitrary or not feasible. See Report at 
129 (``we must defer to the expertise of the Librarian the final 
evaluation of the administrative feasibility of terms which willing 
buyers and willing sellers would agree to in marketplace 
negotiations''). The discussion that follows addresses, first, the 
terms recommended by the Panel that one or more parties have asked the 
Librarian to reject. Following that discussion, the Register discusses 
those terms recommended by the Panel that, although they are acceptable 
to the parties, she proposes to modify or reject, because they are 
arbitrary or contrary to law.
1. Disputed Terms
    The parties were unable to reach a consensus with respect to two 
issues: (1) The incorporation of specific definitions for the terms, 
``Affiliated,'' ``AM/FM streaming,'' ``Broadcaster,'' and ``Non-
Public;'' and (2) the designation of an agent for unaffiliated 
copyright owners.
    a. Definitions. The Panel carefully considered the utility of 
incorporating the proposed terms for Affiliated,'' ``AM/FM streaming,'' 
``Broadcaster,'' and ``Non-Public.'' It decided to reject the 
webcasters'' request to adopt the disputed terms and definitions, 
noting that the terms were not applicable to the rate structure 
ultimately adopted by the Panel. The Parties have filed no objection on 
this point and the Register finds no reason to include a definition of 
these terms in the regulations.
    Notwithstanding the Panel's decision as to these terms, it did 
incorporate other terms that were necessary for the administration of 
the license. The proposed definitions for these additional terms are 
based upon submissions from the parties made at the Panel's request. 
See, Services' Submission of Definitions; Proposed Definitions of the 
Recording Industry Association of America, Inc. (Feb. 12, 2002). Again, 
no party has filed an objection to the Panel's decision to propose 
additional terms the purpose of which is make the regulatory framework 
clearer and more functional.
    b. Designated Agent for Unaffiliated Copyright Owners. Read 
literally, section 114 appears to require that Services pay the 
statutory royalties directly to each Copyright Owner. As a practical 
matter, it would be impractical for a Service to identify, locate and 
pay each individual Copyright Owner whose works it performed. As a 
result, in the administration of the predecessor statutory license for 
noninteractive subscription services, a Collective was appointed to 
receive and distribute all royalties. The RIAA has served as the 
Collective for the nonsubscription services.
    In this proceeding, the Parties proposed and the CARP agreed to a 
modification of the single-collective model. Licensees making 
transmissions of a public performance of a sound recording pursuant to 
the statutory license in section 114 and/or making ephemeral recordings 
of these works under the statutory license in section 112(e) would make 
all payments owed under these licenses to the designated ``Receiving 
Agent.'' \44\ The Receiving

[[Page 45267]]

Agent would then make further distribution of the royalty fees to the 
two Designated Agents \45\ who would then distribute the royalty fees 
among the Copyright Owners and Performers in accordance with the 
methodology set forth in the regulations.
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    \44\ A ``Receiving Agent'' is the agent designated by the 
Librarian of Congress through the rate setting process for the 
collection of the royalty fees from the Licensees operating under 
the sections 112 and 114 licenses.
    \45\ A ``Designated Agent'' is an agent designated by the 
Librarian of Congress through the same rate setting process who 
receives royalty fees paid for use of the statutory licenses from 
the Receiving Agent and makes further distributions of these fees to 
Copyright Owners and Performers.
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    The CARP accepted the proposal of the parties to designate a single 
Receiving Agent, SoundExchange, in order to maximize administrative 
efficiencies for the Copyright Owners and Performers, on the one hand, 
and Licensees, on the other. SoundExchange is a nonprofit organization 
formed by RIAA for the purpose of administering the sections 112 and 
114 statutory licenses. It has over 280 member companies, affiliated 
with more than 2,000 record labels accounting for over 90% of the sound 
recordings lawfully sold in the United States. W.D.T. at 4 (Rosen). 
SoundExchange is governed by a board comprised of representatives of 
Copyright Owners and Performers and, under a recent reorganization, the 
Copyright Owners and artists representatives will have equal control 
over the SoundExchange Board. AFM/AFTRA PFFCL ] 6.
    In addition to its role as a Receiving Agent, the CARP accepted the 
Parties' proposal that both SoundExchange and Royalty Logic, Inc. 
(``RLI'') serve as Designated Agents. RLI is a for profit subsidiary of 
Music Reports, Inc. and was created to offer a competitive alternative 
to SoundExchange. W.D.T. at 2 (Gertz). The purpose of having two 
designated agents is to provide Copyright Owners with the option of 
electing to receive their royalty distribution from either 
SoundExchange or RLI. The Receiving Agent will allocate royalties to 
the two Designated Agents based on the Copyright Owner's 
designation.\46\
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    \46\ The Register is skeptical of the benefit of this two-tier 
structure, which adds expense and administrative burdens to a 
process the purpose of which is to make prompt, efficient and fair 
payments of royalties to Copyright Owners and Performers with a 
minimum of expense. However, the Register cannot say that the 
Panel's decision, presumably based on the conclusion that 
competition among Designated Agents will result in better service to 
Copyright Owners and Performers, is arbitrary.
---------------------------------------------------------------------------

    However, the parties could not agree on which Designated Agent 
would distribute funds to Copyright Owners who failed to make an 
election. The Webcasters proposed that RLI be named the agent for 
unaffiliated Copyright Owners, but Copyright Owners and Performers 
asked the Panel to designate SoundExchange as the agent for those 
copyright owners.
    After carefully considering the role of the Designated Agent for 
unaffiliated copyright owners and the record evidence, the Panel made a 
determination to name SoundExchange as the Designated Agent for those 
copyright owners who fail to expressly designate either SoundExchange 
or RLI as their agent to receive and distribute royalties on their 
behalf. The primary reason for this designation was the preference 
expressed by the Copyright Owners and the Performers. The Panel 
reasoned that the Services had no real stake in deciding this issue 
because their responsibilities and direct interest end with the payment 
of the royalty fees to the Receiving Agent. Moreover, AFM and AFTRA, 
which represent artists who are among the beneficiaries of the license, 
expressed a strong preference for the designation of SoundExchange as 
the agent in these instances. The Copyright Owners made this choice 
based on the non-profit status of SoundExchange, its experience with 
royalty payments, and the fact that SoundExchange has agreed to a 
reorganization that gives artists substantial control over its 
operations. The Panel agreed with the reasons articulated by the 
Copyright Owners and Performers and found that the probable outcome of 
a marketplace negotiation would have been the selection of 
SoundExchange.
    Broadcasters contest the Panel's decision to designate 
SoundExchange as the agent for unaffiliated copyright owners. They 
assert that there is no record evidence to support the Panel's 
observation that this was the inevitable outcome of marketplace 
negotiations, in spite of the actual requests made by Copyright Owners 
who participated in this proceeding. Broadcasters Petition at 59-60.
    The Copyright Owners and Performers disagree, and assert that 
unlike the Licensees whose only concern is whom to pay and when, 
copyright owners and performers have a vital interest in how their 
royalty fees are collected and distributed and have expressed a strong 
preference for SoundExchange as the designated agent. See RIAA Reply at 
81; AFM/AFTRA Reply at 2. Certainly, Performers believe that 
SoundExchange will make fair and equitable distributions and not deduct 
additional costs beyond those necessary costs incurred to effectuate a 
distribution. AFM/AFTRA Reply at 2-3 (``SoundExchange is subject to the 
joint and equal control of copyright owner and performer 
representatives with an interest in maintaining an efficient operation 
that will distribute the maximum possible license fees, that 
SoundExchange is a nonprofit organization so that no copyright owner's 
or artist's royalty share will be diminished by anything other than 
necessary distribution costs, and that SoundExchange is experienced and 
has demonstrated its commitment to identifying, finding and paying 
performers during its distribution of Section 114 and 112 subscription 
service statutory license fees.''); see also RIAA Reply at 83.
    The CARP's decision to designate SoundExchange as the agent for 
unaffiliated copyright owners is fully supported by the record evidence 
and, consequently, it is not arbitrary. First, the fact that Copyright 
Owners and Performers commend SoundExchange to the Panel is direct 
evidence of their preference for a non-profit organization that has 
already invested heavily in a system designed to locate and pay 
Copyright owners and Performers. It would be arbitrary to ignore their 
wishes where, in fact, the alternative agent represents primarily 
broadcasters, television stations, and other Licensees--not Licensors. 
See AFM/AFTRA PFFCL concerning terms ] 13. Second, SoundExchange is a 
non-profit collective that will deduct only necessary distribution 
costs. On the other hand, RLI, the entity competing for the agency 
designation, is a for-profit organization whose acknowledged goal is to 
make a profit. In fact, RLI has suggested that it needs the designation 
from the CARP in order to generate enough revenues to make it 
worthwhile to take on the role of an agent for purposes of making 
distributions of statutory license royalty fees. See Services Proposed 
Findings (12/18/01) at ] 16. In addition, RLI has been unable to say 
just how much it expects to deduct as reasonable costs, making it 
impossible to ascertain whether designation of RLI would be in the best 
interest of the unaffiliated copyright owners. Third, Performers and 
Copyright Owners have a direct governance role in the operation of 
SoundExchange, thereby insuring their interests are not neglected or 
overshadowed by the interests of the agent. AFM/AFTRA Reply at 4; AFM/
AFTRA PFFCL concerning terms ] 6. Performers have expressed strong 
concerns about the designation of an agent who has no mechanism or 
apparent interest in providing the Copyright Owners and Performers with

[[Page 45268]]

a means to voice their concerns. See AFM/AFTRA PFFCL concerning terms ] 
9 (noting that designation of RLI as the agent for unaffiliated 
copyright owners would have the undesirable effect of forcing these 
non-members ``into an agency relationship with an entity that not only 
is not governed by Copyright Owners and Performers, but also is not 
even required to obtain their guidance and input regarding policies, 
procedures or distribution methodologies.'' ).
    For all the foregoing reasons, the Register concludes that the CARP 
was not arbitrary in designating SoundExchange as the agent for 
unaffiliated copyright owners. Of the four factors considered by the 
Panel, each weighs in favor of SoundExchange. Of course, any Copyright 
Owner or Performer can affirmatively choose RLI to act on its behalf as 
a Designated Agent.
    c. Gross proceeds. As discussed earlier, the Panel proposed the 
adoption of a rate for Business Establishment Services making ephemeral 
recordings under section 112 at 10% of gross proceeds. The Panel 
recognized the necessity of also formulating a definition of ``gross 
proceeds'' in order to make the rate workable. To meet this need, it 
opted to incorporate, with minor modifications to accommodate the 
section 112 license, the definition used in many of the background 
music agreements even though the definition is less than clear on its 
face as to what constitutes gross proceeds. The lack of specificity, 
however, did not trouble the Panel because it expected the parties to 
adopt the understandings within the industry developed during the 
normal course of dealings.
    RIAA does not share the Panel's view. It objects to the proposed 
definition of ``gross proceeds,'' arguing that the provision fails 
utterly to define the term in any meaningful way. It also contends that 
it is arbitrary to rely on industry practices to flesh out the 
industry's understanding of the term when no record evidence exists 
about these practices. To remedy this situation, RIAA proposes that the 
Librarian adopt the definition of ``gross proceeds'' for a Business 
Establishment Service that is set forth in the agreement between 
SoundExchange and MusicMusicMusic (``MMM''). RIAA Exhibit No. 60A. RIAA 
asserts that this is the only record evidence on this point. RIAA 
petition at 52-54.
    DMX/AEI rejects RIAA's suggestion that the Librarian adopt a 
definition from an agreement with MMM, ``an unsophisticated licensee, 
who by its own admission is unlikely to pay any significant royalties 
pursuant to the agreement.'' DMX/AEI Reply at 3. RIAA's proposed 
definition of ``gross proceeds'' would include fees generated by 
equipment rental, maintenance services, advertising of all kinds, and 
revenues payable to a licensee from any source in connection with the 
licensee's background music service. Id. at 5. DMX/AEI argues that such 
a definition is utterly contrary to the normal practice of using 
proceeds derived solely from the delivery of copyrighted sound 
recordings to business establishments.
    As a general principle, terms pertaining to a statutory license 
must be defined with specificity. At first blush, the proposed 
definition of ``gross proceeds'' does not appear to meet this standard, 
merely reciting that a Business Establishment Service must pay a sum 
equal to ten percent of the licensee's gross proceeds derived from use 
of the musical programs that are attributable to copyrighted 
recordings. However, record evidence suggests the definition may be as 
simple as the CARP's characterization of the term. Barry Knittel,\47\ 
in discussing the promotional funds established for the benefit of the 
record companies from gross proceeds, stated that the money placed into 
these accounts comes from the company's gross revenues, and that these 
revenues are generated from all the billings for music. Tr. 8384 
(Knittel). This statement suggests that the determination of what 
constitutes ``gross revenues'' is not a mystery and that it is merely 
the amount the Business Establishment Services receive from their 
customers for use of the music. This approach, however, does not 
necessarily appear to capture in-kind payments of goods, free 
advertising or other similar payments for use of the license. See RIAA 
Petition at 54.
---------------------------------------------------------------------------

    \47\ Barry Knittel, formerly President of AEI Music Markets--
Worldwide is now DMX/AEI's Senior Vice President of Business Affairs 
Worldwide.
---------------------------------------------------------------------------

    Consequently, the Register proposes to expand on the CARP's 
approach and adopt a definition of ``gross proceeds'' which clarifies 
that ``gross proceeds'' shall include all fees and payments from any 
source, including those made in kind, derived from the use of 
copyrighted sound recordings to facilitate the transmission of the 
sound recording pursuant to the section 112 license. See RIAA Exhibit 
No. 60A DR. (Second Webcasting Performance and Webcasting and Business 
Establishment Ephemeral Recording License Agreement). The Register 
finds it necessary to expand upon the proposed definition to avoid any 
confusion on this point and not as a means to capture additional 
revenue streams not contemplated by the Panel or by the parties to such 
agreements. Because the record fails to enumerate the types of revenue 
that may be received in kind, the Register finds it unwise to include 
even an illustrative list when there is little evidence of what 
specific types of revenues should be considered in the calculation of 
``gross proceeds.'' Thus, the definition of ``gross proceeds'' shall be 
as follows:

    ``Gross proceeds'' shall mean all fees and payments, including 
those made in kind, received from any source before, during or after 
the License term which are derived from the use of copyrighted sound 
recordings pursuant to 17 U.S.C. 112(e) for the sole purpose of 
facilitating a transmission to the public a performance of a sound 
recording under the limitation on the exclusive rights specified in 
section 114(d)(1)(c)(iv).

2. Terms Not Disputed by the Parties
    a. Limitation of Liability. One of the terms proposed by the 
Parties and adopted by the CARP was that ``A Designated Agent shall 
have no liability for payments made in accordance with this subsection 
with respect to disputes between or among recipients.'' The Parties 
explained that the purpose of this provision was to ``mak[e] clear that 
so long as a Designated Agent complies with the requirements adopted by 
the Copyright Office for distributing royalties, then a beneficiary of 
statutory royalties cannot sue such Designated Agent for payments made 
in accordance with Copyright Office regulations. Any dispute among 
recipients should be resolved among themselves.''
    The Register understands the desire of SoundExchange and RLI to 
insulate themselves from liability in cases where Copyright Owners or 
Performers dispute the Designated Agent's allocation of royalties. The 
Copyright Office's experience with distribution proceedings for the 
statutory licenses for which royalties are initially paid to the 
Copyright Office provides ample evidence that individual copyright 
owners and performers often believe they are being paid less than their 
fair share of statutory license royalties, and it is natural for a 
Designated Agent to wish to avoid having to defend against such claims.
    Moreover, as has become apparent in the course of the pending 
rulemaking proceeding relating to notice and recordkeeping for the use 
of sound recordings under the statutory licenses, the information that 
Licensees will be providing to the Designated Agents about which (and 
how many) sound recordings they have performed will be far from 
perfect, and the Designated Agents necessarily will have to make

[[Page 45269]]

difficult judgments in determining how to allocate royalties. If the 
Designated Agents had comprehensive information identifying each and 
every performance transmitted by a Licensee, and each and every 
Copyright Owner and Performer for each performance, in theory they 
could pay each Copyright Owner and Performer his or her precise share 
of royalties. In the real world--or at least for the remainder of the 
period for which this proceeding is setting rates and terms--some 
Copyright Owners and Performers inevitably will receive less than their 
precise share of the royalty pool, and others will receive more than 
their precise share. The Designated Agents should not be held to an 
impossibly high standard of care.
    Unfortunately, neither the CARP nor the Librarian have the power to 
excuse a Designated Agent (or, for that matter, anyone else) from 
liability for a breach of a legal obligation. If a Designated Agent has 
in fact wrongfully withheld or underpaid royalties to a Copyright Owner 
or Performer, the law may provide a remedy to the Copyright Owner or 
Performer.
    Although the Librarian cannot excuse the Designated Agents from 
potential liability, he can adopt terms that provide a mechanism that 
will make claims by disgruntled Copyright Owners or Performers less 
likely, or at least less viable. The Register therefore recommends that 
in place of the ultra vires provision excusing the Designated Agents 
from any liability, the Librarian provide that the Designated Agents 
must submit to the Copyright Office a detailed description of their 
methodology for distributing royalty payments to nonmembers. This 
information will be made available to the public, and any Copyright 
Owner or Performer who believes the methodology is unfair will have an 
opportunity to raise an objection with the Designated Agent prior to 
the distribution, thereby giving the Designated Agent the opportunity 
to address the problem before the Copyright Owner or Performer has 
suffered any alleged harm. This provision is modeled on a provision 
proposed by the parties to the previous CARP proceeding to establish 
rates and terms for noninteractive subscription services under section 
114. See proposed 37 CFR 260.3(e), in Notice of Proposed Rulemaking, 
Determination of Reasonable Rates and Terms for the Public Performance 
of Sound Recordings, 66 FR 38226, 38228 (July 23, 2001).\48\
---------------------------------------------------------------------------

    \48\ A similar provision is recommended with respect to the 
methodology for allocating royalties among Designated Agents.
---------------------------------------------------------------------------

    The Register also proposes that the Librarian adopt a term that 
provides a Designated Agent with an optional mechanism pursuant to 
which the Designated Agent may request that the Register provide a 
written opinion stating whether the Agent's methodology for 
distributing royalty payments to nonmembers meets the requirements of 
the terms for distribution set forth in the implementing regulations. 
Although such an opinion by the Register would not be binding on a 
court evaluating a claim against a Designated Agent, it can be assumed 
that a court would find the opinion of the Register persuasive.
    The Register anticipates that under this scheme, a Designated Agent 
that acts conscientiously and in good faith in the distribution of 
royalties will not be found liable to a Copyright Owner or Performer 
who is dissatisfied with his or her share of the distribution.
    b. Deductions from Royalties for Designated Agent's Costs. The 
parties had proposed, and the CARP agreed, that Designated Agents be 
permitted to deduct from the royalties paid to Copyright Owners and 
Performers ``reasonable costs incurred in the licensing, collection and 
distribution of the royalties paid by Licensees * * * and a reasonable 
charge for administration.'' The Register recommends that the provision 
permitting deductions for costs incurred in licensing be removed from 
this provision. See Sec. 261.4(i). Although a Designated Agent may 
happen to engage in licensing activities, licensing per se is not among 
the responsibilities of a Designated Agent under the terms of the 
statutory license. The purpose of the Designated Agent is to receive 
and distribute the statutory royalty fees. There is no justification 
for permitting a Designated Agent to deduct costs incurred in licensing 
activity from the statutory royalties, and the CARP's acquiescence in 
this term was therefore arbitrary.
    There was also a suggestion in testimony presented to the CARP that 
it would be proper for a Designated Agent to deduct from statutory 
royalties its costs incurred as a participant in a CARP proceeding. Tr. 
11891-11893 (Williams). Nothing in Sec. 261.4(i), including the 
references to ``reasonable costs incurred in the collection and 
distribution of the royalties paid by Licensees,'' can properly be 
construed as permitting a Designated Agent to deduct from the royalty 
pool any costs of participating in a CARP proceeding. Such activity is 
beyond the scope of collection and distribution of royalties. Of 
course, Copyright Owners and Performers may enter into agreements with 
a Designated Agent permitting such deductions, but a Designated Agent 
may not make such deductions from royalties due to unaffiliated 
Copyright Owners and Performers or those who have simply designated a 
Designated Agent without specifically agreeing to permit such 
deductions.\49\
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    \49\ The Register is also troubled by the parties permitting a 
Designated Agent to deduct ``a reasonable charge for 
administration'' which is included ``to permit a for-profit 
Designated Agent to make a reasonable profit on royalty collection 
and distribution on top of the direct expenses that may be incurred 
in licensing, collection and distribution.'' Appendix B, p. B-13. 
But in light of the parties' acceptance and the CARP's adoption of a 
procedure permitting multiple Designated Agents, including a for-
profit Designated Agent, the Register reluctantly cannot conclude 
that the provision is arbitrary.
---------------------------------------------------------------------------

    c. Ephemeral Recording. The Register recommends that a definition 
of ``Ephemeral Recording'' be added to the definitions. This definition 
incorporates by reference the requirements set forth in section 112(e).
    In a related provision, the Register has harmonized the language of 
Secs. 261.3(b) and (c) and makes clear that beneficiaries of the 
statutory license for ephemeral recordings may make any number of 
ephemeral recordings so long as they are made for the sole purpose of 
facilitating the statutory licensees permitted transmissions of 
performances of sound recordings. The regulatory text proposed by the 
parties and accepted by the Panel provided that for Business 
Establishment Services, the section 112 royalty shall be paid ``[f]or 
the making of unlimited numbers of ephemeral recordings in the 
operation of broadcast services pursuant to the Business Establishment 
exemption contained in 17 U.S.C. 114(d)(1)(C)(iv),'' (emphasis added), 
but that for webcasters, the section 112 royalty shall be paid ``[f]or 
the making of all ephemeral recordings required to facilitate their 
internet transmissions.''
    A literal reading of section 112(e) might lead to the conclusion 
that the ephemeral recording statutory license permits only the making 
of a single ephemeral recording, but the statute qualifies that 
provision by stating ``(unless the terms and conditions of the 
statutory license allow for more),'' and the legislative history makes 
clear that the terms established by the Librarian in this proceeding 
may include terms permitting the making of additional

[[Page 45270]]

ephemeral recordings. H.R.Rep. 105-796, at 89. Therefore, it is 
appropriate that the terms make clear that statutory licensees may make 
more than one ephemeral recording to accomplish the purposes of the 
statutory license.
    The reference to ``all'' ephemeral recordings ``required'' to 
facilitate webcasters'' transmissions, and the reference to 
``unlimited'' recordings for Business Establishment Services'' 
``operation'', are arguably inconsistent with each other and somewhat 
ambiguous. To clarify that the scope of the section 112 statutory 
license is similar for both types of service, and to more accurately 
reflect the appropriate scope of that license, the Register recommends 
that the regulatory language provide, in the case of webcasters, 
``[f]or the making of any number of ephemeral recordings to facilitate 
the Internet transmission of a sound recording,'' and in the case of 
Business Establishment Services, ``[f]or the making of any number of 
ephemeral recordings in the operation of a service pursuant to the 
Business Establishment exemption.'' (Emphasis added).
    d. Definition of ``Listener''. The definitions of ``Aggregate 
Tuning Hours'' and ``Performance'' both include references to a 
``listener'' or to ``listeners.'' It is not clear from the text of 
these definitions whether each person who is hearing a performance is a 
``listener'' even if all the persons hearing the performance are 
listening to the same machine or device (e.g., two or more persons 
listening to a performance rendered on a single computer). Clearly the 
intent is that all persons listening to a performance on a single 
machine or device constitute, collectively, a single ``listener,'' 
because ``listener'' is used here to assist in defining what 
constitutes a single performance. Indeed, it would be difficult to 
implement an interpretation that counted all individuals in such 
circumstances as separate ``listeners.'' Accordingly, the Register 
recommends including a definition that provides that if more than one 
person are listening to a transmission made to a single machine or 
device, those persons collectively constitute a single listener.
    e. Timing of Payment by Receiving Agent to Designated Agent. The 
terms proposed by the Parties and accepted by the CARP included a 
provision requiring that the Receiving Agent pay a Designated Agent its 
share of any royalty payments received from a Licensee within 20 days 
after the day on which the Licensee's payment is due. While the 
Register recognizes that such a provision would, in principle, be 
unobjectionable, she concludes that under current conditions it is 
administratively unfeasible.
    As the parties recognized in their commentary on this provision, 
``The parties do not know either the payment methodology that will be 
used to calculate royalties or the types of information that will be 
reported by Licensees. Such determinations cannot be made before the 
conclusion of this proceeding and the Notice and Recordkeeping 
Proceeding.'' Appendix B, p. B-10. However, they assumed that the 
Receiving Agent and the Designated Agent could agree on a ``reasonable 
allocation method'' even in the absence of any firm data.
    The Register is skeptical. It is apparent at this point in the 
rulemaking on notice and recordkeeping that obtaining accurate reports 
of Licensees' use of sound recordings will be difficult, particularly 
during the first few months. Moreover, the initial reports of use will 
require reporting on less than a monthly basis, making it impossible in 
many instances for the Receiving Agent to make any determination 
whatsoever as to a Designated Agent's allocated share during at least 
the first month or two in which royalties are paid. Reports on past use 
of sound recordings (i.e., from October 28, 1998, to the present) will 
present an even more formidable challenge. It is difficult to imagine 
that 20 days after the Receiving Agent has received the first royalty 
payments from Licensees, the Receiving Agent and the Designated Agent 
will have any reliable information from which they can ascertain how 
the proceeds should be allocated. The Register therefore recommends 
that the proposed requirement that payment be made within 20 days of 
the day on which the Licensee's payment is due be replaced by a 
requirement that the payment be made ``as expeditiously as is 
reasonably possible,'' a more flexible term that recognizes the 
difficulty in establishing a specific deadline. The Register cautions 
that during the first few months of operation of the system of 
reporting and or royalty payment, ``expeditious'' payment under the 
circumstances may be a matter of many weeks, if not months.
    It can reasonably be expected that for future periods governed by 
future CARPs or negotiated agreements, more stringent requirements of 
prompt payment will be appropriate. But it must be recognized that in 
this initial, transitional period, delays will be inevitable.
    f. Allocation of Royalties among Designated Agents and Among 
Copyright Owners and Performers. The terms proposed by the Parties and 
accepted by the Panel provide that the Receiving Agent allocate royalty 
payments to Designated Agents ``on a reasonable basis to be agreed 
among the Receiving Agent and the Designated Agents,'' and that the 
Designated Agents distribute royalty payments ``on a reasonable basis 
that values all performances by a Licensee equally.'' The Panel 
accepted these terms, but observed that a ``determination of how 
royalty payments should be apportioned between the Designated Agents 
cannot be made until the parties know the rate structure adopted by the 
CARP (in the first instance) and the Librarian of Congress (on review) 
and the outcome of the Notice and Recordkeeping Proceeding.'' Appendix 
B, at p. B-10. Similarly, the Panel remarked that ``The terms do not 
specifically provide how a Designated Agent should allocate royalties 
among parties entitled to receive such royalties because such 
allocation will depend upon the rate structure adopted by the CARP (in 
the first instance) and by the Librarian of Congress (on review) and 
may be affected by the types of reporting requirements that are adopted 
by the Copyright Office in the Notice and Record-keeping Proceeding for 
eligible nonsubscription transmissions and business establishment 
services.'' Id., p. B-12.
    The Register recommends that the provisions for allocation of 
royalty payments among Designated Agents and for allocation of 
royalties among parties entitled to receive such royalties be 
clarified, making explicit the relationship between the notice and 
recordkeeping regulations and the allocation of royalties. Each of 
these provisions should provide that the method of allocation shall be 
based upon the information provided by the Licensee pursuant to the 
regulations governing records of use of performances.
    The Register has some trepidation about the provision in 
Sec. 261.4(a), proposed by the Parties and recommended by the CARP, 
that provides that apportionment among Designated Agents ``shall be 
made on a reasonable basis that uses a methodology that values all 
performances equally and is agreed upon among the Receiving Agent and 
the Designated Agents.'' (Emphasis added). The regulation does not 
provide what happens in the event that the Receiving Agent and the 
Designated Agents cannot agree on an allocation methodology. One could 
recommend a provision that gives the ultimate decisionmaking power to 
one of the parties or to a third party, but instead,

[[Page 45271]]

the Register proposes the addition of Sec. 261.4(l), which would simply 
provide that in the event of a stalemate, ``either the Receiving Agent 
or a Designated Agent may seek the assistance of the Copyright Office 
in resolving the dispute.''
    g. Choice of Designated Agent by Performers. A literal reading of 
the terms recommended by the Panel would permit a Copyright Owner to 
select the Designated Agent of its choice, but would require a 
Performer to accept the Designated Agent selected by the Copyright 
Owner; and the Panel's report appears to agree with this 
interpretation. Report at 132. However, the Report does not articulate 
any reason for the decision to deprive Performers of the same right to 
choose that is given to Copyright Owners, and the commentary in 
Appendix B is silent as well.
    As the Panel acknowledged, ``Copyright owners and performers, on 
the other hand, have a direct and vital interest in who distributes 
royalties to them and how that entity operates'' Report at 132 
(emphasis added). The Register agrees. It was arbitrary to permit 
Copyright Owners to make an election that Performers are not permitted 
to make. The Register can conceive of no reason why Performers should 
not be given the same choice. Accordingly, the Register recommends that 
Sec. 261.4 be amended to provide that a Copyright Owner or a Performer 
may make such an election. See Sec. 261.4(c) of the recommended 
regulatory text.
    The Register has also inserted a housekeeping amendment to provide 
that for administrative convenience, a Copyright Owner's or Performer's 
designation of a Designated Agent shall not be effective until 30 days 
have passed.
    h. Performers' Right to Audit. The terms proposed by the Parties 
and accepted by the CARP provided that a Copyright Owner may conduct an 
audit of a Designated Agent. These provisions also include safeguards 
to ensure that a Designated Agent is not subjected to more than one 
audit in a calendar year.
    However, the terms do not provide that Performers have a similar 
right to conduct an audit of a Designated Agent, despite the fact that 
Performers, like Copyright Owners, depend upon the Designated Agent to 
make fair and timely royalty payments. The Parties' commentary in 
Appendix B states that audit rights are limited to Copyright Owners 
``rather than the entire universe of Copyright Owners and Performers, 
which could number in the tens of thousands.'' Appendix B at p. B-24. 
The commentary suggests that it would be impracticable for a Designated 
Agent to be subject to audit from individual Performers. Apart from 
reproducing the Parties' commentary, the Panel offered no observations 
on this point.
    The Register fails to understand how it would be ``impracticable'' 
to permit Performers, who depend on a Designated Agent for their 
royalty payments, to initiate an audit of the Designated Agent when the 
Copyright Owners may do so. The Designated Agent is given sufficient 
protection by virtue of the provision that it can be subject to only a 
single audit in a calendar year, by the provision that the party 
requesting the audit must bear the presumably considerable costs of the 
audit, and by the provision that any audit ``shall be binding on all 
Copyright Owners and Performers.'' \50\ The Register, therefore, 
recommends that the audit provisions be amended to permit not only 
Copyright Owners, but also Performers, to initiate an audit.
---------------------------------------------------------------------------

    \50\ It is noteworthy that although the Parties were unwilling 
to give Performers a right to initiate an audit, they did not 
hesitate to provide that Performers will be bound by an audit 
initiated by a Copyright Owner.
---------------------------------------------------------------------------

    i. Effective date. Section 114(f)(4)(C) states that payments in 
arrears for the performance of sound recordings prior to the setting of 
a royalty rate are due on a date certain in the month following the 
month in which the rate is set. The effective date of the rates, 
however, is not necessarily the date of publication in the Federal 
Register. The Librarian has often set the effective date of a rate 
several months after the initial announcement of the decision. See 
Determination of Reasonable Rates and Terms for Subscription Services, 
63 FR 25394 (May 8, 1998) (setting the effective date for the rate for 
subscription services three weeks after the date of publication of the 
final order in the Federal Register); Rate Adjustment for the Satellite 
Carrier Compulsory License, 62 FR 55742 (October 28, 1997) (announcing 
an effective date of January 1, 1998, set to coincide with the next 
filing period of the statements of account).
    Section 802(g) provides that the effective date of the new rates is 
``as set forth in the decision.'' 17 U.S.C. 802(g). The Register has 
interpreted the term ``decision'' to mean the decision of the 
Librarian, since section 802(g) only refers to the decision of the 
Librarian. Thus, this provision has been interpreted as providing the 
Librarian with discretion in setting the effective date. Moreover, the 
courts have held that an agency normally retains considerable 
discretion to choose an effective date, where, as here, the statute 
authorizing agency action fails to specify a timetable for 
effectiveness of decisions. RIAA v. CRT, 662 F.2d. 1, 14 (D.C. Cir. 
1981).
    In setting an effective date, the Register has considered the 
impact of the rate on the Licensees and the administrative burden on 
the Office in promulgating regulations to insure effective 
administration of the license. Clearly, there will be a burden on many 
Licensees who, by law, are required to make full payment of all 
royalties owed for transmissions made since the effective date of the 
DMCA, October 28, 1998, on or before the 20th day of the month next 
succeeding the month in which the royalty rate is set. Moreover, the 
Copyright Office is in the midst of promulgating rules governing 
records of use that will be used to make distribution of royalty fees 
in accordance with the terms of payment.
    Consequently, the Register proposes an effective date of September 
1, 2002, which will require the Licensees to make full payment of the 
arrears on October 20, 2002. Payment for the month of September shall 
be due on or before November 14, 2002, the forty-fifth (45th) day after 
the end of the month on which the rate becomes effective, in accordance 
with the term proposed by the parties and adopted by the CARP. 
Similarly, all subsequent payments shall be due on the 45th after the 
end of each month for which royalties are owed. This payment schedule 
provides the Licensees with additional time to make the initial payment 
and any necessary adjustments in their business operations to meet 
their copyright obligation.

V. Conclusion

    Having fully analyzed the record in this proceeding, the 
submissions of the parties, the Register of Copyrights recommends that 
the Librarian adopt the statutory rates for the transmission of a sound 
recording pursuant to section 114, and the making of ephemeral 
phonorecords pursuant to section 112(e), as set forth below:

[[Page 45272]]



   Summary of Royalty Rates for Section 114(f)(2) and 112(e) Statutory
                                Licenses
------------------------------------------------------------------------
                                    Performance fee   Ephemeral  license
 Type of DMCA--Complaint service   (per performance)         fees
------------------------------------------------------------------------
1. Webcaster and Commercial
 Broadcaster:
    All Internet transmissions,   0.07[cent]........  8.8% of
     including simultaneous                            Performance Fees
     internet retransmissions of                       Due.
     over-the-air AM or FM radio
     broadcasts.
2. Non-CPB, Non-Commercial
 Broadcaster:
    (a) Simultaneous internet     0.02[cent]........  8.8% of
     retransmissions of over-the-                      Performance Fees
     air AM or FM radio                                Due.
     broadcasts.
    (b) Other internet            0.02[cent]........  8.8% of
     transmissions, including up                       Performance Fees
     to two side channels of                           Due.
     programming consistent with
     the public broadcasting
     mission of the station.
    (c) Transmissions on any      0.07[cent]........  8.8% of
     other side channels.                              Performance Fees
                                                       Due.
3. Business Establishment
 Service:
    For digital broadcast         Statutorily Exempt  10% of Gross
     transmissions of sound                            Proceeds.
     recordings pursuant to 17
     U.S.C. 114(d)(1)(C)(iv).
4. Minimum Fee:
    (a) Webcasters, commercial        $500 per year for each licensee.
     broadcasters, and non-CPB,
     noncommercial broadcasters.
    (b) Business Establishment                        $10,000
     Services.
------------------------------------------------------------------------

    In addition, the Register recommends that the Librarian adopt the 
terms of payment proposed by the CARP, as modified in the 
recommendation, and set September 1, 2002, as the effective date for 
the statutory rates and the terms of payment.

VI. The Order of the Librarian of Congress

    Having duly considered the recommendation of the Register of 
Copyrights regarding the Report of the Copyright Arbitration Royalty 
Panel in the matter to set rates and terms for Licensees making certain 
digital performances of sound recordings under section 114(d)(2) and 
those making ephemeral recordings under section 112(e), the Librarian 
of Congress fully endorses and adopts her recommendation to accept the 
Panel's decision in part and reject it in part. For the reasons stated 
in the Register's recommendation, the Librarian is exercising his 
authority under 17 U.S.C. 802(f) and is issuing this order, and 
amending the rules of the Library and the Copyright Office, announcing 
the new royalty rates and terms of payment for the sections 112 and 114 
statutory licenses.

List of Subjects in 37 CFR Part 261

    Copyright, Digital audio transmissions, Performance right, 
Recordings.

Final Regulation

    In consideration of the foregoing, part 261 of 37 CFR is added to 
read to as follows:

PART 261--RATES AND TERMS FOR ELIGIBLE NONSUBSCRIPTION 
TRANSMISSIONS AND THE MAKING OF EPHEMERAL REPRODUCTIONS

Sec.
261.1   General.
261.2   Definitions.
261.3   Royalty fees for public performance of sound recordings and 
for ephemeral recordings.
261.4   Terms for making payment of royalty fees and statements of 
account.
261.5   Confidential information.
261.6   Verification of statements of account.
261.7   Verification of royalty payments.
261.8   Unclaimed funds.

    Authority: 17 U.S.C. 112(e), 114, 801(b)(1).


Sec. 261.1  General.

    (a) This part 261 establishes rates and terms of royalty payments 
for the public performance of sound recordings in certain digital 
transmissions by certain Licensees in accordance with the provisions of 
17 U.S.C. 114, and the making of ephemeral recordings by certain 
Licensees in accordance with the provisions of 17 U.S.C. 112(e).
    (b) Licensees relying upon the statutory license set forth in 17 
U.S.C. 114 shall comply with the requirements of that section and the 
rates and terms of this part.
    (c) Licensees relying upon the statutory license set forth in 17 
U.S.C. 112 shall comply with the requirements of that section and the 
rates and terms of this part.
    (d) Notwithstanding the schedule of rates and terms established in 
this part, the rates and terms of any license agreements entered into 
by Copyright Owners and services within the scope of 17 U.S.C. 112 and 
114 concerning eligible nonsubscription transmissions shall apply in 
lieu of the rates and terms of this part.


Sec. 261.2  Definitions.

    For purposes of this part, the following definitions shall apply:
    Aggregate Tuning Hours mean the total hours of programming that the 
Licensee has transmitted over the Internet during the relevant period 
to all end users within the United States from all channels and 
stations that provide audio programming consisting, in whole or in 
part, of eligible nonsubscription transmissions. By way of example, if 
a service transmitted one hour of programming to 10 simultaneous 
listeners, the service's Aggregate Tuning Hours would equal 10. 
Likewise, if one listener listened to a service for 10 hours, the 
service's Aggregate Tuning Hours would equal 10.
    Business Establishment Service is a Licensee that is entitled to 
transmit to the public a performance of a sound recording under the 
limitation on exclusive rights specified by 17 U.S.C. 114(d)(1)(C)(iv) 
and that obtains a compulsory license under 17 U.S.C. 112(e) to make 
ephemeral recordings for the sole purpose of facilitating those exempt 
transmissions.
    Commercial Broadcaster is a Licensee that owns and operates a 
terrestrial AM or FM radio station that is licensed by the Federal 
Communications Commission to make over-the-air broadcasts, other than a 
CPB-Affiliated or Non-CPB-Affiliated, Non-Commercial Broadcaster.
    Copyright Owner is a sound recording copyright owner who is 
entitled to receive royalty payments made under this part pursuant to 
the statutory licenses under 17 U.S.C. 112(e) or 114.
    Designated Agent is the agent designated by the Librarian of 
Congress for the receipt of royalty payments made pursuant to this part 
from the Receiving

[[Page 45273]]

Agent. The Designated Agent shall make further distribution of those 
royalty payments to Copyright Owners and Performers that have been 
identified in Sec. 261.4(c).
    Ephemeral Recording is a phonorecord created solely for the purpose 
of facilitating a transmission of a public performance of a sound 
recording under the limitations on exclusive rights specified by 17 
U.S.C. 114(d)(1)(C)(iv) or under a statutory license in accordance with 
17 U.S.C. 114(f), and subject to the limitations specified in 17 U.S.C. 
112(e).
    Gross proceeds mean all fees and payments, as used in 
Sec. 261.3(d), including those made in kind, received from any source 
before, during or after the License term which are derived from the use 
of copyrighted sound recordings pursuant to 17 U.S.C. 112(e) for the 
sole purpose of facilitating a transmission to the public of a 
performance of a sound recording under the limitation on the exclusive 
rights specified in section 114(d)(1)(c)(iv).
    Licensee is: (1) A person or entity that has obtained a compulsory 
license under 17 U.S.C. 112 or 114 and the implementing regulations 
therefor to make eligible non-subscription transmissions and ephemeral 
recordings, or
    (2) A person or entity entitled to transmit to the public a 
performance of a sound recording under the limitation on exclusive 
rights specified by 17 U.S.C. 114(d)(1)(C)(iv) and that has obtained a 
compulsory license under 17 U.S.C. 112 to make ephemeral recordings.
    Listener is a recipient of a transmission of a public performance 
of a sound recording made by a Licensee or a Business Establishment 
Service. However, if more than one person is listening to a 
transmission made to a single machine or device, those persons 
collectively constitute a single listener.
    Non-CPB, Non-Commercial Broadcaster is a Public Broadcasting Entity 
as defined in 17 U.S.C. 118(g) that is not qualified to receive funding 
from the Corporation for Public Broadcasting pursuant to the criteria 
set forth in 47 U.S.C. 396.
    Performance is each instance in which any portion of a sound 
recording is publicly performed to a listener via a Web Site 
transmission or retransmission (e.g. the delivery of any portion of a 
single track from a compact disc to one listener) but excluding the 
following:
    (1) A performance of a sound recording that does not require a 
license (e.g., the sound recording is not copyrighted);
    (2) A performance of a sound recording for which the service has 
previously obtained license from the copyright owner of such sound 
recording; and
    (3) An incidental performance that both: (i) Makes no more than 
incidental use of sound recordings including, but not limited to, brief 
musical transitions in and out of commercials or program segments, 
brief performances during news, talk and sports programming, brief 
background performances during disk jockey announcements, brief 
performances during commercials of sixty seconds or less in duration, 
or brief performances during sporting or other public events; and
    (ii) Other than ambient music that is background at a public event, 
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).
    Performer means the respective independent administrators 
identified in 17 U.S.C. 114(g)(2)(A) and (B) and the parties identified 
in 17 U.S.C. 114(g)(2)(C).
    Receiving Agent is the agent designated by the Librarian of 
Congress for the collection of royalty payments made pursuant to this 
part by Licensees and the distribution of those royalty payments to 
Designated Agents, and that has been identified as such in 
Sec. 261.4(b). The Receiving Agent may also be a Designated Agent.
    Side channel is a channel on the Web Site of a Commercial 
Broadcaster or a Non-CPB, Non-Commercial Broadcaster, which channel 
transmits eligible non-subscription transmissions that are not 
simultaneously transmitted over-the-air by the Licensee.
    Webcaster is a Licensee, other than a Commercial Broadcaster, Non-
CPB, Non-Commercial Broadcaster or Business Establishment Service, that 
makes eligible non-subscription transmissions of digital audio 
programming over the Internet through a Web Site.
    Web Site is a site located on the World Wide Web that can be 
located by an end user through a principal Uniform Resource Locator (a 
``URL''), e.g., www.xxxxx.com.


Sec. 261.3  Royalty fees for public performances of sound recordings 
and for ephemeral recordings.

    (a) For the period October 28, 1998, through December 31, 2002, 
royalty rates and fees for eligible digital transmissions of sound 
recordings made pursuant to 17 U.S.C. 114(d)(2), and the making of 
ephemeral recordings pursuant to 17 U.S.C. 112(e) shall be as follows:
    (1) Webcaster and Commercial Broadcaster Performance Royalty. For 
all Internet transmissions, including simultaneous Internet 
retransmissions of over-the-air AM or FM radio broadcasts, a Webcaster 
and a Commercial Broadcaster shall pay a section 114(f) performance 
royalty of 0.07[cent] per performance.
    (2) Non-CPB, Non-Commercial Broadcaster Performance Royalty.
    (i) For simultaneous Internet retransmissions of over-the-air AM or 
FM broadcasts by the same radio station, a non-CPB, Non-Commercial 
Broadcaster shall pay a section 114(f) performance royalty of 
0.02[cent] per performance.
    (ii) For other Internet transmissions, including up to two side 
channels of programming consistent with the mission of the station, a 
Non-CPB, Non-Commercial Broadcaster shall pay a section 114(f) 
performance royalty of 0.02[cent] per performance.
    (iii) For Internet transmissions on other side channels of 
programming, a Non-CPB, Non-Commercial Broadcaster shall pay a section 
114(f) performance royalty of 0.07[cent] per performance.
    (b) Estimate of Performance. Until December 31, 2002, a Webcaster, 
Commercial Broadcaster, or Non-CPB, Non-Commercial Broadcaster may 
estimate its total number of performances if the actual number is not 
available. Such estimation shall be based on multiplying the total 
number of Aggregate Tuning Hours by 15 performances per hour (1 
performance per hour in the case of transmissions or retransmissions of 
radio station programming reasonably classified as news, business, talk 
or sports, and 12 performances per hour in the case of transmissions or 
retransmissions of all other radio station programming).
    (c) Webcaster and Broadcaster Ephemeral Recordings Royalty. For the 
making of any number of ephemeral recordings to facilitate the Internet 
transmission of a sound recording, each Webcaster, Commercial 
Broadcaster, and Non-CPB, Non-Commercial Broadcaster shall pay a 
section 112(e) royalty equal to 8.8% of their total performance 
royalty.
    (d) Business Establishment Ephemeral Recordings Royalty. For the 
making of any number of ephemeral recordings in the operation of a 
service pursuant to the Business Establishment exemption contained in 
17 U.S.C. 114(d)(1)(C)(iv), a Business Establishment Service shall pay 
a section 112(e) ephemeral recording royalty equal to ten percent (10%) 
of the Licensee's annual gross

[[Page 45274]]

proceeds derived from the use in such service of the musical programs 
which are attributable to copyrighted recordings. The attribution of 
gross proceeds to copyrighted recordings may be made on the basis of:
    (1) For classical programs, the proportion that the playing time of 
copyrighted classical recordings bears to the total playing time of all 
classical recordings in the program,
    (2) For all other programs, the proportion that the number of 
copyrighted recordings bears to the total number of all recordings in 
the program.
    (e) Minimum fee. (1) Each Webcaster, Commercial Broadcaster, and 
Non-CPB, Non-Commercial Broadcaster licensed to make eligible digital 
transmissions and/or ephemeral recordings pursuant to licenses under 17 
U.S.C. 114(f) and/or 17 U.S.C. 112(e) shall pay a minimum fee of $500 
for each calendar year, or part thereof, in which it makes such 
transmissions or recordings.
    (2) Each Business Establishment Service licensed to make ephemeral 
recordings pursuant to a license under 17 U.S.C. 112(e) shall pay a 
minimum fee of $10,000 for each calendar year, or part thereof, in 
which it makes such recordings.


Sec. 261.4  Terms for making payment of royalty fees and statements of 
account.

    (a) A Licensee shall make the royalty payments due under Sec. 261.3 
to the Receiving Agent. If there are more than one Designated Agent 
representing Copyright Owners or Performers entitled to receive any 
portion of the royalties paid by the Licensee, the Receiving Agent 
shall apportion the royalty payments among Designated Agents using the 
information provided by the Licensee pursuant to the regulations 
governing records of use of performances for the period for which the 
royalty payment was made. Such apportionment shall be made on a 
reasonable basis that uses a methodology that values all performances 
equally and is agreed upon among the Receiving Agent and the Designated 
Agents. Within 30 days of adoption of a methodology for apportioning 
royalties among Designated Agents, the Receiving Agent shall provide 
the Register of Copyrights with a detailed description of that 
methodology.
    (b) Until such time as a new designation is made, SoundExchange, an 
unincorporated division of the Recording Industry Association of 
America, Inc., is designated as the Receiving Agent to receive 
statements of account and royalty payments from Licensees. Until such 
time as a new designation is made, Royalty Logic, Inc. and 
SoundExchange are designated as Designated Agents to distribute royalty 
payments to Copyright Owners and Performers entitled to receive 
royalties under 17 U.S.C. 114(g)(2) from the performance of sound 
recordings owned by such Copyright Owners.
    (c) SoundExchange is the Designated Agent to distribute royalty 
payments to each Copyright Owner and Performer entitled to receive 
royalties under 17 U.S.C. 114(g)(2) from the performance of sound 
recordings owned by such Copyright Owners, except when a Copyright 
Owner or Performer has notified SoundExchange in writing of an election 
to receive royalties from a particular Designated Agent. With respect 
to any royalty payment received by the Receiving Agent from a Licensee, 
a designation by a Copyright Owner or Performer of a particular 
Designated Agent must be made no later than thirty days prior to the 
receipt by the Receiving Agent of that royalty payment.
    (d) Commencing September 1, 2002, a Licensee shall make any 
payments due under Sec. 261.3 to the Receiving Agent by the forty-fifth 
(45th) day after the end of each month for that month. Concurrently 
with the delivery of payment to the Receiving Agent, a Licensee shall 
deliver to each Designated Agent a copy of the statement of account for 
such payment. A Licensee shall pay a late fee of 0.75% per month, or 
the highest lawful rate, whichever is lower, for any payment received 
by the Receiving Agent after the due date. Late fees shall accrue from 
the due date until payment is received by the Receiving Agent.
    (e) A Licensee shall make any payments due under Sec. 261.3 for 
transmissions made between October 28, 1998, and August 31, 2002, to 
the Receiving Agent by October 20, 2002.
    (f) A Licensee shall submit a monthly statement of account for 
accompanying royalty payments on a form prepared by the Receiving Agent 
after full consultation with all Designated Agents. The form shall be 
made available to the Licensee by the Receiving Agent. A statement of 
account shall include only such information as is necessary to 
calculate the accompanying royalty payment. Additional information 
beyond that which is sufficient to calculate the royalty payments to be 
paid shall not be required to be included on the statement of account.
    (g) The Receiving Agent shall make payments of the allocable share 
of any royalty payment received from any Licensee under this section to 
the Designated Agent(s) as expeditiously as is reasonably possible 
following receipt of the Licensee's royalty payment and statement of 
account as well as the Licensee's Report of Use of Sound Recordings 
under Statutory License for the period to which the royalty payment and 
statement of account pertain, with such allocation to be made on the 
basis determined as set forth in paragraph (a) of this section. The 
Receiving Agent and the Designated Agent shall agree on a reasonable 
basis on the sharing on a pro-rata basis of any incremental costs 
directly associated with the allocation method. A final adjustment, if 
necessary, shall be agreed and paid or refunded, as the case may be, 
between the Receiving Agent and a Designated Agent for each calendar 
year no later than 180 days following the end of each calendar year.
    (h) The Designated Agent shall distribute royalty payments on a 
reasonable basis that values all performances by a Licensee equally 
based upon the information provided by the Licensee pursuant to the 
regulations governing records of use of performances; Provided, 
however, that Copyright Owners and Performers who have designated a 
particular Designated Agent may agree to allocate their shares of the 
royalty payments among themselves on an alternative basis.
    (i)(1) A Designated Agent shall provide to the Register of 
Copyrights:
    (i) A detailed description of its methodology for distributing 
royalty payments to Copyright Owners and Performers who have not agreed 
to an alternative basis for allocating their share of royalty payments 
(hereinafter, ``non-members''), and any amendments thereto, within 30 
days of adoption and no later than 60 days prior to the first 
distribution to Copyright Owners and Performers of any royalties 
distributed pursuant to that methodology;
    (ii) Any written complaint that the Designated Agent receives from 
a non-member concerning the distribution of royalty payments, within 30 
days of receiving such written complaint; and
    (iii) The final disposition by the Designated Agent of any 
complaint specified by paragraph (i)(1)(ii) of this section, within 60 
days of such disposition.
    (2) A Designated Agent may request that the Register of Copyrights 
provide a written opinion stating whether the Agent's methodology for 
distributing royalty payments to non-members meets the requirements of 
this section.
    (j) A Designated Agent shall distribute such royalty payments 
directly to the Copyright Owners and Performers, according to the 
percentages set forth in 17 U.S.C. 114(g)(2), if such Copyright

[[Page 45275]]

Owners and Performers provide the Designated Agent with adequate 
information necessary to identify the correct recipient for such 
payments. However, Performers and Copyright Owners may jointly agree 
with a Designated Agent upon payment protocols to be used by the 
Designated Agent that provide for alternative arrangements for the 
payment of royalties to Performers and Copyright Owners consistent with 
the percentages in 17 U.S.C. 114(g)(2).
    (k) A Designated Agent may deduct from the royalties paid to 
Copyright Owners and Performers reasonable costs incurred in the 
collection and distribution of the royalties paid by Licensees under 
Sec. 261.3, and a reasonable charge for administration.
    (l) In the event a Designated Agent and a Receiving Agent cannot 
agree upon a methodology for apportioning royalties pursuant to 
paragraph (a) of this section, either the Receiving Agent or a 
Designated Agent may seek the assistance of the Copyright Office in 
resolving the dispute.


Sec. 261.5  Confidential information.

    (a) For purposes of this part, ``Confidential Information'' shall 
include the statements of account, 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 Licensee submitting the statement.
    (b) Confidential Information shall not include documents or 
information that at the time of delivery to the Receiving Agent or a 
Designated Agent are public knowledge. The Receiving Agent or a 
Designated Agent that claims the benefit of this provision shall have 
the burden of proving that the disclosed information was public 
knowledge.
    (c) In no event shall the Receiving Agent or Designated Agent(s) 
use any Confidential Information for any purpose other than royalty 
collection and distribution and activities directly related thereto; 
Provided, however, that the Designated Agent may report Confidential 
Information provided on statements of account under this part in 
aggregated form, so long as Confidential Information pertaining to any 
Licensee or group of Licensees cannot directly or indirectly be 
ascertained or reasonably approximated. All reported aggregated 
Confidential Information from Licensees within a class of Licensees 
shall concurrently be made available to all Licensees then in such 
class. As used in this paragraph, the phrase ``class of Licensees'' 
means all Licensees paying fees pursuant to Sec. 261.4(a).
    (d) Except as provided in paragraph (c) of this section and as 
required by law, access to Confidential Information shall be limited 
to, and in the case of paragraphs (d)(3) and (d)(4) of this section 
shall be provided upon request, subject to resolution of any relevance 
or burdensomeness concerns and reimbursement of reasonable costs 
directly incurred in responding to such request, to:
    (1) Those employees, agents, consultants and independent 
contractors of the Receiving Agent or a Designated Agent, subject to an 
appropriate confidentiality agreement, who are engaged in the 
collection and distribution of royalty payments hereunder and 
activities directly related thereto, who are not also employees or 
officers of a Copyright Owner or Performer, and who, for the purpose of 
performing such duties during the ordinary course of employment, 
require access to the records;
    (2) An independent and qualified auditor, subject to an appropriate 
confidentiality agreement, who is authorized to act on behalf of the 
Receiving Agent or a Designated Agent with respect to the verification 
of a Licensee's statement of account pursuant to Sec. 261.6 or on 
behalf of a Copyright Owner or Performer with respect to the 
verification of royalty payments pursuant to Sec. 261.7;
    (3) In connection with future Copyright Arbitration Royalty Panel 
proceedings under 17 U.S.C. 114(f)(2) and 112(e), under an appropriate 
protective order, attorneys, consultants and other authorized agents of 
the parties to the proceedings, Copyright Arbitration Royalty Panels, 
the Copyright Office or the courts; and
    (4) In connection with bona fide royalty disputes or claims by or 
among Licensees, the Receiving Agent, Copyright Owners, Performers or 
the Designated Agent(s), under an appropriate confidentiality agreement 
or protective order, attorneys, consultants and other authorized agents 
of the parties to the dispute, arbitration panels or the courts.
    (e) The Receiving Agent or Designated Agent(s) and any person 
identified in paragraph (d) of this section shall implement procedures 
to safeguard all Confidential Information using a reasonable standard 
of care, but no less than the same degree of security used to protect 
Confidential Information or similarly sensitive information belonging 
to such Receiving Agent or Designated Agent(s) or person.
    (f) Books and records of a Licensee, the Receiving Agent and of a 
Designated Agent relating to the payment, collection, and distribution 
of royalty payments shall be kept for a period of not less than three 
(3) years.


Sec. 261.6  Verification of statements of account.

    (a) General. This section prescribes general rules pertaining to 
the verification of the statements of account by the Designated Agent.
    (b) Frequency of verification. A Designated Agent may conduct a 
single audit of a Licensee, upon reasonable notice and during 
reasonable business hours, during any given calendar year, for any or 
all of the prior three (3) calendar years, and no calendar year shall 
be subject to audit more than once.
    (c) Notice of intent to audit. A Designated Agent must submit a 
notice of intent to audit a particular Licensee with the Copyright 
Office, which shall publish in the Federal Register a notice announcing 
the receipt of the notice of intent to audit within thirty (30) days of 
the filing of the Designated Agent's notice. The notification of intent 
to audit shall be served at the same time on the Licensee to be 
audited. Any such audit shall be conducted by an independent and 
qualified auditor identified in the notice, and shall be binding on all 
Designated Agents, and all Copyright Owners and Performers.
    (d) Acquisition and retention of records. The Licensee shall 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 and retain such records for a period of not less than 
three (3) years. The Designated Agent requesting the verification 
procedure shall retain the report of the verification for a period of 
not less than three (3) years.
    (e) Acceptable verification procedure. An audit, including 
underlying paperwork, which was performed in the ordinary course of 
business according to generally accepted auditing standards by an 
independent and qualified auditor, shall serve as an acceptable 
verification procedure for all Designated Agents with respect to the 
information that is within the scope of the audit.
    (f) Consultation. Before rendering a written report to a Designated 
Agent, except where the auditor has a reasonable basis to suspect fraud 
and disclosure would, in the reasonable opinion of the auditor, 
prejudice the investigation of such suspected fraud, the auditor shall 
review the tentative written findings of the audit with the appropriate 
agent or employee of the Licensee being audited in order to remedy any 
factual errors and clarify any issues relating to the audit;

[[Page 45276]]

Provided that the appropriate agent or employee of the Licensee 
reasonably cooperates with the auditor to remedy promptly any factual 
errors or clarify any issues raised by the audit.
    (g) Costs of the verification procedure. The Designated Agent 
requesting the verification procedure shall pay the cost of the 
procedure, unless it is finally determined that there was an 
underpayment of ten percent (10%) or more, in which case the Licensee 
shall, in addition to paying the amount of any underpayment, bear the 
reasonable costs of the verification procedure; Provided, however, that 
a Licensee shall not have to pay any costs of the verification 
procedure in excess of the amount of any underpayment unless the 
underpayment was more than twenty percent (20%) of the amount finally 
determined to be due from the Licensee and more than $5,000.00.


Sec. 261.7  Verification of royalty payments.

    (a) General. This section prescribes general rules pertaining to 
the verification by any Copyright Owner or Performer of royalty 
payments made by a Designated Agent; Provided, however, that nothing 
contained in this section shall apply to situations where a Copyright 
Owner or a Performer and a Designated Agent have agreed as to proper 
verification methods.
    (b) Frequency of verification. A Copyright Owner or a Performer may 
conduct a single audit of a Designated Agent upon reasonable notice and 
during reasonable business hours, during any given calendar year, for 
any or all of the prior three (3) calendar years, and no calendar year 
shall be subject to audit more than once.
    (c) Notice of intent to audit. A Copyright Owner or Performer must 
submit a notice of intent to audit a particular Designated Agent with 
the Copyright Office, which shall publish in the Federal Register a 
notice announcing the receipt of the notice of intent to audit within 
thirty (30) days of the filing of the notice. The notification of 
intent to audit shall be served at the same time on the Designated 
Agent to be audited. Any such audit shall be conducted by an 
independent and qualified auditor identified in the notice, and shall 
be binding on all Copyright Owners and Performers.
    (d) Acquisition and retention of records. The Designated Agent 
making the royalty payment shall 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 and retain 
such records for a period of not less than three (3) years. The 
Copyright Owner or Performer requesting the verification procedure 
shall retain the report of the verification for a period of not less 
than three (3) years.
    (e) Acceptable verification procedure. An audit, including 
underlying paperwork, which was performed in the ordinary course of 
business according to generally accepted auditing standards by an 
independent and 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.
    (f) Consultation. Before rendering a written report to a Copyright 
Owner or Performer, except where the auditor has a reasonable basis to 
suspect fraud and disclosure would, in the reasonable opinion of the 
auditor, prejudice the investigation of such suspected fraud, the 
auditor shall review the tentative written findings of the audit with 
the appropriate agent or employee of the Designated Agent being audited 
in order to remedy any factual errors and clarify any issues relating 
to the audit; Provided that the appropriate agent or employee of the 
Designated Agent reasonably cooperates with the auditor to remedy 
promptly any factual errors or clarify any issues raised by the audit.
    (g) Costs of the verification procedure. The Copyright Owner or 
Performer requesting the verification procedure shall pay the cost of 
the procedure, unless it is finally determined that there was an 
underpayment of ten percent (10%) or more, in which case the Designated 
Agent shall, in addition to paying the amount of any underpayment, bear 
the reasonable costs of the verification procedure; Provided, however, 
that a Designated Agent shall not have to pay any costs of the 
verification procedure in excess of the amount of any underpayment 
unless the underpayment was more than twenty percent (20%) of the 
amount finally determined to be due from the Designated Agent and more 
than $5,000.00.


Sec. 261.8  Unclaimed funds.

    If a Designated Agent is unable to identify or locate a Copyright 
Owner or Performer who is entitled to receive a royalty payment under 
this part, the Designated Agent shall retain the required payment in a 
segregated trust account for a period of three (3) years from the date 
of payment. No claim to such payment shall be valid after the 
expiration of the three (3) year period. After the expiration of this 
period, the unclaimed funds of the Designated Agent may first be 
applied to the costs directly attributable to the administration of the 
royalty payments due such unidentified Copyright Owners and Performers 
and shall thereafter be allocated on a pro rata basis among the 
Designated Agents(s) to be used to offset such Designated Agent(s) 
other costs of collection and distribution of the royalty fees.

    Dated: June 20, 2002.
Marybeth Peters,
Register of Copyrights.
James H. Billington,
The Librarian of Congress.
[FR Doc. 02-16730 Filed 7-5-02; 8:45 am]
BILLING CODE 1410-33-P