[Federal Register Volume 73, Number 16 (Thursday, January 24, 2008)]
[Rules and Regulations]
[Pages 4080-4104]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E8-669]


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LIBRARY OF CONGRESS

Copyright Royalty Board

37 CFR Part 382

[Docket No. 2006-1 CRB DSTRA]


Determination of Rates and Terms for Preexisting Subscription 
Services and Satellite Digital Audio Radio Services

AGENCY: Copyright Royalty Board, Library of Congress.

ACTION: Final rule and order.

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SUMMARY: The Copyright Royalty Judges are announcing their final 
determination of the rates and terms for the digital transmission of 
sound recordings and the reproduction of ephemeral recordings by 
preexisting satellite digital audio radio services for the period 
beginning on January 1, 2007, and ending on December 31, 2012.

DATES: Effective Date: January 24, 2008.
    Applicability Date: The regulations apply to the license period 
January 1, 2007, through December 31, 2012.

ADDRESSES: The final determination also is posted on the Copyright 
Royalty Board Web site at http://www.loc.gov/crb/proceedings/2006-1/sdars-final-rates-terms.pdf.

FOR FURTHER INFORMATION CONTACT: Richard Strasser, Senior Attorney, or 
Gina Giuffreda, Attorney Advisor. Telephone: (202) 707-7658. Telefax: 
(202) 252-3423.

SUPPLEMENTARY INFORMATION:

I. Introduction

    This is a rate determination proceeding convened under 17 U.S.C. 
803(b) and 37 CFR part 351. A Notice announcing commencement of 
proceeding with request for Petitions to Participate in such proceeding 
to determine the rates and terms of royalty payments under Sections 114 
and 112 of the Copyright Act for the activities of preexisting 
subscription services (``PSS'') and preexisting satellite digital audio 
radio services (``SDARS'') was published in the Federal Register on 
January 9, 2006.\1\ The rates and terms set in this proceeding apply to 
the period of January 1, 2008, through December 31, 2012 for PSS, and 
January 1, 2007, through December 31, 2012 for SDARS. 17 U.S.C. 
804(b)(3)(B). The PSS royalty rates are provided in a separate order. 
For the SDARS, the instant order provides for a beginning rate of 6% of 
gross revenues, with increases during the term of the period. See infra 
at Section IV.C.3.d.
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    \1\ 71 FR 1455, Docket No. 2006-1 CRB DSTRA.
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II. The Proceeding

    The following entities filed Petitions in response to the January 
9, 2006 request for Petitions to Participate: SoundExchange, Music 
Choice, Muzak LLC, XM, Sirius, Royalty Logic, Inc. (``RLI''), and THP 
Capstar Acquisition d/b/a DMX Music (``DMX''). The Copyright Royalty 
Judges (``Judges'') dismissed Muzak as a party on January 10, 2007.\2\ 
On August 21, 2006, the Judges referred a novel material question of 
substantive law regarding the universe of preexisting subscription 
services under 17 U.S.C. 114(j)(11) \3\ to the Register of 
Copyrights.\4\ On October 20, 2006, the Register transmitted a 
Memorandum Opinion to the Board that addressed the novel question of 
law.\5\ The Register concluded that
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    \2\ Order Granting SoundExchange's Motion to Dismiss Muzak LLC, 
Docket No. 2006-1 CRB DSTRA.
    \3\ Section 114(j)(11) of the Copyright Act defines the term 
``preexisting subscription service'' to mean ``a service that 
performs sound recordings by means of noninteractive audio-only 
subscription digital audio transmissions, which was in existence and 
was making such transmissions to the public for a fee on or before 
July 31, 1998, and may include a limited number of sample channels 
representative of the subscription service that are made available 
on a nonsubscription basis in order to promote the subscription 
service.'' 17 U.S.C. 114(j)(11).
    \4\ Order Granting in Part SoundExchange's Motion Requesting 
Referral of a Novel Question of Substantive Law and Denying Motion 
by THP Capstar Acquisition Corp. D/B/A DMX Music Requesting Proposed 
Briefing Schedule, Docket No. 2006-1 CRB DSTRA. In its motion 
SoundExchange contended that Sirius and DMX are not eligible for a 
statutory license for a ``preexisting subscription service'' because 
they are not the entities that were in existence and making digital 
audio transmissions on or before July 31, 1998, a requirement under 
Section 114 of the Copyright Act. See 71 FR at 64640.
    \5\ The Register's Memorandum Opinion was published in the 
Federal Register on November 3, 2006. 71 FR 64639.

    for purposes of participating in a rate setting proceeding, the 
term ``preexisting subscription service'' is best interpreted as 
meaning the business entity which operates under the statutory 
license. A determination of whether DMX is the same service that was 
identified by the legislative history in 1998 and has operated 
continuously since that time requires a factual analysis that is 
beyond the scope of the Register's authority for questions presented 
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under 17 U.S.C. 802(f)(1)(B).


[[Page 4081]]


71 FR 64640.
    Subsequently, Sirius presented its case solely as an SDARS and not 
as a PSS in the instant proceeding. DMX withdrew from participation in 
the proceeding on October 30, 2006.\6\ Following an unsuccessful 
negotiation period, the then-remaining parties filed written direct 
statements on October 30, 2006 (SoundExchange, Music Choice, Sirius, 
and XM) and on November 21, 2006 (RLI), respectively. RLI withdrew from 
the proceeding on March 16, 2007.\7\ Music Choice and SoundExchange 
settled on June 12, 2007.\8\ The Judges published the settlement for 
public comment in the Federal Register on October 31, 2007 (72 FR 
61585) and published a Final Rule relating to PSS on December 19, 2007 
(72 FR 71795).
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    \6\ Notice by DMX, Inc. of its Withdrawal from Participation in 
the 2006 Copyright Royalty Board Proceeding Entitled ``Adjustment of 
Rates and Terms for Preexisting Subscription and Satellite Digital 
Audio Radio Services,'' Docket No. 2006-1 CRB DSTRA.
    \7\ Notice by Royalty Logic, Inc. of Its Withdrawal from 
Participation in the 2006 Copyright Royalty Board Proceeding 
Entitled ``Adjustment of Rates and Terms for Preexisting 
Subscription and Satellite Digital Audio Radio Services,'' Docket 
No. 2006-1 CRB DSTRA.
    \8\ Notice of Settlement, Docket No. 2006-1 CRB DSTRA (June 12, 
2007).
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    Discovery was followed by live testimony. Testimony was taken from 
June 4, 2007, to July 9, 2007. XM presented testimony of the following 
witnesses: Mr. Gary Parsons, Chairman of the Board, XM; Mr. Eric Logan, 
Executive Vice President of Programming, XM; Mr. Mark Vendetti, Senior 
Vice President of Corporate Finance, XM; Mr. Stephen Cook, Executive 
Vice President for Automotive, XM; and Mr. Anthony Masiello, Senior 
Vice President of Operations, XM.
    Sirius presented testimony from the following witnesses: Mr. Mel 
Karmazin, President and CEO, Sirius; Mr. Terrence Smith, Senior Vice 
President of Engineering, Sirius; Mr. Douglas Wilsterman, Senior Vice 
President and General Manager of the Automotive OEM Division, Sirius; 
Mr. Jeremy Coleman, Vice President and General Manager of Talk 
Entertainment and Information Programming, Sirius; Mr. Steven Cohen, 
Vice President of Sports Programming, Sirius; Mr. Steven Blatter, 
Senior Vice President of Music Programming, Sirius; Ms. Christine Heye, 
former Vice President, Research, Sirius; Mr. Michael Moore, Vice 
President, Customer Care and Sales Operations, Sirius; Mr. David J. 
Frear, Chief Financial Officer, Sirius; and Mr. Robert Law, Senior Vice 
President and General Manager of the Consumer Electronics Division, 
Sirius.
    XM and Sirius jointly presented testimony from the following 
witnesses: Dr. John R. Woodbury, Vice President, CRA International and 
Mr. J. Armand Musey, President and Partner, New Earth, LLC.
    SoundExchange presented testimony of the following witnesses: Dr. 
Yoram (Jerry) Wind, Professor of Marketing and a Lauder Professor, The 
Wharton School, University of Pennsylvania; Mr. Mark Eisenberg, 
Executive Vice President, Business and Legal Affairs, Global Digital 
Business Group, Sony BMG Music Entertainment; Ms. Barrie Kessler, Chief 
Operating Officer, SoundExchange, Inc.; Mr. Sean Butson, Chartered 
Financial Analyst and consultant; Mr. Edgar Bronfman, Jr., Chairman and 
CEO, Warner Music Group; Mr. Simon Renshaw, President, Strategic Artist 
Management; Dr. Janusz Ordover, Professor of Economics, New York 
University; Mr. Dan Navarro, singer, songwriter, recording artist; Mr. 
Edward Chemelewski, President, Blind Pig Records; Mr. Michael Kushner, 
Senior Vice President, Business and Legal Affairs, Atlantic Records; 
Mr. Lawrence Kenswil, President of Universal eLabs, a division of 
Vivendi Universal's Universal Music Group; Mr. Charles Ciongoli, 
Executive Vice President and Chief Financial Officer, Universal Music 
Group North America; Dr. Michael Pelcovits, Principal, Microeconomic 
Consulting & Research Associates, Inc.
    The remaining parties filed written rebuttal statements on July 24, 
2007. The rebuttal phase of the trial occurred from August 15, 2007 to 
August 30, 2007. XM presented the rebuttal testimony of Mr. Vendetti. 
Sirius presented the rebuttal testimony of Mr. Karmazin and Mr. Frear. 
Sirius and XM presented the joint rebuttal testimony of Dr. Roger G. 
Noll, Professor Emeritus of Economics, Stanford University; Dr. Erich 
Joachimsthaler, CEO, Vivaldi Partners; Dr. George Benston, John H. 
Harlan Professor of Finance, Accounting and Economics at the Goizueta 
Business School and Professor of Economics, Emory University; Mr. Daryl 
Martin, Vice President, Consor Intellectual Assessment Management; Dr. 
John Hauser, Management Science Area Head and Kirin Professor of 
Marketing, Massachusetts Institute of Technology; Mr. Bruce Silverman, 
marketing consultant; and Dr. Woodbury.\9\
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    \9\ The Services also sought to present the testimony of 
Professor William W. Fisher, III, but the Judges granted 
SoundExchange's motion to strike Professor Fisher's rebuttal 
testimony. 8/15/07 Tr. at 11.
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    SoundExchange presented the rebuttal testimony of Mr. Ciongoli; Dr. 
Ordover; Mr. Bruce Elbert, President, Application Technology Strategy, 
Inc.; Mr. Butson; Dr. Pelcovits; Mr. Eisenberg; Ms. Kessler; Dr. Wind; 
Dr. Steven Herscovici, Managing Principal, Analyst Group, Inc.; and Mr. 
George Mantis, President, The Mantis Group, Inc.
    At the close of the evidence, the record was closed. In addition to 
the written direct statements and written rebuttal statements, the 
Judges heard 26 days of testimony, which filled over 7,700 pages of 
transcript, and over 230 exhibits were admitted. The docket contains 
over 400 pleadings, motions, and orders.
    On October 1, 2007, after the evidentiary phase of the proceeding, 
the participants filed Proposed Findings of Fact and Conclusions of 
Law. Participants filed replies on October 11, 2007. Closing arguments 
occurred on October 17, 2007.
    On December 3, 2007, the Copyright Royalty Judges issued the 
Initial Determination of Rates and Terms. Pursuant to 17 U.S.C. 
803(c)(2) and 37 CFR part 353, SoundExchange filed a Motion for 
Rehearing. The Judges requested the SDARS to respond to the motion, 
which they did in a timely fashion. Having reviewed SoundExchange's 
motion and the SDARS' response, the Judges denied the motion for 
rehearing. Order Denying Motion for Rehearing, In the Matter of 
Determination of Rates and Terms for Preexisting Subscription Services 
and Satellite Digital Audio Radio Services, Docket No. 2006-1 CRB DSTRA 
(January 8, 2008). As reviewed in said Order, none of the grounds in 
the motion presented the type of exceptional case where the Initial 
Determination is not supported by the evidence. 17 U.S.C. 803(c)(2)(A); 
37 CFR 353.1 and 353.2. The motion did not meet the required standards 
set by statute, by regulation and by case law. Nevertheless, the Judges 
were persuaded to clarify one aspect of the definition of Gross 
Revenues. Specifically, the Judges are adding the phrase ``offered for 
a separate charge'' to the regulatory language of subsection (3)(vi)(A) 
of the definition of Gross Revenues at Sec.  382.11 to make clear that 
this portion of the definition dealing with data services does not 
contemplate an exclusion of revenues from such data services, where 
such data services are not offered for a separate charge from the basic 
subscription product's revenues.

[[Page 4082]]

III. The Statutory Standards for Determining Royalty Rates

    Section 801(b)(1) of the Copyright Act, 17 U.S.C., provides that 
the Copyright Royalty Judges shall ``make determinations and 
adjustments of reasonable terms and rates of royalty payments'' for the 
statutory licenses set forth in Sections 112(e) and 114.\10\ The 
section then prescribes that the royalty rates applicable under Section 
114(f)(1)(B), which is the performance license for sound recordings at 
issue in this proceeding, shall be calculated to achieve the following 
objectives: \11\
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    \10\ The ``reasonable'' rates and terms requirement also applies 
to the statutory licenses set forth in 17 U.S.C. 115, 116, 118, 119, 
and 1004. Though the Section 119 license is referenced, there is 
currently no rate adjustment provided in the Copyright Act for that 
license.
    \11\ We note that the Section 801(b)(1) objectives, or factors, 
do not apply to the Section 112(e) license. For a discussion of this 
license's applicability to this proceeding, see infra at Section 
IV.D.

    (A) To maximize the availability of creative works to the 
public.
    (B) To afford the copyright owner a fair return for his or her 
creative work and the copyright user a fair income under existing 
economic conditions.
    (C) To reflect the relative roles of the copyright owner and the 
copyright user in the product made available to the public with 
respect to relative creative contribution, technological 
contribution, capital investment, cost, risk, and contribution to 
the opening of new markets for creative expression and media for 
their communication.
    (D) To minimize any disruptive impact on the structure of the 
industries involved and on generally prevailing industry practices.

17 U.S.C. 801(b)(1). Because of the importance of this language to our 
determination, the Copyright Royalty Judges undertake the following 
comprehensive review of the provisions and their interpretation.

A. Legislative Background

    The Section 801(b)(1) factors owe their origin to the legislative 
process that produced the Copyright Act of 1976. The 1976 Act created 
three new statutory licenses \12\--cable, jukebox and noncommercial 
broadcasting--and established the Copyright Royalty Tribunal to adjust 
rates and terms and make royalty distributions to copyright owners 
where appropriate. An examination of the legislative history of the 
1976 Act reveals that the motivation for adopting the Section 801(b)(1) 
factors arose from an exchange between Professor Ernest Gellhorn, on 
behalf of certain copyright users, and Professor Louis H. Pollack, on 
behalf of certain copyright owners, concerning the constitutionality of 
the Copyright Royalty Tribunal. Professor Gellhorn recommended that in 
order to bolster the constitutionality of the Tribunal, the Congress 
should, inter alia, adopt statutory standards beyond the vague 
criterion of ``reasonableness.'' Hearings on H.R. 2223 before the 
Subcomm. on Courts, Civil Liberties, and the Administration of Justice 
of the House Comm. on the Judiciary, 94th Cong., 1922 (1975). The 
Register of Copyrights, in her second supplementary report on the 
general revision of the copyright laws later that year, disputed the 
constitutional concerns of Professor Gellhorn but concluded that it 
would be ``wise to establish, in the statute, certain criteria beyond 
`reasonableness' that each Panel is to apply to its decision-making.'' 
Second Supplementary Report of the Register of Copyrights on the 
General Revision of the U.S. Copyright Law, Chapter XV, p. 31 (1975). 
The House Judiciary Committee, in its subsequent report on the Senate 
revision bill, took heed of the Register's advice and stated in the 
report (but not the bill), that ``it is anticipated that the Commission 
\13\ will consider the following objectives in determining a reasonable 
rate * * * '':
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    \12\ The lone statutory license under the 1909 Copyright Act, 
the section 115 ``mechanical'' license for the making and 
distribution of phonorecords, was carried forward into the 1976 Act.
    \13\ The House revision bill created a Copyright Royalty 
Commission, whereas the Senate revision bill created a Copyright 
Royalty Tribunal. The Senate nomenclature was used in the final 
bill.

    (1) The rate should maximize the availability of diverse 
creative works to the public.
    (2) The rate should afford the copyright owner a fair income, or 
if the owner is not a person, a fair profit, under existing economic 
conditions, in order to encourage creative activity.
    (3) The rate should not jeopardize the ability of the copyright 
user
    (a) To earn a fair income, or if the user is not a person, a 
fair profit, under existing economic conditions, and
    (b) To charge the consumer a reasonable price for the product.
    (4) The rate should reflect the relative roles of the copyright 
owner and the copyright user in the product made available to the 
public with respect to relative contribution, technological 
contribution, capital investment, cost, risk, and contribution to 
the opening of new markets for creative expression and media for 
their communication.
    (5) The rate should minimize any disruptive impact on the 
structure of the industries involved and on generally prevailing 
industry practices.

H.R. Rep. No. 94-1476, at 173-174 (1976) (footnote added). The House 
and Senate Conference yielded the revision bill as enacted and set 
forth the Section 801(b)(1) factors in their current form. 
Unfortunately, the Conference Report does not offer any discussion of 
the final language.

B. Prior Proceedings

    There have been three statutory license proceedings involving the 
reasonable rate standard and the Section 801(b)(1) factors: A Section 
116 jukebox rate adjustment by the Copyright Royalty Tribunal; a 
Section 115 mechanical rate adjustment, also by the Tribunal; and a 
proceeding under the Copyright Arbitration Royalty Panel (``CARP'') 
system administered by the Librarian of Congress for preexisting 
subscription services under the same Section 114(f)(1)(B) statutory 
license involved in this proceeding. All three of these decisions were 
the subject of judicial review.
1. The 1980 Jukebox License Proceeding
    The Copyright Royalty Tribunal's first consideration of the 
reasonable rate standard and the Section 801(b)(1) factors involved the 
1980 Adjustment of the Royalty Rate for Coin-Operated Phonorecord 
Players, better known as jukeboxes. 46 FR 884 (January 5, 1981). The 
Tribunal raised the $8 a year per jukebox fee that was set by statute 
in the 1976 Copyright Act to $50 per year phased in over a 2-year 
period. The rate remained in effect for a 10-year period from 1980 to 
1990.
    While the Tribunal's decision was somewhat lengthy, its 
consideration and application of the standard and the Section 801(b)(1) 
factors was not. Coming in the last section of its decision and 
amounting to less than a page, the Tribunal applied the factors to the 
$50 rate it derived from its consideration of ``marketplace analogies'' 
and determined that the selected rate was consistent with each. 46 FR 
889. In reviewing the Tribunal's decision, the U.S. Court of Appeals 
for the Seventh Circuit gave no attention to the Section 801(b)(1) 
factors or the Tribunal's application of them, focusing instead on the 
appropriateness of the Tribunal's choice of ``marketplace analogies.'' 
Amusement & Music Operators Ass'n. v. Copyright Royalty Tribunal, 676 
F.2d 1144 (7th Cir. 1982). The Tribunal decision was upheld.
2. The 1981 Mechanical License Proceeding
    Less than one month after releasing the jukebox rate determination, 
the Tribunal issued its decision in the Adjustment of the Royalty 
Payable Under Compulsory License for Making

[[Page 4083]]

and Distributing Phonorecords, better known as the mechanical license 
proceeding. 46 FR 10466 (February 3, 1981). The mechanical license 
requires payment to copyright owners of musical works (songwriters and 
music publishers) for the creation and distribution of phonorecords of 
their works. In a lengthy decision, the Tribunal nearly doubled the 
existing rates and established a complex system for future interim 
adjustments during the 7-year license period to reflect increases in 
the average list price of record albums.
    Unlike the jukebox proceeding, the Tribunal offered its views as to 
the `reasonable' royalty standard and the Section 801(b)(1) factors. As 
to the `reasonable' royalty standard, the Tribunal stated that ``[i]t 
is our opinion that the term reasonable in the statute is of dominating 
importance in reaching a final determination in this proceeding.'' 46 
FR 10479. As to the meaning of the term ``reasonable,'' the Tribunal 
recalled Professor Gellhorn's and the Register of Copyrights' 
admonitions to the Congress to adopt standards in the 1976 Copyright 
Act and observed that ``Congress drafted the (Section 801(b)(1)) 
criteria in the broadest terms that it could, consistent with its 
intent to prevent a challenge to the constitutionality of the 
Tribunal.'' Id. (parenthetical added). The Tribunal went on and 
``conclude[d], consistent with its Congressional mandate, that this 
Tribunal's adjustment must set a ``reasonable'' mechanical royalty rate 
designed to achieve four objectives, set forth in Section 801 of the 
Act* * *'' Id. The Tribunal then undertook an application of the record 
evidence to each of the Section 801(b)(1) factors and concluded that 
the 4 cent rate it had derived from the evidence and economic testimony 
of the parties satisfied all of the factors. Id. at 10479-81.
    The U.S. Court of Appeals for the District of Columbia Circuit 
upheld the Tribunal's determination of the rates, but set aside the 
Tribunal's mechanism for adjusting the rates within the licensing 
period as being beyond the Tribunal's statutory authority. Recording 
Industry Ass'n. of America v. Copyright Royalty Tribunal, 662 F.2d 1 
(D.C. Cir. 1981). In reviewing the rates, the Court discussed the 
Section 801(b)(1) factors not in the context of the Tribunal's 
interpretation or application of them, but rather in terms of the 
judicial standard of review to be applied. The Court concluded at least 
three aspects of the factors increased the deference owed to the 
Tribunal's conclusions. First, subsections (A) and (D)--the 
maximization of the availability of creative works to the public and 
minimization of disruption to the industries--``require determinations 
`of a judgmental or predictive nature,' and the court must be aware 
that `a forecast of the direction in which the future public interest 
lies necessarily involves deductions based on the expert knowledge of 
the agency.' '' Id. at 8 (citations omitted). Second, the Court noted 
that subsections (B) and (C)--the fair return and income to owners and 
users and relative roles of owners and users in the product--call for 
policy choices that should be owed considerable deference. Id. at 8-9. 
Finally, the Court observed:

    [T]he statutory factors pull in opposing directions, and 
reconciliation of these objectives is committed to the Tribunal as 
part of its mandate to determine ``reasonable'' royalty rates. Both 
the House and Senate had originally passed bills whose only 
instruction to the Tribunal was to assure that the royalty rate was 
reasonable, although the House report had stated objectives that it 
``anticipated that the Commission will consider.'' As part of the 
compromise that produced the final structure of the Tribunal, most 
of those objectives were written into the statute,* * *, but the 
Tribunal was not told which factors should receive higher 
priorities. To the extent that the statutory objectives determine a 
range of reasonable royalty rates that would serve all these 
objectives adequately but to differing degrees, the Tribunal is free 
to choose among those rates, and courts are without authority to set 
aside the particular rate chosen by the Tribunal if it lies within a 
``zone of reasonableness.''

Id. at 9 (footnotes omitted).
3. The Digital Performance Right in Sound Recordings Proceeding
    The Tribunal never had occasion again to conduct a Section 
801(b)(1) rate adjustment, and it was abolished in 1993 and replaced by 
the CARP scheme administered by the Librarian of Congress. Copyright 
Royalty Tribunal Reform Act of 1993, Pub. L. No. 103-198, 107 Stat. 
2304. Subsequent to the Tribunal's abolition, Congress passed the 
Digital Performance Right in Sound Recordings Act of 1995, Pub. L. No. 
104-39, 109 Stat. 336, which created the Section 114 digital 
performance right license that is the subject of this proceeding. 
Unlike prior statutory licenses where the Congress fixed the initial 
rates within the statute, the rates for the new digital performance 
right license were left to resolution by a CARP. The Librarian convened 
a CARP in 1997 for PSS and SDARS. The SDARS settled with copyright 
owners and withdrew from the proceeding,\14\ and the CARP rendered a 
determination only with respect to the PSS. The Librarian reviewed the 
CARP's determination and rejected it with respect to the rate as well 
as to certain terms, and the U.S. Court of Appeals for the District of 
Columbia Circuit reviewed the Librarian's decision. The Court upheld 
the Librarian's rate determination but remanded certain terms adopted 
by the Librarian for lack of supporting evidence. Recording Industry 
Ass'n of America, Inc. v. Librarian of Congress, 176 F.3d 528, 532 (DC 
Cir. 1999).
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    \14\ The terms and conditions of the agreement were never 
publicly disclosed.
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    While the CARP offered nothing by way of interpretation of the 
Section 801(b)(1) factors, it took a decidedly different approach from 
the Tribunal in applying them. Whereas the Tribunal first analyzed the 
economic benchmarks submitted by the parties, selected a royalty fee 
and then applied the factors sequentially to the record evidence to 
determine if the selected fee satisfied them, the CARP instead began 
its analysis with the factors. The CARP did not analyze the factors in 
order, instead beginning with subsection (C), followed by subsections 
(D), (A) and then (B). Curiously, the CARP's consideration of the 
parties' benchmarks occurred under its consideration of subsection (B), 
the factor requiring a balancing of fair return to the copyright owner 
and fair income to the copyright user. Then, at the end of the 
determination, the CARP provided a less than one-page conclusion 
resolving all of the factors in favor of the PSS. In re: Determination 
of Statutory License Terms and Rates for Certain Digital Subscription 
Transmissions of Sound Recordings, Report of the Copyright Arbitration 
Royalty Panel, Docket No. 96-5 CARP DSTRA, p. 62 (November 28, 1997).
    The CARP's approach did not particularly vex the Librarian, but its 
terse conclusion that subsection (A)--maximization of creative works to 
the public--favored the PSS certainly did.

    There is no record evidence to support a conclusion that the 
existence of the digital transmission services stimulates the 
creative process. Instead, the Panel made observations concerning 
the development of another method for disseminating creative works 
to the public--a valid and vital consideration addressed in the 
statutory objective concerning the relative contributions from each 
party--but fails to discuss how the creation of a new mode of 
distribution will itself stimulate the creation of additional works.


[[Page 4084]]


Determination of Reasonable Rates and Terms for the Digital Performance 
of Sound Recordings (Final Rule and Order), 63 FR 25394, 25406 (May 8, 
1998) (codified at 37 CFR part 260) (``1998 PSS Rate Determination''). 
The Librarian also faulted the CARP for failing to reconcile its 
conclusion with the Tribunal's determination in the 1980 jukebox rate 
adjustment proceeding that jukeboxes did not contribute to the 
maximization of creative works to the public. Id. at 25406-7. As to the 
other Section 801(b)(1) factors, the Librarian affirmed the CARP's 
determination, but he concluded that an upward adjustment of the rate 
was necessary because he found that the CARP's reliance upon a single 
private license agreement offered as a benchmark and its subsequent 
manipulation of the license fee amounted to arbitrary action. Id. at 
25409. The Librarian increased the 5% of annual revenues fee proposed 
by the CARP to 6.5%, stating that the 6.5% rate met all of the Section 
801(b)(1) factors. Id. at 25410.
    Only the Recording Industry Association of America, Inc. (``RIAA'') 
challenged the Librarian's decision. In its petition for review, RIAA 
argued that the Librarian misinterpreted Section 801(b)(1) by equating 
``reasonable'' royalty rates with those that are calculated to achieve 
the objectives of the Section 801(b)(1) factors. Rather, in RIAA's 
view, the statutory language imposes two separate requirements: the 
royalty fee must be (1) a ``reasonable copyright royalty rate,'' and 
(2) it must be then ``calculated to achieve'' the Section 801(b)(1) 
objectives. RIAA argued that a ``reasonable copyright royalty rate'' 
was one that affords fair market compensation, thus making market rates 
the starting point for application of the Section 801(b)(1) factors. 
Recording Industry Ass'n of America, Inc. v. Librarian of Congress, 176 
F.3d 528, 532 (DC Cir. 1999).
    The U.S. Court of Appeals for the District of Columbia Circuit 
rejected RIAA's position, ruling that the Librarian's interpretation of 
the statute was permissible under Chevron U.S.A., Inc. v. Natural 
Resources Defense Council, Inc., 467 U.S. 837 (1984). 176 F.3d at 533. 
The Court went further and observed: ``Here, the Librarian determined 
that `reasonable rates' are those that are calculated with reference to 
the four statutory criteria. This interpretation is not only 
permissible but, given that [Section] 114 rates are to be `calculated 
to achieve' the four objectives of [Section] 801(b)(1), it is the most 
natural reading of the statute.'' Id.; see also, 176 F.3d at 534 
(``Because it was reasonable for the Librarian to find that the term 
`reasonable copyright royalty rates' is defined by the four statutory 
objectives, there is no need to look to Tribunal precedent interpreting 
the term `reasonable rates' in other contexts.''). The Court did not 
discuss the Librarian's application of the Section 801(b)(1) factors to 
the record evidence, but ``den[ied] RIAA's petition for review with 
respect to the establishment of a 6.5 percent rate. Id. at 535.\15\
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    \15\ The RIAA was successful in convincing the Court to vacate 
and remand the Librarian's determination with respect to terms on 
the grounds of lack of record evidence to support them. Id. at 536.
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C. Approach of the Copyright Royalty Judges

    Based upon the above discussion, the path for the Copyright Royalty 
Judges is well laid out. We shall adopt reasonable royalty rates that 
satisfy all of the objectives set forth in Section 801(b)(1)(A)-(D). In 
so doing, we begin with a consideration and analysis of the benchmarks 
and testimony submitted by the parties, and then measure the rate or 
rates yielded by that process against the statutory objectives to reach 
our decision. Section 114(f)(1)(B) also affords us the discretion to 
consider the relevance and probative value of any agreements for 
comparable types of digital audio transmission services that submit 
voluntary agreements under 17 U.S.C. 114(f)(1)(A). See, 17 U.S.C. 
114(f)(1)(B) (``[I]n addition to the objectives set forth in Section 
801(b)(1), the Copyright Royalty Judges may consider the rates and 
terms for comparable types of subscription digital audio transmission 
services and comparable circumstances under voluntary license 
agreements described in subparagraph (A).'') (emphasis added).

IV. Determination of Royalty Rates

A. Application of Section 114 and Section 112

    Based on the applicable law and relevant evidence received in this 
proceeding, the Copyright Royalty Judges must determine rates for the 
Section 114 performance licenses and the associated Section 112 
ephemeral reproduction licenses utilized by SDARS.
    As previously discussed, the Copyright Act requires that the 
Copyright Royalty Judges establish rates for the Section 114 license 
that are reasonable and calculated to achieve the following four 
specific policy objectives: (A) To maximize the availability of 
creative works to the public; (B) to afford the copyright owner a fair 
return for his creative work and the copyright user a fair income under 
existing economic conditions; (C) to reflect the relative roles of the 
copyright owner and the copyright user in the product made available to 
the public with respect to relative creative contribution, 
technological contribution, capital investment, cost, risk, and 
contribution to the opening of new markets for creative expression and 
media for their communication; and (D) to minimize any disruptive 
impact on the structure of the industries involved and on generally 
prevailing industry practices. 17 U.S.C. 114(f)(1)(B) and 17 U.S.C. 
801(b)(1).
    With respect to the Section 112 license, the Copyright Act requires 
that the Copyright Royalty Judges establish rates for this license that 
most clearly represent those ``that would have been negotiated in the 
marketplace between a willing buyer and a willing seller'' and to take 
into account evidence presented on such factors as (1) whether the use 
of the services may substitute for or promote the sale of phonorecords 
and (2) whether the copyright owner or the service provider makes 
relatively larger contributions to the service ultimately provided to 
the consuming public with respect to creativity, technology, capital 
investment, cost and risk. 17 U.S.C. 112(e)(4).
    Having carefully considered the relevant law and the evidence 
received in this proceeding, the Copyright Royalty Judges determine 
that the appropriate Section 114 performance license rate is 6.0% of 
gross revenues for 2007 and 2008, 6.5% for 2009, 7.0% for 2010, 7.5% 
for 2011 and 8.0% for 2012 and, further, that the appropriate Section 
112 reproduction license rate is deemed to be embodied in the Section 
114 license rate.
    The applicable rate structure for the Section 114 license is the 
starting point for the Copyright Royalty Judges' determination.

B. The Rate Proposals of the Parties and the Appropriate Royalty 
Structure for Section 114 Performance License Applicable To Sdars

1. Rate Proposals
    The contending parties present several alternative rate structures. 
In its second amended rate proposal, SoundExchange argues in favor of a 
monthly fee equal to the greater of: A percentage of gross revenues 
varying from 8% to 23% or a per subscriber rate varying from $0.85 per 
subscriber to $3.00 per subscriber. These applicable fees vary based on 
the actual number of

[[Page 4085]]

subscriptions reported by the service. For example, the lowest fee 
(i.e., the greater of 8% of gross revenues or $0.85 per subscriber) 
would be applicable for a number of subscriptions equal to less than 9 
million. At the opposite extreme, the highest fee (i.e., the greater of 
23% of gross revenues or $3.00 per subscriber) would be applicable for 
a number of subscriptions equal to or more than 19 million. While 
proposing that the percent of revenues alternatives increase only in 
response to subscriber growth over the license period, SoundExchange 
proposes that the per subscriber alternatives associated with 
particular subscriber numbers would be additionally adjusted at the 
beginning of each year starting with January, 2008 by the change in the 
consumer price index (CPI-U) over the preceding 12 months ending on 
November 1. SoundExchange Second Amended Rate Proposal (July 24, 2007) 
at 1-4.
    Subsequently, SoundExchange defensively offered, in the 
alternative, a second ``option'' in which applicable rates would 
continue to vary with subscriber numbers but also would vary at each 
subscriber interval based on a per broadcast/per subscriber metric. For 
example, at the low end of this alternative proposal, if the number of 
subscriptions were equal to less than 9 million for an SDARS, 
$0.0000028 per subscriber would be applicable to each broadcast of a 
sound recording for the first 150,000 sound recordings broadcast each 
month and $0.0000008 per subscriber would be applicable to each 
broadcast of a sound recording thereafter. At the high end of this 
alternative, if the number of subscriptions were equal to more than 19 
million for an SDARS, $0.00001 per subscriber would be applicable to 
each broadcast of a sound recording for the first 150,000 sound 
recordings broadcast each month and $0.000003 per subscriber would be 
applicable to each broadcast of a sound recording thereafter. With 
respect to this ``option,'' SoundExchange also proposes that the 
royalty rates associated with particular subscriber numbers would be 
additionally adjusted at the beginning of each year starting with 
January, 2008 by the change in the CPI-U over the preceding 12 months 
ending on November 1. SoundExchange Third Amended Rate Proposal (August 
6, 2007) at 1-8.
    By contrast, XM and Sirius initially proposed only a percentage of 
revenues fee structure equal to 0.88% of a licensee's quarterly gross 
revenues resulting from residential services in the United States to be 
applicable for the duration of the 2007-2012 license period. XM Rate 
Proposal (January 17, 2007) at Sec.  26--.3; Sirius Rate Proposal 
(January 17, 2007) at Sec.  26--.3. This proposal was subsequently 
revised in an amended proposal \16\ that called for the establishment 
in 2007 of a quarterly license fee of $1.20 per play \17\ of a 
copyrighted sound recording during the quarter, with subsequent years 
of the license period beginning with 2008 adjusted each year by the 
percentage change in combined SDARS subscribers during the preceding 
year. XM Amended Rate Proposal (July 24, 2007) at Sec.  3--.3; Sirius 
Amended Rate Proposal (July 24, 2007) at Sec.  3--.3. A further 
revision of this proposal was submitted as the Services' Second Amended 
Proposal of Rates and Terms and provided for the establishment in 2007 
of a quarterly license fee of $1.60 per play of a copyrighted sound 
recording during the quarter, again with subsequent years of the 
license period beginning with 2008 adjusted each year by the percentage 
change in combined SDARS subscribers during the preceding year. Second 
Amended Proposal of Rates and Terms of Sirius Satellite Radio Inc. and 
XM Satellite Radio Inc. (October 1, 2007) at Sec.  3--.3.
---------------------------------------------------------------------------

    \16\ While the XM and Sirius amended rate proposal omits any 
specific mention of a revenue basis, their chief economic expert, 
Dr. Woodbury, nevertheless supplies a revised estimate of his 
recommended revenue-based rate in the course of his rebuttal 
testimony and uses that revised revenue-based rate as the basis for 
the SDARS' amended and second amended ``per play'' proposals. At 
bottom then, the SDARS' amended rate proposal does not scrap its 
revenue basis, but rather simply translates the revenue-based 
recommendation of 1.20% into a per play rate by dividing the 
revenues that would be garnered from the application of the revised 
revenue-based rate by the total number of estimated compensable 
plays broadcast by the SDARS in 2006. This results in a per play 
rate of $1.20 in their amended proposal based on 2006 revenues and a 
per play rate of $1.60 in their second amended proposal based 
instead on 2007 revenue projections. Woodbury WRT at 22; SDARS PFF 
at ]] 845-846.
    \17\ ``Play'' is defined as the transmission of a sound 
recording by the SDARS, regardless of the number of listeners who 
tune in or listen to the transmission. XM Amended Rate Proposal 
(July 24, 2007) at Sec.  3--.2(d); Sirius Amended Rate Proposal 
(July 24, 2007) at Sec.  3--.2(d).
---------------------------------------------------------------------------

    In other words, while the parties on both sides initially proposed 
rates based on a percentage of gross revenues (albeit with somewhat 
different definitions of gross revenues), they both subsequently 
submitted royalty payment proposals that could generally be described 
as ``per play'' or ``per broadcast'' rates. However, their purposes in 
proposing ``per play'' or ``per broadcast'' rates differ. While 
admitting the likelihood of increased administrative costs, the SDARS 
maintain that their ``per play'' mechanism is superior to a revenue-
based rate structure because: (1) It allows the SDARS to respond to any 
substantial increases in fees by economizing on the use of music so as 
to reduce their payments and (2) it preserves the incentives of the 
SDARS to acquire more attractive nonmusic programming or to improve the 
quality of their radio devices. Woodbury WRT at 21. SoundExchange, on 
the other hand, while recognizing that there are benefits to a per 
performance rate structure such as adopted by the Judges in the 
recently concluded webcasting proceeding \18\ (i.e., where a 
performance refers to one play of one sound recording to a single 
listener at a time), also recognizes that its ``per broadcast'' 
alternative is not the functional equivalent of a per performance rate 
structure. As a result, SoundExchange admits that its ``per broadcast'' 
mechanism does not engender the benefits of the usage metric adopted in 
Webcaster II and, further, that it is inferior to a percentage of 
revenue structure. Pelcovits WRT at 19, 25-26. At bottom, 
SoundExchange's alternative proposal is submitted defensively to 
protect against the possibility that, notwithstanding these weaknesses, 
this Court might nevertheless settle upon a per play or per broadcast 
approach without reducing what SoundExchange identifies as ``the most 
significant distortion in a static proposal of this nature''--the lack 
of proportionality between total listening and the number of 
broadcasts. Pelcovits WRT at 23. For this reason, SoundExchange offers 
a two-tier structure associated with seven specific subscriber 
intervals as part of its per broadcast/per subscriber proposal to help 
mitigate the potential adverse revenue impact of a decline in music 
broadcasts that is not fully matched by an equivalent decline in music 
listenership. Pelcovits WRT at 23-25.
---------------------------------------------------------------------------

    \18\ Digital Performance Right in Sound Recordings and Ephemeral 
Recordings (Final Rule and Order), 72 FR 24084 (May 1, 2007) 
(codified at 37 CFR part 380) (``Webcaster II'').
---------------------------------------------------------------------------

2. Rate Structure
    Because we have no true per performance fee proposal before us nor 
sufficient information from evidence of record to accurately transform 
any of the parties' proposals into a true per performance fee proposal, 
the Copyright Royalty Judges conclude that a revenue-based fee 
structure for the SDARS is the most appropriate fee structure 
applicable to these licensees.
    First, the absence of a true per performance fee proposal that 
seeks to tie payment directly to actual usage of the sound recording by 
the licensees

[[Page 4086]]

makes all the various alternative fee proposals of the parties into 
proxies for a usage metric at best. Although revenue merely serves as a 
proxy for measuring the value of the rights used, so also do the per 
play and per broadcast alternatives offered by the parties. Neither of 
the parties' alternatives to a revenue-based metric really measures 
actual usage. The SDARS ``per play'' proposal makes no attempt to 
measure the number of listeners to any particular sound recording, but 
rather transforms the revenue-based metric into a ``per play'' metric 
by applying that revenue rate to the transmission of a sound recording 
without regard to the number of listeners who tune in or listen to the 
transmission. Woodbury WRT at 22 and XM Amended Rate Proposal (July 24, 
2007) at Sec.  3--.2(d); Sirius Amended Rate Proposal (July 24, 2007) 
at Sec.  3--.2(d); Second Amended Proposal of Rates and Terms of Sirius 
Satellite Radio Inc. and XM Satellite Radio Inc. (October 1, 2007) at 
Sec.  3--.2(d).
    Indeed, since the number of ``plays'' (i.e. transmission of a sound 
recording) for which the SDARS propose payment is not further related 
to the number of listeners to such transmissions, Dr. Woodbury admits 
that the per play rate is not even as good a proxy for usage as revenue 
without further annual adjustments for growth in subscribers. Woodbury 
WRT at 22. Similarly, the SoundExchange ``per broadcast'' rate proposal 
fails to relate royalty payments directly to usage. Even though the 
SoundExchange ``per broadcast'' proposal is tied to the number of SDARS 
subscribers, it remains, at best, a proxy for actual usage because, as 
Dr. Pelcovits admits, ``subscribers'' are not the functional equivalent 
of ``listeners'' and because the available data does not permit the 
precise determination of whether the music listened to by SDARS 
subscribers refers solely to the compensable sound recordings at 
question in this proceeding. Pelcovits WRT at Appendix at 1-3. In 
short, as Dr. Pelcovits states, ``the per broadcast/per subscriber 
metric simply does not provide an accurate and dynamic measure of 
listening/consumption.'' Pelcovits WRT at 25.
    Second, the advocates of the ``per play'' and ``per broadcast'' 
rate structures effectively admit that, as proxies for usage, such 
measures are no better than revenue-based measures, as shown by their 
attempts to use changes in general subscriber levels as a rough proxy 
for measuring the impact of changes in the number of listeners. For 
example, Dr. Woodbury, after noting that the ``per-play payment does 
not account for any changes in aggregate music listening time during 
the license period,'' suggests ``accounting for such changes in an 
approximate way by increasing the per-play rate by the actual annual 
percentage change in the number of SDARS subscribers.'' Woodbury WRT at 
22 (emphasis added). Similarly, SoundExchange's ``per broadcast/per 
subscriber'' rate proposal, ultimately ties increases in royalty rates 
to the achievement of specific subscriber levels that are only roughly 
related to the actual number of listeners to any given sound recording. 
SoundExchange Third Amended Rate Proposal (August 6, 2007) at 5-7. In 
short, both parties ultimately focus on a major driver of revenue 
growth (i.e., subscriber growth) as a proxy for usage because, without 
this additional adjustment, ``per play'' and ``per broadcast'' metrics 
are clearly poorer substitutes for a usage-based metric compared to a 
percentage of revenue approach. Consequently, notwithstanding the 
various adjustments made by advocates of the ``per play'' or ``per 
broadcast'' proposals they remain inextricably focused on revenues. 
Moreover, because the adjustments suggested to improve the ``per play'' 
and ``per broadcast'' proposals result in additional ambiguities rather 
than more precision, these alternatives may be even less satisfactory 
proxies for a usage-based metric than the percentage of revenue 
approach.
    Third, upon careful review, we find that the SDARS' two proffered 
advantages of a ``per play'' metric as compared to a percentage of 
revenue measure are less advantageous than claimed. The SDARS argue 
that a ``per play'' rate provides the SDARS with more business 
flexibility because it allows them to respond to any substantial 
increases in fees by economizing on the plays of sound recordings so as 
to reduce their royalty costs. Woodbury WRT at 20; Karmazin WRT at 13. 
While the general proposition of enhancing business flexibility is 
usually advantageous (at least to the party obtaining such 
flexibility), the probability of obtaining the specific advantage 
described by Dr. Woodbury and Mr. Karmazin is reduced by the myriad of 
economic circumstances which must coalesce as necessary 
preconditions.\19\ Further, the same flexibility may be achieved by 
other means.\20\ At the same time, this business flexibility 
``advantage'' raises serious questions of fairness precisely because 
the SDARS ``per play'' metric is a less than fully satisfactory proxy 
for listenership. Thus, fewer stations (ergo fewer plays) could be 
offered by the SDARS without a proportionate reduction in the number of 
transmissions actually heard. Under such circumstances, the copyright 
owner's per performance revenue would decline because of the 
shortcomings of the ``per play'' metric in question as a proxy for 
measuring actual usage. SX PFF at ]] 1442-9. It is not fair to so 
clearly fail to properly value the performance rights at issue in this 
proceeding. Such a result is additionally at odds with the stated 
policy objective of the statute to afford the copyright owner a fair 
return for his creative work. 17 U.S.C. 801(b)(1). Similarly, the 
SDARS' contention that the adoption of a ``per play'' rate structure 
would preserve their incentives to improve the quality of their service 
(by leaving them with more revenue to acquire more attractive nonmusic 
programming or to improve the quality of their radio devices), is not 
an advantage equitably experienced by both parties. Rather, the 
advantage runs to the SDARS who stand to gain revenue while the 
copyright owner experiences a decline in the value of the performance 
rights at issue in this proceeding. Again, this is because number of 
plays can be reduced with a less than proportionate reduction in 
listenership. Furthermore, there is no guarantee that the SDARS will 
spend any additional revenue so acquired to improve the quality of 
their services; thus ``preserving an incentive'' is not the equivalent 
of insuring action of the type suggested by Dr. Woodbury based on that 
incentive.
---------------------------------------------------------------------------

    \19\ From an economic point of view, for example, it would only 
make sense for the SDARS to reduce their use of music as an input in 
response to a royalty fee increase if the revenue they earned from 
the last dollar spent on music programming came to be outstripped by 
the revenue they earned from spending the same dollar on nonmusic 
programming. This assumes that a variety of relative revenue 
generation and relative input pricing circumstances have been 
simultaneously satisfied.
    \20\ For example, in light of the definition of ``gross 
revenues'' herein below in this determination, the SDARS could offer 
wholly nonmusic programming as an additional, separately priced 
premium channel/service without having the revenues from such a 
premium channel/service become subject to the royalty rate and, 
thereby, achieve the desired flexibility of offering more lucrative 
nonmusic programming without sharing the revenues from that 
programming with the suppliers of sound recording inputs.
---------------------------------------------------------------------------

    In short, given that the two ``advantages'' of the ``per play'' 
approach stated by Dr. Woodbury are neither clear-cut nor of estimable 
likelihood, we are persuaded that the ``countervailing consideration'' 
of greater administrative costs raised by Dr. Woodbury clearly 
outweighs the

[[Page 4087]]

tenuous benefits of the SDARS ``per play'' fee structure. SoundExchange 
in its proposed ``per broadcast/per subscriber'' approach attempts to 
mitigate some of the untoward effects of the SDARS ``per play'' 
approach through the addition of a two-tier fee structure that 
partially and indirectly addresses the absence of a true per 
performance measure reflective of actual listenership. However, we 
agree with Dr. Pelcovits that even as so modified, this approach still 
yields less than satisfactory results. Pelcovits WRT at 25 (``the per 
broadcast/per-subscriber [sic] metric simply does not provide an 
accurate and dynamic measure of listening/consumption''). Moreover, the 
tradeoff for this modest conceptual improvement in the ``per play'' fee 
structure is reliance on less than precise estimates of listenership 
and additional complexity in administration. On balance, then, we 
conclude that neither the SDARS' ``per play'' metric nor 
SoundExchange's ``per broadcast/per subscriber'' measure is superior to 
a revenue-based fee structure as a proxy for a true per performance fee 
structure for the services in this proceeding. Furthermore, a revenue-
based fee structure at least offers clear administrative advantages to 
these parties and, therefore, reduced transactions costs compared to 
the ``per play'' and ``per broadcast/per subscriber'' alternatives 
proposed by the parties.
    Fourth, while in Webcaster II we concluded that the evidence in the 
record of that proceeding weighed in favor of a per performance usage 
fee structure for both commercial and noncommercial webcasters, we 
further suggested that, in the absence of some of the more egregious 
problems noted therein, the use of a revenue-based metric as a proxy 
for a usage-based metric might be reasonable. Webcaster II, 72 FR 
24090. In particular, one of the more intractable problems associated 
with the revenue-based metrics proposed by the parties in Webcaster II, 
72 FR 24090, was the parties' strong disagreement concerning the 
definition of revenue for nonsubscription services. This was further 
complicated by questions related to applying the same revenue-based 
metric to noncommercial as well as commercial services. See Webcaster 
II, 72 FR 24094 n.15. The same degree of difficulty is not presented by 
the applicable facts in this proceeding. The parties to this 
proceeding, at least initially, all proposed a revenue-based metric 
and, while there were some differences in the definition of revenues in 
their initial proposals, no party has submitted any evidence regarding 
the impossibility of applying or complying with a revenue-based metric. 
That is not surprising, inasmuch as the parties have until now lived 
under a revenue-based regime. Therefore the parties are most familiar, 
and perhaps most comfortable, with the operation of a revenue-based 
metric. The value of such familiarity lies in its contribution towards 
minimizing disputes and, concomitantly, keeping transactions costs in 
check. Because XM and Sirius are both commercial subscription services 
and music is an integral part of each subscription service, focusing on 
gross revenues attributable to those subscriptions or derived in 
connection with the use of music in SDARS programming (e.g., 
advertising or sponsorship revenues attributable to such programming) 
provides a straightforward method of relating music fees to the value 
of the rights being provided.
    For all of the above reasons, the Copyright Royalty Judges conclude 
that evidence in the record weighs in favor of a revenue-based fee 
structure for the SDARS. We find a sufficient clarity of evidence based 
on the record in this proceeding to produce a revenue-based metric that 
can serve as adequate proxy for a usage-based metric. Furthermore, 
there was no substantial evidence offered by any party to readily guide 
the calculation of a usage-based (i.e. per performance) metric as a 
substitute for the revenue-based approach long employed by the parties. 
Indeed, in stark contrast to the record in Webcaster II, neither the 
SDARS nor SoundExchange provided substantial evidence to indicate that 
a true per performance rate was susceptible of being calculated by the 
parties to this proceeding. Therefore, we find that a revenue-based 
measure is currently the most effective proxy for capturing the value 
of the performance rights at issue here, particularly in the absence of 
any substantial evidence of how some readily calculable true per 
performance metric could be applied to the SDARS.
3. Revenue Defined
    In order to properly implement a revenue-based metric, a definition 
of revenue that properly relates the fee to the value of the rights 
being provided is required.\21\ Although the SDARS and SoundExchange 
offered somewhat different formulations of how revenue should be 
defined in their initial rate proposals, the parties offered little 
evidence to support their respective proposed definitions of revenue. 
SoundExchange proposed an expansive reading of revenue to include ``all 
revenue paid or payable to an SDARS that arise from the operation of an 
SDARS service * * *'' SoundExchange Third Amended Rate Proposal (August 
6, 2007) at Sec.  38--.2(g). However, SoundExchange offers scant 
evidentiary support for this particularly broad yet vague definition. 
The SDARS, by contrast, offer a definition of gross revenues that 
apparently seeks to largely adapt the existing PSS definition of gross 
revenues, 37 CFR 260.2(e), to the nature of current SDARS services. XM 
Rate Proposal (January 17, 2007) at Sec.  26--.2(d); Sirius Rate 
Proposal (January 17, 2007) at Sec.  26--.2(d). With one exception, we 
find that the SDARS ``gross revenue'' definition in their initial fee 
proposal more unambiguously relates the fee to the value of the sound 
recording performance rights at issue in this proceeding. For example, 
the SDARS definition of ``gross revenues'' excludes monies attributable 
to premium channels of nonmusic programming that are offered for a 
charge separate from the general subscription charge for the service. 
The separate fee generated for such nonmusic premium channels is not 
closely related to the value of the sound recording performance rights 
at issue in this proceeding. Therefore, this proposed exclusion serves 
to more clearly delineate the revenues related to the value of the 
sound recording performance rights at issue in this proceeding.
---------------------------------------------------------------------------

    \21\ Dr. Ordover simply describes the main consideration as 
follows: ``In sum, rates should reflect purchasers' willingness to 
pay for music content.'' Ordover WDT at 21 (emphasis added).
---------------------------------------------------------------------------

    The one exception to the SDARS definition of revenues that fails to 
meet the test of unambiguously relating the fee to the value of the 
sound recording performance rights is the use of the SDARS definition 
of a Music Channel in two places in their gross revenue definition--
once in connection with a limitation on advertising revenues and again 
in an exclusion of subscription revenues solely derived from nonmusic 
channels. The SDARS define Music Channels to mean channels where sound 
recordings constitute 50% or more of the programming at SDARS proposed 
regulation Sec.  26--.2(f), but their gross revenue definition at SDARS 
proposed regulation Sec.  26--.2(d)(vi)(B) also implies that nonmusic 
channels are channels that are characterized as those with only 
``incidental'' performances of sound recordings.\22\ Because the latter

[[Page 4088]]

interpretation is more consistent with the test of unambiguously 
relating the fee to the value of the sound recording performance rights 
at issue in this proceeding and because the SDARS offer no substantial 
evidence to support their 50% breakpoint, we decline to adopt the more 
cramped position stated in the SDARS' proposed definition of a Music 
Channel. Rather, we adopt the SDARS ``incidental'' performance of sound 
recordings formulation. Using the latter formulation, gross revenues 
would exclude both subscription and advertising revenues associated 
with channels that use only ``incidental'' performances of sound 
recordings as part of their programming.\23,\ \24\
---------------------------------------------------------------------------

    \22\ The latter definition is more consistent with current SDARS 
programming. See Woodbury Amended WDT at 6-7 and Ex. 3 and Ex. 4. It 
is also more consistent with the notion of a music channel espoused 
by SDARS' expert economist, Dr. Woodbury, who identifies all 
channels using commercially released sound recordings as ``music 
channels'' in his analyses. Woodbury Amended WDT at 7 and n.22.
    \23\ See infra at Sec.  382.11 (definition of ``Gross 
Revenues'').
    \24\ The Judges do not address here the compensability of 
``incidental'' performances of sound recordings; rather, the Judges 
find that reference to such ``incidental'' performances facilitates 
an unambiguous definition of nonmusic channels identifying 
substantial revenue generation unrelated to the sound recording 
rights at issue in this proceeding and which arises under 
circumstances clearly distinguishable from the joint music/nonmusic 
product typically offered by the SDARS.
---------------------------------------------------------------------------

    A further consequence of the Copyright Royalty Judges adopting the 
revenue-based metric as a proxy for a usage-based metric with the 
definition of gross revenue described hereinabove is to eliminate the 
need for a rate structure formulated as a ``greater of'' comparison 
between gross revenue-based metrics and alternative revenue-based 
metrics that focus on the dollar value of subscriptions alone.
    Although SoundExchange proposes an alternative per subscription 
dollar amount, the Judges do not find the basis for this alternative 
structure to be supported by persuasive evidence. For example, 
SoundExchange's expert economist, Dr. Pelcovits, simply asserts that 
its rate proposal ``sensibly follows a `greater of' rate structure 
common to certain marketplace agreements'' without more. Pelcovits WDT 
at 4. Indeed, Dr. Pelcovits' recommended SDARS rate itself is not 
stated as a ``greater of'' alternative, but rather as equivalent dollar 
per subscriber or percent of revenue rates. Pelcovits WDT at 32, 
Pelcovits WRT at 39. SoundExchange's other economic expert, Dr. 
Ordover, similarly reads SoundExchange's per subscriber and percent of 
revenue rates as equivalent alternatives. Ordover WDT at 4. Neither Dr. 
Pelcovits nor any other SoundExchange witness offers a solid 
explanation of why a ``greater of'' rate structure makes sense in other 
marketplaces together with an explanation of how that rationale is also 
applicable to this marketplace, notwithstanding any differences 
observed between the marketplaces in question. Nor does SoundExchange 
present any persuasive evidence that the availability of this per 
subscription alternative is necessary because it is easier to 
administer and thus will reduce transactions costs. Finally, given the 
parameters of gross revenues as defined hereinabove, there is no 
evidence in the record to suggest that gross revenues could be reduced 
below the amount of revenues otherwise due from applicable 
subscriptions. For all these reasons, the Judges decline to establish 
such a duplicative structure.

C. The Section 114 Royalty Rates for the SDARS

1. The Applicable Standard
    As previously noted hereinabove, supra at Section IV.A., the 
Copyright Act requires that the Copyright Royalty Judges establish 
rates for the Section 114 license that are reasonable and calculated to 
achieve the following four specific policy objectives identified in 
Section 801(b): (A) To maximize the availability of creative works to 
the public; (B) to afford the copyright owner a fair return for his 
creative work and the copyright user a fair income under existing 
economic conditions; (C) to reflect the relative roles of the copyright 
owner and the copyright user in the product made available to the 
public with respect to relative creative contribution, technological 
contribution, capital investment, cost, risk, and contribution to the 
opening of new markets for creative expression and media for their 
communication; and (D) to minimize any disruptive impact on the 
structure of the industries involved and on generally prevailing 
industry practices. 17 U.S.C. 114(f)(1)(B) and 17 U.S.C. 801(b)(1).
    Both the copyright owners and the SDARS agree that a good starting 
point for the determination of what constitutes a reasonable rate 
encompassing the four policy factors is to focus on comparable 
marketplace royalty rates as ``benchmarks,'' indicative of the prices 
that prevail for services purchasing similar music inputs for use in 
digital programming ultimately made available to consumers. SDARS PFF 
at ] 810 and SX PFF at ] 279. We agree that ``comparability'' is a key 
issue in gauging the relevance of any proffered benchmarks. Although 
the applicable Section 114 statutory standard provides a broader scope 
for analyzing relevant ``benchmark'' rates than the ``willing buyer, 
willing seller standard'' applicable to the Webcaster II proceeding, 
nevertheless potential benchmarks are confined to a zone of 
reasonableness that excludes clearly noncomparable marketplace 
situations.
2. Comparability of Marketplace Rates
    Notwithstanding their apparent general agreement that beginning 
with a relatively comparable marketplace benchmark is the best way to 
undertake the requisite analysis here, the parties disagree about what 
constitutes an appropriate benchmark. The SDARS argue that the most 
appropriate benchmarks, as analyzed by their expert economist, Dr. 
Woodbury, are (1) PSS rates applicable to cable subscription offerings 
by Music Choice; and (2) agreements between performing rights 
organizations (ASCAP and BMI) and the SDARS covering the digital public 
performance of musical works. On the other hand, SoundExchange 
maintains that the most appropriate benchmark agreements, as analyzed 
by its expert economists, Dr. Michael Pelcovits and Dr. Janusz Ordover, 
are: (1) The SDARS nonmusic programming content expenditures; (2) 
market agreements between record companies and a variety of services 
that digitally distribute their sound recordings; and (3) agreements 
between content providers and satellite television operators. We find, 
based on the available evidence before us, that no single market 
benchmark offered in evidence wholly satisfies the requisite analysis 
here, but rather that some evidence offered by both the SDARS and 
SoundExchange can serve to identify the parameters of a reasonable 
range of rates within which a particular rate most reflective of the 
four 801(b) factors can be located.
a. The Woodbury Benchmarks
    The SDARS' expert economic witness, Dr. Woodbury, offers two 
alternative benchmarks for consideration as the starting point for rate 
determination in the instant matter: (1) The 2004-7 rate paid by Music 
Choice for sound recordings used in its cable subscription offering, or 
7.25% of gross revenues, subject to certain adjustments which would 
reduce the effective rate for the SDARS to 1.20% of gross revenues; and 
(2) the aggregate current musical works rates paid to ASCAP and BMI, or 
2.35% of gross revenues. In addition, the SDARS argue that certain 
other evidence in the record ``corroborates Dr. Woodbury's PSS-Derived 
Rate'' (e.g., the

[[Page 4089]]

``custom radio'' agreement between Yahoo! and Sony BMG, again subject 
to certain adjustments which would reduce the effective rate if applied 
to the SDARS to 2.57% of revenue).
i. An Adjusted Music Choice PSS Rate
    With respect to the first of these proferred benchmarks, we find 
that Dr. Woodbury's assertion that the Music Choice cable television 
music offering is comparable to the services offered by the SDARS is 
unpersuasive. The Music Choice audio service is included as a part of a 
bundle of primarily audiovisually oriented services (i.e., television 
channels) offered over cable television systems to cable television 
subscribers at fixed locations, while the SDARS music channels are a 
substantial part of purely audio services provided to subscribers over 
devices designed in large part to compete with terrestrial radio in 
terms of equivalent mobility. Further, no evidence has been presented 
to indicate that cable TV subscribers utilize the Music Choice audio 
service except as incidental to their primary activity of television 
channel usage, while substantial evidence has been provided by both the 
SDARS and SoundExchange to indicate that music listening is an integral 
part of consumer activity with respect to SDARS transmissions. SX PFF 
at ]] 333-5; Woodbury Amended WDT at 34. In short, the consumer 
products from which demand is derived for music inputs are clearly not 
comparable in these two markets. Furthermore, in contrast to the core 
SDARS product, there is evidence that consumer demand for the Music 
Choice offering on cable TV is relatively weak. SX PFF at ]] 1298-1300. 
Since demand for the music input is a demand derived from its use in 
the consumer service offered and, in this case, the ultimate uses of 
the Music Choice music programming and SDARS music programming exhibit 
substantial differences so as to make them poor comparators, we find 
that the Music Choice ``benchmark'' provides little if any guidance as 
to a reasonable price for the music input used in the SDARS service.
    We are also not persuaded that the so-called ``functionality'' 
adjustment applied by Dr. Woodbury in a purported effort to make his 
proposed Music Choice benchmark market more comparable to the SDARS 
target market achieves the desired result. The Woodbury 
``functionality'' adjustment does not address adequately the salient 
consumer product differences noted above. In that sense, to refer to 
this adjustment as a ``functionality'' adjustment is a misnomer. Dr. 
Woodbury's ``functionality adjustment'' merely lists key 
characteristics of the music made available to SDARS consumers (e.g. 
mobility, quality of reception, broader playlists than typically 
available on terrestrial radio, etc.) for which music consumers are 
willing to pay enhanced revenues and then attributes all of the revenue 
associated with these characteristics to other inputs such as satellite 
technology under the unsubstantiated theory that such other inputs 
could produce the same level of revenue \25\ absent any music to 
broadcast. Therefore, the Woodbury ``functionality'' adjustment is 
seriously flawed and makes little contribution to resolving the lack of 
comparability between the Music Choice cable TV music programming 
proposed benchmark market and the SDARS target market.
---------------------------------------------------------------------------

    \25\ Although Dr. Woodbury uses the ``costs'' associated with 
these other inputs in his adjustment, he makes clear that those 
costs merely serve as a proxy for revenues attributable to the use 
of inputs. Woodbury Amended WDT at 23 (``The SRPR [sound recording 
performance right] fee paid by XM and Sirius would be higher only 
because of the added revenue (reflecting higher costs) attributable 
to providing an end-to-end mobile service, not necessarily because 
of the inherently higher value of music.'') Dr. Woodbury describes 
the costs of these other inputs as ``subscriber distribution and 
acquisition costs.'' Woodbury Amended WDT at 22.
---------------------------------------------------------------------------

    We conclude from the record before us that there is no basis to 
support the notion that music inputs in both these markets are equally 
productive in generating revenues for the users. That notion is 
artificially and inappropriately created by Dr. Woodbury's reduction of 
the capabilities associated with the music inputs used by the SDARS by 
restricting their use to the more limited capabilities of the music 
inputs used by Music Choice in its cable TV offering (e.g., no 
mobility, etc.). If anything, rather than adding to the downward 
adjustment to the Music Choice rate already made by Dr. Woodbury to 
account for music/nonmusic differences, it would seem more appropriate 
to adjust the proffered SDARS rate upwards to account for these 
particular mobility differences.\26\
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    \26\ This is not to say that the music input that is sold to 
consumers as ``mobile music'' is wholly responsible for the consumer 
revenues generated by the product over and above the revenues that 
are generated by an otherwise identical but ``nonmobile music 
product,'' any more than the technical distribution vehicle is 
wholly responsible for those added revenues.
---------------------------------------------------------------------------

    In sum, the consumer products from which demand is derived for 
music inputs are clearly not comparable in these two markets and the 
proferred adjustments do not remedy this shortcoming. Because of the 
large degree of its incomparability, particularly as adjusted by Dr. 
Woodbury, the proposed Music Choice benchmark clearly lies outside the 
``zone of reasonableness'' for consideration in this proceeding. 
Therefore, we find this particular benchmark cannot serve as a starting 
point for the 801(b) analysis that must be undertaken in this 
proceeding.
ii. The Musical Works Rates
    The musical works rates benchmark proposed by the SDARS also fails 
to provide a reasonable benchmark in terms of comparability. This 
benchmark analysis tracks some similar arguments that failed to prevail 
in Webcaster II.
    The Copyright Royalty Judges find that the musical works benchmark 
analysis offered by Dr. Woodbury is similarly flawed here for several 
reasons. First, the musical works benchmark analysis is based on a 
marketplace in which, while the buyers may be the same as in the SDARS 
marketplace, the sellers are different and they are selling different 
rights. Webcaster II, 72 FR 24094. The fact that an SDAR requires both 
sets of rights does not make them equivalent. Many products and 
services require several essential inputs, but that fact alone does not 
lead to price parity across those inputs. Ordover WRT at 19.
    Second, contrary to Dr. Woodbury's assertions that the prices paid 
for the rights in each respective market should be the same, 
substantial empirical evidence shows that sound recording rights are 
paid multiple times the amounts paid for musical works rights in most 
digital markets (e.g., ringtones, digital downloads, music videos).\27\ 
Webcaster II, 72 FR 24094; SX

[[Page 4090]]

PFF at ]] 1381-87, 1389-93. Thus, we conclude that the marketplace 
evidence from other digital markets submitted by SoundExchange casts 
substantial doubt on the reasonableness of using the proferred musical 
works rates as a benchmark for the sound recording rates to be 
determined in this proceeding, except as an indicator that a reasonable 
rate for sound recordings could not be as low as the musical works 
rate.
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    \27\ The SDARS attempt to discount these particular disparities 
by implying that since the sound recording rates are negotiated in 
an unconstrained marketplace while the ASCAP musical works rates in 
these markets are subject to court supervision, the latter must 
necessarily be relatively lower because they are constrained by the 
threat of court intervention. (See, for example, SDARS RFF at ] 90.) 
But this argument is not persuasive, because it fails to show that 
the negotiated sound recording rates are greater than ``the price 
that a willing buyer and a willing seller would agree to in an arm's 
length transaction'' (i.e., the rate court standard for 
reasonableness as articulated in U.S. vs. ASCAP (Salem Media), 981 
F. Supp 199, 210 (S.D.N.Y., 1997)).
    The SDARS also appear to argue that the Librarian's statement in 
the 1998 PSS Rate Determination, at 63 FR 25405, that copyright 
owners of musical compositions and record companies ``do not share 
equal power to set rates in an unfettered marketplace,'' recognized 
that sound recordings enjoy relatively higher rates compared to 
musical works in other digital markets because of the exercise of 
relatively greater market power by the record companies as compared 
to the more constrained musical works seller. Yet, the SDARS 
reliance on the Librarian's decision in the 1998 PSS Rate 
Determination is misplaced insofar as the Librarian was not focusing 
on comparative musical works and sound recording rate data from 
these other digital markets where record companies do not sell 
directly to consumers in the 1998 decision, but rather was 
evaluating the merits of an RIAA contention that record companies 
should receive more value from the performance right in sound 
recordings because the record companies garner more revenue from the 
use of the mechanical license than do the songwriters and composers. 
In other words, the focus was on the relevance of the wholesale 
market for CDs and cassette tapes. Indeed, the Librarian 
specifically criticized the RIAA offering for failing to ``explain 
why the relative value of the mechanical license to the various 
owners and users has any application to the determination of the 
value of digital performance in sound recordings.'' 1998 PSS Rate 
Determination at 63 FR 25405.
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    Third, the Copyright Royalty Judges find that Dr. Woodbury's 
equivalence argument also is flawed because of his effective reliance 
on the assumption of ``sunk costs'' as a justification. This assumption 
fails on both theoretical and empirical grounds for the same reasons 
that we rejected it in Webcaster II. Dr. Woodbury claims that, while 
the sellers in his benchmark market are not the same as in the target 
market, they stand in a similar position because for both musical works 
and sound recordings, the costs of producing the underlying 
intellectual property are effectively sunk, meaning that there is no 
incremental cost imposed on the sellers of either the musical work or 
sound recording by virtue of making the underlying intellectual 
property available for digital performance. Woodbury Amended WDT at 37. 
As a matter of theory, then, Dr. Woodbury's proposed benchmark analysis 
ignores the long-established pattern of investment in the recording 
industry. As we noted in Webcaster II at 72 FR 24094, not only are 
there some initial sunk investments, but there is a requirement of 
repeated substantial outlays year after year or, in other words, the 
repeated ``sinking'' of funds; and, if sellers are faced with the 
prospect of not recovering such sunk costs, then the incentive to 
produce sound recordings is diminished. In this case there is also 
substantial evidence of a substantially greater investment of this type 
in sound recordings as compared to musical works. SoundExchange PFF at 
]] 1399-1401, 1407. Furthermore, recording companies will necessarily 
make future investment decisions based on their best estimates of the 
revenue sources available to them in the future from all sources 
including revenue streams derived from the SDARS' use of sound 
recordings. Ordover WRT at 14 (``Record companies' incentives to 
produce new music are based on revenues from all available sources''). 
As we recognized in Webcaster II at 72 FR 24094 n.28, this is a dynamic 
economic process concerned with obtaining greater resources for future 
creative efforts. To suggest that the sound recording copyright owners 
should ignore such costs in their approach to pricing in the SDARS 
market makes little sense. At bottom, then, we find Dr. Woodbury's 
equivalence rationale for his proposed benchmark to be severely flawed. 
Moreover, as we pointed out above, there is ample empirical evidence in 
the record from other digital marketplaces to controvert Dr. Woodbury's 
premise that the market for sound recordings and the market for musical 
works are necessarily equivalent. SX PFF at ]] 1381-87, 1389-93.
    For all these reasons, the Judges find that Dr. Woodbury's 
proffered musical works benchmark is not useful as a starting point for 
our determination of a reasonable sound recording rate in this market 
and, further, that marketplace evidence from other digital markets 
submitted by SoundExchange shows that a reasonable rate for sound 
recordings could not be as low as the musical works rate.
iii. SDARS' Corroborative Evidence for PSS-Derived Rate
    The SDARS argue that certain other evidence in the record 
corroborates Dr. Woodbury's PSS-derived rate of 1.2% of revenues: (1) 
The prior SDARS-RIAA agreement (in the range of 2.0% to 2.5% of 
revenues); (2) the SDARS Musical Works Agreements (suggested benchmark 
rate of 2.35%); (3) a ``custom radio'' agreement between Yahoo! and 
Sony BMG, subject to certain adjustments which would reduce the 
effective rate if applied to the SDARS to 2.57% of revenue; and (4) Dr. 
Pelcovits' nonmusic programming benchmark, also subject to certain 
adjustments which would reduce the effective rate if applied to the 
SDARS to 3.51% of revenue. We find that rates which are virtually 2 or 
3 times as great (e.g. 2.35% or 3.51%) as the rate they are being used 
to corroborate (i.e. 1.2%) only serve to undermine any reasonableness 
that might be ascribed to the Woodbury PSS-derived rate of 1.2%. That 
is, even if the Woodbury PSS-derived rate was derived from an arguably 
comparable benchmark, this ``corroborative'' data all points in the 
direction that it is too low as adjusted.
    Furthermore, we find that the musical works benchmark and the 
adjusted Pelcovits nonmusic programming benchmark themselves suffer 
from serious flaws. See supra at Section IV.C.2.a.ii. and infra at 
Section IV.C.2.b.ii. In addition, the SDARS-RIAA current agreement 
cannot be corroborative of a reduced rate going forward since it is not 
accompanied by any evidentiary showing that economic circumstances in 
this market have deteriorated. Finally, the rate terms from a ``custom 
radio'' agreement between Yahoo! and Sony BMG (which were not 
introduced to corroborate the PSS-adjusted rate but rather were 
introduced by Dr. Woodbury to ostensibly test the sensitivity of Dr. 
Ordover's analyses of other markets): (1) Were not shown to be 
representative of this category's agreements; and (2) suffer from the 
same flawed ``functionality'' adjustment as Dr. Woodbury's PSS-derived 
rate. In short, we find no persuasive evidence proffered by the SDARS 
that would cause us to alter our earlier finding that the PSS-derived 
rate as adjusted by Dr. Woodbury (i.e., 1.2% of revenues) clearly lies 
outside the ``zone of reasonableness'' for consideration in this 
proceeding.
b. The Pelcovits Benchmarks and Analyses
    SoundExchange's expert economic witness, Dr. Pelcovits, offers two 
benchmarks for consideration as the starting point for determination of 
a royalty rate applicable to the SDARS: (1) Royalties of 23% for sound 
recordings based on Sirius' payments to Howard Stern for nonmusic 
content (Pelcovits Amended WDT at 8); and (2) royalties of 18.6% for 
sound recordings based on payments made in the aggregate by the SDARS 
for nonmusic programming, including payments made to Howard Stern 
(Pelcovits Amended WDT at 10). In addition, Dr. Pelcovits offers an 
alternative analysis that yields royalties of 18% for sound recordings 
based on a ``division of surplus'' analysis between nonmusic content 
and music content (Pelcovits WRT at 39 n.64).
i. The Stern Benchmark
    Dr. Pelcovits offers his Stern analysis on the assumption that 
nonmusic content and music content are substitutes. He then focuses on 
one particular type of non-music content, Howard Stern's programming on 
Sirius. He next estimates that Sirius paid about 50% of revenue to 
Stern for each incremental subscriber that his

[[Page 4091]]

programming attracted to Sirius. Using the results of a survey 
undertaken by Dr. Wind that purports to show that 56% of all Sirius' 
subscriber revenues would be lost if it offered no music channels, Dr. 
Pelcovits then concludes that just as Howard Stern is paid 50% of the 
revenues for the customers attributed to him, the music input should 
likewise be paid 50% of the revenues for the 56% of SDARS customers 
attributed to it. Subtracting the music publishers' royalty and the 
SDARS' internal production costs for music channels, Dr. Pelcovits is 
left with a bottom line royalty of 23% for sound recordings. We find 
this analysis suffers from several serious shortcomings.
    First, Dr. Pelcovits' assertion that ``different kinds of content 
are substitutable inputs'' (see Pelcovits WDT at 10) is questionable in 
light of the fact that both inputs are required to produce the SDARS 
primary offering--a joint music-nonmusic consumer service. As currently 
constituted in this joint offering, these two types of different 
content, by definition, may well be classified as complementary (e.g., 
similar to the joint requirement for a fishing rod and a fishing reel 
in order to engage in the activity of fishing). No substantial evidence 
regarding the relevant cross-price elasticities of demand was presented 
by Dr. Pelcovits to support his assertion that music programming and 
nonmusic programming are substitutes as currently utilized by the 
SDARS.\28\ Indeed, Dr. Pelcovits recognizes this complementary aspect 
of the various programming inputs when he declares, with respect to the 
current Sirius service, that ``a large catalog of music is essential to 
a music-based service and attracts customers to Sirius just as Stern 
attracts customers.'' Pelcovits WDT at 13 (emphasis added).
---------------------------------------------------------------------------

    \28\ A positive cross-price elasticity of demand for music 
programming associated with an increase in the price of nonmusic 
programming would indicate that the two inputs were substitutes, 
while a negative cross-price elasticity of demand under the same 
circumstances would indicate that the two inputs were complements.
---------------------------------------------------------------------------

    Second, Dr. Pelcovits makes several unjustifiable leaps in his 
analysis. He asserts that since Sirius paid 50% of revenues for each 
incremental subscriber that Stern's programming attracted to Sirius, 
the same 50% figure ``ought to apply equally to music content as to 
Stern'' without performing any comparable incremental revenue analysis 
for music programming. Pelcovits WDT at 13. Given the weaknesses of the 
50% calculation for Stern, his assertion without any attempted analysis 
of the same 50% figure for music content requires a leap of faith that 
appears unjustified.\29\ Dr. Pelcovits then multiplies the 50% Stern 
figure by 56% of all customers purportedly attracted to music so as to 
determine the ``share of the customer base that can be attributed to 
sound recordings in the same sense'' that Stern's incremental customers 
are attributed to Stern. Pelcovits WDT at 13. But this latter 
calculation has little to do with determining incremental subscriber 
revenue. For example, Dr. Wind's survey findings do not satisfactorily 
meet the needs of the theory espoused by Dr. Pelcovits because, as 
noted by Dr. Noll, ``The survey methods for determining the importance 
of music to SDARS penetration are not designed to answer the pertinent 
question, which is the incremental value of music, holding constant the 
features of the service, including the quantity of music that is now 
available.'' Noll WRT at 69. (See also Noll WRT at 10-11). Thus, even 
assuming Dr. Wind's survey were without faults, that survey says little 
about incremental subscribers, but rather tries to assess the consumer 
preferences of all Sirius subscribers or the average Sirius subscriber. 
By comparing the incremental revenues attributable to Stern and the 
overall revenues arguably attributable to music programming in order to 
solve for the unknown price of the music input, Dr. Pelcovits 
effectively ignores the marginal or incremental nature of the concept 
he seeks to employ.\30\ Even Dr. Pelcovits' estimate of the total 
revenues attributable to the music input is based on a single imperfect 
snapshot of consumer preferences provided by Dr. Wind \31\ at one point 
in time, without any justification for the implied assumption that such 
preferences have remained or will remain stable across Sirius' 
subscribership over time or even over any limited relevant time period.
---------------------------------------------------------------------------

    \29\ This 50% estimate was originally based on analyst 
projections of 1.75 million incremental subscribers. A subsequent 
50% estimate was based on the 2 million incremental subscribers that 
Dr. Pelcovits said Sirius contemplated Stern would generate by the 
end of 2007. Pelcovits Amended WDT at 6-8. In his amended estimates, 
using the original 1.75 million incremental subscribers reduces the 
Stern cost as a percent of incremental revenue to 49%. Dr. Pelcovits 
further offered estimates for 1, 2, 3 or 4 million subscribers (79%, 
50%, 39% and 34% respectively) as well as an average percentage of 
49% taking into account each of the four amounts of incremental 
subscribers. Pelcovits Amended WDT at 7-8. Incredulously, even 
though he offers no apparent reason for looking at one of these 
estimates (the 3 million incremental subscriber case) or for 
suggesting that it might reflect actual experience in some way, Dr. 
Pelcovits includes it in his ``average'' and describes the resulting 
average as ``reasonable.'' Pelcovits Amended WDT at 8 n.20. To the 
contrary, Dr. Pelcovits' various alternative estimates simply 
underscore the lack of a solid foundation, in fact or in theory, for 
his estimates and, therefore, undermine their reasonableness.
    \30\ Indeed, it is questionable as to whether the marginal 
analysis Dr. Pelcovits seeks to apply to the Stern content makes 
good sense given that the acquisition of Stern was a ``lumpy'' 
purchase that inhibits small incremental adjustments. Woodbury WRT 
at 41.
    \31\ Because nonmusic content is broken down into a number of 
non-additive sub-categories, while music content is not, Dr. Wind 
asks consumers to compare music not relative to nonmusic content, 
but rather to compare music to each of news, sports and talk and 
entertainment programming separately. These survey results therefore 
cannot be properly interpreted as if music as a generic category 
were being compared to nonmusic as a generic category.
---------------------------------------------------------------------------

    Third, and most importantly, inasmuch as Dr. Pelcovits offers the 
Stern analysis as a ``benchmark,'' he assumes a degree of marketplace 
comparability that the evidence in this proceeding does not support. 
The sellers of the respective inputs are different.\32\ There is a 
single purchaser of the ``exclusive'' Stern content from among the 
SDARS (i.e. Sirius), while both SDARS are buyers of the same music 
content. The way the inputs are used in the ultimate consumer offering 
results in different revenue generating capabilities for the respective 
inputs. For example, the Stern content can generate revenue through 
increased subscriptions as well as through increased advertising, while 
the chief characteristic of the music input on the SDARS is that it is 
commercial-free. Then too, there are other benefits associated with 
specific nonmusic content like the Stern content, such as the right to 
associate the service with the content provider's brand, that makes 
those inputs differentiable from the music input in terms of the 
breadth of intellectual property rights provided or the nature of the 
input provided. SDARS RFF at ] 286. In other words, all ``content'' is 
not comparable, any more than all inputs in addition to that content 
are comparable just because they share the ultimate purpose of 
generating revenue for the SDARS.
---------------------------------------------------------------------------

    \32\ In addition, because Stern is a single seller in the market 
for his content, he arguably functions as a monopolist in the market 
for his service whereas the sellers of the music inputs are more 
numerous.
---------------------------------------------------------------------------

    Fourth, to the extent that Dr. Pelcovits treats advertising 
revenues as part of incremental revenues attributable to Howard Stern 
(Pelcovits Amended WDT at 6), his use of the result as a benchmark for 
pricing commercial-free content inappropriately assumes an 
undemonstrated incremental revenue impact for the music input from 
advertising. SoundExchange's argument that ``to the extent that music 
grows the subscriber base, and those subscribers

[[Page 4092]]

listen to non-music channels as well as music channels, the larger base 
of potential listeners helps attract advertisers'' (see SX RFF at ] 
464) mistakenly attempts to equate an actual, measurable direct or 
primary effect associated with the Stern content to a possible, though 
a largely unsupported and uncalculated indirect or secondary effect 
which SoundExchange attributes to music. There is no dispute that the 
Stern content, as is the case with other nonmusic content used by the 
SDARS, is specifically utilized in conjunction with advertising, while 
the music content used by the SDARS is specifically touted to emphasize 
the commercial-free nature of the offering.
    Finally, Dr. Pelcovits' estimates of subscribers drawn to Sirius by 
the Stern deal do not inspire great confidence. Other conflicting 
evidence concerning estimates of the additional subscribers likely to 
flow from the Stern deal have been identified in the record. SDARS RFF 
at ]] 392-393.
    For all these reasons, we find the proposed Stern content benchmark 
to be a poor starting point for the 801(b) analysis that must be 
undertaken in this proceeding.
ii. The Nonmusic Content Benchmark
    Many of the shortcomings that apply to the Stern benchmark, 
similarly apply to Dr. Pelcovits' consideration of other nonmusic 
content deals as benchmarks. Here again, Dr. Pelcovits does not satisfy 
his theoretical claims that music programming and these other types of 
content are substitutes in the primary product offering of the SDARS. 
Most importantly, the key characteristic of a good benchmark--
comparability--is not present. The sellers are different, the buyers 
are only the same in the aggregate and the nature of the inputs offered 
vary substantially.
    Then too, Dr. Pelcovits abandons the economic rationale that he 
claimed served to undergird his Stern analysis: ``Absent data for other 
content deals, I was unable to reliably perform similar analyses of 
other individual deals relating the amount paid to the content provider 
to the expected number of incremental subscribers.'' Pelcovits Amended 
WDT at 9. Undeterred, Dr. Pelcovits claims that it is sufficient to 
simply calculate the total expenditure of the SDARS on nonmusic content 
as a proportion of total SDARS revenues in order to determine the 
appropriate revenue-based rate to use as a benchmark for the music 
input. We find Dr. Pelcovits' analysis and the resulting recommended 
``benchmark'' of 18.6% particularly unpersuasive. Certainly, confidence 
in the reliability of the benchmark is hardly enhanced by the fact that 
it reflects two widely disparate estimates for each of the two 
SDARS.\33\
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    \33\ Looking at each of the SDARS individually, Dr. Pelcovits 
calculates that XM's nonmusic content providers were paid 16.9% of 
revenues in 2006 while Sirius' nonmusic content providers were paid 
33.2% of revenues in 2006. Pelcovits Amended WDT at 10.
---------------------------------------------------------------------------

    In short, we find Dr. Pelcovits' proposed rates based on nonmusic 
content to poorly meet the needs of a reliable benchmark. Even before 
subjecting it to any 801(b) analysis, SoundExchange admits this 
benchmark is significantly lower if the same analysis is applied to 
data projections for the years 2006 through 2012 instead of just actual 
data from 2006. SX RFF at ] 461. Even if the benchmark did not suffer 
from all the shortcomings identified hereinabove, such a large degree 
of sensitivity does not inspire confidence in using this proposed 
benchmark as a starting point for our analysis.
iii. Division of Surplus Analysis
    In addition to his two proferred nonmusic content benchmarks, Dr. 
Pelcovits undertakes an additional analysis that purports to divide the 
SDARS ``surplus'' or residual revenues (revenues net of noncontent 
costs including capital costs) between the SDARS, music content 
providers and nonmusic content providers. We find that this analysis 
relies on unsupported assumptions about market behavior. For example, 
Dr. Pelcovits argues that all content costs must be part of his surplus 
pot because that is how negotiations take place ``in the real world.'' 
Pelcovits WDT at 16. No evidence from this market was provided to 
support this assumption. Despite this assumption, Dr. Pelcovits omits 
musical works royalty costs from his surplus pot. Pelcovits WDT at 16 
n.15. Thus his inclusion of nonmusic content costs into his surplus pot 
appears to be little more than a transparent attempt to enlarge the 
surplus that is potentially available for distribution to owners of 
sound recordings. Although Dr. Pelcovits later claims to amend his 
results by ``excluding these royalties and then pay this same amount 
off the top out of the surplus assigned to music,'' this adjustment 
still treats the music publishers' costs as predetermined, rather than 
adding the publishers as the players to the game who also share in the 
surplus. Dr. Pelcovits offers no sound basis for distinguishing between 
his treatment of nonmusic content costs and musical works content costs 
or, for that matter, for treating other variable inputs as 
predetermined costs as well. As Dr. Noll points out, this disparate 
treatment of SDARS inputs may well bias the Shapley values in favor of 
the record labels. Noll WRT at 89.
    Other assumptions underlying Dr. Pelcovits' analysis are also not 
solidly supported. For example, Dr. Pelcovits relies on Mr. Butson's 
revenue and cost estimates for XM and Sirius in 2012, despite the well-
known fact that financial projections of the kind undertaken by Mr. 
Butson increase in uncertainty over the course of the period projected, 
with the last year in a six-year period of projections (in this case, 
2012) being the least reliable. SDARS PFF at ] 960. Mr. Butson's 
projections in turn rest on a number of growth assumptions that either 
merely track past experience at best or are arbitrary at worst, leading 
us to question the degree to which such data is reliable for the 
purpose employed by Dr. Pelcovits. Different assumptions would provide 
different bottom-line numbers in Dr. Pelcovits' analysis.
    After estimating the available ``surplus'' in 2012, Dr. Pelcovits 
proceeds to use a Shapley model of a cooperative game to divide the 
``surplus'' among the various inputs. But a cooperative game solution 
to a bargaining problem assumes that an agreement between the parties 
is both possible and enforceable. Here there is no enforcement 
mechanism. 7/9/07 Tr. 303 (Pelcovits); Noll WRT at 83. Therefore, the 
outcomes of the model cannot be supported. At the same time, no reason 
is provided by Dr. Pelcovits as to why each participant in the game 
should not make its decisions independently to maximize their own 
profits. In other words, a non-cooperative game approach may have been 
more appropriate under the circumstances.
    In short, questionable assumptions coupled with concerns over the 
reliability of the data used in the Pelcovits analysis cause us to 
regard the findings of the Pelcovits analysis as carrying little 
weight. For those reasons, the Judges find that the Pelcovits surplus 
analysis neither serves to provide a solid market rate estimate to 
serve as a starting point for the application of the 801(b) 
considerations nor to provide additional solid corroboration of 
SoundExchange's various benchmark analyses.
c. The Ordover Benchmarks
    Although Dr. Ordover recognizes that no benchmark is perfect, he 
offers two categories of benchmarks for the Judges' consideration: (1) 
satellite TV deals with nonmusic content providers that yield

[[Page 4093]]

two benchmarks, 40% of gross revenues based on overall content or 49.3% 
of gross revenues based on premium network programming, subject to 
certain adjustments which would reduce the effective rate for the SDARS 
to 18.5% or 23.5% of gross revenues (Ordover WDT at 40-41); and (2) a 
variety of agreements covering other distribution channels for digital 
music (e.g., interactive subscription services, cellular ringtones, 
etc.) that suggest a benchmark of 35% to 50% of revenues, subject to 
only an adjustment for the lower proportion of music content on the 
SDARS that would result in a benchmark royalty rate of 19% to 28% or, 
if adjusted to account for other differences between the benchmark 
market and the target SDARS market, would yield a royalty rate of $2.51 
to $3.09 per subscriber per month (Ordover WDT at 50-52).
    We find the first of these two categories of proferred benchmarks 
to be of little value. Even assuming that the SDARS have similar cost 
structures to satellite TV (also known as Direct Broadcast Satellite or 
DBS) operators, they offer very different consumer products, the inputs 
focused on in the analysis (nonmusic audiovisual content) differ 
substantially from the sound recording inputs at issue in this 
proceeding, and the buyers and sellers are different in the benchmark 
market as compared to the target market. The fact that these different 
enterprises may exhibit some similarities with respect to their capital 
structure and that both are subscription services offering 
entertainment in a broad sense is not sufficient to overcome all the 
aforementioned fundamental differences between the proposed benchmark 
market and the target market.
    However, we find Dr. Ordover's second category of proferred 
benchmarks--certain channels for the distribution of digital music--
more useful. In particular, the interactive subscription market is a 
benchmark with characteristics reasonably comparable to the non-
interactive SDARS, particularly after Dr. Ordover's reasonable 
adjustment for the difference in interactivity. Both markets have 
similar sellers and a similar set of rights to be licensed. While the 
buyers may be different entities, there is no persuasive evidence that 
the buyers in the target market have less relative market power than 
the buyers in the benchmark market. Both markets are input markets and 
demand for these inputs is driven by or derived from the ultimate 
consumer markets in which these inputs are put to use. In these 
ultimate consumer markets, music is delivered to consumers in a similar 
fashion and consumers pay a monthly subscription fee for access 
irrespective of the hours of programming accessed. However, in the 
interactive case, the choice of music actually delivered is usually 
influenced by the ultimate consumer, while in the non-interactive case 
of the SDARS the consumer usually plays a more passive role limited to 
selecting a particular channel of music programming. Ordover WDT at 47-
48. But this difference is reasonably accounted for in Dr. Ordover's 
interactivity adjusted per subscriber rates. In order to make the 
benchmark interactive market more comparable to a non-interactive 
service like the SDARS, Dr. Ordover adjusts the benchmark by the 
differential value associated with the interactivity characteristic. 
Ordover WDT at 47-52. This adjustment by itself suggests a rate of 
$1.40 per subscriber per month (i.e. $7.50 per subscriber per month 
multiplied by an interactivity adjustment factor of .0015/.008). Using 
Dr. Ordover's assumption that the average monthly per subscriber price 
for satellite radio is $11.25, the interactivity adjusted benchmark of 
$1.40 per subscriber per month is the equivalent of 13% on a percentage 
of subscriber revenue basis.\34\ While we agree with Dr. Ordover, that 
but for the lack of extensive data, these calculations might well be 
improved through a hedonic regression analysis, nevertheless we find 
that, based on the available data in the record, this interactivity 
adjusted benchmark is a reasonable estimate of a marketplace derived 
benchmark.\35\
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    \34\ Because of the commercial-free character of music 
programming on the SDARS, subscription revenues attributable to 
music programming are the appropriate focus of this analysis.
    \35\ SoundExchange's argument that this interactivity adjustment 
needs to be adjusted further by differences in the intensity of use 
is not adequately supported by the record. Dr. Ordover admitted that 
the information he would have to rely on to make such an adjustment 
was ``imparted to me by counsel'' and that he ``did not have a 
direct conversation with the people who delivered the information'' 
and that he ``did not file a calculation that would reflect that 
adjustment'' (i.e. he made no adjustment to his proposed rates based 
on this information regarding intensity of use). 8/27/07 Tr. 102:11-
12; 108:7-109:18 (Ordover). Moreover, Mr. Eisenberg's testimony 
cited by SoundExchange to support higher intensity of usage 
ambiguously refers to ``historical'' data from an unknown period 
which may or may not coincide with the period analyzed by Dr. 
Ordover in making his initial interactivity adjustment. Eisenberg 
WDT at 19. At the same time, the SDARS' argument that Dr. Ordover's 
interactivity adjustment is fatally compromised by the absence of 
this additional intensity adjustment is equally without merit. The 
absence of the unsupported additional ``intensity'' adjustment does 
not negate the reasonableness of Dr. Ordover's interactivity 
adjustment based on the record of evidence before us. The SDARS' 
separate argument that Dr. Ordover's video-service interactivity 
adjustment needs to be adjusted to reflect a substantially higher 
value for interactivity, as shown by a few recent audio agreements 
covering interactive as well as noninteractive services, is not 
supported by a close reading of the relevant provisions of those 
agreements. SX PFF at ] 481-486.
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    At the same time, we find that any rate derived from the higher 
digital distribution channel benchmarks offered in evidence lie outside 
the zone of reasonableness because they either: (1) Fail to account for 
key differences that consumers value or (2) propose other adjustments 
not well supported by the evidence. For example, Dr. Ordover himself 
proposes an additional upward ``immediacy'' adjustment to the 
interactivity adjusted digital subscription rate calculated above that 
would raise it from $1.40 per subscriber per month to $2.51 per 
subscriber per month. Ordover WDT at 49-50. However, we find that the 
``immediacy'' adjustment is not well founded in that it: (1) 
Unrealistically treats all computers as stationary devices always 
necessitating a two-step accessibility process involving downloading 
music to a computer and uploading therefrom to a separate portable 
device in order to move the music listening experience to another 
physical location (i.e., widely available technology allows portable 
computers not only to be moved to other physical locations but also to 
access the internet wirelessly); and (2) appears to overstate the 
significance of the delay involved in listening to music because of the 
process of downloading to a computer and uploading therefrom to a 
separate portable device (i.e., the consumer may have previously 
downloaded the music that he may want to listen to at any point in time 
so that the download process does not have to be repeated every time 
the consumer wants to listen to music). Moreover, Dr. Ordover admits 
that, in light of the trend of more recent agreements, it is possible 
that the basis for his ``immediacy'' adjustment has all but disappeared 
as indicated by a ratio approaching unity. 6/21/07 Tr. 186:20-187:8 
(Ordover).
    In sum, while some aspects of the Ordover analysis may not be 
persuasive, the Judges find that these critiques are not sufficient to 
undermine the basic thrust and conclusions of the Ordover analysis that 
the interactive subscription market is a benchmark with characteristics 
reasonably similar to the non-interactive SDARS, particularly after Dr. 
Ordover's reasonable adjustment for the difference in interactivity. As 
noted hereinabove, we equate the resulting benchmark offered by Dr. 
Ordover to be the equivalent of 13% stated as a percentage of revenue.

[[Page 4094]]

We find that some of the additional relevant evidence from the 
marketplace for other types of digital music services corroborates Dr. 
Ordover's analysis by showing that, for many types of music services, a 
substantial portion of revenue is paid to sound recording copyright 
owners above the current SDARS rate, just as it would be pursuant to 
the 13% rate that would result from Dr. Ordover's interactivity 
adjusted interactive subscription market analysis. In other words, we 
find these additional voluntary agreements covering such digital 
services as clip licenses, permanent audio downloads, etc. of some 
general corroborative value. These data show that, in many cases, the 
price paid by buyers for the rights to utilize a sound recording in 
various ways is as much as or higher than the 13% rate suggested 
hereinabove. This shows that the prevailing rates in these other 
markets do not appear to undermine his analysis--some indication of 
general reasonableness. However, because no effort is made to reconcile 
the many differences in product characteristics that may exist between 
these markets and the target SDARS market and adjust for such 
differences, these alternatives must be regarded as having only 
directional value and to lie outside the zone of reasonableness (i.e. a 
zone that excludes clearly noncomparable market situations). In other 
words, based on the record of this proceeding, the 13% rate identified 
hereinabove marks the upper boundary for a zone of reasonableness for 
potential marketplace benchmarks from which to identify a rate that 
satisfies any 801(b) policy considerations not adequately addressed in 
the market.
3. The Zone of Reasonableness and the 801(b) Policy Considerations
    The marketplace evidence offered by the SDARS and SoundExchange 
supports the determination of the parameters of a zone of 
reasonableness. Based on the record of evidence in this proceeding we 
have determined that the 13% rate identified hereinabove marks the 
upper boundary for a zone of reasonableness for potential marketplace 
benchmarks. We have also determined that potential marketplace 
benchmarks cannot be less than or equal to the SDARS' musical works 
rates (i.e., 2.35% of gross revenues). However, the latter lower 
boundary for the zone of reasonableness is not the equivalent of the 
upper boundary in offering a specific benchmark defined by 
comparability. Therefore, based strictly on marketplace evidence, a 
rate close to the upper boundary is more strongly supported than one 
close to the lower boundary. We now turn to the 801(b) policy 
considerations to determine the extent to which those policy 
considerations weigh in the same direction or a different direction as 
the benchmark market evidence hereinbefore reviewed.
    The relevant 801(b) factors meriting further consideration consist 
of the following four specific policy objectives: (A) To maximize the 
availability of creative works to the public; (B) to afford the 
copyright owner a fair return for his creative work and the copyright 
user a fair income under existing economic conditions; (C) to reflect 
the relative roles of the copyright owner and the copyright user in the 
product made available to the public with respect to relative creative 
contribution, technological contribution, capital investment, cost, 
risk, and contribution to the opening of new markets for creative 
expression and media for their communication; and (D) to minimize any 
disruptive impact on the structure of the industries involved and on 
generally prevailing industry practices. 17 U.S.C. 114(f)(1)(B) and 17 
U.S.C. 801(b)(1). Not surprisingly, both the SDARS and SoundExchange 
have a different view of how specific facts weigh in their favor on 
each of these policy objectives. We reject the notion, however, that 
Section 801(b)(1) is a beauty pageant where each factor is a stage of 
competition to be evaluated individually to determine the stage winner 
and the results aggregated to determine an overall winner. Neither the 
Copyright Royalty Tribunal nor the Librarian of Congress adopted such 
an approach. See 46 FR 884 (January 5, 1981) (jukebox proceeding); 46 
FR 10466 (February 3, 1981) (mechanical license proceeding); 63 FR 
25394 (May 8, 1998) (PSS proceeding). Rather, the issue at hand is 
whether these policy objectives weigh in favor of divergence from the 
results indicated by the benchmark marketplace evidence. Therefore, we 
next evaluate the other evidence in the record offered with respect to 
the four policy considerations to determine if that evidence shows that 
the weight of marketplace evidence we have previously reviewed requires 
any adjustment.
a. Maximizing the Availability of Creative Works to the Public
    While the SDARS and SoundExchange offer various arguments to 
suggest that they are each respectively the largest contributor toward 
the achievement of this policy objective, those arguments miss the 
mark. The ultimate question is whether it is necessary to adjust the 
result indicated by marketplace evidence in order to achieve this 
policy objective. We agree with Dr. Ordover that ``voluntary 
transactions between buyers and sellers as mediated by the market are 
the most effective way to implement efficient allocations of societal 
resources.'' Ordover WDT at 11. An effective market assures absence of 
both below-market prices and supra-competitive prices, so that 
suppliers will not reduce output and innovation in response to the 
former and consumers will not experience a reduction in consumer 
welfare in response to the latter. In other words, an effective market 
determines the maximum amount of product availability consistent with 
the efficient use of resources.
    The parties to this proceeding choose to emphasize only one or two 
aspects of these supply and demand dynamics because doing so appears to 
facially support a ``win'' for them on the availability factor. The 
SDARS, for example, choose to emphasize that they foster the 
availability of music: (1) by assuring that different types of music 
are more widely disseminated than they are in the terrestrial radio 
alternative and (2) by the promotional effect of their airplay. 
Therefore, their view is that the availability of works to the public 
is maximized if the rates are as low as possible. See SDARS PFF at ]] 
126-147; Woodbury Amended WDT at 43-44; Noll WRT at 41. On the other 
hand, SoundExchange focuses on the input suppliers' incentive to 
increase creative output, arguing that the recording industry requires 
higher revenues from alternative distribution mechanisms to compensate 
for a drop in the physical sales of CDs generally and higher revenues 
from the SDARS specifically to compensate for the substitution of SDARS 
listening for physical CD sales. Therefore, its view is that the 
availability of works to the public can only be maximized through 
higher rates. See SX PFF at ]] 781-93, ]] 811-12, ]] 669-710.
    We find that the record does not support any adjustment from the 
result indicated by the previously reviewed marketplace evidence in 
order to achieve the policy objective of maximizing the availability of 
creative works. For example, the evidence presented by the SDARS and 
SoundExchange is insufficient to suggest a net substitution/promotion 
difference between the interactive subscription service benchmark and 
the SDARS marketplace. Because only the relative difference between the 
benchmark market and the hypothetical

[[Page 4095]]

target market would necessitate an adjustment, the absence of solid 
empirical evidence of such a difference obviates the need for such 
further adjustment.
    Furthermore, even if the absolute levels of promotion/substitution 
in the SDARS market alone were somehow relevant, as the parties appear 
to suggest, we find that they presented no acceptable empirical basis 
for quantifying promotion/substitution for purposes of adjusting rates. 
For example, the SDARS assert that their service is promotional and 
imply that they should receive credit for this effect. But they present 
no persuasive evidence that would be useful for quantifying the 
magnitude of this asserted effect or for deriving a method for 
translating such magnitudes into a rate adjustment. The mere assertion 
that airplay is promotional without more is insufficient. Indeed, the 
quality of evidence presented by the services on this issue consisted 
largely of such assertions (e.g., Woodbury Amended WDT at 44-46), a 
handful of consumer testimonial e-mails or anecdotes recounting 
subjective opinions. See SX PFF at ]] 714, 717.
    SoundExchange, in an effort to support and quantify its claimed 
substitution effect, offers the results of several consumer surveys. 
Dr. Pelcovits concludes that these surveys show that SDARS subscribers 
will reduce their purchases of CDs by 2.6 CDs per subscriber per year. 
See Pelcovits WRT at 31-33. But the Wind survey on which Dr. Pelcovits 
partially relies in reaching his conclusion was excluded by the Judges 
in their gatekeeping roles (applying Federal Rule of Evidence 702), 
because of data shortcomings and questions about the reliability of the 
methods employed by Dr. Wind in that survey. 8/29/07 Tr. 114:2-115:2. 
Dr. Pelcovits' partial reliance on the marketing survey research 
offered by Mr. Mantis is similarly misplaced because the weight of the 
survey's results are questionable in light of: (1) The lack of a 
control group where the purpose of the survey is to establish 
causality; (2) the potential bias introduced by the leading character 
of important questions in the survey; (3) an inability to specifically 
attribute all of the claimed substitution effect to the SDARS music 
programming as opposed to the SDARS nonmusic programming; and (4) the 
lack of time period specificity in asking about consumer behaviors. 
SDARS PFF at ]] 247-257, 258-261, 263. Dr. Pelcovits' reliance on the 
National Association of Recording Merchants (``NARM'') survey does not 
aid his calculation of the magnitude of the substitution effect 
because, even construing the evidence in a light most favorable to 
SoundExchange, it indicates the percentage of satellite radio 
subscribers who purchased no music in the last year. That is, the NARM 
study may suggest a substitution effect but does not attempt to 
quantify it.\36\
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    \36\ SoundExchange also argues that the SDARS' own listening 
research suggests a substitution effect. Again, even construing the 
evidence in a light most favorable to SoundExchange, the SDARS' 
internal research merely provides general evidence of a substitution 
effect rather than a specific quantifiable magnitude.
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    Thus, on the evidence before us we find the net impact of the 
claimed substitution and promotion effect of the SDARS on CD sales is 
indeterminate. More importantly, we find that little if any of this 
evidence sheds light on the question of whether the net substitution/
promotion effect of the SDARS is different from the net substitution/
promotion effect of the interactive subscription service benchmark.
    Finding no conclusive quantifiable evidence of such a substitution/
promotion difference between the benchmark market and the target market 
and, further, finding no quantifiable difference suggested by the 
parties with respect to the remaining evidence submitted on the first 
policy factor discussed hereinabove, we conclude that, in the instant 
case, the policy goal of maximizing the availability of creative works 
to the public is reflected in the market solution embodied in the 
benchmark market rates. An effective market would have taken into 
account substitution concerns and promotion effects in determining the 
maximum amount of product availability consistent with the efficient 
use of resources.
b. Fair Return to Copyright Owner and Fair Income to Copyright User
    Here, too, the SDARS and SoundExchange offer various arguments to 
suggest that they should each be the largest beneficiary of this policy 
objective and, again, those arguments miss the mark. The ultimate 
question is whether it is necessary to adjust the result indicated by 
marketplace evidence in order to achieve this policy objective and, if 
so, is there sufficient evidence available to do so.
    We find that the evidence in the record supports no such 
adjustment. The SDARS have not shown that their income under existing 
economic conditions is unfairly constrained by adoption of a rate 
informed by the marketplace evidence we have previously reviewed. Nor 
has SoundExchange shown that the copyright owners will fail to receive 
a fair return for their creative work because of the adoption of a rate 
informed by the marketplace evidence we have previously reviewed.
    The SDARS argue that a fair income to the copyright user is one 
which is sufficient to generate a competitive risk-adjusted return on 
past and future investments. See SDARS PFF at ] 179. But the SDARS 
conveniently ignore the highly leveraged structure of their enterprises 
and imply that such a return should occur within the license term and, 
further, that such a return should be at least one that consists of net 
income in the form of profits. See SDARS PFF at ]] 178, 186. Affording 
copyright users a fair income is not the same thing as guaranteeing 
them a profit in excess of the fair expectations \37\ of a highly 
leveraged enterprise. Nor is a fair income one which allows the SDARS 
to utilize its other resources inefficiently. In both these senses, a 
fair income is more consistent with reasonable market outcomes. 
Therefore, in the absence of any substantial evidence in the record to 
the contrary, we find that it is not necessary to adjust the benchmark 
rate hereinbefore indicated by marketplace evidence in order to achieve 
the policy objective of affording copyright users a fair income. For 
example, there is no substantial evidence of the exercise of unfair 
market power in the setting of prices in the benchmark marketplace.
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    \37\ The SDARS readily admit that any projections, particularly 
in this relatively new industry, are subject to substantial 
uncertainty especially towards the latter part of the license 
period. Frear WRT at ]] 13-14. Therefore, the fair earnings 
expectations of a highly leveraged enterprise must reasonably carry 
a somewhat wider ambit than various projections offered into 
evidence by the contending parties.
---------------------------------------------------------------------------

    This is not to say that SDARS' concerns with respect to meeting 
their cash flow and income goals sooner rather than later should not be 
considered in this proceeding, but rather we find that they are more 
properly raised when the SDARS more directly address the timing issue 
and its impact in the context of the fourth policy objective 
articulated in the statute (i.e., minimizing any disruptive impact on 
the structure of the industries involved).
    With respect to the second policy objective, SoundExchange 
primarily points to the voluntary agreements negotiated with other 
digital services in the market for sound recordings as representing a 
fair return for copyright owners. However, SoundExchange suggests that 
if the application of the

[[Page 4096]]

four policy objectives produces a below-market rate, then a fair return 
would not be achieved because that below-market rate would result in 
the record industry not earning sufficient royalties to compensate for 
the substitution effect the SDARS have on revenues from the sales of 
other forms of music. See SX PFF at ] 834. Because we have previously 
addressed SoundExchange's market-based evidence, supra at Section 
IV.C.2.b.-c., we need not address the specifics of that evidence again 
here. Similarly, we have previously addressed SoundExchange's evidence 
with respect to substitution of the SDARS for CD sales, supra at 
Section IV.C.3.a., where we found the net impact of the claimed 
substitution and promotion effect of the SDARS on CD sales was 
indeterminate. We further note that additional SoundExchange claims 
regarding a broader view of substitution (i.e. an SDARS substitutional 
effect on the sales of music in forms other than CDs) are neither 
adequately supported nor quantified in the record. In short, based on 
the evidence before us, we find that it is not necessary to adjust the 
benchmark previously indicated by marketplace evidence in order to 
achieve the policy objective of affording copyright owners a fair 
return.
c. Relative Roles of the Copyright Owner and the Copyright User in the 
Product Made Available to the Public With Respect to Relative Creative 
Contribution, Technological Contribution, Capital Investment, Cost, 
Risk, and Contribution to the Opening of New Markets for Creative 
Expression and Media for Their Communication
    The SDARS, in effect, argue that the third 801(b) policy objective 
requires a discounted market rate in consideration of their: (1) 
Creative contributions to developing and airing nonmusic programming, 
(2) creative contributions to music channels, (3) contributions in the 
form of the design and development of new technology, (4) substantial 
capital investments and operating costs, (5) contribution towards 
meeting various risks associated with making their product available to 
the public, and (6) contribution to opening new markets for creative 
expression and media for their communication. Not surprisingly, 
SoundExchange argues that record companies and artists make equally 
important contributions to the achievement of this third policy 
objective when these various sub-factors are considered as a whole and, 
further, that these various sub-factors are adequately considered and 
valued in market transactions. We find that, considering the record of 
relevant evidence as a whole, the various sub-factors identified in 
this policy objective may weigh in favor of a discount from the market 
rate because of the SDARS' demonstrated need to continue to make 
substantial new investments to support the satellite technology 
necessary to continue to provide this specific service during the 
relevant license period. However, inasmuch as we find this issue is 
intimately intertwined with evidence impacting our consideration of the 
fourth 801(b) policy objective (i.e., minimizing any disruptive impact 
on the structure of the industries involved), we will treat the effect 
of this particular matter as part of our consideration of the fourth 
policy objective. See infra at Section IV.C.3.d.
    We come to this conclusion in a straightforward manner from the 
evidence offered regarding the third policy consideration. The SDARS' 
attempt to obtain credit for creative contributions largely centers on: 
(1) Enhancements to the channels described as music channels and (2) 
their acquisition of nonmusic programming as part of their product 
offering. The SDARS' reliance on the Librarian's decision in the 1998 
PSS Rate Determination at 63 FR 25405 which stated that the ``product 
made available'' is the ``entire digital music service'' of which sound 
recordings are an element is misplaced where the SDARS seek to gain 
credit towards a discounted royalty rate for music by pointing to their 
creative addition of nonmusic programming to the digital music 
offering. The Librarian was clearly considering a music-only service in 
the 1998 PSS Rate Determination and nowhere in that decision suggests 
that such nonmusic content considerations are relevant. SX PCL at ]] 
84-85. While the SDARS' creative contributions to music channels may be 
relevant, it is certainly subsidiary to and dependent on the creative 
contributions of the record companies and artists to the making of the 
sound recordings that are the primary focus of those music 
channels.\38\ Herscovici WRT at 23-24. However, our inquiry does not 
end here. We find that, notwithstanding this imbalance in relative 
creative contributions, there is nothing that distinguishes this result 
from the benchmark marketplace that requires an adjustment in order to 
achieve the third policy objective.
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    \38\ Dr. Woodbury suggests that the creative contributions of 
the record companies and artists are not relevant because they were 
not made specifically for this product offering--that is, they 
involved no ``incremental effort to create new music.'' Woodbury 
Amended WDT at 48. There is no factual basis to support the Woodbury 
assertion. Moreover, the owners of sound recordings clearly receive 
recognition for their creative contribution in the form of 
compensation from all of the other digital music services discussed 
in this proceeding even though those sound recordings were not shown 
to be created exclusively for those services. In other words, the 
Woodbury analysis is flawed because it would preclude intellectual 
property owners from ever being compensated for their creative 
efforts in this market or other similar digital markets and thereby 
eliminates their incentive to create and supply the very music upon 
which the future of this service depends as currently structured.
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    With respect to technological contributions, capital investment, 
cost, risk and the opening of new markets, the SDARS' claims are 
overstated regarding their relative contributions to the relevant 
product made available to the public. For example, the SDARS' claimed 
technological contributions take credit for not only their own efforts 
but also for the substantial technological contributions of others. 
Elbert WRT at 20-40. At the same time, capital investment expense, 
other costs, and risk incurred by copyright owners are dismissed by the 
SDARS because they are not ``incremental'' with respect to satellite 
radio (Woodbury Amended WDT at 50); but this ignores the fact that 
record companies undertake ``significant and irreversible investments 
to develop talent and produce new works and in order to maximize their 
incentives to do so, it is important to receive from each distribution 
channel revenues that reflect the value of their contributions.'' 
Ordover WRT at 14. Thus, contrary to the overstated claims of the 
SDARS, with respect to most such investments, costs and risks, there is 
little to distinguish their relative contribution in this market from 
those of other digital music distributors in their 
markets.39 40 Moreover, over time, the relative position of 
the SDARS may have improved compared to the relative position of the 
record companies. Herscovici WRT at 24-25, 29.
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    \39\ Moreover, there is no substantial evidence to indicate that 
the relative capital investment, cost and risk contributions made by 
the SDARS as shown by the record of evidence in this proceeding were 
made (or are continuing to be made) to secure revenue streams 
limited to the license period at issue in this proceeding. The same, 
of course, is true for similar contributions made by the record 
companies.
    \40\ There is also little to distinguish the SDARS' relative 
contribution to opening new markets from those of other digital 
music distributors in their markets at present. SX RFF at ]] 104-
105.
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    However, the primary type of expenditure incurred by the SDARS that 
does distinguish them from other digital distributors of music is their 
expenditure for satellite technology. This type of investment spending 
has a useful life that typically extends beyond the limited period of a 
single licensing

[[Page 4097]]

period as currently defined by statute; therefore, all of the costs of 
spending on this technology cannot properly be ascribed to a single 
licensing period. Then, too, such technology may have a recoverable 
asset value even if the SDARS that made the investment ceases to 
operate. Herscovici WRT at 28. Nevertheless, nothing in the record of 
evidence before us indicates that the SDARS can continue to make their 
current product available to the public in the license period at issue 
in this proceeding without making new expenditures related to their 
satellite technology. Clearly, new satellite investment, unlike other 
costs, cannot be postponed without a serious threat of disruption to 
the service the SDARS provide. Although this may weigh in favor of a 
discount from the market rate, we find this issue is intimately 
intertwined with evidence impacting our consideration of the fourth 
801(b) policy objective (i.e., minimizing any disruptive impact on the 
structure of the industries involved). Consequently, we will treat the 
potential disruptive effect of postponing investment in new satellite 
technology as part of our consideration of the fourth policy objective 
below. See infra at Section IV.C.3.d.
d. Minimizing Any Disruptive Impact on the Structure of the Industries 
Involved and on Generally Prevailing Industry Practices
    Despite predictions of impending doom for satellite radio if 
excessively high rates are set in this proceeding or similar dire 
predictions for the record companies if exceedingly low rates are set 
in this proceeding, the rate set here is just one component that will 
impact the future of both industries. It can be disruptive, however, if 
it directly produces an adverse impact that is substantial, immediate 
and irreversible in the short-run because there is insufficient time 
for either the SDARS or the copyright owners to adequately adapt to the 
changed circumstances produced by the rate change and, as a 
consequence, such adverse impacts threaten the viability of the music 
delivery service currently offered to consumers under this license.
    Economic experts for both sides agree that a royalty rate that 
would cause the SDARS to cease operating or dramatically change the 
nature of its product would clearly be disruptive. Ordover WDT at 33-
34; Herscovici WRT at 31,40; 8/16/07 Tr. 70:10-72:13, 73:21-76:7 
(Noll). In order to minimize the adverse impact of the rate applicable 
to the license here, we find it appropriate to adopt a rate from the 
zone of reasonableness for potential marketplace benchmarks that is 
lower than the upper boundary most strongly indicated by marketplace 
data. We do so in order to satisfy 801(b) policy considerations related 
to the minimization of disruption that are not adequately addressed by 
the benchmark market data alone. The Judges further find that over the 
period of time marked by the license period, the potential for 
disruption will diminish, allowing for some reasonable escalation of 
the initial rate we set herein.
    Although much evidence of the respective financial conditions of 
the SDARS and the record companies was presented in this proceeding, we 
conclude that many of the claimed examples of ``disruption'' are 
overstated. As Dr. Herscovici points out ``simply causing an increase 
in costs to the Services or a decline in royalties to the record 
companies'' is not substantial enough to qualify as a disruptive 
impact. Herscovici WRT at 31. However, we are persuaded by the evidence 
before us that there are two circumstances faced by the SDARS that 
merit the adoption of a rate below the upper boundary of the zone of 
reasonable market rates we have identified hereinbefore (i.e., 13%).
    First, given that the current rates paid by the SDARS for these 
inputs are in the range of 2.0% to 2.5% of revenues, an immediate 
increase to the upper boundary of the zone of reasonableness (i.e., 
13%) would be disruptive inasmuch as the SDARS have not yet attained a 
sufficient subscriber base nor generated sufficient revenues to reach 
consistent Earnings Before Interest, Taxes, Depreciation and 
Amortization (``EBITDA'') profitability or positive free cash flow. For 
example, EBITDA profitability for Sirius is estimated by Mr. Karmazin 
to be consistent with revenues generated from between 10 million and 11 
million subscribers. 6/7/07 Tr. 35 (Karmazin). Increasing the current 
royalty rates to 13% will increase costs and raise the necessary 
critical mass of subscribers sufficient to generate revenues that can 
yield EBITDA profitability or even positive free cash flow. In order 
not to significantly delay the attainment and amounts of EBITDA 
profitability and positive free cash flow, some rate within the zone of 
reasonableness that is less than 13% is warranted. Even SoundExchange's 
own proposal recognizes that immediate movement to a substantially 
higher market rate is potentially disruptive and seeks to minimize the 
possibility by requesting an initial rate of 8% that increases as 
subscribership increases for each of the SDARS. Moreover, while 
SoundExchange maintains that the proper market-based rate is 23% and it 
is merely proposing a phase-in of that rate, it also recognizes that 
various year-end 2011 consensus subscriber projections in the 
neighborhood of 15-16 million for each of the SDARS (See SX PFF at ]] 
1094, 1096) would only take the SDARS to a rate of 17% by the beginning 
of the last year of the license term (2012). See SoundExchange Third 
Amended Rate Proposal (August 6, 2007) at 1-8 and closing argument of 
SoundExchange's counsel, 10/17/07 Tr. 142 (Handzo). In short, even 
SoundExchange has made a market-based proposal that, barring 
exceptional events,\41\ is adjusted to minimize disruption for the 
SDARS by not only delaying the application of that market-based rate 
but effectively discounting it throughout the relevant period of the 
license.
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    \41\ SoundExchange argues that the proposed merger between 
Sirius and XM should be factored into the rate determination. But 
this would require us to estimate the likelihood that the merger 
would successfully occur, forecast the precise date when the merged 
entity would become a single operation, and project the likelihood, 
magnitude and timing of any synergistic benefits of the merger in 
terms of cost savings. We find on the record before us that we have 
been presented with insufficient evidence on these issues.
---------------------------------------------------------------------------

    Second, as noted, supra at Section IV.C.3.c., we are persuaded that 
still another factor that requires attention is any undue constraint on 
the SDARS' ability to successfully undertake satellite investments 
planned for the license period. A failure to complete these investments 
as scheduled clearly raises the potential for disruption of the current 
consumer service.
    For all these reasons, the Judges find it appropriate to adopt a 
rate from the zone of reasonableness for potential marketplace 
benchmarks that is lower than the upper boundary most strongly 
indicated by marketplace data. Based on the record before us, 
including, among other things, Mr. Butson's sensitivity analysis and 
testimony from the respective CFOs of the SDARS, Mr. Frear and Mr. 
Vendetti, a reasonable starting point for this license is a royalty 
rate of 6% of gross revenues as we have previously defined such 
revenue. See Butson WRT at Appendix A, B and E (suggesting that 
inasmuch as a 4% average rate over the period will not cause the SDARS' 
EBITDA profitability and positive free cash flow to be substantially 
impacted relative to current consensus analyst expectations and, by 
comparison, that a near 8% average rate over the period significantly 
delays the attainment and amounts of EBITDA profitability and

[[Page 4098]]

positive free cash flow for the SDARS, then an average rate somewhat 
less than 8% and structured to begin as high as 6% will have an impact 
not likely to threaten disruption); 6/6/07 Tr. 37:16-38:16 (Vendetti) 
(indicating that a 4% immediate rate necessitates no change in plans as 
contrasted to an 8% immediate rate that ``particularly impacts the 
amount of cash the company has to run its operation'' and therefore an 
8% immediate rate adversely impacts the company ``very much'' in the 
short-term whereas a 6% rate has lesser impact than an 8% rate); 6/12/
07 Tr. 172:1-10 (Frear) and 8/15/07 Tr. 103:15-104:12 (Frear) (sound 
recording royalties already budgeted in 2007 at a figure north of 4% or 
at 4.2%); see also closing argument of XM's counsel, Mr. Bruce Rich, at 
10/17/07 Tr. 234:19-237:14 (indicating that an immediate rate higher 
than 6% is likely to give rise to planning concerns and that SDARS do 
not have ``absolute vision that 4\1/2\ percent wouldn't work or 5% 
wouldn't work''). We further find that over the passage of time the 
potential for disruption from the imposition of the 6% rate gradually 
diminishes as indicated by various forecasts showing consistent 
subscriber and revenue growth (See SX PFF at ]] 1094, 1096), thereby 
allowing a reasonable escalation of the initial rate by the addition of 
0.5% annually beginning with the start of the 2009 calendar year to the 
previous years' royalty rate.
    In short, the Judges find that the percentage of gross revenues 
rate applicable to each year of the license for the SDARS is as 
follows: 6.0% for 2007, 6.0% for 2008, 6.5% for 2009, 7.0% for 2010, 
7.5% for 2011, and 8.0% for 2012. We find no basis for making further 
adjustments to this revenue rate to reflect inflation.\42\
---------------------------------------------------------------------------

    \42\ We do not find that the benchmark supports an additional 
Consumer Price Index adjustment to the percent of revenue rate. No 
showing has been made to indicate that gross revenues, as 
hereinbefore defined, will not maintain their real value over time--
indeed, the services have increased their prices during the prior 
licensing periods. Moreover, no evidence has been submitted by 
SoundExchange, the proponent of such an adjustment, to support this 
additional adjustment by what is, at this point in time, an 
indeterminate amount.
---------------------------------------------------------------------------

D. The Section 112 Royalty Rates and Minimum Fees

1. Background
    Section 112(e) of the Copyright Act directs the Judges to establish 
rates and terms for the making of ephemeral copies of digital 
recordings. We are tasked with setting rates and terms that ``most 
clearly represent the fees that would have been negotiated in the 
marketplace between a willing buyer and a willing seller,'' as well as 
establish `` a minimum fee for each type of service offered by 
transmitting organizations.'' 17 U.S.C. 112(e)(4).
2. Proposals of the Parties
    SoundExchange proposes combining the Section 112 and 114 rates over 
the license period by allocating 8.8% of the combined fee owed by the 
SDARS towards the Section 112 charge. SoundExchange Third Amended Rate 
Proposal (August 6, 2007) at 4. The SDARS also appear to believe that 
the fee for the Section 112 license should be combined with that for 
Section 114, but their fee proposal recognizes no separate value for 
the Section 112 license. They argue that ephemeral copies have no 
economic value separate from the value of the performances they 
effectuate, citing the Copyright Office's 2001 DMCA Section 104 Report 
in support. SDARS PFF at ]] 898-899, 902; SDARS RFF at ] 504.
3. The Record Evidence
    While the record in Webcaster II regarding the Section 112 license 
was exceedingly slim, it is virtually nonexistent in this proceeding. 
No party presented any evidence as to the independent value arising 
from the Section 112 license. SDARS PFF at ] 903.
4. Conclusion
    Of the thousands of pages of testimony and exhibits submitted by 
the parties in this proceeding, virtually none of them are devoted to 
any discussion of the Section 112 license and ephemeral copies. It is 
therefore evident that the parties consider the Section 112 license to 
be of little value at this point in time. Nevertheless, SoundExchange 
asks the Copyright Royalty Judges to bless the fiction that whatever 
the royalty fee for the Section 114 license may be, 8.8% of that fee 
constitutes the value of the Section 112 license. We decline to accept 
SoundExchange's invitation for the same two reasons we declined to do 
so in Webcaster II.
    First, the Section 112 license requires us to determine the rate or 
rates that would have been negotiated between a willing buyer and a 
willing seller, not the value that copyright owners and performers or 
the SDARS would have attached to ephemeral copies. SoundExchange's 
valuation of 8.8% is not a rate. The SDARS will not be paying 8.8% more 
in total royalty fees because of this valuation, nor will they be 
subtracting 8.8% from their charge if they choose not to avail 
themselves of the Section 112 license. Rather, SoundExchange's 8.8% 
valuation is nothing more than an effort to preserve a belief that the 
Section 112 license has some value by perpetuating the number adopted 
in the first webcasting proceeding. Determination of Reasonable Rates 
and Terms for the Digital Performance of Sound Recordings and Ephemeral 
Recordings (Final Rule), 67 FR 45240 (July 8, 2002) (codified at 37 CFR 
part 261) (``Webcaster I'').
    Second, the paucity of the record prevents us from determining that 
8.8% of the Section 114 royalties is either the value or the rate for 
the Section 112 license. SoundExchange's mere assertion that its 8.8% 
proposal reflects an agreement between record companies and artists on 
the rate applicable to Section 112 does not overcome the absence of 
evidence in the record with respect to this license. SoundExchange did 
not present any testimony or evidence from copyright owners or 
performers on this point.
    We are left with a record that demonstrates that the license is 
merely an add-on to the securing of the performance rights granted by 
the Section 114 license. SoundExchange's proposal to include the 
Section 112 license within the rates set for the Section 114 license 
reflects this reality and we accept it as we did in Webcaster II. 
However, just as we did in Webcaster II, we decline, for the reasons 
stated above, to ascribe any particular percentage of the Section 114 
royalty as representative of the value of the Section 112 license. See 
Webcaster II, 72 FR 24101-2.

 V. Terms

    Having determined the rates to be paid by the SDARS for their 
activities under Sections 114 and 112 of the Copyright Act, the Judges 
now turn to the terms necessary to effectuate payment and distribution. 
As we stated in Webcaster II, we are obligated to ``adopt royalty 
payment and distribution terms that are practical and efficient.'' 72 
FR 24102. SoundExchange and the SDARS each submitted proposals of the 
terms they believe fulfill this obligation. SoundExchange based its 
proposal largely on terms the Judges adopted in Webcaster II. SX PFF at 
] 1466. The terms proposed by the SDARS differ in certain respects from 
the Webcaster II terms.
    In considering the parties' proposals and adopting royalty terms, 
we seek to maintain consistency across the licenses set forth in 
Sections 112 and 114. Consistency promotes efficiency thereby

[[Page 4099]]

reducing the overall costs associated with the administration of the 
licenses. This is not to say that the Judges will never vary terms 
across the licenses, but the burden is upon the parties to demonstrate 
the need for and the benefits of variance. As discussed below, the 
parties, for the most part, have not met this burden.

A. Collective

    SoundExchange requests to be named the sole collective for the 
collection and distribution of royalties paid by the SDARS under the 
Section 112 and 114 licenses for the license period 2007-2012. SX PFF 
at ] 1505; Kessler WDT at 15-17. The SDARS do not oppose 
SoundExchange's request. SDARS RFF at ] 506 n.51.
    We have determined previously that designation of a single 
Collective ``represents the most economically and administratively 
efficient system for collecting royalties under the blanket license 
framework created by the statutory licenses.'' Webcaster II, 72 FR 
24104. No party submitted evidence that would compel us to alter that 
determination here. Indeed, no party requested the designation of 
multiple collectives, and SoundExchange was the only party requesting 
to be selected as a collective.\43\
---------------------------------------------------------------------------

    \43\ Although Royalty Logic Inc. filed a petition to 
participate, it withdrew from the proceeding before the oral 
presentation of witnesses. See, supra, at 3.
---------------------------------------------------------------------------

    SoundExchange has a track record of serving as a Collective for the 
collection and processing of royalty payments made under Sections 112 
and 114, having done so since the inception of the statutory licenses. 
That coupled with the absence of any opposition or record evidence to 
suggest that SoundExchange should not serve in that capacity here leads 
us to determine that SoundExchange will serve as the Collective for the 
2007-2012 license period.
    We now turn to those terms which are in dispute.

B. Disputed Terms

1. Late Fees
a. Late Royalty Payments
    SoundExchange requests that the Judges establish a fee for late 
royalty payments equal to 1.5% of the total royalty owed by the SDARS 
for that period. SX PFF at ]] 1482, 1488, 1489; Kessler WRT at 2-4; 8/
29/07 Tr. 19:15-20:5 (Kessler). The proposed fee of 1.5% is the fee 
that is currently paid by PSS for the license period 2002-2007 and was 
the fee imposed by the Judges in the recently concluded webcasting 
proceeding. See SX PFF at ]] 1480-82; 8/29/07 Tr. 19:15-20:5 (Kessler).
    SoundExchange argues that imposition of a ``significant'' late fee 
is necessary in order to compel licensees to make timely royalty 
payments. SX PFF at ] 1486; 6/19/07 Tr. 44:3-10 (Kessler). 
SoundExchange represents that many licensees are late with their 
payments, with such delinquency ranging from a few days to a few 
months. SX PFF at ] 1483. Ms. Kessler asserts that late fees are the 
only remedy available to SoundExchange to thwart late payments, absent 
filing an infringement suit. Kessler WRT at 3; 6/19/07 Tr. 44:3-10 
(Kessler). Moreover, SoundExchange submits that a 1.5% late fee is not 
burdensome to the SDARS provided they submit their royalty payments in 
a timely manner. SX PFF at ] 1483; SX RFF at ] 522.
    In support of its proposed fee, SoundExchange cites three 
marketplace agreements between record companies and digital music 
services that impose a late fee of 1.5%. SDARS Ex. 86 at SE-REB0025070 
(sec. 7.2); SDARS Ex. 88 at SE-REB 0025912 (sec. 6.04(d)); SX Ex. 105 
DR at Ex. A, sec. 5(b).
    While the SDARS do not oppose the imposition of a fee for untimely 
royalty payments, they counter that a fee of 0.5% of the total royalty 
owed for the period is more reasonable and is supported by the record 
in this proceeding. SDARS PFF at ] 1311. The SDARS argue that 
SoundExchange's primary support for its 1.5% fee is that the Judges 
adopted that fee in Webcaster II and relies on the agreements offered 
in that proceeding here. See SDARS PFF at ] 1315; SDARS RFF at ]] 507-
09. The SDARS contend that SoundExchange has presented no other 
agreements in this proceeding to support its proposal. SDARS PFF at ] 
1314. The SDARS further contend that, unlike the record in Webcaster 
II, which established that SoundExchange was faced ``with virtually 
hundreds of different webcasters, including some with an established 
poor or unknown payment history,'' the SDARS are defined entities with 
a history of making payments in a timely manner the majority of the 
time--a point conceded by SoundExchange. SDARS PFF at ] 1315; 6/19/07 
Tr. 94:14-95:5 (Kessler) (``XM and Sirius are typically timely with 
their payments.''). The SDARS assert, therefore, that they need no 
motivation to pay timely. SDARS PFF at ] 1315.
    The SDARS also cite the testimony of Mr. Frear who testified that 
most of Sirius' ``commercial agreements have no late payment charges at 
all. If there are late payment charges, they tend to be in the half of 
one percent to one percent per month range.'' 6/12/07 Tr. 24:4-8 
(Frear). They state that Mr. Frear's testimony is supported by numerous 
SDARS agreements as well as record company agreements and amendments 
with digital music services in the record which contain either no late 
fee provision or impose a late fee of 1%. SDARS PFF at ] 1312, citing 
SIR Exs. 43, 52-53; SDARS Ex. 85 at SE-REB 0027789; SDARS Ex. 87 at SE-
REB 0028157; SX Ex. 104 DR at 23; SX Ex. 256 RR.at SE 0000626; SX Ex. 
257 RR at SE 000148; SE Ex. 258 RR at SE 0005331-32; SX Ex. 253 RR; SX 
Ex. 254 RR. The SDARS claim that SoundExchange's proposal of a 1.5% 
late fee is ``the rare and extreme upper bound of marketplace fees, 
[whereas] the norm is no late fee at all,'' thus making the SDARS' 
proposal of 0.5% ``far more consistent with the record evidence * * * 
particularly in light of [their] established record of timeliness.'' 
SDARS RFF at ] 510.
    In determining an appropriate late fee, a balance must be struck 
between providing an effective incentive to the licensee to make 
payments timely on the one hand and not making the fee so high that it 
is punitive on the other hand. As we did in Webcaster II, the Judges 
conclude that a fee of 1.5% for untimely payments strikes the proper 
balance. Even though the SDARS typically submit their payments in a 
timely manner (SDARS PFF at ] 1309; 6/19/07 Tr. 94:14-95:5 (Kessler)), 
the SDARS' payment history is not dispositive. We are not persuaded 
that a late fee of 0.5% per month provides a sufficient incentive. 
While the content agreements and record company agreements cited by the 
SDARS do not contain a late fee provision, these agreements do contain 
provisions allowing for the termination of the agreement in the event 
of a breach of the agreement such as failure to make payments timely. 
SIR Ex. 43, sec. 12.4(a); SDARS Ex. 85 at SE-REB 0027790 (sec. 8(b)); 
SDARS Ex. 86 at SE-REB 0025071 (sec. 12); SDARS Ex. 87 at SE-REB 
0028160 (sec. 10(b)); SDARS Ex. 88 at SE-REB 0025917 (sec. 10.01); SX 
Ex. 104 DR at 34 (sec. 12). Copyright owners and performers have no 
such recourse under a statutory license. They cannot terminate, short 
of a finding of infringement by a federal court, access to their works 
under the license. See Webcaster II, 72 FR 24107. We find that a late 
fee of 1.5%, as found in several of the agreements in the record, 
provides a proper incentive to the SDARS to maintain such timeliness 
and is not unduly harsh. SDARS Ex. 86

[[Page 4100]]

at SE-REB 0025070 (sec. 7.2); SDARS Ex. 88 at SE-REB 0025912 (sec. 
6.04(d)); SX Ex. 105 DR at A-7 (sec. 5(b)); SX Ex. 107 DR at 9 (sec. 
6(c)). The 1.5% late fee we adopt today is consistent with the late 
fees applicable to webcasters and PSS.
b. Statements of Account and Reports of Use
    SoundExchange proposes that a late fee of 1.5% also be assessed for 
untimely statements of account and reports of use. SX PFF at ]] 1488-
89; Kessler WRT at 3; 6/19/07 Tr. 44:15-17 (Kessler). SoundExchange 
justifies its request by asserting that untimely submission of these 
documents hamper its ability to promptly distribute royalties. SX PFF 
at ] 1488; Kessler WRT at 4. SoundExchange goes on that such late fees 
would provide licensees with a financial incentive to submit their 
statements and reports in a timely fashion. SX PFF at ] 1488; 6/19/07 
Tr. 44:15-45:6 (Kessler).
    The SDARS oppose SoundExchange's proposal. They assert that 
SoundExchange has provided no record evidence to support assessment of 
late fees to these submissions. SDARS PFF at ] 1319. Rather, the SDARS 
continue, the record establishes the opposite. Specifically, the SDARS 
point to several agreements between record labels and digital music 
distribution services which assess no late fee for anything other than 
a late payment. SDARS Ex. 85 at SE-REB 0027789; SDARS Ex. 86 at SE-REB 
0025070; SDARS Ex. 87 at SE-REB 0028157; SDARS Ex. 88 at SE-REB 
0025912; SX Ex. 104 DR at 23; SX Ex. 105 DR at A-6 of 7/1/04 agreement; 
SX Ex. 107 DR at 9; SX Ex. 256 RR at SE 0000626; SX Ex. 257 RR at SE 
000148. In light of these agreements, they conclude that 
SoundExchange's proposal is unreasonable. SDARS RFF at ] 511.
    In Webcaster II, the Judges determined ``that timely submission of 
a statement of account is critical to the quick and efficient 
distribution of royalties.'' 72 FR 24107. Given its importance to the 
distribution process, we imposed a late fee of 1.5% of the total 
royalty owed for that month for its untimely submission. 72 FR 24108. 
That reasoning applies with equal force here. Consequently, we adopt 
the same 1.5% per month late fee for untimely statements of account 
that was adopted in Webcaster II and proposed by SoundExchange here. We 
defer any decision, however, to apply a late fee to the reports of use 
in light of our determination that issues relating to reports of use 
are best addressed in the context of a rulemaking proceeding. See infra 
at Section VI.
    As we found in Webcaster II, ``inconsequential good-faith omissions 
or errors'' in the statement of account ``should not warrant imposition 
of the late fee.'' 72 FR 24108.
    In applying a late fee to both royalty payments and statements of 
account, we reject SoundExchange's request to have the late fee accrue 
separately for these items regardless of whether they are submitted 
simultaneously, as proposed by SoundExchange, or separately. Since we 
are requiring the simultaneous submission of payments and statements of 
account, we agree with the SDARS that SoundExchange has not 
demonstrated the need for such an onerous provision in that instance. 
Therefore, when a royalty payment and statement of account are 
submitted together in accordance with the regulations but are late, the 
offending SDAR will pay a late fee of 1.5% that covers both the payment 
and the statement. Conversely, if the payment and the statement are 
submitted separately and both are late, then the SDAR will pay a 1.5% 
late fee for the late payment and an additional 1.5% late fee for the 
untimely statement.
    Finally, we reject the SDARS' proposal to require receipt of 
written notice of a late submission before the accrual of the late fee 
begins. See Second Amended Proposal of Rates and Terms of Sirius 
Satellite Inc. and XM Satellite Radio Inc. (October 1, 2007) at Sec.  
3.--.3(c). The responsibility of timely submitting royalty payments and 
statements of account rests with the statutory licensee. We do not find 
such responsibility to be unduly burdensome. Therefore, we see no 
justification for providing the SDARS with any grace period before the 
commencement of the accrual period.
2. Confidentiality
    The parties are at loggerheads over whether copyright owners and 
performers should have access to the information contained in the 
statements of account. SoundExchange seeks adoption of the same 
confidentiality provisions adopted in Webcaster II. SX PFF at ] 1491; 
see also 37 CFR 380.5. There, copyright owners and performers and their 
agents (as well as attorneys, consultants, and authorized agents in 
future proceedings) are allowed to review confidential information in 
or pertaining to statements of account, subject to appropriate 
confidentiality agreements. SX PFF at ] 1491. SoundExchange submits 
that such access assists copyright owners and performers in making 
informed decisions regarding licensees' compliance with their statutory 
obligations and in making audit and enforcement decisions. Id. 
SoundExchange contends that in its experience more restrictive 
confidentiality provisions, such as those adopted in Webcaster I, lead 
to ``significant operational and other problems'' which make ``it 
difficult for SoundExchange to complete its work'' and result in 
unfairness to copyright owners and performers, the ultimate 
beneficiaries of the royalties. SX PFF at ]] 1492-8.
    In opposing SoundExchange's proposal, the SDARS characterize 
SoundExchange's proposal as flawed because it ``assumes that the 
services at issue are not complying with their obligations or making 
accurate payments.'' SDARS PFF at ] 1327. The SDARS point out that 
unlike the webcasters in Webcaster II, they ``largely have been 
compliant with all of their obligations.'' Id. They conclude that 
``[w]here there is no basis for the premise underlying SoundExchange's 
confidentiality proposal, there can be no justification for adopting'' 
it. Id.
    We find that the SDARS' argument misses the mark and adopt the 
confidentiality provisions proposed by SoundExchange. We previously 
have made clear that we will not impose confidentiality restrictions 
without a showing by the licensee--the SDARS here--of how disclosure of 
the information in the statements of account would be, or likely would 
be, harmful; in other words, a showing that such information is 
confidential. See 72 FR 24108. The SDARS made no such showing here; 
indeed, they put forth no evidence in support of their proposal to deny 
copyright owners and performers access to the statements of account. 
The SDARS' history of being ``largely compliant'' in its statutory 
obligations, while commendable, provides no justification for adversely 
impacting copyright owners' and performers' substantive rights under 
the Section 112 and 114 licenses. See, id. There is no support in the 
statute for excluding copyright owners and performers from having 
access to the information necessary to pursue an infringement suit, 
especially when copyright owners have full and complete access to the 
statements of account filed under the cable, satellite and DART 
licenses. 72 FR 24108 & n.77.
    As in Webcaster II, the general public will not have access to the 
statements of account. Therefore, access is limited to copyright owners 
and performers, and their agents and representatives identified in the 
regulations, whose

[[Page 4101]]

works were used by the SDARS under the Section 112 and 114 licenses. 
See, 72 FR 24109.
3. Audits and Verification of Payments
    The SDARS strenuously object to SoundExchange's proposal that the 
SDARS be required to ``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 [royalty verification] audit.'' SDARS 
PFF at ] 1335. The SDARS argue that such a term is ``unheard of in 
marketplace contracts between record labels and digital distribution 
services.'' SDARS PFF at ] 1336, citing SDARS Exs. 85-89; SIR Exs. 43, 
52-53; SX Exs. 104-05, 107 DR; SX Exs. 253-54, 256-258 RR. The SDARS 
add that such a term would interfere with their private contractual 
relationships with third parties. SDARS PFF at ] 1336.
    SoundExchange counters that its proposal only requires the SDARS to 
use ``commercially reasonable efforts'' to obtain these records, and 
the SDARS have offered no reason why they cannot make such an effort 
``to enable those audits to be as thorough and accurate as possible.'' 
SX RFF at ] 535.
    Audits serve a critical function in the context of a statutory 
license where a copyright owner cannot easily terminate access to its 
works. Therefore, it is important that there be a high level of 
confidence in the results of such audits. It is equally important that 
the audit be as thorough and accurate as possible. Achievement of this 
goal requires a balancing of the benefits to SoundExchange of having at 
its disposal all pertinent records (or access thereto) against the 
burdens placed upon the SDARS in providing such records or access. We 
find that the balance weighs in favor of SoundExchange. Therefore, we 
are requiring the SDARS to use commercially reasonable efforts to 
obtain or provide access to records maintained by third parties that 
are relevant to the verification process. Imposition of this 
requirement is consistent with the terms we adopted in Webcaster II. 
See, 37 CFR 380.6(d).

VI. Notice and Recordkeeping

    Section 803(c)(3) of the Copyright Act grants the Copyright Royalty 
Judges the authority to adopt terms regarding notice and recordkeeping 
which would supercede those set forth in 37 CFR part 370. Our exercise 
of this authority, however, is discretionary. 17 U.S.C. 803(c)(3) 
(``[T]he Copyright Royalty Judges may specify notice and recordkeeping 
requirements of users of the copyrights at issue that apply in lieu of 
those that would otherwise apply under regulations.'') (emphasis 
added). As with our consideration of terms, the Judges will adopt new 
or amended notice and/or recordkeeping requirements only where the 
parties sufficiently demonstrate the need for and the benefits of 
variances with existing regulations. The parties have once again failed 
to satisfy their burden.
    The parties each have submitted recordkeeping proposals which go 
beyond the current interim notice and recordkeeping regulations set 
forth in 37 CFR part 370. See SoundExchange Third Amended Rate Proposal 
(August 6, 2007) at 9; Second Amended Proposal of Rates and Terms of 
Sirius Satellite Radio Inc. and XM Satellite Radio Inc. (October 1, 
2007) at Sec.  3--.6. The proposals include provisions covering the 
frequency of service of the reports of use, the additional information 
to be reported regarding each sound recording, the time period for 
retention of the reports of use by the SDARS, signature requirements, 
format and delivery requirements, confidentiality of the reports, and 
census reporting. While the parties agree on certain of the proposed 
provisions, they disagree on others.
    The parties' proposals, with one exception discussed below, all 
suffer the same deficiency: they are nothing more than bare proposals 
unsupported by record evidence. The need for the changes and the 
benefits to be obtained from them are backed by nothing more than 
argument of counsel in their closing briefs. Without more, the Judges 
decline to exercise their discretion to amend the notice and 
recordkeeping regulations.
    The one proposal that is offered with some record testimony is 
SoundExchange's request that the recordkeeping regulations be amended 
to require census reporting. Kessler WDT at 17-18; 8/29/07 Tr. 23:19-
25:11 (Kessler); SX PFF at ] 1469. SoundExchange relies on the 
testimony it presented in Webcaster II for support of all of its 
proposed terms, including those relating to reports of use. Kessler WDT 
at 2; 6/19/07 Tr. 39:16-40:2, 47:8-19 (Kessler). The SDARS do not 
object to census reporting in general but disagree with SoundExchange 
that they should be required to report all sound recordings, noting 
that SoundExchange's proposal does not include the ``pragmatic 
exceptions'' found in the current recordkeeping regulations. SDARS PFF 
at ]] 1329-30. Such ``exceptions'' require no reporting of sound 
recordings that are not under federal copyright protection or whose 
term has expired, that have been directly licensed by the Service or 
that amount to an incidental performance as defined in the regulations. 
37 CFR 370.3(b)(8)(i)-(iii); SDARS PFF at ] 1329.
    When the interim notice and recordkeeping rules were promulgated, 
we made clear our intention to ``monitor the operation of these 
regulations * * * and [to] request public comment in the future as to 
the need for amendment or improvement prior to adopting final 
regulations.'' Notice and Recordkeeping for Use of Sound Recordings 
Under Statutory License (Interim Final Rule), 71 FR 59010, 59011 
(October 6, 2006) (codified at 37 CFR Part 370). In Webcaster II, we 
declined to address notice and recordkeeping as part of that rate 
setting proceeding, explaining that ``because our recordkeeping 
regulations are interim and not final, there is ample opportunity to 
again address'' issues such as the Services' recordkeeping costs and 
SoundExchange's request for census reporting in the more appropriate 
context of a future rulemaking proceeding. 72 FR 24110. Moreover, we 
found ``there was no persuasive testimony compelling an adjustment of 
the current recordkeeping regulations.'' Id. SoundExchange has failed 
to present any persuasive evidence in this proceeding to challenge our 
conclusion in Webcaster II, and we therefore do not see any reason to 
now adopt its proposed census reporting requirement, particularly where 
the parties cannot agree as to what information constitutes census 
reporting.

VII. Determination and Order

    Having fully considered the record, the Copyright Royalty Judges 
make the above Findings of Fact based on the record. Relying upon these 
Findings of Fact, the Copyright Royalty Judges unanimously adopt every 
portion of this Determination of the Rates and Terms of the Statutory 
Licenses for the digital transmission of sound recordings, pursuant to 
17 U.S.C. 114, and for the making of ephemeral phonorecords, pursuant 
to 17 U.S.C. 112(e).

    So ordered.

James Scott Sledge,
Chief Copyright Royalty Judge.

William J. Roberts, Jr.,
Copyright Royalty Judge.

Stanley C. Wisniewski,
Copyright Royalty Judge.

Dated: January 10, 2008.

List of Subjects in 37 CFR Part 382

    Copyright, Digital audio transmissions, Performance right, Sound 
recordings.

[[Page 4102]]

Final Regulations

0
For the reasons set forth in the preamble, the Copyright Royalty Judges 
are amending part 382 of Chapter III to title 37 of the Code of Federal 
Regulations by adding a new Subpart B to read as follows:

PART 382--RATES AND TERMS FOR DIGITAL TRANSMISSIONS OF SOUND 
RECORDINGS AND THE REPRODUCTION OF EPHEMERAL RECORDINGS BY 
PREEXISTING SUBSCRIPTION SERVICES AND PREEXISTING SATELLITE DIGITAL 
AUDIO RADIO SERVICES

Subpart B--Preexisting Satellite Digital Audio Radio Services

Sec.
382.10 General.
382.11 Definitions.
382.12 Royalty fees for public performance of sound recordings and 
the making of ephemeral recordings.
382.13 Terms for making payment of royalty fees and statements of 
account.
382.14 Confidential information.
382.15 Verification of royalty payments.
382.16 Verification of royalty distributions.
382.17 Unclaimed funds.

    Authority: 17 U.S.C. 112(e), 114(f), 804(b)(3).


Sec.  382.10  General.

    (a) Scope. This subpart establishes rates and terms of royalty 
payments for the public performance of sound recordings in certain 
digital transmissions by Licensees in accordance with the provisions of 
17 U.S.C. 114, and the making of Ephemeral Recordings by Licensees in 
accordance with the provisions of 17 U.S.C. 112(e), during the period 
from January 1, 2007, through December 31, 2012.
    (b) Legal compliance. Licensees relying upon the statutory licenses 
set forth in 17 U.S.C. 112 and 114 shall comply with the requirements 
of those sections, the rates and terms of this subpart, and any other 
applicable regulations.
    (c) Relationship to voluntary agreements. Notwithstanding the 
royalty rates and terms established in this subpart, the rates and 
terms of any license agreements entered into by Copyright Owners and 
Licensees shall apply in lieu of the rates and terms of this subpart to 
transmission within the scope of such agreements.


Sec.  382.11  Definitions.

    For purposes of this subpart, the following definitions shall 
apply:
    Collective is the collection and distribution organization that is 
designated by the Copyright Royalty Judges. For the 2007-2012 license 
period, the Collective is SoundExchange, Inc.
    Copyright Owners are sound recording copyright owners who are 
entitled to royalty payments made under this subpart pursuant to the 
statutory licenses under 17 U.S.C. 112(e) and 114(f).
    Ephemeral Recording is a phonorecord created for the purpose of 
facilitating a transmission of a public performance of a sound 
recording 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).
    GAAP shall mean generally accepted accounting principles in effect 
from time to time in the United States.
    Gross Revenues. (1) Gross Revenues shall mean revenue recognized by 
the Licensee in accordance with GAAP from the operation of an SDARS, 
and shall be comprised of the following:
    (i) Subscription revenue recognized by Licensee directly from 
residential U.S. subscribers for Licensee's SDARS; and
    (ii) Licensee's advertising revenues, or other monies received from 
sponsors, if any, attributable to advertising on channels other than 
those that use only incidental performances of sound recordings, less 
advertising agency and sales commissions.
    (2) Gross Revenues shall include such payments as set forth in 
paragraphs (1)(i) and (ii) of the definition of ``Gross Revenues'' to 
which Licensee is entitled but which are paid to a parent, wholly-owned 
subsidiary or division of Licensee.
    (3) Gross Revenues shall exclude:
    (i) Monies or other consideration attributable to the sale and/or 
license of equipment and/or other technology, including but not limited 
to bandwidth, sales of devices that receive the Licensee's SDARS and 
any taxes, shipping and handling fees therefor;
    (ii) Royalties paid to Licensee for intellectual property rights;
    (iii) Monies or other consideration received by Licensee from the 
sale of phonorecords and digital phonorecord deliveries;
    (iv) Sales and use taxes, shipping and handling, credit card, 
invoice, and fulfillment service fees;
    (v) Bad debt expense, and
    (vi) Revenues recognized by Licensee for the provision of
    (A) Current and future data services offered for a separate charge 
(e.g., weather, traffic, destination information, messaging, sports 
scores, stock ticker information, extended program associated data, 
video and photographic images, and such other telematics and/or data 
services as may exist from time to time);
    (B) Channels, programming, products and/or other services offered 
for a separate charge where such channels use only incidental 
performances of sound recordings;
    (C) Channels, programming, products and/or other services provided 
outside of the United States; and
    (D) Channels, programming, products and/or other services for which 
the performance of sound recordings and/or the making of ephemeral 
recordings is exempt from any license requirement or is separately 
licensed, including by a statutory license and, for the avoidance of 
doubt, webcasting, audio services bundled with television programming, 
interactive services, and transmissions to business establishments.
    Licensee is a person that has obtained a statutory license under 17 
U.S.C. 114, and the implementing regulations, to make transmissions 
over a preexisting satellite digital audio radio service, and has 
obtained a statutory license under 17 U.S.C. 112(e), and the 
implementing regulations, to make Ephemeral Recordings for use in 
facilitating such transmissions.
    Performers means the independent administrators identified in 17 
U.S.C. 114(g)(2)(B) and (C), and the parties identified in 17 U.S.C. 
114(g)(2)(D).
    Qualified Auditor is a Certified Public Accountant.
    Residential means, with respect to a service, a service that may be 
licensed under the provisions of 17 U.S.C. 114(d)(2)(B); and, with 
respect to subscribers, subscribers to such a service.
    SDARS means the preexisting satellite digital audio radio services 
as defined in 17 U.S.C. 114(j)(10).
    Term means the period commencing January 1, 2007, and continuing 
through December 31, 2012.


Sec.  382.12  Royalty fees for the public performance of sound 
recordings and the making of ephemeral recordings.

    The monthly royalty fee to be paid by a Licensee for the public 
performance of sound recordings pursuant to 17 U.S.C. 114(d)(2) and the 
making of any number of ephemeral phonorecords to facilitate such 
performances pursuant to 17 U.S.C. 112(e) shall be the percentage of 
monthly Gross Revenues resulting from Residential services in the 
United States as follows: for 2007 and 2008, 6.0%; for 2009, 6.5%; for 
2010, 7.0%; for 2011, 7.5%; and for 2012, 8.0%.

[[Page 4103]]

Sec.  382.13  Terms for making payment of royalty fees and statements 
of account.

    (a) Payment to the Collective. A Licensee shall make the royalty 
payments due under Sec.  382.12 to the Collective.
    (b) Designation of the Collective. (1) Until such time as a new 
designation is made, SoundExchange, Inc., is designated as the 
Collective to receive statements of account and royalty payments from 
Licensees due under Sec.  382.12 and to distribute such royalty 
payments to each Copyright Owner and Performer, or their designated 
agents, entitled to receive royalties under 17 U.S.C. 112(e) or 114.
    (2) If SoundExchange, Inc. should dissolve or cease to be governed 
by a board consisting of equal numbers of representatives of Copyright 
Owners and Performers, then it shall be replaced by a successor 
Collective upon the fulfillment of the requirements set forth in 
paragraph (b)(2)(i) of this section.
    (i) By a majority vote of the nine Copyright Owner representatives 
and the nine Performer representatives on the SoundExchange board as of 
the last day preceding the condition precedent in paragraph (b)(2) of 
this section, such representatives shall file a petition with the 
Copyright Royalty Judges designating a successor to collect and 
distribute royalty payments to Copyright Owners and Performers entitled 
to receive royalties under 17 U.S.C. 112(e) or 114 that have themselves 
authorized the Collective.
    (ii) The Copyright Royalty Judges shall publish in the Federal 
Register within 30 days of receipt of a petition filed under paragraph 
(b)(2)(i) of this section an order designating the Collective named in 
such petition.
    (c) Monthly payments. A Licensee shall make any payments due under 
Sec.  382.12 on a monthly basis on or before the 45th day after the end 
of each month for that month, except that payments due under Sec.  
382.12 for the period beginning January 1, 2007, through the last day 
of the month in which the Copyright Royalty Judges issue their final 
determination adopting these rates and terms shall be due 45 days after 
the end of such period. All payments shall be rounded to the nearest 
cent.
    (d) Late payments and statements of account. A Licensee shall pay a 
late fee of 1.5% per month, or the highest lawful rate, whichever is 
lower, for any payment and/or statement of account received by the 
Collective after the due date. Late fees shall accrue from the due date 
until payment is received by the Collective.
    (e) Statements of account. Any payment due under Sec.  382.12 shall 
be accompanied by a corresponding statement of account. A statement of 
account shall contain the following information:
    (1) Such information as is necessary to calculate the accompanying 
royalty payments;
    (2) The name, address, business title, telephone number, facsimile 
number (if any), electronic mail address and other contact information 
of the person to be contacted for information or questions concerning 
the content of the statement of account;
    (3) The handwritten signature of a duly authorized officer or 
representative of the Licensee;
    (4) The printed or typewritten name of the person signing the 
statement of account;
    (5) The date of signature;
    (6) The title or official position held in relation to the Licensee 
by the person signing the statement of account;
    (7) A certification of the capacity of the person signing; and
    (8) A statement to the following effect:

    I, the undersigned officer or representative of the Licensee, 
have examined this statement of account and hereby state that it is 
true, accurate, and complete to my knowledge after reasonable due 
diligence.

    (f) Distribution of royalties. (1) The Collective shall promptly 
distribute royalties received from Licensees to Copyright Owners and 
Performers, or their designated agents, that are entitled to such 
royalties. The Collective shall only be responsible for making 
distributions to those Copyright Owners, Performers, or their 
designated agents who provide the Collective with such information as 
is necessary to identify the correct recipient. The Collective shall 
distribute royalties on a basis that values all performances by a 
Licensee equally based upon the information provided under the reports 
of use requirements for Licensees contained in Sec.  370.3 of this 
chapter.
    (2) If the Collective is unable to locate a Copyright Owner or 
Performer entitled to a distribution of royalties under paragraph 
(f)(1) of this section within 3 years from the date of payment by a 
Licensee, such royalties shall be handled in accordance with Sec.  
382.17.
    (g) Retention of records. Books and records of a Licensee and of 
the Collective relating to payments of and distributions of royalties 
shall be kept for a period of not less than the prior 3 calendar years.


Sec.  382.14  Confidential information.

    (a) Definition. For purposes of this subpart, ``Confidential 
Information'' shall include the statements of account and any 
information contained therein, including the amount of royalty 
payments, and any information pertaining to the statements of account 
reasonably designated as confidential by the Licensee submitting the 
statement.
    (b) Exclusion. Confidential Information shall not include documents 
or information that at the time of delivery to the Collective are 
public knowledge. The party claiming the benefit of this provision 
shall have the burden of proving that the disclosed information was 
public knowledge.
    (c) Use of Confidential Information. In no event shall the 
Collective use any Confidential Information for any purpose other than 
royalty collection and distribution and activities related directly 
thereto.
    (d) Disclosure of Confidential Information. Access to Confidential 
Information shall be limited to:
    (1) Those employees, agents, attorneys, consultants and independent 
contractors of the Collective, subject to an appropriate 
confidentiality agreement, who are engaged in the collection and 
distribution of royalty payments hereunder and activities related 
thereto, for the purpose of performing such duties during the ordinary 
course of their work and who require access to the Confidential 
Information;
    (2) An independent and Qualified Auditor, subject to an appropriate 
confidentiality agreement, who is authorized to act on behalf of the 
Collective with respect to verification of a Licensee's statement of 
account pursuant to Sec.  382.15 or on behalf of a Copyright Owner or 
Performer with respect to the verification of royalty distributions 
pursuant to Sec.  382.16;
    (3) Copyright Owners and Performers, including their designated 
agents, whose works have been used under the statutory licenses set 
forth in 17 U.S.C. 112(e) and 114(f) by the Licensee whose Confidential 
Information is being supplied, subject to an appropriate 
confidentiality agreement, and including those employees, agents, 
attorneys, consultants and independent contractors of such Copyright 
Owners and Performers and their designated agents, subject to an 
appropriate confidentiality agreement, for the purpose of performing 
their duties during the ordinary course of their work and who require 
access to the Confidential Information; and
    (4) In connection with future proceedings under 17 U.S.C. 112(e) 
and 114(f) before the Copyright Royalty Judges, and under an 
appropriate protective order, attorneys, consultants and other 
authorized agents of the parties to the proceedings or the courts.

[[Page 4104]]

    (e) Safeguarding of Confidential Information. The Collective and 
any person identified in paragraph (d) of this section shall implement 
procedures to safeguard against unauthorized access to or dissemination 
of any 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 the Collective or person.


Sec.  382.15  Verification of royalty payments.

    (a) General. This section prescribes procedures by which the 
Collective may verify the royalty payments made by a Licensee.
    (b) Frequency of verification. The Collective 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 3 calendar years, but no calendar year shall be subject to audit 
more than once.
    (c) Notice of intent to audit. The Collective must file with the 
Copyright Royalty Judges a notice of intent to audit a particular 
Licensee, which shall, within 30 days of the filing of the notice, 
publish in the Federal Register a notice announcing such filing. 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 parties.
    (d) Acquisition and retention of report. 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. The Collective shall retain the report of the 
verification for a period of not less than 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 the 
Collective, 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; Provided 
that an 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 Collective shall pay 
the cost of the verification procedure, unless it is finally determined 
that there was an underpayment of 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.


Sec.  382.16  Verification of royalty distributions.

    (a) General. This section prescribes procedures by which any 
Copyright Owner or Performer may verify the royalty distributions made 
by the Collective; Provided, however, that nothing contained in this 
section shall apply to situations where a Copyright Owner or Performer 
and the Collective have agreed as to proper verification methods.
    (b) Frequency of verification. A Copyright Owner or Performer may 
conduct a single audit of the Collective upon reasonable notice and 
during reasonable business hours, during any given calendar year, for 
any or all of the prior 3 calendar years, but no calendar year shall be 
subject to audit more than once.
    (c) Notice of intent to audit. A Copyright Owner and Performer must 
file with the Copyright Royalty Judges a notice of intent to audit the 
Collective, which shall, within 30 days of the filing of the notice, 
publish in the Federal Register a notice announcing such filing. The 
notification of intent to audit shall be served at the same time on the 
Collective. Any 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 report. The Collective 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. The Copyright Owner or Performer requesting the 
verification procedure shall retain the report of the verification for 
a period of not less than 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 Collective in order to remedy 
any factual errors and clarify any issues relating to the audit; 
Provided that the appropriate agent or employee of the Collective 
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 10% or more, in which case the Collective shall, in 
addition to paying the amount of any underpayment, bear the reasonable 
costs of the verification procedure.


Sec.  382.17  Unclaimed funds.

    If the Collective is unable to identify or locate a Copyright Owner 
or Performer who is entitled to receive a royalty distribution under 
this subpart, the Collective shall retain the required payment in a 
segregated trust account for a period of 3 years from the date of 
distribution. No claim to such distribution shall be valid after the 
expiration of the 3-year period. After expiration of this period, the 
Collective may apply the unclaimed funds to offset any costs deductible 
under 17 U.S.C. 114(g)(3). The foregoing shall apply notwithstanding 
the common law or statutes of any State.

    Dated: January 10, 2008.
James Scott Sledge,
Chief Copyright Royalty Judge.
 [FR Doc. E8-669 Filed 1-23-08; 8:45 am]
BILLING CODE 1410-72-P