[Federal Register Volume 81, Number 84 (Monday, May 2, 2016)]
[Rules and Regulations]
[Pages 26316-26410]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-09707]



[[Page 26315]]

Vol. 81

Monday,

No. 84

May 2, 2016

Part II





Library of Congress





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Copyright Royalty Board





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37 CFR Part 380





Determination of Royalty Rates and Terms for Ephemeral Recording and 
Webcasting Digital Performance of Sound Recordings (Web IV); Final Rule

  Federal Register / Vol. 81, No. 84 / Monday, May 2, 2016 / Rules and 
Regulations  

[[Page 26316]]


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LIBRARY OF CONGRESS

Copyright Royalty Board

37 CFR Part 380

[Docket No. 14-CRB-0001-WR (2016-2020)]


Determination of Royalty Rates and Terms for Ephemeral Recording 
and Webcasting Digital Performance of Sound Recordings (Web IV)

AGENCY: Copyright Royalty Board, Library of Congress.

ACTION: Final rule and order.

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SUMMARY: The Copyright Royalty Judges announce their determination of 
rates and terms for two statutory licenses (permitting certain digital 
performances of sound recordings and the making of ephemeral 
recordings) for the period beginning January 1, 2016, and ending on 
December 31, 2020.

DATES: Effective Date: This rule is effective on May 2, 2016.
    Applicability dates: These rates and terms are applicable to the 
period January 1, 2016, through December 31, 2020.

FOR FURTHER INFORMATION CONTACT: LaKeshia Keys, Program Specialist, at 
202-707-7658 or [email protected].

SUPPLEMENTARY INFORMATION: The Copyright Royalty Judges (Judges) hereby 
issue their written determination of royalty rates and terms to apply 
from January 1, 2016, through December 31, 2020, to digital performance 
of sound recordings over the Internet by nonexempt, noninteractive 
transmission services and to the making of ephemeral recordings to 
facilitate those performances.
    The rate for commercial subscription services in 2016 is $0.0022 
per performance. The rate for commercial nonsubscription services in 
2016 is $0.0017 per performance. The rates for the period 2017 through 
2020 for both subscription and nonsubscription services shall be 
adjusted to reflect the increases or decreases, if any, in the general 
price level, as measured by the Consumer Price Index applicable to that 
rate year, as set forth in the regulations adopted by this 
determination.
    The rates for noncommercial webcasters are: $500 annually for each 
station or channel for all webcast transmissions totaling not more than 
159,140 Aggregate Tuning Hours (ATH) in a month, for each year in the 
rate term. In addition, if, in any month, a noncommercial webcaster 
makes total transmissions in excess of 159,140 ATH on any individual 
channel or station, the noncommercial webcaster shall pay per-
performance royalty fees for the transmissions it makes on that channel 
or station in excess of 159,140 ATH at the rate of $0.0017 per 
performance. The rates for transmissions over 159,140 ATH per month for 
the period 2017 through 2020 shall be adjusted to reflect the increases 
or decreases, if any, in the general price level, as measured by the 
Consumer Price Index applicable to that rate year, as set forth in the 
regulations adopted by this determination.
    The Judges also determine herein details relating to the rates for 
each category of webcasting service, such as minimum fee and 
administrative terms. The regulatory language codifying the rates and 
terms of the Judges' determination \1\ are set out below this 
Supplementary Information section.
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    \1\ The Judges proposed to the parties a reorganization of the 
regulations. Only one party's (Pandora's) proposed regulations 
followed the proposed new format. The other parties submitted 
proposed new subparts for each type of entity. One party 
(SoundExchange) specifically opposed the reorganization. The Judges 
find that reducing the amount of repetition in the regulations is 
not prejudicial to SoundExchange, and in the interests of plain 
language have used the new format.
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I. Background

A. Purpose of the Proceeding

    The licenses at issue in the captioned proceeding, viz., licenses 
for commercial and noncommercial noninteractive webcasting, are 
compulsory. Title 17, United States Code (Copyright Act or Act), 
establishes exclusive rights reserved to copyright owners, including 
the right to ``perform the copyrighted work publicly by means of a 
digital audio transmission.'' See 17 U.S.C. 106(6). The digital 
performance right is limited, however, by Sec.  114 of the Act, which 
grants a statutory license for nonexempt noninteractive Internet 
transmissions of protected works. 17 U.S.C. 114(d). Eligible webcasters 
are entitled to perform sound recordings without an individual license 
from the copyright owner, provided they pay the statutory royalty rates 
for the performance of the sound recordings and for the ephemeral copy 
of the sound recording necessary to transmit it. 17 U.S.C. 114(f) and 
112(e). Licensee webcasters pay the royalties to a Collective, which 
distributes the funds to copyright owners. The statutory rates and 
terms apply for a period of five years.
    The Act requires that the Judges ``shall establish rates and terms 
that most clearly represent the rates and terms that would have been 
negotiated in the marketplace between a willing buyer and a willing 
seller.'' 17 U.S.C. 114(f)(2)(B). The marketplace the Judges look to is 
a hypothetical marketplace, free of the influence of compulsory, 
statutory licenses. Web II, 72 FR 24084, 24087 (May 1, 2007). The 
Judges ``shall base their decision on economic, competitive[,] and 
programming information presented by the parties . . . .'' 17 U.S.C. 
114(f)(2)(B) and 112(e)(4) (emphasis added). Within these categories, 
the Judges' determination shall account for (1) whether the Internet 
service substitutes for or promotes the copyright owner's other streams 
of revenue from the sound recording, and (2) the relative roles and 
contributions of the copyright owner and the service, including 
creative, technological, and financial contributions, and risk 
assumption. Id. The Judges may consider rates and terms of comparable 
services and comparable circumstances under voluntary, negotiated 
license agreements. Id. The rates and terms established by the Judges 
``shall distinguish'' among the types of services and ``shall include'' 
a minimum fee for each type of service. Id. (emphasis added).

B. Procedural Posture

    Following the timeline prescribed by the Act, the Judges published 
notice of commencement of this proceeding in the Federal Register.\2\ 
79 FR 412 (Jan. 3, 2014). Twenty-nine parties in interest filed 
petitions to participate in the proceeding.\3\ Ten of those petitioners 
subsequently withdrew from the proceeding, the Judges rejected the 
petitions of three petitioners because the

[[Page 26317]]

Judges determined they lacked the requisite substantial interest in the 
proceeding, and the Judges dismissed the Petition to Participate of 
another party due to a procedural default.\4\
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    \2\ Contemporaneously, the Judges commenced a proceeding to 
establish rates and terms for ephemeral recording and digital 
performance of sound recordings by ``New Subscription Services'' 
(NSS). See 79 FR 410 (Jan. 3, 2014). The NSS at issue in that 
companion proceeding were limited to NSS transmitting to residential 
subscribers through a cable television provider. See 37 CFR 
383.2(h). That proceeding was resolved by negotiated agreement and 
the Judges published rates and terms for new subscription licensees 
at 80 FR 36927 (Jun. 29, 2015). Settlement of the cable NSS did not 
have any effect on the Internet subscription services at issue in 
this proceeding.
    \3\ The 29 parties that filed Petitions to Participate were: 
8tracks, Inc.; AccuRadio, LLC; Amazon.com, Inc.; Apple Inc.; Beats 
Music, LLC; Clear Channel (nka iHeartMedia, Inc.); CMN, Inc.; 
College Broadcasters, Inc. (CBI); CustomChannels.net, LLC; Digital 
Media Association (DiMA); Digitally Imported, Inc.; Educational 
Media Foundation; Feed Media, Inc.; Geo Music Group; Harvard Radio 
Broadcasting Inc. (WHRB); idobi Network; Intercollegiate 
Broadcasting System, Inc. (IBS); Music Reports Inc.; National 
Association of Broadcasters (NAB); National Music Publishers 
Association (NMPA); National Public Radio (NPR); National Religious 
Broadcasters Noncommercial Music License Committee (NRBNMLC); 
Pandora Media Inc.; Rhapsody International, Inc.; Sirius XM Radio 
Inc.; SomaFM.com LLC; SoundExchange, Inc. (SX or SoundExchange); 
Spotify USA Inc.; and Triton Digital, Inc.
    \4\ The ten parties that withdrew their Petitions to Participate 
were: 8tracks, Inc.; Amazon.com, Inc.; CMN, Inc.; 
CustomChannels.net, LLC; Digitally Imported, Inc.; Feed Media, Inc.; 
idobi Network; Rhapsody International, Inc.; SomaFM.com LLC; and 
Spotify USA Inc. The three parties whose Petitions to Participate 
were dismissed for lacking a substantial interest in the proceeding 
were: Music Reports Inc., NMPA, and Triton Digital. The Petition to 
Participate of AccuRadio was dismissed by the Judges due to a 
procedural default. Although they did not formally withdraw from the 
proceeding, Apple, Beats, and DiMA did not file Written Direct 
Statements and did not participate in the hearing. Educational Media 
Foundation joined with NAB and appeared by and through NAB and its 
counsel.
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1. Negotiated Settlements
a. Educational Webcasters
    The Judges published notice of the CBI-SoundExchange settlement in 
November 2014.\5\ The Judges received approximately 60 comments in 
response to the Notice. The Judges considered the comments, some of 
which supported and others of which opposed the proposed settlement, 
and concluded that the CBI-SoundExchange agreement provides a 
reasonable basis to adopt its proposed rates and terms. On September 
28, 2015, the Judges published amended regulations substantially in 
conformity with the proposal.\6\
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    \5\ 79 FR 65609 (Nov. 5, 2014).
    \6\ 80 FR 58201 (Sept. 28, 2015).
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b. Public Broadcasters
    The NPR-CPB settlement with SoundExchange proposed creation of a 
new Subpart D to part 380 of the Regulations entitled Certain 
Transmissions by Public Broadcasting Entities. IBS was the only 
commenting party. IBS made procedural and substantive objections to the 
settlement. Notwithstanding, the Judges concluded that, as the proposed 
settlement would bind only the ``Covered Entities,'' i.e., NPR, 
American Public Media, Public Radio International, and Public Radio 
Exchange, and up to 530 Originating Public Radio Stations as named by 
CPB, adoption of the settlement would not preclude the Judges' separate 
consideration of the concerns of IBS, which is not one of the ``Covered 
Entities'' subject to the new Subpart D. On October 2, 2015, the Judges 
published the settlement, substantially as proposed, as a final 
regulation.\7\
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    \7\ 80 FR 59588 (Oct. 2, 2015). In publishing both negotiated 
settlements, the Judges postponed the designation of a Collective 
until issuance of the current determination.
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2. The Current Proceeding To Adjudicate Rates and Terms
    The Act provides that the Judges shall make their determinations 
``on the basis of a written record, prior determinations and 
interpretations of the Copyright Royalty Tribunal, Librarian of 
Congress . . .'' and their own prior determinations to the extent those 
determinations are ``not inconsistent with a decision of the Register 
of Copyrights . . .'' 17 U.S.C. 803(a). Pursuant to 17 U.S.C. 803(b), 
the Judges conduct a hearing to create that ``written record,'' in 
order to issue their determination as required by 17 U.S.C. 801(b)(1) 
and 803(1).
    To that end, non-settling parties appeared before the Judges for a 
determination hearing. At the hearing, SoundExchange, Inc. 
(SoundExchange), a member organization comprised of copyright owners 
and performing artists, and the designated Collective in this 
proceeding, and Mr. George Johnson, dba GEO Music, represented the 
interests of licensors. Seven licensees participated in the hearing.\8\
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    \8\ Harvard Radio Broadcasting, Inc. (WHRB), Intercollegiate 
Broadcasting System, Inc., iHeartMedia, Inc., National Association 
of Broadcasters (also representing the interests of Educational 
Media Foundation), National Religious Broadcasters Noncommercial 
Music Licensing Committee, Pandora Media, Inc., and Sirius XM Radio, 
Inc.
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    The hearing commenced on April 27, 2015, and concluded on June 3, 
2015. The parties submitted proposed findings and conclusions (and 
responses thereto) in writing, prior to their closing arguments on July 
21, 2015. During the hearing, the Judges heard oral testimony from 47 
witnesses, some of them for both direct case and rebuttal testimony. 
The witnesses included 16 qualified experts. The Judges admitted 660 
exhibits into evidence, consisting of over 12,000 pages of documents, 
and considered numerous illustrative and demonstrative materials that 
focused on aspects of the admitted evidence and the permitted oral 
testimony.
    On December 16, 2015, the Judges issued their Determination of 
Rates and Terms. Pursuant to 17 U.S.C. 803(c)(2) and 37 CFR part 353, 
SoundExchange and George Johnson dba GEO Music Group (GEO) filed 
motions for rehearing. The Judges sought responses to the issues raised 
in the SoundExchange motion, but did not solicit written responses to 
the GEO Music motion.\9\ NAB, Pandora, and iHeart filed written 
arguments responsive to the SoundExchange motion. Having reviewed the 
motions, written arguments, and responses, the Judges denied the 
motions for rehearing. The Judges determined that neither of the 
motions presented the exceptional case required for rehearing or 
reconsideration. In other words, neither SoundExchange nor GEO 
established that the Determination (1) is not supported by the 
evidence, (2) is erroneous, (3) is contrary to legal requirements, or 
(4) requires the introduction of new evidence.\10\ See 17 U.S.C. 
803(c)(2)(A); 37 CFR 353.1 and 353.2. The motions did not meet the 
required standards set by statute, by regulation, or by case law. 
Nevertheless, as discussed in the order denying SoundExchange's motion 
for rehearing, the Judges amended certain of the royalty terms 
regulations to enhance clarity. The Judges incorporate the regulatory 
clarifications, making this Determination final and subject to legal 
review by the Register of Copyrights.
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    \9\ Order Permitting Written Response(s) to SoundExchange Motion 
for Rehearing (Revised) (Jan. 6, 2016).
    \10\ Order Denying in Part SoundExchange's Motion for Rehearing 
and Granting in Part Requested Revisions to Certain Regulatory 
Provisions (Feb. 10, 2016) and Order Denying George Johnson's Motion 
for Rehearing (Feb. 10, 2016).
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II. Context of the Current Proceeding

A. Prior Rate Determinations

    Congress created the exclusive sound recordings digital performance 
copyright in 1995. See Digital Performance Right in Sound Recordings 
Act of 1995, Public Law No. 104-39, 109 Stat. 336 (Nov. 1, 1995). At 
the same time, Congress limited that performance right by granting 
noninteractive subscription services a statutory license to perform 
sound recordings by digital audio transmission. In 1998, Congress 
created the ephemeral recording license and further defined and limited 
the statutory license for digital performance of sound recordings. See 
Digital Millennium Copyright Act, Public Law 105-304, 112 Stat. 2860 
(Oct. 28, 1998) (DMCA).
1. Web I
    The Copyright Office commenced the first webcasting rate 
determination in November 1998. The resulting rates, published in July 
2002, covered a rate period from October 1998 through December 
2002.\11\ Interested parties negotiated rates and terms for 2003-2004, 
including for the first time radio broadcasters with Internet simulcast

[[Page 26318]]

service.\12\ The published webcasting rate determination confirmed that 
the willing buyer/willing seller standard in the Act is the determining 
standard. The Librarian of Congress (Librarian) determined that rate-
setters must consider the promotion/substitution and relative 
contribution factors, although they must not consider those factors 
determinative, nor are they to use those additional factors to adjust a 
rate derived from the willing buyer/willing seller analysis. See 67 FR 
45240, 45244 (July 8, 2002). This conclusion is part of the rate-
setting precedent that instructs the Judges in the current proceeding.
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    \11\ See 67 FR 45240 (Jul. 8, 2002); see also 67 FR 78510 
(allowing non-precedential, negotiated modification of 1998-2002 
rates and terms for ``small webcasters'' under the Small Webcaster 
Settlement Act of 2002).
    \12\ See 68 FR 35008 (Jun. 11, 2003) (noncommercial webcasters' 
rates, effective 1998-2004); 37 FR 5693 (Feb. 6, 2004) (subscription 
and nonsubscription services' and simulcasters' rates, effective 
2003-04, and new subscription services' rates, effective 1998-2004).
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2. Web II Determination and Appeals and Webcaster Settlement Acts
    In November 2004, Congress passed the Copyright Royalty and 
Distribution Reform Act of 2004 (Reform Act), which became effective in 
May 2005. The Reform Act established the Copyright Royalty Judges as 
the institutional successor to the arbitration panel program managed by 
the Copyright Office. The new statute continued the extant 2004 rates 
through 2005 to enable the newly created Copyright Royalty Judges 
program to initiate rate proceedings. The new statute also expanded the 
rate period to five years.\13\
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    \13\ Public Law 108-419, 118 Stat. 2341. In 2004, the Copyright 
Office initiated a proceeding to adjust rates and terms for the 
Section 114 and 112 licenses for 2005-2006 under the CARP system. 
Congress terminated this proceeding, however, and directed that the 
rates and terms in effect on December 31, 2004, remain in effect at 
least for 2005. See 70 FR 7970 n.2 (Feb. 16, 2005) and 70 FR 6736 
(Feb. 8, 2005).
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    The Judges published the determination from their first webcasting 
rate proceeding, covering the period 2006 to 2010, on May 1, 2007 (Web 
II).\14\ In Web II, the Judges differentiated the rate structure for 
commercial and noncommercial webcasters. They set commercial 
webcasters' rates using a per-performance structure and set 
noncommercial webcasters' rates as a flat fee up to a certain usage 
level, after which the commercial rates would apply. See 72 FR 24084, 
24096, 24097-98. In accordance with the statute, the Judges established 
a minimum fee of $500 for each channel or station in either category. 
The Judges did not differentiate the minimum fee, as they based it upon 
the cost to SoundExchange, the designated Collective, to administer the 
license. For noncommercial webcasters, the minimum fee is the only 
royalty fee due, unless the webcaster exceeds established usage limits.
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    \14\ 72 FR 24084.
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    Intercollegiate Broadcasting System, Inc. (IBS) appealed the amount 
of the minimum fee as it applied to noncommercial webcasters. The U.S. 
Court of Appeals for the D.C. Circuit remanded the issue for further 
fact-finding.\15\ The Judges received further evidence and ruled on 
remand to keep the minimum fee at $500 for all licensees. See 75 FR 
56873, 56874 (Sept. 17, 2010). IBS again appealed to the D.C. Circuit, 
challenging the application of the minimum fee to noncommercial 
educational webcasters. The court stayed the second Web II appeal 
pending its resolution of a constitutional question raised by IBS in 
relation to the Judges' Web III determination. Ultimately, the court 
again remanded Web II to the Judges.\16\ The Judges conducted a de novo 
review of the record and published their determination on the second 
remand in 2014. See 79 FR 64669 (Oct. 31, 2014). IBS moved to drop its 
third appeal of Web II and the court dismissed it on September 11, 
2015.\17\
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    \15\ Intercollegiate Broad. Sys., Inc. v. Copyright Royalty 
Board, 574 F.3d 748, 771 (D.C. Cir. 2009).
    \16\ Intercollegiate Broadcasting Sys., Inc., v. Copyright 
Royalty Board, No. 10-1314 (D.C. Cir. Sept. 30, 2013) (order 
granting joint motion for vacatur and remand).
    \17\ Intercollegiate Broad. Sys., Inc. v. Copyright Royalty 
Board, No. 14-1262 (D.C. Cir. Sept. 11, 2015) (order granting joint 
motion to dismiss appeal).
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    After the Library published the Web II determination, Congress 
passed the Webcaster Settlement Act of 2008 (2008 WSA) and the 
Webcaster Settlement Act of 2009 (2009 WSA). These acts enabled 
webcasters to renegotiate rates and terms for a portion of the Web II 
rate period and set rates for the succeeding rate period (2011-2015). 
Entities accounting for 95% of the webcasting royalties paid to 
SoundExchange negotiated settlements under the 2008 WSA and the 2009 
WSA.\18\
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    \18\ 79 FR 23102 n.5 (Apr. 25, 2014).
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3. Web III Determination and Appeals
    On January 5, 2009, the Judges commenced a proceeding to establish 
rates and terms for webcasting for the period January 1, 2011, through 
December 31, 2015 (Web III).\19\ Many interested webcasters had 
recently reached agreements with SoundExchange pursuant to the WSAs and 
did not participate in the Web III proceeding. Only three licensees did 
participate: College Broadcasters, Inc. (CBI), Live365, Inc. (Live365), 
and IBS.\20\
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    \19\ 74 FR 318 (Jan. 5, 2009).
    \20\ As part of the Web III determination, the Judges confirmed 
their adoption of agreed rates and terms for commercial broadcasters 
(simulcasters) proposed in a settlement agreement between 
SoundExchange and the NAB. 76 FR at 13027.
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    CBI's participation was limited to its defense of a proposed 
settlement it negotiated with SoundExchange. Under the CBI/
SoundExchange agreement, the Judges were asked to adopt regulations 
that established a subcategory of noncommercial webcasters, viz., 
noncommercial educational webcasters (NEWs). The Judges did so and 
established the minimum fee for the educational category at the same 
level as every other category of webcasting service, i.e., $500 per 
year for each station or channel, applicable to the flat fee for usage. 
See Digital Performance Right in Sound Recordings and Ephemeral 
Recordings, 76 FR 13026 (March 9, 2011) (Web III). Recognizing the 
operational constraints on educational webcasters, the Judges also 
adopted less burdensome usage reporting standards for the category. 
Educational webcasters not exceeding 159,140 Aggregate Tuning Hours 
(ATH) of webcasting per month could opt for sample reporting in lieu of 
census reporting of each sound recording performance. Educational 
webcasters not exceeding 55,000 ATH could forego reporting usage at all 
by paying a $100 proxy fee to defray the cost to SoundExchange of 
developing proxy usage data.
    For the commercial webcaster rates, SoundExchange and Live365 each 
proposed a per-performance rate structure. Live365 attempted to reach a 
per-performance rate by way of a revenue analysis, factoring in the 
webcasting services' costs and a presumed 20% profit, and applying the 
remainder of revenue to royalties. SoundExchange approached the 
calculation by analyzing comparable market ``benchmark'' agreements, 
with adjustments as necessary to account for differences in the 
services. SoundExchange relied on interactive services rate agreements.
    The Web III Judges rejected the Live365 attempt to base rates on a 
service's ability to pay. Instead, the Judges derived the commercial 
webcasting rate in Web III from a review of market benchmarks presented 
by SoundExchange. SoundExchange provided only interactive services' 
licenses as benchmarks. The Judges adjusted those benchmarks to account 
for significant functional differences between interactive services and

[[Page 26319]]

noninteractive services subject to the statutory rates and terms.
    IBS appealed the Web III determination.\21\ The D.C. Circuit agreed 
with the IBS argument that the Librarian's appointment of the Judges 
under the Reform Act violated the Appointments Clause of the 
Constitution. The D.C. Circuit severed that portion of the Reform Act 
that limited the Librarian's ability to remove Judges, remanding the 
substantive merits of the determination for decision by a validly 
appointed panel of Judges. The Librarian appointed the current Judges 
and they issued a determination on remand in April 2014.\22\ In their 
Web III Remand, the Judges relied upon the rates set forth in the WSA 
agreements between SoundExchange and the NAB and between SoundExchange 
and Sirius XM, and, to a lesser extent, SoundExchange's benchmark 
analysis of various interactive agreements. Id.
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    \21\ Intercollegiate Broad. Sys., Inc. v. Copyright Royalty Bd., 
684 F.3d 1332 (2012). SoundExchange and CBI intervened.
    \22\ See Determination of Royalty Rates for Digital Performance 
Right in Sound Recordings and Ephemeral Recordings, 79 FR 23102 
(Apr. 25, 2014) (Web III Remand).
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    IBS appealed the Judges' remand determination on May 2, 2014. The 
D.C. Circuit affirmed the determination on August 11, 2015.\23\
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    \23\ See Intercollegiate Broad. Sys., Inc. v. Copyright Royalty 
Bd., Case No. 14-1098 (Aug. 11, 2015).
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B. Web IV

    When the Judges commenced the present proceeding (Web IV) in 
January 2014, they invited all potentially affected entities to 
consider in the presentation of their respective cases: (1) The pros 
and cons of revenue-based rates, (2) the existence or propriety of 
price differentiation in a market in which the product (digital sound 
recordings) can be reproduced at a near-zero marginal cost, and (3) 
economic variations among buyers and sellers in the relevant market. 
\24\ The parties addressed many of these issues in their filings 
(including their rate proposals) and in testimony provided during the 
proceeding.
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    \24\ See 79 FR 412 (Jan. 3, 2014).
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III. Judges' Resolution of General Issues

A. Rate Differentiation

1. Majors vs. Indies
    In the evidence presented during the hearing, the Services 
established a potentially meaningful dichotomy between rates they pay 
to Major Labels and those they pay to independent record companies 
(Indies). Put simply, in the marketplace, Services have agreed to pay 
higher royalty rates to Majors than to Indies.\25\
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    \25\ This point is exemplified by the different effective rates 
in the Pandora/Merlin Agreement and the iHeart/Warner Agreement, 
discussed infra.
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    The Act provides that the Judges must differentiate rates based 
upon differences in the webcasting services, but is less clear on 
whether the Judges may also establish differential rates based on 
differences among copyright owners as revealed by the evidence. To gain 
clarity on the latter issue, the Judges referred to the Register of 
Copyrights the novel question whether the Copyright Act permits the 
Judges to differentiate based on types of licensors. After careful 
review, the Register concluded that the Judges' question ``d[id] not 
meet the statutory criteria for referral,'' and declined to answer it. 
Memorandum Opinion on Novel Question of Law at 7 (Nov. 24, 2015) 
(Register's Opinion).
    Citing the fact that no party in the proceeding had proposed a rate 
structure that differentiated among licensors, the Register found that 
``such a structure was not understood to be a subject of litigation.'' 
Id. at 8-9. Consequently, the Register found that the issue was not 
``presented'' in the proceeding as required by the ``novel question'' 
provision in 17 U.S.C. 802(f)(1)(B). Id. at 7. The Register's Opinion 
appears to be premised, in part, on an interpretation of the D.C. 
Circuit's decisions in Settling Devotional Claimants v. Copyright 
Royalty Bd., 797 F.3d 1106 (D.C. Cir. 2015), and Intercollegiate Broad. 
Sys. v. Copyright Royalty Bd., 574 F.3d 748 (D.C. Cir. 2009). See 
Register's Opinion at 9. The Register appears to interpret those cases 
as barring the Judges from relying on theories ``first presented in the 
Judges' determination and not advanced by any participant.'' Id.
    Section 802(f)(1)(B) provides that the Register's timely decision 
of a novel question is binding on the Judges. Because the Register has 
declined to decide the question that the Judges referred to her in the 
current proceeding, however, there is no decision that binds the Judges 
on this issue. Moreover, to the extent that the Register's Opinion 
rests on an interpretation of the D.C. Circuit's application of 
traditional standards of administrative law to particular facts, that 
interpretation does not constitute a resolution of a ``novel question 
concerning an interpretation of . . . provisions of'' title 17 that 
would bind the Judges.
    Nevertheless, the Judges acknowledge that interpretation of the 
evidence out of context and without adequate input of the parties would 
be capricious. Moreover, reopening the proceeding at this juncture, 
long after the closing of the record pursuant to 37 CFR 351.12, for 
further evidence and argument on this issue would be improper. The 
Judges, therefore, do not resolve the legal issue they referred to the 
Register and do not set rates in this proceeding that distinguish among 
classes of copyright owners.
2. Commercial Webcasters vs. Noncommercial Webcasters
    In accordance with the statutory direction to ``distinguish among 
the different types of eligible nonsubscription transmission 
services,'' 17 U.S.C. 114(f)(2)(A), the Judges (and the Librarian of 
Congress before them) have recognized noncommercial webcasters as a 
separate rate category from commercial webcasters in prior 
proceedings.\26\ The Judges deemed different (and lower) rates for 
noncommercial webcasters to be appropriate because ``certain 
`noncommercial' webcasters may constitute a distinct segment of the 
noninteractive webcasting market that in a willing buyer/willing seller 
hypothetical marketplace would produce different, lower rates than we 
have determined . . . for Commercial Webcasters.'' Web II Original 
Determination, 72 FR at 24097.
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    \26\ See Determination of Reasonable Rates and Terms for the 
Digital Performance of Sound Recordings and Ephemeral Recordings, 67 
FR 45240, 45258-59 (July 8, 2002) (Web I); Digital Performance Right 
in Sound Recordings and Ephemeral Recordings, 72 FR 24084, 24097 
(May 1, 2007) (Web II Original Determination); Determination of 
Royalty Rates for Digital Performance Right in Sound Recordings and 
Ephemeral Recordings, 79 FR 23102, 23122 (April 25, 2014) (Web III 
Remand).
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    The record in the instant proceeding demonstrates some of the 
reasons why, in a hypothetical marketplace, a noncommercial webcaster's 
willingness to pay for sound recordings would be lower than a 
commercial webcaster's willingness to pay. For example, a noncommercial 
religious broadcaster that streams a simulcast of its broadcasts is 
prohibited under FCC regulations from selling advertising.\27\ NRBNMLC 
Ex. 7000 ] 18 (Emert WDT). Increased Internet performances are thus 
unlikely to lead to increased revenue, even as

[[Page 26320]]

they result in an increased royalty burden. See 5/21/15 Tr. at 5270 
(Henes).\28\
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    \27\ The NRBNMLC also highlights a number of differences between 
broadcasters and other ``pure play'' webcasters. See, e.g., NRBNMLC 
PFF ] 33. No party has proposed noncommercial broadcasters as a rate 
category separate from other noncommercial webcasters, and the 
record does not provide the Judges a sufficient basis to establish 
separate rates for those separate categories. Consequently, the 
differences that the NRBNMLC highlights are irrelevant.
    \28\ As discussed above, SoundExchange and two groups of 
noncommercial webcasters--CBI and NPR/CPB--submitted settlement 
agreements covering certain noncommercial webcasters that establish 
separate, lower effective royalty rates for some noncommercial 
webcasters. The Judges adopted these agreements. 80 FR 58201 (Sept. 
28, 2015); 80 FR 59588 (Oct. 2, 2015). These agreements demonstrate 
that willing sellers are prepared to accept royalty rates for at 
least some noncommercial webcasters that are different and lower 
than commercial webcasting rates.
---------------------------------------------------------------------------

    Indeed, the NRBNMLC and SoundExchange both proposed that the Judges 
adopt a different rate structure for noncommercial webcasters than for 
commercial webcasters, which suggests to the Judges that there is 
continued support in the marketplace for a different rate structure for 
commercial and noncommercial webcasters.
    Therefore, for all of the foregoing reasons, and in accordance with 
the Judges' reasoning from Web II and Web III, the Judges adopt a 
separate rate structure for noncommercial webcasters than the one 
applicable to commercial webcasters.
3. Simulcasters vs. Other Commercial Webcasters
    The NAB participated in this proceeding on behalf of its member 
terrestrial radio stations that simulcast over-the-air broadcasts on 
the Internet. iHeartMedia (iHeart) also owns and operates terrestrial 
broadcasting stations that simulcast, in whole or in large part, their 
over-the-air programming. In this proceeding, the Judges focus solely 
on the Internet transmissions of these broadcasters.
    The NAB argues that simulcasting is different from other forms of 
commercial webcasting. Given these purported differences, the NAB 
advocates for a separate (lower) rate for simulcasters than for other 
commercial webcasters. The NAB avers that simulcasting constitutes a 
distinct submarket in which buyers and sellers would be willing to 
agree to lower royalty rates than their counterparts in the commercial 
webcasting market. See NAB Proposed Rates and Terms at 2 (definition of 
eligible transmission) (Oct. 7, 2014). No other party's rate proposal 
treats simulcasting differently from other commercial webcasting.
    As the proponent of a rate structure that treats simulcasters as a 
separate class of webcasters, the NAB bears the burden of demonstrating 
not only that simulcasting differs from other forms of commercial 
webcasting, but also that it differs in ways that would cause willing 
buyers and willing sellers to agree to a lower royalty rate in the 
hypothetical market. As discussed below, based on the record in the 
current proceeding, the Judges do not believe that the NAB satisfied 
that burden. Therefore, the Judges do not adopt a different rate 
structure for simulcasters than that which applies to other commercial 
webcasters.
a. History
    No prior rate determination has treated simulcasters differently 
from other webcasters. In Web I, the Librarian, at the recommendation 
of the Register, rejected a CARP report that set a separate rate for 
retransmission of radio broadcasts by a third-party distributor, and 
adopted a single rate for commercial webcasters. 67 FR at 45252.\29\
---------------------------------------------------------------------------

    \29\ The Librarian also rejected arguments that broadcasters who 
stream their own radio broadcasts should be treated differently from 
third parties who stream the same broadcasts. Id. at 45254.
---------------------------------------------------------------------------

    In Web II, the Judges rejected broadcasters' arguments that rates 
for simulcasting should be different from (and lower than) royalty 
rates for other commercial webcasters.

    The record before us fails to persuade us that these 
simulcasters operate in a submarket separate from and noncompetitive 
with other commercial webcasters. Indeed, there is substantial 
evidence to the contrary in the record indicating that commercial 
webcasters . . . and simulcasters . . . regard each other as 
competitors in the marketplace.

Digital Performance Right in Sound Recordings and Ephemeral Recordings, 
72 FR 24084, 24095 (May 1, 2007), aff'd in relevant part sub nom. 
Intercollegiate Broad. Sys. v. Copyright Royalty Bd., 571 F.3d 69 (D.C. 
Cir. 2009) (Web II).
    The NAB reached a WSA settlement with SoundExchange prior to the 
conclusion of Web III covering the remainder of the Web II rate period 
and all of the Web III rate period.\30\ At the request of the NAB and 
SoundExchange, the Judges adopted the settlement as statutory rates and 
terms binding on all simulcasting broadcasters. See 75 FR 16377 (April 
1, 2010). Consequently, simulcasters did not participate in the Web III 
proceeding, in which the Judges determined rates for ``all other 
commercial webcasters.'' Although the Judges did not determine separate 
rates for simulcasters in Web III, because the Judges adopted the NAB 
settlement, simulcasting broadcasters currently pay different rates 
than webcasters that operate under the rates determined by the 
Judges.\31\
---------------------------------------------------------------------------

    \30\ The NAB Settlement rates rose from $0.0017 per performance 
in 2011 to $0.0025 in 2015. 37 CFR 380.12(a).
    \31\ Under the NAB settlement, participating simulcasters 
initially paid lower per-performance royalty rates than those set by 
the Judges in Web III. In later years, however, the rates increased 
to levels that exceed those set by the Judges in Web III. As a 
consequence, simulcasters currently pay a higher royalty rate than 
all other commercial webcasters. Since no party has asserted that 
simulcasters should pay a higher rate than other commercial 
webcasters, the Judges do not reach that issue at this time.
---------------------------------------------------------------------------

b. Comparable Agreements
    In the current proceeding, the NAB presented no benchmarks in 
support of its rate proposal, opting instead for an alternative 
economic analysis.\32\ The NAB does not, therefore, direct the Judges 
to any marketplace benchmarks to demonstrate different prevailing 
royalty rates for simulcasters than for other webcasters.
---------------------------------------------------------------------------

    \32\ See discussion infra, section IV.G.2.
---------------------------------------------------------------------------

    The only agreements in the record that relate specifically to 
simulcasting are the NAB WSA settlement agreement and the 27 direct 
licenses between iHeartMedia and independent record labels (the iHeart/
Indie Agreements). The NAB settlement (which the NAB repudiates as a 
benchmark) does not support the NAB proposal. The average of the 
settlement rates over the Web III rate period is precisely the same as 
the average of the rates that the Judges determined for all other 
commercial webcasters in Web III.\33\ The 2015 rate of $0.0025 per 
performance is five times the rate that the NAB proposes for the 2016-
2020 rate period ($0.0005).
---------------------------------------------------------------------------

    \33\ In both cases the average per-performance royalty rate over 
the 2011-2015 period is $0.00214.
---------------------------------------------------------------------------

    The Judges cannot compare the iHeart/Indie rates directly to the 
NAB settlement rate because they do not employ a per-performance 
royalty rate. Instead those agreements set royalties at the record 
company's pro-rata share of [REDACTED]% of [REDACTED]. See, e.g., Ex. 
3351 at 7-8 (Clear Channel-RPM Entertainment License Agreement). 
Without additional data (e.g., iHeart's net simulcasting revenues and 
the number of simulcast performances of recorded music), the Judges are 
unable to convert the [REDACTED] rate into a per-performance rate. 
Moreover, there is insufficient evidence and economic analysis in the 
record for the Judges to determine whether the headline rate for 
simulcasting in the iHeart-Indie agreements fully accounts for the 
economic value of the licenses to the parties.\34\ The Judges are 
unable to

[[Page 26321]]

determine on this record whether or not the iHeart-Indie agreements 
support the NAB proposal. Therefore, the Judges find that the iHeart-
Indie agreements do not provide adequate evidentiary support for the 
NAB's proposed differential rate for simulcasters.
---------------------------------------------------------------------------

    \34\ For example, the agreements include payments that are 
characterized as royalties for performances of recorded music by 
means of [REDACTED]. See, e.g., IHM Ex. 3351 at 7. Since U.S. 
copyright law confers no exclusive right of public performance by 
means of terrestrial radio transmissions for sound recording 
copyright owners, the Judges would need further evidence to 
determine whether, as an economic matter, these payments should be 
treated, at least in part, as compensation for other uses (such as 
[REDACTED]) covered by the agreements that do require a license 
under copyright law.
---------------------------------------------------------------------------

c. NAB's Qualitative Arguments for a Separate Rate for Simulcasters
    In lieu of quantitative benchmarks, the NAB offers several 
qualitative arguments why willing buyers and sellers would agree to 
lower simulcasting rates. Each argument proceeds from two basic 
premises: (1) The programming content on a simulcast stream is the same 
as programming content on terrestrial radio; and (2) terrestrial radio 
is fundamentally different from music services.\35\
---------------------------------------------------------------------------

    \35\ See, e.g., NAB Ex. 4002 ]] 4, 11, 30-40 (Dimick WDT); NAB 
Ex. 4009 ] 5 (Dimick WRT); 5/26/15 Tr. 5798-99 (Dimick); 5/20/15 Tr. 
at 5076-78, 5104 (Newberry); NAB Ex. 4003 ]] 2, 13-26, 29 (Knight 
WDT); NAB Ex. 4005 ] 14, 24-34 (Downs WDT); 5/21/15 Tr. at 5217-19 
(Downs); NAB Ex. 4006 ]] 3, 9-19 (Koehn WDT).
---------------------------------------------------------------------------

i. FCC License and Public Interest Requirement
    Radio broadcasters, which are licensed and regulated by the Federal 
Communications Commission (FCC), are legally required to act in the 
public interest. See NAB Ex. 4001 ] 14 (Newberry WDT). By extension, 
this requirement distinguishes simulcasters from other commercial 
webcasters.
    The NAB's witnesses testified persuasively that the public interest 
requirement is a key consideration for radio broadcasters as they 
conduct their business. See, e.g., 5/20/15 Tr. at 5075 (Newberry); 
Dimick WDT ] 33. What is far less clear is the connection between this 
requirement and the NAB's proposal that simulcasters should pay lower 
royalty rates than other commercial webcasters. The NAB did not present 
any persuasive evidence that the public interest requirement would in 
any way affect the royalty rates that willing buyers and sellers would 
agree to in the hypothetical market. To the extent the NAB's argument 
is that, as a matter of public policy, radio broadcasters' public 
interest requirement justifies lower royalty rates for simulcasting, 
that argument is without any basis in Sec.  114.
ii. Local Focus and Community Involvement
    NAB witnesses testified that radio broadcasters focus on their 
local market both in their terrestrial broadcasts and in their 
simulcast streams. They attribute this local focus to their legal 
obligations under FCC regulations, 5/20/15 Tr. at 5075 (Newberry), to 
the needs of their advertisers to reach customers proximate to their 
places of business, id. at 5077-78, and to their desire to connect with 
their listeners and, presumably, build listener loyalty. Id. One aspect 
of that local focus is involvement in, and reporting of, activities in 
the community. See, eg., Knight WDT ] 18; Dimick WDT ] 33. The Judges 
find neither record evidence nor an articulated rationale to support a 
lower royalty rate for simulcasters based on the purported local focus 
of radio broadcasters. The Judges decline to infer such a rationale.
iii. On-Air Personalities and Other Non-Music Content
    The NAB stresses the role of on-air personalities, news, weather, 
and other non-music content in cultivating the loyalty of radio 
listeners and distinguishing a radio station from its competitors. Once 
again, the NAB ably demonstrated a distinction between simulcasting and 
other webcasting, but failed to articulate why that distinction 
supports differential royalty rates for simulcasters.
    The NAB cites a survey conducted by Professor Dominique Hanssens 
that concluded that 12.2% of the value that simulcast listeners derive 
from listening to music-formatted stations is attributable to ``hosts, 
DJs, and other on-air personalities.'' NAB Ex. 4012 ] 62, App. 8 
(Hanssens WRT); NAB Ex. 4015 ] 67, Table 5 (Katz AWRT). The NAB 
presents no evidence, however, that the on-air time consumed by on-air 
personalities exceeds, on a percentage basis, the value that listeners 
attribute to them. By including non-music content in their 
transmissions, simulcasters reduce the number of performances of 
recorded music, thus reducing their royalty obligation under a per-
performance rate structure. The NAB failed to present any evidence that 
the value of non-music content is not fully accounted for in this 
reduction of royalties.\36\ Absent such evidence, the Judges find that 
the relative amount of non-music content transmitted by simulcasters 
versus the amount transmitted by other commercial webcasters does not 
support a reduced royalty rate for simulcasters.
---------------------------------------------------------------------------

    \36\ Were the Judges to adopt a percentage-of-revenue rate 
structure, an appropriate adjustment would be necessary to reflect 
the lower percentage of recorded music as compared with an Internet 
music service. As the Judges do not adopt a percentage-of-revenue 
rate structure in this proceeding, however, no adjustment is needed.
---------------------------------------------------------------------------

iv. Degree of Interactivity
    The NAB argues that simulcasters should pay a lower royalty rate in 
recognition of the fact that simulcast transmissions are the least 
interactive form of webcasting. The NAB contends that three 
SoundExchange fact witnesses--Dennis Kooker, Raymond Hair, and Aaron 
Harrison--conceded as much in their testimony and pretrial depositions. 
NAB PFF ]] 114-118.
(A) Kooker Testimony
    Dennis Kooker, President, Global Digital Business at Sony Music 
Entertainment, testified that

statutory licensees pay for their content at compulsory rates, and 
as a consequence exert downward pressure on privately negotiated 
rates. One of the original justifications for allowing statutory 
services to pay these lower rates was that the offering under the 
statutory license would provide a user experience similar to 
terrestrial radio. Statutory services could offer channels of 
particular musical genres, but the programming would be selected by 
the service. If listeners wanted to select their programming, they 
would have to pay for it through directly licensed services.

SX Ex. 12 at 15 (Kooker WDT). The NAB contends that ``Mr. Kooker 
recognized a dichotomy between service-selected programming, which is 
eligible for the lower statutory rate, and listener-selected 
programming, which requires payment of a higher, directly licensed 
rate.'' NAB PFF ] 115.
    Even accepting Mr. Kooker's testimony at face value,\37\ it is not 
a concession that simulcasters should be charged lower rates than other 
webcasters. It is clear in context that the ``dichotomy'' that Mr. 
Kooker identifies is that established in Sec.  114 between interactive 
services, which are directly licensed, and noninteractive services, 
which are subject to the statutory license that is the subject of this 
proceeding.\38\ Mr. Kooker does not state that, among statutory 
services, some should pay lower rates than others based on how 
interactive they are. Mr. Kooker's testimony does not support a 
conclusion that he believes simulcasters should pay lower rates than 
other

[[Page 26322]]

webcasters, much less support the conclusion that willing sellers would 
accept a lower rate in the hypothetical marketplace.
---------------------------------------------------------------------------

    \37\ Mr. Kooker does not cite any evidence of legislative 
history to support his conclusion that the similarity of 
noninteractive webcasting to terrestrial radio was a 
``justification'' for allowing statutory services to pay lower 
rates. That statement is merely an expression of Mr. Kooker's lay 
opinion.
    \38\ Mr. Kooker then argues that that distinction is ``rapidly 
disappearing'' in the marketplace. Kooker WDT at 15.
---------------------------------------------------------------------------

(B) Hair Testimony
    In his hearing testimony, Raymond Hair, International President of 
the American Federation of Musicians, confirmed that he had previously 
expressed \39\ the opinion that services with greater ``functionality'' 
should pay higher rates than services with less functionality. 4/29/15 
Tr. at 806 (Hair).\40\ Mr. Hair's opinion is not authoritative in this 
context, however, because he represents neither the buyer nor the 
seller in the hypothetical transaction that he describes.
---------------------------------------------------------------------------

    \39\ The earlier statement was in comments Mr. Hair submitted on 
behalf of the AFM to the Copyright Office in connection with a study 
on music licensing issues. The comments are not a part of the record 
of this proceeding.
    \40\ Mr. Hair's view of what constitutes ``functionality'' is 
not entirely clear, however, though it appears to include the 
ability to ``hear what I want to hear and hear it when I want to 
hear it.'' Id. at 809.
---------------------------------------------------------------------------

(C) Harrison Testimony
    The strongest evidence the NAB offers on this point is Aaron 
Harrison's testimony. Mr. Harrison, Senior Vice President, Business and 
Legal Affairs of UMG Recordings, agreed with the statement ``the higher 
the level of interactivity, the higher the rate'' because ``higher 
levels of interactivity are more substitutional than less on-demand.'' 
4/30/15 Tr. at 1101 (Harrison). Mr. Harrison also agreed that 
``simulcast is the least substitutional.'' Id.
    As a record company executive, Mr. Harrison's testimony provides 
some evidence that record companies would be willing to accept lower 
royalties from services that are less interactive, because those 
services are less likely to displace sales of sound recordings. The 
probative value of his evidence in determining whether a differential 
rate is justified for simulcasters is limited, however. First, Mr. 
Harrison was responding to a question posed in the abstract, rather 
than identifying specific transactions that he had witnessed or in 
which he had participated. Second, Mr. Harrison stated that he was 
aware of no empirical data on the subject, and was merely testifying as 
to his ``perception from being in the industry.'' Id. at 1102. In sum, 
testimony regarding the perceptions of an industry participant carries 
considerably less weight than actual examples of marketplace behavior. 
Nevertheless, Mr. Harrison's testimony carries some weight that 
hypothetical sellers view the amount of interactivity that a service 
offers as a relevant factor in assessing the royalty rate that a 
service should be required to pay. As such, the Judges consider it 
together with the other evidence relevant to the NAB's arguments.
    Nevertheless, Mr. Harrison's testimony provides little support for 
the NAB's assertion that simulcasters generally should be entitled to 
pay lower royalty rates than other commercial webcasters. While the NAB 
posits that simulcasting is less interactive than custom webcasting, it 
has not established (or attempted to establish) that simulcasting as a 
rule is materially less interactive than any other form of non-custom, 
noninteractive webcasting, all of which would be subject to the general 
commercial webcasting rates. The statutory license is available to 
services that offer a continuum of features, including various levels 
of interactivity, which are offered in a manner consistent with the 
license. On the record before them, the Judges find little support for 
attempting to parse the levels of interactivity that the various 
statutory services offer to try to cobble together a customized rate 
structure among categories of commercial webcasters based solely on 
statutorily permissible levels of interactivity.
v. Promotional Effect
    The record of this proceeding is replete with statements concerning 
the promotional value of terrestrial radio play for introducing new 
artists and new songs to the public and stimulating sales of sound 
recordings. See, e.g., Knight WDT ]] 30-31; Dimick WDT ] 43; IHM Ex. 
3226 ] 7 (Poleman WDT); 4/28/15 Tr. at 386-87, 461-62 (Kooker). There 
appears to be consensus, or near-consensus, on this point.
    The consensus breaks down, however, when it comes to the 
promotional effect of webcasting, including simulcasting. The NAB 
offers a somewhat tautological argument: Simulcasting is, by 
definition, simultaneous retransmission of the content of a terrestrial 
radio broadcast over the Internet; it is, therefore, the same as radio; 
therefore, it must have the same promotional impact as terrestrial 
radio. NAB PFF ]] 107-113; see NAB Ex. 4000 ] 83 (Katz WDT); Katz AWRT 
] 98; see also iHeartMedia PFF ]] 123-124. SoundExchange disputes this 
conclusion. See SoundExchange PFF ]] 897-938.
    As SoundExchange points out, there are a number of differences 
between terrestrial radio and simulcasting. For example, terrestrial 
radio broadcasts are (as the NAB stresses) locally-focused; simulcasts, 
by contrast, can be accessed throughout the country or even overseas. 
See 5/14/15 Tr. at 3909-10 (Peterson); 5/29/15 Tr. at 6556 (Kooker); 
Dimick WDT ] 12. The choices available to radio listeners are more 
limited than those available to simulcast listeners. See 5/7/15 Tr. at 
2522-23 (Wilcox); 5/29/15 Tr. at 6556 (Kooker). Through aggregation 
sites, such as iHeartRadio and TuneIn, simulcasting offers listeners 
greater functionality (e.g., the ability to search, pause, rewind and 
record) than radio does. See 6/1/15 Tr. at 7075-77 (Burress); SX Ex. 27 
at 5 (Kooker WRT); 5/26/15 Tr. at 5840-51 (Dimick).
    These differences may affect listening habits in a way that 
diminishes the promotional effect of simulcasting. This is supported by 
uncontroverted evidence that radio advertisers are generally unwilling 
to pay to promote their products and services on simulcast streams, see 
Downs WDT ] 22; 5/21/15 Tr. at 5242-43 (Downs), and record companies do 
not view simulcasting as having the same promotional impact as 
terrestrial radio.\41\ See 6/1/15 Tr. at 7045, 7048, 7050 (Burress); 
Ex. 3242 at 20, 33 (Walk Deposition at 75, 129). See also Blackburn WRT 
] 42 (``neither interactive nor noninteractive services have a 
statistically significant promotional impact on users' propensity to 
purchase digital tracks'') (Ex. 24).
---------------------------------------------------------------------------

    \41\ The NAB and iHeart repeatedly point to evidence that record 
company promotional personnel thank music services for playing their 
artists' music to support the conclusion that such ``spins'' are 
promotional. See, e.g., Emert WDT ] 25; 5/13/15 Tr. at 3573 
(Morris); 5/21/15 Tr. at 5165 (Poleman); Exs. 3241, 3569, 3570, 
3576, 3575, 3576, 3643. The Judges do not find this argument 
persuasive. It is at least equally plausible that record company 
executives were merely displaying ``common courtesy.'' 6/1/15 Tr. at 
7046-47 (Burress).
---------------------------------------------------------------------------

    In short, there is no empirical evidence in the record that 
simulcasting is promotional to the same degree as terrestrial radio, 
and the narrative the NAB puts forward to support that proposition is 
flawed at best. The Judges need not, however, decide that particular 
question in order to determine whether simulcasters should receive a 
discounted rate. Whether or not simulcasting is as promotional as 
terrestrial radio simply is not the relevant question. The relevant 
questions are (1) whether simulcasting is more promotional than other 
forms of commercial webcasting and, if so, (2) whether such heightened 
promotional impact justifies a discounted rate for simulcasters. 
Assuming for the sake of argument that a promotional impact could 
justify a discounted royalty rate for simulcasters, the NAB would be

[[Page 26323]]

required to demonstrate that such promotional effect is greater for 
simulcasting than for other forms of commercial webcasting to an extent 
that would justify a lower rate for simulcasters. The NAB has not done 
so.
    The licensee services introduced two studies in this proceeding to 
demonstrate empirically that statutory webcasting is promotional. 
Pandora presented a study by Dr. Stephen McBride that examined the 
effect on sales of particular albums (in the case of new music) or 
songs (in the case of catalog material) in particular geographic 
regions if Pandora did not play that music in that region. See 
generally McBride WDT (PAN Ex. 5020). iHeartMedia presented a study by 
Dr. Todd Kendall that examined the relationship between music purchases 
made on certain machines (PCs) and the amount of time that music was 
streamed on those same machines. See generally Kendall WRT (IHM Ex. 
3148).
    Dr. McBride's study concluded that Pandora has a positive effect on 
music sales. See McBride WDT ] 49. As it focused solely on the effect 
that Pandora, a custom radio service, has on music sales, the McBride 
study reveals nothing about the relative promotional value of 
performances by simulcasters as compared with other commercial 
webcasters.
    Dr. Kendall's study compares the promotional effect of interactive 
and noninteractive streaming services, finding that noninteractive 
services have a greater promotional effect. See Kendall WRT ]] 25-29. 
Again, however, this study fails to compare simulcasters with other 
commercial webcasters. The noninteractive services that were included 
in Dr. Kendall's study included both simulcast and non-simulcast 
webcasters. See IHM Ex. 3151 (Exhibit A to Kendall WRT).
    The Judges are well aware of SoundExchange's criticisms of these 
two studies. However, for purposes of assessing the strength of the 
NAB's argument for a separate rate for simulcasters, it suffices to 
note that these studies do not even purport to answer the central 
question whether simulcasting has a greater promotional effect than 
other forms of commercial webcasting. In conclusion, the record does 
not support a separate rate for simulcasters on the basis of any 
purported promotional effect simulcasting may have.
vi. Additional Considerations Supporting the Same Rate for Simulcasters 
and Other Commercial Webcasters
(A) Competition With Other Commercial Webcasters
    Simulcasters and other commercial webcasters compete for listeners. 
The record shows that Pandora, the largest commercial webcasting 
service, regards iHeartRadio, one of the largest services that 
aggregates simulcast streams (as well as providing a custom streaming 
service), as a competitor, and vice versa. See, e.g., SX Ex. 269 at 18 
(including iHeart among Pandora competitors); see generally Ex. 166 
(including Pandora among iHeart competitors). Pandora broadly includes 
other interactive and noninteractive streaming services, as well as 
terrestrial radio, as its competitors. See Ex. 159 at 18-19. Internal 
iHeartMedia emails demonstrate [REDACTED]. See, e.g., Exs. 373, 1028, 
1189.The mutual competition between simulcasters and other commercial 
webcasters is a strong indication that simulcasters and other 
commercial webcasters operate in the same, not separate submarkets. See 
Web II, 17 FR at 24095.
(B) Proposed Definitions of Simulcast
    The NAB proposes to define ``broadcast retransmissions'' (the term 
used to denote simulcasts in the Judges' regulations) as follows:

    Broadcast Retransmissions means transmissions made by or on 
behalf of a Broadcaster over the Internet, wireless data networks, 
or other similar transmission facilities that are primarily 
retransmissions of terrestrial over-the-air broadcast programming 
transmitted by the Broadcaster through its AM or FM radio station, 
including transmissions containing (1) substitute advertisements; 
(2) other programming substituted for programming for which 
requisite licenses or clearances to transmit over the Internet, 
wireless data networks, or such other transmission facilities have 
not been obtained, (3) substituted programming that does not contain 
Performances licensed under 17 U.S.C. 112(e) and 114, and; (4) 
occasional substitution of other programming that does not change 
the character of the content of the transmission.

NAB Proposed Rates and Terms at 2.
    iHeartMedia proposes to amend the current definition of ``broadcast 
retransmission'' in 37 CFR 380.11 by adding:

    [A] Broadcast Retransmission does not cease to be a Broadcast 
Retransmission because the Broadcaster has replaced programming in 
its retransmission of the radio broadcast, so long as a majority of 
the programming in any given hour of the radio broadcast has not 
been replaced.

iHeartMedia Proposed Rates and Terms at 3.
    Both proposed definitions would permit the substitution of 
substantial portions of the content of a broadcast before 
retransmitting it over the Internet. [REDACTED], in fact, has already 
developed and deployed [REDACTED] to accomplish this substitution more 
easily. See 5/13/15 Tr. at 3662 (Littlejohn); see generally IHM Ex. 
3210 (Littlejohn WDT). Even if the Judges were persuaded that simulcast 
streams bear unique characteristics that distinguish them from other 
webcast streams, the ability and demonstrated willingness of 
broadcasters to alter those streams casts doubt on any proposal to 
grant simulcasting lower rates than other commercial webcasters.
d. Conclusion Regarding Separate Rate for Simulcasters
    Based on the record in the current proceeding, the Judges do not 
find that a separate rate category for simulcasters is warranted. The 
NAB's arguments in favor of a separate rate category for simulcasters 
lack support in the record, or are otherwise unpersuasive. The bulk of 
relevant evidence in the record persuades the Judges that simulcasters 
and other commercial webcasters compete in the same submarket and 
therefore should be subject to the same rate. Granting simulcasters 
differential royalty treatment would distort competition in this 
submarket, promoting one business model at the expense of others.

B. Greater-of Rate Structure

    In their notice commencing this proceeding, the Judges inquired 
about price differentiation in the market and the desirability of using 
a percentage-of-revenue rate structure in lieu of, or in addition to, 
the per-performance rate structure in use for the licenses at issue in 
this proceeding. Perhaps in response to this solicitation of comment, 
SoundExchange and Pandora each proposed different greater-of rate 
structures employing a per-play rate and a percentage-of-revenue rate. 
Nevertheless, all of the Services apart from Pandora oppose adoption of 
this two-prong approach. As discussed below, after careful 
consideration of all rate structure proposals presented in the 
proceeding, the Judges find that a greater of rate structure is not 
warranted in the current rate period.
1. SoundExchange's Support for a Greater-of Rate Structure
    In support of its proposed greater-of rate structure, SoundExchange 
makes the following arguments.

[[Page 26324]]

     According to Dr. Daniel Rubinfeld and Dr. Thomas Lys (two 
SoundExchange economic expert witness), willing buyers and willing 
sellers have demonstrated a ``revealed preference'' for a greater-of 
rate structure, as evidenced by the adoption of such rates in the 
market.\42\ For example, many agreements that allow for more ``lean-
forward'' functionality contain a two-pronged per-play and revenue 
percentage structure like the one SoundExchange proposes.\43\
---------------------------------------------------------------------------

    \42\ SX Ex. 17 ] 94 (Rubinfeld CWDT); SX Ex. 14 ]] 25-32 (Lys 
WDT) (94% of 62 label-service pairings adopt a greater-of 
structure). The majority (50% to 60%) of the purely interactive 
agreements that contain a greater-of structure utilize the same two 
prongs that SoundExchange proposes-a per-play rate and a percentage-
of-revenue rate. Rubinfeld CWDT ] 206; SX Ex. 63 (App. 1a).
    \43\ See SX Ex. 2070 (the [REDACTED] Agreement Sec.  1(b), at1); 
SX Ex. 2071 (the [REDACTED] Agreement Sec.  1(d), at 2; SX Ex. 33 
(the [REDACTED] Agreement Sec.  3(b)(2), at 15-16); IHM Ex. 3343 at 
9; IHM Ex. 3365 at 11; IHM Ex. 3356 at 9-10; Rubinfeld CWRT ] 87 
([REDACTED]'s agreements with [REDACTED]); SX Ex. 80; ([REDACTED] 
Agreement); SX Ex. 87 ([REDACTED] Agreement); SX Ex. 100 ([REDACTED] 
Agreement); IHM Ex. 3476 ([REDACTED] Term Sheet); SX Ex. 100 
([REDACTED] Agreement); SX Ex. 80 ([REDACTED] Agreement); PAN Ex. 
5014 ([REDACTED] Agreement).
---------------------------------------------------------------------------

     A greater-of structure provides positive economic 
efficiencies that benefit licensees as well as licensors. 5/5/15 Tr. 
1756-58 (Rubinfeld).
     In particular, the greater-of structure provides 
reasonable compensation to the record companies because: (1) The per-
play prong provides a guaranteed revenue stream, especially against the 
vicissitudes of consumer demand; and (2) the percentage-of-revenue 
prong allows record companies to share in any substantial returns 
generated by a Service. Rubinfeld CWDT ]] 96; 100.
     The greater-of structure benefits the Services because the 
presence of the percentage-of-revenue prong, on the upside, allows for 
a lower per-play rate than would exist if a single-prong, per-play rate 
were established, and a lower per-play rate would encourage entry into 
the market by new services. Rubinfeld CWDT ] 95.
     The greater-of structure would enable a beneficial form of 
price discrimination. All else being equal, services facing relatively 
low price elasticities (facing more inelastic demand) would be more 
likely to charge higher prices, earn greater revenues and thus trigger 
the percentage-of-revenue prong. Conversely, services facing relatively 
high price elasticities (facing more elastic demand) would be more 
likely to charge lower prices, generate lower revenues and therefore 
pay royalties on the per-play basis. Rubinfeld CWDT ] 112.\44\
---------------------------------------------------------------------------

    \44\ SoundExchange proposed a ``55% of revenue'' rate as the 
second prong of its proposed greater-of rate structure based on Dr. 
Rubinfeld's survey of the revenue percentage shares contained in his 
interactive benchmark agreements, which identified a range between 
50% and 60% of the services' revenues, with the majority falling 
between 55% and 60%. Rubinfeld CWDT ] 206; SX Ex. 63, App. 1a 
(Rubinfeld CWDT App. 1a). The following noninteractive services and/
or nonsubscription services also have percentage-of-revenue prongs 
that approximate the 55% rate SoundExchange has proposed:
    [REDACTED]'s agreements with Universal, Warner, and Sony for 
[REDACTED] Service, which purportedly does not have on-demand 
functionality, has a greater-of structure with percentage-of-revenue 
shares of between [REDACTED]%-[REDACTED]% paid by the labels.
    [REDACTED]'s agreements with Universal, Sony, and Warner for 
[REDACTED] streaming service, which allegedly does not have on-
demand functionality, has a greater-of structure with a pro-rata 
share of [REDACTED]% of [REDACTED] premium net revenue.
    [REDACTED]'s free radio service has a percentage-of-revenue 
prong in its agreement with [REDACTED] for a pro-rata payment of 
[REDACTED]% of revenue. See SX Ex. 80, 
SNDEX_0024312_[REDACTED]_20130101 at SNDEX0024322 ([REDACTED] 
Agreement). SoundExchange acknowledges that several other agreements 
contain a percentage-of-revenue prong of 45%. More particularly, the 
[REDACTED] agreements with [REDACTED] and [REDACTED] have a greater-
of compensation formula that includes a pro-rata [REDACTED]% share 
of ad revenues for the [REDACTED] service. SX Ex. 2070 at section 
1(b), p. 1 ([REDACTED] Agreement); SX Ex. 2071 at section 1(d), p. 2 
([REDACTED] Agreement). Also, the [REDACTED] Agreement contains a 
greater-of structure that includes a pro rata share of [REDACTED]% 
of gross, non-simulcast webcasting revenues. SX Ex. 33 Sec.  
3(b)(2), at 15-16.
---------------------------------------------------------------------------

2. The Services' Opposition to a Greater-of Rate Structure
    The Services that oppose the greater-of structure in principle 
argue \45\ that such a structure allocates all of the downside risk to 
the Services alone, while allocating to the record companies a share of 
potential upside benefits. See, e.g., Katz AWRT ] 140. Such 
misallocation of risk and reward, according to the opposing Services, 
not only unjustifiably allows the record companies to free-ride on a 
service's economic success, but also ignores the services' downside 
risk that they will fail to execute their respective business models 
and go out of business. See, e.g., IHM Ex. 3216 ] 19-26 (Pakman WDT); 
Katz AWRT ] 149.\46\
---------------------------------------------------------------------------

    \45\ The NAB, iHeart, and Sirius XM raise additional objections 
to the use of a percentage-of-revenue prong as applied to 
simulcasters. Because the Judges decline to adopt a separate rate 
that applies only to simulcasters they need not address these 
additional objections.
    \46\ These Services assert that there is no economic 
justification for ``rewarding'' record companies for ``incremental 
value that is created by the webcaster above and beyond that created 
directly by the music itself,'' an additional value that may arise 
from lower price elasticities not attributable to the sound 
recordings. See, e.g., Katz AWRT ] 148.
---------------------------------------------------------------------------

    A further economic deficiency in this two-prong approach, according 
to the opposing Services, is that it utilizes a percentage of revenue 
rather than a percentage of profits. An investment that raises revenues 
by less than the cost of the investment would reduce profits, yet, 
under a percentage-of-revenue prong, royalty payments would rise. In 
such a scenario, the ``upside'' from increases in revenues would not 
necessarily translate into an increase in profits. See Katz AWRT ] 150.
    According to the opposing Services, forty-two percent of the 
Majors' contracts examined by Dr. Rubinfeld do not contain a per-play 
prong, contradicting SoundExchange's claim that the market has 
demonstrated a consistent ``revealed preference'' for a greater-of 
approach. Katz AWRT ] 143. According to these Services, all but one of 
the 62 ``label-service pairings'' identified by Dr. Lys related to 
interactive services, thereby further contradicting SoundExchange's 
claim of a revealed marketplace preference for a greater of rate 
structure. 5/4/15 Tr. 1474-75 (Lys).
    The opposing Services also note that the agreements entered into by 
[REDACTED] and [REDACTED], relied upon by Dr. Rubinfeld, were 
negotiated as parts of overall interactive agreements with their record 
company counterparties, and the specific services within those 
agreements upon which Dr. Rubinfeld relies have extra-statutory 
interactive functionality. See NAB PFF ]] 510, 528-530, 515-518, 525-
527 (and citations to the record therein).\47\
---------------------------------------------------------------------------

    \47\ With particular regard to the [REDACTED] agreements, the 
opposing Services also note that they were global deals (rather than 
U.S.-only deals) and tied rates to the sale of [REDACTED], rendering 
those agreements inapplicable as benchmarks. Katz AWRT ] 248.
---------------------------------------------------------------------------

    The opposing Services point out that the parties to the other 
agreements relied upon by Dr. Rubinfeld did not demonstrate an 
expectation that the revenue prong of the greater-of formula would ever 
be triggered (given the relative levels of the per-play and revenue 
percentage prongs). See, e.g., PAN Ex. 5110 5/6/15 Tr. 6956-57 
(Lexton). Rather, according to the opposing Services, the percentage-
of-revenue prongs were added by the record companies merely to create 
favorable precedent for future proceedings. See generally Katz AWRT ] 
193-196; PAN Ex. 5365 at 5-6 (Shapiro SWRT); 5/15/15 Tr. 4025 
(Lichtman); 6/2/15 Tr. 7362-63 (Cutler). Consistent with this point, 
the opposing Services note that:
     There is no evidence that [REDACTED] has paid royalties 
under

[[Page 26325]]

the percentage-of-revenue prongs of its agreements with [REDACTED] or 
the Indies. See NAB PFF 603 (and record citations therein); and
     [REDACTED] has not paid royalties under the percentage-of-
revenue prong of its agreement with [REDACTED]. 6/1/15 Tr. 6896-97 
(Lexton).\48\
---------------------------------------------------------------------------

    \48\ Moreover, in this vein, the opposing Services point out 
that [REDACTED] did not even estimate the potential value of the 
percentage-of-revenue prong in its agreement with [REDACTED]. Id. at 
6895.
---------------------------------------------------------------------------

3. The Services' Opposition to the Percentage of Revenue That 
SoundExchange Proposed
    Even assuming that a percentage-of-revenue prong should be included 
in a greater-of rate structure, the Services (including Pandora) oppose 
the 55% percent figure SoundExchange proposed. Their opposition is 
based on the following arguments:
    First, as with his per-play proposal, Dr. Rubinfeld bases his 
percentage-of-revenue analysis entirely on the unsupported and 
economically improper assumption that, in a competitive market, 
noninteractive services would pay the same percentage-of-revenue rates 
as do interactive services.\49\
---------------------------------------------------------------------------

    \49\ Pandora's RPFF ] 226 (quoting Rubinfeld CWDT ] 169 (``I 
have assumed that the ratio of the average retail subscription price 
to the per-subscriber royalty paid by the licensee to the record 
label is approximately the same in both interactive and 
noninteractive markets.'')) (emphasis added). Pandora's RPFF ] 226 
(quoting Rubinfeld CWDT ] 169 (``I have assumed that the ratio of 
the average retail subscription price to the per-subscriber royalty 
paid by the licensee to the record label is approximately the same 
in both interactive and noninteractive markets.'')) (emphasis 
added).
---------------------------------------------------------------------------

    Second, the Services assert that SoundExchange's reliance on 
evidence that the Majors were able to extract similar supra-competitive 
rates from a handful of services that are not fully on-demand fails to 
support an importation of the 55% revenue rate into a fully and 
effectively competitive noninteractive market. Pandora's RPFF ] 227 
(responding to SX PFF ]] 425-430).
    Third, the Services argue that Dr. Rubinfeld inexplicably ignored 
an agreement between Slacker and Warner for Slacker's DMCA-compliant 
noninteractive radio service that requires Slacker to pay the greater 
of [REDACTED]% of revenue (or the stated per-play rates). The terms of 
this agreement are in stark contrast to Slacker's agreement with Warner 
for Slacker's on-demand service, under which Slacker pays the greater 
of [REDACTED]% of revenue (or the stated per-play rates). PAN Ex. 5222 
(Nov. 2013 agreement) at 16-17; see also 5/7/15 Tr. 2495:5-2498:8 
(Wilcox). Similarly, the Services note that Dr. Rubinfeld ignored a 
Slacker agreement with Universal, under which Slacker paid (until June 
2014), the greater of [REDACTED]% of revenue (or the stated per-play 
rates) for the on demand service, but only the greater of [REDACTED]% 
of revenue (or the stated per-play rates) for Slacker's radio service. 
PAN Ex. 5034 at 0022479-80; 4/30/15 Tr. 1133:6-1135:18 (Harrison).\50\
---------------------------------------------------------------------------

    \50\ Additionally, the Services point out that beginning in June 
2014, Slacker and [REDACTED] agreed to a reduction in the on-demand 
percentage to [REDACTED]% in exchange for an increase in the basic 
radio percentage to [REDACTED]%, but the radio service percentage-
prong royalty rate therefore was still significantly only 64% of the 
rate for the on demand service. PAN Ex. 5035 at 116684-87; 4/30/15 
Tr. 1137:19-1140:10 (A. Harrison).
---------------------------------------------------------------------------

    The Services further note that the [REDACTED] revenue-sharing 
provision relied on by SoundExchange is not for ``[REDACTED]'s free 
radio service,'' but rather applies only to two premium subscription 
services and specifically excludes [REDACTED]'s free offerings.\51\ 
Both subscription services offer on-demand functionality, among other 
interactive features.52 53
---------------------------------------------------------------------------

    \51\ See [REDACTED] Agreement, SNDEX_0024312_[REDACTED] 20130101 
(SX Ex. 80) at 11 of 82 (revenue-share provisions); id. at 3 of 82 
(defining ``Portable Service''); [REDACTED] Agreement, 
SNDEX0023904_[REDACTED]_20100528 (SX. Ex. 80) at 15 of 155 (defining 
``Tethered Service'' and ``Subscription Service'').
    \52\ See [REDACTED] Agreement, SNDEX0023904_[REDACTED]_20100528 
(SX. Ex. 80) at 15 of 155 (describing functionality of 
``Subscription Service'').
    \53\ Additionally, the Services aver that [REDACTED] service 
relied on by SoundExchange is not DMCA compliant, and therefore is 
not a noninteractive service, as SoundExchange claims. See IHM PFF 
]] 352-355 (and citations to the record therein). Furthermore, the 
[REDACTED]% of revenue share agreed to by [REDACTED] for the 
[REDACTED] service is below SoundExchange's proposed interactive-
based 55% benchmark rate. According to the Services, the provisions 
of the [REDACTED] agreements cited in this paragraph do not reflect 
a comparable ``greater of compensation formula,'' as SoundExchange 
claims, but rather reflect a formula whereby a per-play rate is 
added to a different percent-of-revenue figure. See [REDACTED] 
Agreement Sec.  (1)(b), at 1-2 (SX Ex. 2070) (``[REDACTED]% of Net 
Advertising Revenue Per Play''); [REDACTED] Agreement Sec.  1(d), 
p.2 (SX Ex. 2071) (``[REDACTED]% of Net Advertising Revenues per 
Play'').
---------------------------------------------------------------------------

    Fourth, the Services point out that Dr. Rubinfeld ignored the 
percent-of-revenue levels in the Pandora/Merlin Agreement and the 27 
agreements between [REDACTED] and independent labels as they related to 
custom (Pureplay) webcasting. Among those agreements, all but one 
contained an alternative greater-of prong with a [REDACTED]% of revenue 
rate, far less than Dr. Rubinfeld's proposed 55% rate. See, e.g., PAN 
Ex. 5014; IHM Ex. 3343.\54\ This discussion is largely academic, 
however, because, as discussed below, the Judges have determined not to 
adopt a greater of rate structure and instead will continue the current 
per-play structure for commercial webcasters.
---------------------------------------------------------------------------

    \54\ Pandora notes one outlier, the agreement between [REDACTED] 
and iHeartMedia, that contains a [REDACTED]% of revenue prong for 
iHeartMedia's custom offering. The Services argue that this 
[REDACTED]% rate should be given little weight, in that it ``was 
only agreed to because it was almost certainly not going to become 
binding during the term of the agreement.'' 6/2/15 Tr. 7362:21-
7363:5 (Cutler).
---------------------------------------------------------------------------

4. The Judges Reject Adoption of a Greater-of Rate Structure
    The Judges reject the proposals by SoundExchange and by Pandora 
that the statutory rate should contain a greater-of structure. Rather, 
the Judges find that the statutory rate should continue to be set on a 
per-play basis for commercial webcasters. The Judges reach this 
conclusion for several reasons, any one of which the Judges find to be 
sufficient to reject the greater-of approach with a percentage-of-
revenue prong.
    The Judges first note that none of the percentage-of-revenue prongs 
in the greater-of agreements in the record has been triggered, which 
may suggest that the parties to those agreements viewed the per-play 
rate as the rate term that would most likely apply for the length of 
the agreement. See, e.g., 6/2/15 Tr. 7362-63 (Cutler) (distinguishing 
``hard'' negotiations over the iHeart/Warner per-play rate from the 
percentage-of-revenue prong to which Warner ``agreed because we were 
never really going to hit that feature anyway.'').
    Additionally, the agreements, or portions of agreements, relied 
upon by SoundExchange in support of a greater of rate structure, are 
not contained within the benchmarks relied on by SoundExchange. 
SoundExchange, through Dr. Rubinfeld, looked at agreements other than 
his benchmark agreements to find rate structures with a percentage-of-
revenue prong. In other words, the agreements that SoundExchange 
contends are most reflective of the marketplace value of the copyright 
owners' rights under the statutory licenses do not contain a greater of 
rate structure.
    Further, for its part Pandora pointed to the 25% revenue rate from 
the Pandora/Merlin Agreement to support a greater of rate structure. 
Unlike the steered rate provision in the Pandora/Merlin Agreement, 
however, the 25% of revenue prong was nothing other than a figurative 
``cut and paste'' of the Pureplay percentage rate. As such, it reveals 
nothing about whether the parties in the marketplace would agree to 
include such a prong in an

[[Page 26326]]

agreement.\55\ Indeed, Dr. Shapiro proffered virtually no justification 
for the inclusion of the percentage-of-revenue prong in Pandora's 
proposal.
---------------------------------------------------------------------------

    \55\ When Pandora and Merlin agreed to a lower per-play rate 
through steering, they created a rate that was not the higher 
Pureplay rate. By contrast, the 25% of revenue prong that they 
incorporated into the agreement, which equaled the Pureplay rate, 
reveals nothing about any specific negotiations between Pandora and 
Merlin over that term. For example, if Pandora and Merlin had agreed 
to a 20% or a 30% revenue prong, that fact would perhaps have been 
informative of a marketplace term.
---------------------------------------------------------------------------

    Relatedly, SoundExchange's rationale in support of a greater of 
structure that record companies should share in the upside if the 
Services monetize their models at a faster rate is wholly unconvincing. 
Absent proof that the per-play prong had been set too low, there is no 
justification for assuming that the record companies should share in 
that monetization through a percentage-of-revenue prong in the rate 
structure.\56\ Dr. Rubinfeld indicated that his ``ratio equivalency'' 
per-play methodology resulted in a per-play royalty payment that 
approximated 55% of service revenue. Successful monetization by the 
Services might drive the percent-of-revenue equivalence below 55%, but 
there is no economic basis to support maintaining that level with a 
separate percent-of-revenue prong.\57\
---------------------------------------------------------------------------

    \56\ A potential rationale for the percentage-of-revenue prong 
is that it could offset a per-play rate that is ``too low.'' The 
Judges have taken great care to discount any proposed rate that they 
believe would be too low to compensate adequately the licensors for 
the rights under the licenses. As discussed below, the per-play 
rates that the Judges adopt for commercial webcasters are consistent 
with rates negotiated in marketplace agreements.
    \57\ This criticism would not apply to the subscription rates 
for noninteractive services, based upon Dr. Rubinfeld's ``ratio 
equivalency'' model. However, the other criticisms set forth in the 
text are sufficient to reject the use of a greater-of rate structure 
with a percentage-of-revenue prong even for the subscription rate.
---------------------------------------------------------------------------

    Only SoundExchange and Pandora proposed a two-prong approach, and, 
as discussed above, the Judges find their reasons in support of such a 
structure unpersuasive. Moreover, other parties raised numerous, valid 
objections to the use of a greater-of structure with a percent-of-
revenue prong. See, e.g., NAB Ex. 4011 (Weil WRT) (a percent-of-revenue 
rate would create uncertainty and controversy regarding the definition 
and allocation of revenue).
    Finally, by maintaining the statutory rate as a per-play rate, the 
Judges are acting in a manner consistent with prior decisions, 
consistent with 17 U.S.C. 803(a)(1). Although new and persuasive 
evidence could cause the Judges in future proceedings to consider a 
greater-of rate structure and a percent-of-revenue rate, no such 
evidence has been provided to the Judges in this proceeding.\58\
---------------------------------------------------------------------------

    \58\ Moreover, the Judges are concerned that, given the 
limitations of the evidence in this proceeding regarding agreements 
with greater of rate structures, any attempt to ``mix and match'' 
per-play rates with percentage-of-revenue rates could cause 
licensors and licensees alike to experience undesirable and 
potentially destabilizing swings in anticipated revenues and 
payments over the length of the license. Continuation of the current 
per-play rate structure helps to ameliorate this concern.
---------------------------------------------------------------------------

    For these reasons, the Judges reject the two-pronged rate proposals 
proposed by SoundExchange and Pandora, and shall continue the current 
practice of setting the statutory webcasting rates on a per-play basis.

C. Promotion and Substitution

    The Act provides, among other things, that the Judges base their 
hypothetical marketplace rates on ``economic, competitive[,] and 
programming information'' that the parties present, including promotion 
and substitution as factors that would influence rates in the 
marketplace. 17 U.S.C. 114(f)(2)(B).\59\
---------------------------------------------------------------------------

    \59\ In prior proceedings, the focus of the question of 
substitution has been physical record sales. In the current market, 
however, digital access through interactive services is a revenue 
stream that might be affected by consumers choosing the statutory 
noninteractive streaming services. To evaluate interactive licenses 
as benchmarks for noninteractive services, therefore, the Judges 
must look at how the latter might prove a substitute for the former.
---------------------------------------------------------------------------

    As set forth in this determination, infra, the Judges have relied 
upon certain marketplace agreements as benchmarks for the setting of 
the statutory rates. In prior determinations, the Judges have concluded 
that contracting parties, as rational economic actors, factor in the 
promotion and substitution effects when negotiating direct 
licenses.\60\ That is, parties negotiating direct licenses for the 
performance of sound recordings on services will be cognizant of the 
promotion and substitution effects, and those effects will influence 
the rate at which they agree to a license. Witnesses on both sides in 
this proceeding generally agree that promotion and substitution effects 
are factored into negotiated agreements. See, e.g., Rubinfeld CWDT ] 
31(d); Shapiro WDT at 39).\61\
---------------------------------------------------------------------------

    \60\ See Web III Remand, 79 FR 23102, 23119 n.50 (``The adoption 
of an adjusted benchmark approach to determine the rates leads this 
panel to agree with Web II and Web I that such statutory 
considerations implicitly have been factored into the negotiated 
prices utilized in the benchmark agreements. Web II, 72 FR at 24095; 
Web I, 67 FR at 45244.'').
    \61\ The more particular issue of whether noninteractive 
services substitute for interactive services is part and parcel of 
the issue of whether there has been important ``convergence'' 
between the two types of services, discussed at length in connection 
with the evidence regarding segmentation of listeners based on their 
willingness to pay.
---------------------------------------------------------------------------

    The parties' mutual awareness reconfirms the Judges' earlier 
conclusion that the promotion and substitution effects on royalty rates 
are ``baked in'' to a negotiated license rate. To the extent the Judges 
adopt a rate based on benchmark evidence, it is not necessary to make 
additional adjustments to benchmarks to reflect the promotion and 
substitution factors. The Judges hold in this determination, as they 
have held consistently in the past, that the use of benchmarks ``bakes-
in'' the contracting parties' expectations regarding the promotional 
and substitutional effects of the agreement. For the noninteractive 
benchmarks upon which the Judges rely, this long-standing position to 
deem substitution and promotion effects as incorporated into the 
agreements appears to be fully applicable.
    SoundExchange disagrees, however, and points, for example, to 
testimony from Charlie Lexton of Merlin who stated that Merlin never 
considered the promotional or substitutional effects when agreeing to 
the terms of the Pandora/Merlin Agreement. 6/1/15 Tr. 6910 (Lexton). 
The Judges find that such testimony is not credible and not sufficient 
to support abandonment by the Judges of their long-standing treatment 
of promotional and substitutional issues. Indeed, the fact that Merlin 
arguably was so cavalier regarding the impact of the Pandora/Merlin 
Agreement on the positive promotional effects or the negative 
substitutional effects (to interactive streaming, download sales, and 
other revenue channels) implies that Merlin either understood the net 
value of these factors to be positive or, at worst, neutral. 
Apparently, SoundExchange infers: ``This is not to say that [Merlin] 
did not value those terms--of course it did, but there was no precise 
calibration of the negotiated rate to Merlin's view of the promotional 
and substitutional impact of the deal.'' SX PFF ] 1101. It strains 
credulity to think that Merlin was oblivious to the potential 
promotional and substitutional effects of the Pandora/Merlin Agreement, 
yet proceeded with the deal on unaltered terms.
    Additionally, the Judges reject the argument, advanced by 
SoundExchange, that the Pandora/Merlin and iHeart/Warner Agreements are 
too new and untested to support the longstanding understanding that 
substitution and promotional effects are ``baked in'' to benchmark 
agreements. An important aspect of the benchmarking approach is

[[Page 26327]]

that it credits sophisticated business entities that have carefully 
negotiated their agreements with an understanding of market forces. 
That is, there is a presumption that marketplace benchmarks demonstrate 
how parties to the underlying agreements commit real funds and 
resources, which serve as strong indicators of their understanding of 
the market. If promotional or substitutional effects had separate 
values that were not already reflected in those rate and play-quantity 
terms, rational commercial entities would identify those promotional 
and substitutional effects and account for them explicitly.
    The ``baked-in'' aspect of promotional and substitutional effects 
does not address the issue of whether there is a difference between the 
promotional/substitutional effects of interactive services, on the one 
hand, and noninteractive services, on the other. To the extent the 
Judges rely on SoundExchange's interactive benchmark to set statutory 
rates in the noninteractive market, the Judges must identify and 
consider any difference in the promotional/substitutional effects 
between these markets to determine whether to adjust the interactive 
benchmark rate.
    These potential promotional/substitutional effects hypothetically 
could occur in two different ways. First, the availability of 
noninteractive services could cause listeners to substitute 
noninteractive listening at the expense of interactive services. 
Second, noninteractive services could substitute for, or promote less, 
the sale of sound recordings through downloads or otherwise. To address 
these issues, the parties rely on expert witness testimony and on the 
observational and anecdotal testimony of industry witnesses. The Judges 
find the lay testimony to be unhelpful and essentially self-serving. 
Rather, the Judges find this issue to be technical in nature, and 
consider the expert testimony, discussed below, to be the type of 
evidence that has the potential to identify whether such differences 
exist. SoundExchange relied upon the survey work undertaken by Sarah 
Butler, a Vice President at NERA Economic Consulting. The Services' 
position was supported by the survey work of Larry Rosin, President of 
Edison Research.
    Ms. Butler, a survey expert, designed and constructed a consumer 
survey to identify the types of music listening Pandora and iHeart 
substituted for, in the opinion of listeners. SX Ex. 5 at 3. Ms. Butler 
gathered information from on-line survey respondents on age, gender, 
and familiarity with different types of music listening formats. She 
then defined the relevant population as comprising those individuals 
who reported themselves as currently using iHeart or Pandora. For 
listeners who reported using both of these services, Ms. Butler 
testified that she assigned them to either the iHeart or the Pandora 
group. Id. ]] 30-31.
    Survey respondents were asked two substantive questions relating to 
each service. The first question asked:
    Imagine you could no longer listen to music on iHeart [or Pandora]. 
Which of the following statements represents what you would be most 
likely to do?

 I would find a substitute for the music I listen to on iHeart 
[or Pandora]
 I would stop listening to music
 Don't know/unsure

Id. ] 38.
    The second question asked respondents who answered the first 
question by stating they would find a substitute for the music they 
listened to on either Pandora or iHeart:
    Which of the following, if any, would be your most preferred 
substitute for iHeart [Pandora]?

Id. ] 40. Respondents were given a list of alternatives. Id.
    Ms. Butler's survey found that for Pandora users, 43.3% would 
listen to one of the following services: Spotify (19.7%), iTunes Radio 
(9.7%), Amazon and Rhapsody (about 4% each), Google Play and Slacker 
(about 2% each), and Beats and Rdio (about 1% each). Id. ] 48, Figure 
3. For iHeart users, Ms. Butler's survey showed that 30% would switch 
to Pandora, and 23.1% would instead listen to another service, 
including Spotify (10.7%), iTunes Radio (7.5%), or Amazon, Google Play, 
Slacker, or Rhapsody (about 1% each). Id. ] 50, Figure 5.
    According to SoundExchange, these results show that interactive 
services are common, if not predominant, substitutes for noninteractive 
services, and that listeners would turn to such interactive services in 
a hypothetical world in which no statutory noninteractive services were 
available. SX PFF ]] 1130-1131.
    The Judges have evaluated Ms. Butler's survey and the criticisms by 
the Services, and the Judges find that there are three significant 
problems with Ms. Butler's survey that preclude its usefulness in 
attempting to demonstrate that noninteractive statutory services 
substitute for interactive services. Any one of these problems, 
standing alone, is sufficient to preclude the Judges' reliance on Ms. 
Butler's survey.
    First, Ms. Butler's survey fails even to attempt to measure 
listeners' willingness to pay (WTP) for different services. See 5/29/15 
Tr. 6779, 6796-98 (Butler) (acknowledging that she did not measure 
WTP--including whether WTP for any listener was greater than zero). Her 
survey also did not test whether the responding listeners had any 
knowledge of the prices of the potential substitute services she 
provided to them when asking her second question. Given that the Judges 
are attempting to set rates in this proceeding, a survey that asks 
``listeners'' to rank substitute services without providing price 
information fails to provide any meaningful information as to how those 
``listeners'' will act as ``consumers'' of streaming services.
    Second, Ms. Butler did not select her survey respondents in a 
random manner, and therefore had no ability to calculate margins of 
error or confidence intervals for her results. See 5/29/15 Tr. 6782 
(Butler).
    Third, Ms. Butler intentionally assigned virtually all respondents 
who reported listening to both Pandora and iHeart to the iHeart group 
only for further questioning. This caused her to omit about 40% of 
actual Pandora users from her results as they related to such Pandora 
users, including respondents who reported using Pandora daily. Id. at 
6789, 6806-08.
    Accordingly, the Judges cannot and do not rely on Ms. Butler's 
survey results.
    Mr. Rosin, on whose survey the Services rely, conducted his survey 
in a manner consistent with the standards and code of ethics of the 
American Association for Public Opinion Research, a major survey 
research standards organization. PAN Ex 5021 at 5 n.2. (Rosin WRT). 
Specifically, Mr. Rosin conducted a national telephone survey of 
Americans 13 years of age and older. Respondents were selected 
randomly, and 2,006 interviews were conducted via landlines and cell 
phones. The margin of error for his results was +/-2%, with a 
confidence interval of 95%. Rosin WRT at 5, 7.
    The responses to Mr. Rosin's survey revealed, inter alia, that
     only 1% to 1.6% of noninteractive users reported that 
their listening was replacing listening on interactive services;
     only 3.8% of survey respondents would subscribe to pay for 
an interactive service;
     only 2% of survey respondents were ``very likely'' to pay 
the market monthly subscription rate of $9.99 for an interactive 
service, and only 7% were ``somewhat likely'' to subscribe at this 
price point--91% were ``not at all

[[Page 26328]]

likely'' or ``not very likely'' to subscribe at that price.

Rosin WRT at 9, 12.
    Based upon these findings, Mr. Rosin concluded that:
    1. Most consumers are unwilling to pay monthly subscription fees 
for access to streaming services.
    2. Noninteractive services like Pandora and iHeart are not close 
substitutes for interactive on-demand services such as Spotify.
    3. Only a small market exists for paid (subscription) services.
    4. Listeners to Pandora would not otherwise be listening to 
interactive services.

Rosin WRT at 4.
    The Judges find Mr. Rosin's random survey to be generally credible, 
and certainly more informative than the non-random survey work done by 
Ms. Butler. Most importantly, Mr. Rosin treated ``listeners'' as 
``consumers''--inquiring as to their WTP rather than their preferences 
unconstrained by prices. SoundExchange argues that even this price-
point inquiry indicates that some listeners, at some lower price 
points, might be somewhat likely to subscribe to an on-demand service. 
See Rosin WRT at 10 (only 79% of respondents ``not at all likely'' or 
``not very likely'' to spend $4.99 per month for a streaming 
subscription, and that percentage drops to 69% if the price is lowered 
to $2.99 per month). However, there is no dispute that subscribers 
constitute a minority of overall streaming listeners (as noted infra in 
the discussion of ``Convergence''), so it is not particularly revealing 
that these levels of survey respondents would consider subscribing 
instead to an on-demand interactive service at various lower price 
points.\62\
---------------------------------------------------------------------------

    \62\ Also, to the extent subscribership might increase if the 
subscription price were lowered, then the commensurate royalty 
derived by SoundExchange's interactive ``ratio equivalency'' 
benchmark analysis (discussed infra) would likewise be reduced. 
Thus, these criticisms of Mr. Rosin's survey results undermine any 
broad use of SoundExchange's own interactive benchmark.
---------------------------------------------------------------------------

    The Judges reject the additional criticism by SoundExchange that 
Mr. Rosin should not have presented specific price points to 
respondents, but rather should have asked if they were willing to pay a 
``small fee'' for interactive subscriptions. Such a vague phrase would 
be less informative, and more subjective, than particular price points. 
The Judges also reject the criticism that Mr. Rosin should not have 
indicated that an alternative to noninteractive services was to listen 
to ``free'' FM radio and that another alternative was to ``pay'' for a 
subscription to an interactive service, because interactive services do 
offer ``freemium'' subscriptions, which begin as free subscriptions 
subject to a conversion option. The Judges find that Mr. Rosin's 
language meaningfully reinforces the different pricing and pricing 
strategies that exist in the market, because FM radio is free to the 
listener and on-demand services are designed to obtain paying 
subscribers, whether at the outset of the subscription period or by 
using ad-supported services as a ``freemium'' tool to convert listeners 
into subscribers. (Indeed, SoundExchange's economic expert, Dr. 
Rubinfeld, testified that he did not even use interactive ad-supported 
rates as a benchmark because they were designed as tools to convert 
listeners into subscribers.)
    The Judges take note of SoundExchange's criticism of Mr. Rosin's 
decision not to rotate one of his multiple choice answers to the 
question of what a listener would do if no free streaming services 
existed. See Rosin WRT at App. B. The choice ``would you just listen to 
less music'' was always asked last, whereas the other three choices 
(listen to free FM radio, listen to your CDs and downloads or watch 
music videos, YouTube, or Vevo) were rotated. SoundExchange notes the 
presence of a potential ``recency effect'' if one choice is always 
presented last, possibly inducing respondents to favor that choice. Mr. 
Rosin acknowledged the general existence of such an effect, 5/14/15 Tr. 
3755 (Rosin), but he indicated that ``pinning'' certain options in a 
multiple choice question was necessary to enhance the respondents' 
ability to comprehend the question. 5/14/15 Tr. 3743-44 (Rosin). The 
Judges do not find that there was record evidence sufficient to find 
that it was unreasonable for Mr. Rosin, in applying his expertise, to 
weigh these technical survey issues and construct his choices in this 
manner, nor do the Judges find that there was sufficient record 
evidence to indicate that Mr. Rosin's fundamental conclusions would 
have been materially different if he had rotated that final choice on 
that single question.
    Finally, the Judges do not agree with SoundExchange's criticism 
that Mr. Rosin's survey is deficient because he failed to describe in 
sufficient detail the features offered by a hypothetical on-demand 
interactive subscription service in one of his questions.\63\ However, 
in that question, he specifically mentioned Spotify, Rhapsody, and 
Rdio, see Rosin WRT App. B at 9, and he identified additional features 
of an on-demand service (Spotify) in a prior question. See id., 
Question 7E. There is not sufficient record evidence to suggest that 
the structuring of these questions in this manner weakens the probative 
value of Mr. Rosin's survey and conclusions.
---------------------------------------------------------------------------

    \63\ Mr. Rosin described them in Question 9A as services that 
allow listeners to stream music as they choose, for access but not 
ownership.
---------------------------------------------------------------------------

    Turning to the question of whether there is a difference between 
the substitution or promotion effects of interactive versus 
noninteractive services with regard to music sales, the parties 
presented different empirical analyses.
    iHeart relied upon the expert testimony of Dr. Todd Kendall, who 
attempted to analyze the effect of listening to online streaming on 
music purchases, by reviewing data from 10,000 personal computers over 
a six month period. IHM Ex. 3148 ] 8 (Kendall WRT). Dr. Kendall used 
three categories of monthly data for each sample computer: (1) The 
amount of time spent listening to music; (2) the number of digital 
music purchases made on Amazon and iTunes; and (3) the amount of time 
spent visiting music sites, such as RollingStone.com. Id. ]] 10, 12; 
see IHM Exs. 3151-3153.
    He then compared the relative promotional effect of fourteen on-
demand services, including Spotify, with the relative promotional 
effect of nine Internet radio services, including Pandora and iHeart. 
Kendall WRT ]] 9, 15-17. Dr. Kendall found that a 10% increase in 
listening to Internet radio was associated with a statistically 
significant 0.070% increase in music purchasing. See id. ] 22; IHM Exs. 
3154, 3156-3158. Based on this finding, Dr. Kendall opined that 
noninteractive services are 15 times more promotional than interactive 
services. Kendall WRT ] 5.
    There are several important flaws in Dr. Kendall's work, however, 
that render it insufficient for the Judges to conclude that Dr. 
Rubinfeld's interactive benchmark should be reduced to reflect a 
supposed lower promotional effect. Most importantly, Dr. Kendall's 
conclusion is premised on his finding that on the computers he analyzed 
individuals spent 18 times more time listening to interactive services 
than to noninteractive services. 5/12/15 Tr. 3274 (Kendall). When 
listeners spend more time on a service, that drives down the 
calculation of the number of purchases per hour of listening, which is 
the promotional effect being sought by the analysis.
    SoundExchange demonstrated in its cross-examination of Dr. Kendall 
that this extreme multiple resulted from the different methods of 
recording listening

[[Page 26329]]

time for interactive and noninteractive services. More particularly, 
Spotify, a leading interactive service, is more widely used on desktop 
applications, and Pandora is more widely accessed through web browsers. 
SX Ex. 1568; 5/12/15 Tr. 3305 (Kendall). Web site listening 
measurements were cut off if the listener had not interacted with the 
Pandora Web site. Kendall WRT ] 5 n.14. By contrast, listening 
measurements based on the use of desktop applications simply measured 
the time the application was open on a user's desktop, and otherwise 
not in hibernation mode, screen saver mode, or some other similar mode. 
Id. Further, the default setting for the Spotify application is for it 
to launch when the computer is turned on--even if no one is listening. 
5/12/15 Tr. 3306-07 (Kendall).
    Simply put, these differences in measuring listening time alone 
skew Dr. Kendall's analysis and results. Accordingly, the Judges cannot 
conclude from his testimony and analysis that noninteractive services 
are more promotional of music sales than interactive services.
    With regard to the relative promotional or substitutional effects 
of interactive versus noninteractive streaming services on music sales, 
SoundExchange relies on the testimony of Dr. David Blackburn. Unlike 
Dr. Kendall, he did not attempt to relate the amount of time spent 
listening to these services to increases in purchasing music. Rather, 
Dr. Blackburn attempted to determine whether there was any meaningful 
promotional or substitution effect on music sales as between those who 
use the two different types of services.
    In this instance, the particulars of the study are less important 
than the conclusion. Dr. Blackburn opined that, based on his analysis, 
``neither interactive nor non-interactive services have a statistically 
significant promotional impact on users' propensity to purchase digital 
tracks.'' SX Ex. 24 ] 42 (Blackburn WRT). Because Dr. Blackburn is a 
SoundExchange witness, and because the point of the present discussion 
is to determine whether an interactive benchmark rate must be lowered 
or raised to reflect such differences, his conclusion fails to support 
any change in SoundExchange's interactive benchmark for promotional or 
substitutional effects.
    Finally, the Judges take note of Pandora's ``Music Sales 
Experiments'' conducted by its Senior Scientist, Economics, Dr. Stephan 
McBride. The purpose of that experiment was ``to test whether 
performance of sound recordings on Pandora have a positive or negative 
impact on sales of those sound recordings.'' PAN Ex. 5020 ] 23 (McBride 
WDT). However, whether or not Pandora has a net promotional or 
substitutional effect does not address the issue of whether that net 
effect is different from the net promotional/substitutional effect of 
interactive services.
    Rather, when relying on benchmarks, the Judges deem the benchmark 
agreements of rational actors to include an implicit understanding of 
the promotional and substitutional effects of their transaction. 
Therefore, Dr. McBride's conclusions, as well as Dr. Blackburn's 
criticisms of those ``Music Sales Experiments,'' do not affect the 
Judges' rate determination.

D. Impact of Parties' Financial Circumstances

    The Services aver that the rates set in this proceeding must be 
sufficiently low to permit their business models to be profitable. See, 
e.g., NAB PFF ]] 119-149; IHM ]] 245-257 (and citations to the record 
therein). Reciprocally, SoundExchange argues that the rates must be 
sufficiently high to allow the record companies to cover their costs 
and to obtain the necessary return on investment (ROI), plus a profit. 
See, e.g., SX PFF ]] 165-208 (discussing costs and investments and 
noting (] 165) that ``[t]he rates that record companies receive from 
streaming services ha[ve] been--and over the next five years will 
continue to be--critical to [the record companies'] ability to make 
such recurring investments.''); 4/30/15 Tr. 972-73 (A. Harrison) 
(``[T]he profit maximization goal is definitely . . . a top goal of the 
company . . . and also provides the incentive to create music.'').
    The Judges find that they do not need to relate the rates set in 
this proceeding directly to the parties' proposed business models. 
Rather, the Judges' adoption of the benchmark method of determining 
rates obviates the need to: (1) Analyze whether the record companies' 
costs require a particular rate to allow them to obtain an appropriate 
ROI; and (2) protect particular noninteractive services whose business 
models might require a low enough rate to sustain their survival and/or 
growth. Benchmarks based on marketplace agreements, by their very 
nature, reflect the parties' need for rates that allow them to project 
a sufficient ROI and enable them to implement their respective business 
models.
    As with the promotional and substitutional impact of the rates, the 
Judges conclude that the benchmarking process ``bakes-in'' 
(internalizes) these necessary elements, given the assumed rational, 
maximizing nature of sophisticated business entities. Moreover, even if 
the Judges were to attempt to ascertain whether a particular ROI could 
be met by a given rate, or whether a particular business model could be 
sustained, the present record would preclude such an analysis. The 
Judges would require much more detailed financial and economic data 
regarding the parties' costs and revenues before attempting to make 
such determinations.
    Further, as the Judges have previously held, the statute neither 
requires nor permits the Judges to protect any given business model 
proposed or adopted by a market participant. Web II, 72 FR at 24089. 
The Judges further noted in the Web III Remand that any attempt by the 
Judges to set rates with these ROI and business model issues in mind 
would essentially convert this Sec.  114(f)(2)(B) proceeding into a 
classic public utility style rate-of-return hearing. 79 FR at 23107. 
None of the parties argues that the statutory standard permits such a 
process, and neither the D.C. Circuit, nor the Judges (or any of their 
predecessors) have so held.

E. The Effect of the Alleged ``Shadow'' of the Statutory Rate

    The parties assert that the benchmarks that are adverse to their 
positions are compromised by the fact that they were set in the 
``shadow'' of the statutory rate. See, e.g., Rubinfeld CWDT ]] 80-85 
(statutory rate as a shadow pushing rates down); Talley WRT at 46; 
Shapiro WDT at 36 (statutory rate as a shadow pulling rates up); 5/15/
15 Tr. 3993-94 (Lichtman); Fischel (same). There are essentially two 
types of statutory shadows noted by the parties.
    The first purported shadow is cast by the existing statutory rate, 
whether set in a CRB proceeding or through the parties' WSA 
settlements. As an initial matter, the Judges find that any such 
``shadows'' that could have been cast by existing statutory rates did 
not meaningfully affect the effective steered rates in the Pandora/
Merlin Agreement or the IHeart/Warner Agreement. As discussed herein, 
those rates are below the otherwise applicable statutory rates, and it 
would be irrational for a licensor to accept a rate below the statutory 
rate when it could have rejected the direct deal and enjoyed the higher 
statutory rate. Also, the supposed shadow of the existing rate is less 
relevant to the subscription-based benchmark proffered by 
SoundExchange, because it is based on benchmarks that are at a further

[[Page 26330]]

remove from the statutory license. Rubinfeld CWDT ] 18.
    Dr. Shapiro argues that the statutory shadow not only exceeds the 
marketplace rate, but also acts like a ``focal point,'' or ``magnet,'' 
pulling a freely negotiated rate higher than it would be in the absence 
of the statutory shadow. Shapiro WDT at 36-37. However, neither Dr. 
Shapiro nor any other expert provides a sufficiently detailed 
explanation as to how the statutory rate would pull up a below-statute 
consensual rate that is otherwise mutually beneficial. Rather, the 
experts who advance this variant of the shadow argument simply note the 
existence of a ``focal point,'' ``magnet'' or ``anchor'' theory in the 
economic literature and then posit that such an effect is present in 
the noninteractive market--without making a sufficient connection 
between theory and evidence. Indeed, Dr. Shapiro candidly acknowledged 
that the focal point/magnet/anchor hypothesis is not an ``ironclad'' 
economic law. Id. at 37 n. 65. In sum, the Judges do not credit this 
conjecture as sufficient to affect their determination of the rate in 
this proceeding.
    On behalf of SoundExchange, Dr. Talley asserts that the existing 
statutory rate casts a shadow so dark as to obscure entirely evidence 
of consensual transactions that would have been consummated in the 
noninteractive space, but for the statutory rate. More particularly, 
Dr. Talley notes that any pairing of willing licensors and licensees 
(``dyads'' in Dr. Talley's parlance) in which the licensee's WTP was 
greater than the statutory rate, and greater than or equal to a 
licensor's ``willingness to accept'' (WTA) (also above the statutory 
rate), would not consummate an agreement at a consensual rate, because 
the buyer would always default to the lower statutory rate. SX Ex. 19 
at 58 (Talley WRT) (Concluding ``in an economic environment most 
relevant to this setting, a statutory licensing option can crowd out 
negotiated transactions for relatively high-valuing buyer-seller dyads 
while not affecting other, low-valuing dyads. . . . [T]his crowding out 
phenomenon can generate downward statistical bias, leaving behind only 
a subset of negotiated deals involving buyers and sellers whose 
valuations . . . reflect[ ] prices which serve as poor benchmarks for 
estimating the price [to which] willing buyers and sellers would 
agree.) \64\
---------------------------------------------------------------------------

    \64\ For example, assume the statutory rate was $0.0010. If a 
licensor had a WTA of $0.0015 and a licensee had a WTP of $0.0020, 
then in the absence of a statutory rate, these parties would strike 
a deal between $0.0015 and $0.0020. However, with the statutory rate 
at $0.0010, the licensee would not negotiate, but would default to 
the lower statutory rate. Dr. Talley describes such a foreclosed 
agreement as having been obscured by the shadow of the statutory 
rate.
---------------------------------------------------------------------------

    The Services counter that, although the logic of Dr. Talley's point 
may be correct, Dr. Talley's analysis is purely theoretical and he did 
not examine the evidence to determine whether his analysis was 
supported by the facts. In particular, the Services criticize Dr. 
Talley's ``shadow'' argument because he assumes that the ``missing 
dyads'' would reflect a significantly different WTP and WTA than those 
of the parties who entered into agreements (e.g., the Pandora/Merlin 
dyad and the iHeart/Warner dyad). See, e.g., Pandora RPFF 96-103 (and 
citations to the record therein). Dr. Talley counters, quite correctly, 
that the very point of his analysis is that no negotiations or 
agreements for above-statutory rates would exist because the parties 
would not waste their time engaging in bargaining that was made moot by 
the statutory rate. Id. at 6032-34.
    Dr. Talley suggests though that Dr. Rubinfeld's interactive 
benchmark may approximate the ``unseen'' noninteractive transactions 
because it is affected less by the shadow of the statutory rate. Id. at 
6036. However, that argument fails to note the fundamental distinction 
in Dr. Rubinfeld's benchmark--that it pertains to an upstream market 
for interactive licensees in which upstream demand is derived from 
downstream consumers who have a positive WTP for streaming services. 
The ``missing dyads,'' so to speak, would be those in the upstream 
noninteractive market in which the ``missing'' agreements would reflect 
only the downstream demand of listeners to free-to-the-listener ad-
supported platforms, not those dyads identified by Dr. Rubinfeld in the 
subscription market.\65\
---------------------------------------------------------------------------

    \65\ This important distinction between listeners based on their 
differentiated WTP is discussed in greater detail infra in 
connection with Dr. Rubinfeld's proposed benchmark.
---------------------------------------------------------------------------

    Relatedly, the Services also criticize Dr. Talley's argument 
because it fails to note the potential steering, ``competitive 
dynamics'', or other interactions that would cause dyads to cluster 
closely. 5/19/15 Tr. 4660-61 (Shapiro).
    On balance, the Judges find Dr. Talley's criticism, albeit rational 
and hypothetically correct, too untethered from the facts to be 
predictive or useful in adjusting for the supposed shadow of the 
existing statutory rate. The Services' criticisms are likewise 
speculative, but that simply underscores the factual indeterminacy of 
Dr. Talley's argument. Further, Dr. Talley's point appears to be a 
back-door way to question both the applicability of the benchmarks in 
the noninteractive market, as well as the benchmarking process itself. 
However, the Judges have found that the Pandora/Merlin Agreement and 
the iHeart/Warner Agreement to be sufficiently representative 
benchmarks (and have found that Dr. Rubinfeld's benchmark analysis is 
likewise representative) in particular segments of the statutory 
market. This segmented analysis strengthens the representativeness of 
the benchmarks and weakens the speculative argument that ``missing 
dyads'' might tell a different story.
    The second shadow identified by the parties is cast by the 
statutory rate yet to be established in this proceeding. The record is 
replete with evidence that the parties entered into various 
transactions with the knowledge, if not the intent, that such 
agreements could be used as evidentiary benchmarks in this proceeding. 
See SX PFF ]] 567-570 (and citations to the record therein regarding 
the Pandora/Merlin Agreement); IHM PFF ]] 359-362 (and citations to the 
record therein regarding Apple's agreements with the Majors); NAB PFF 
]] 456-458. Of course, a proposed benchmark is not disqualified because 
a contracting party wanted it to be a benchmark. Such a desire would 
apply to otherwise proper benchmarks as it would to dubious benchmarks. 
The Judges analyze the proposed benchmarks based on the overall factual 
merits attendant to their formation and applicability, not based upon 
the parties' hopes or manipulations. If a benchmark is deficient in 
some manner, the adversarial process of this proceeding allows the 
parties to expose those deficiencies.
    The Judges agree with a particular criticism made by iHeart of the 
shadow argument asserted by SoundExchange: In the absence of the 
statutory shadow, the antitrust policy toward the noninteractive 
streaming market could well be different. Cf. 141 Cong. Rec. S. 11,962-
63 (daily ed. Aug. 8, 1995) (Letter from Assistant Attorney General 
Andrew Fois to Hon. Patrick Leahy, July 21, 1995, noting that any 
noncompetitive rates created by the existence of only a single 
collective could be corrected by the ``rate panel.''). Although that 
comment was made in connection with the potential anticompetitive 
consequence of a single collective, it suggests to the Judges that the 
so-called ``shadow'' of the statutory rate offsets any potential device 
that

[[Page 26331]]

would cause rates to deviate from an ``effectively competitive'' 
level.\66\
---------------------------------------------------------------------------

    \66\ The issue of ``effective competition'' is discussed at 
length, infra.
---------------------------------------------------------------------------

    Thus, to the extent the ``shadow of antitrust law'' has receded, it 
was counterbalanced by the ``shadow of the statutory rate.'' 
Accordingly, the presence of the so-called statutory shadow appears to 
reflect a trade-off and a second-best solution, rather than a 
distortion of an effectively competitive marketplace.
    Additionally, the Judges' consideration of the Pandora/Merlin 
Agreement and the iHeart/Warner Agreement as appropriate benchmarks for 
the ad-supported (free-to-the-listener) market obviates the supposed 
``shadow'' problem. In both benchmarks, the rate is below the otherwise 
applicable statutory rates. The statutory rates did not cast a shadow 
that negatively affected the licensors in those agreements because (as 
noted infra) they voluntarily agreed to rates below the applicable 
statutory rates (in exchange for the steering of more plays), rather 
than defaulting to the higher statutory rate.
    Further, in the subscription market the Judges have adopted the 
SoundExchange benchmark approach, which analogizes between the 
interactive and noninteractive markets. As Dr. Rubinfeld testified, the 
interactive contracts on which he relied for his subscription-based 
benchmark ``minimize[] the effect of the statutory shadow'' because the 
interactive services cannot default to the statutory rate. Rubinfeld 
CWDT ] 18.
    Finally, the Judges emphasize that they find the ``shadow'' 
criticism to be both nihilistic and self-contradictory. If the 
``shadow'' infects all benchmarks so as to disqualify that method of 
rate-setting, then the parties would need to adjust or abandon their 
benchmarking strategies and develop new bases for analysis. That could 
mean the wholesale abandonment of benchmarking, to be replaced by a 
valuation approach yet to be applied and accepted in these 
proceedings.\67\
---------------------------------------------------------------------------

    \67\ As explained elsewhere in this determination, the Judges 
have rejected the non-benchmarking approaches to rate setting 
proposed by some parties in this proceeding. They were not rejected 
because they were not benchmarks, but because each was unpersuasive 
in its own right.
---------------------------------------------------------------------------

F. The Legal Issue of Whether Effective Competition Is a Required 
Element of the Statutory Rate

    The statutory language that includes the ``willing buyer/willing 
seller language also commands that ``[i]n determining such rates . . . 
the . . . Judges ``shall base their decision on economic, competitive 
and programming information presented by the parties . . .'' 17 U.S.C. 
114(f)(2)(B) (emphasis added). Accord, 17 U.S.C. 112(e)(4) (regarding 
ephemeral licenses). Several previous decisions by the D.C. Circuit, 
the Librarian, the Judges and the CARP (in Web I) have discussed the 
concept of ``effective competition'' and its relationship to Sec.  
114(f)(2)(B).
    SoundExchange and the Services disagree as to whether Sec.  
114(f)(2)(B) and prior decisions require the Judges to set a rate that 
reflects an ``effectively competitive'' market populated by willing 
buyers and willing sellers. SoundExchange argues that no authority 
allows for such a requirement, while the Services assert that the 
statute and prior decisions require the Judges to set rates that would 
be established an ``effectively competitive'' market.\68\
---------------------------------------------------------------------------

    \68\ As discussed in more detail in this determination, 
SoundExchange asserts that its interactive benchmark need not be 
reflective of an ``effectively competitive'' market because such a 
requirement is not contained within section 114(f)(2)(B). 
SoundExchange also argues that, assuming an ``effectively 
competitive'' market standard is part of the statutory scheme, its 
interactive benchmark is a product of effective competition. The 
Services argue that their respective proposed benchmarks reflect 
rates that have been set in an ``effectively competitive'' market, 
unlike SoundExchange's proposed interactive benchmark that is the 
product of a market lacking the necessary competitive features. 
iHeart and Pandora each maintains that, even assuming that the 
statute does not contain an ``effectively competitive'' market 
standard, their respective benchmarks are nonetheless appropriate, 
because they represent the rates to which willing sellers and 
willing buyers would agree in the market, notwithstanding whether 
those rates reflect ``effective competition.''
---------------------------------------------------------------------------

    The Services construe Sec.  114(f)(2)(B) as explicitly requiring 
the Judges to utilize competitive information introduced in evidence to 
set a marketplace rate that reflects ``effective competition,'' and to 
adjust an otherwise appropriate benchmark in order to reflect 
``effective competition.'' In support of this position, the Services 
make several principal arguments.
    The Services assert that prior decisional law constitutes precedent 
that requires the Judges to set rates that are ``effectively 
competitive.'' They point to the most recent determination by the 
Judges, the Web III Remand, in which the Judges approvingly cited and 
relied upon the language in prior decisions by the Librarian in Web I 
and the Judges in Web II regarding the need to set rates under Sec.  
114(f)(2)(B) that reflect those that would be set in an ``effectively 
competitive market.'' Web III Remand at 23114 n. 37. The NAB further 
notes that in Web II, the Judges held that ``neither sellers nor buyers 
can be said to be `willing' partners to an agreement if they are 
coerced to agree to a price through the exercise of overwhelming market 
power.'' Web II at 24091. Sirius XM emphasizes other particular 
language from Web II, which states: ``An effectively competitive market 
is one in which super-competitive prices or below-market prices cannot 
be extracted by sellers or buyers . . . .'' 72 FR at 24091.
    The NAB emphasizes that in the present proceeding the Judges must 
follow these decisions because 17 U.S.C. 803(a)(1) expressly requires 
the Judges to act in accordance with the Librarian of Congress's 
interpretation. NAB PFFCL ] 689. The Services also rely on a decision 
by the D.C. Circuit as persuasive, if not binding precedent, because it 
states that Sec.  114(f)(2)(B) ``does not require that the market 
assumed by the Judges achieve metaphysical perfection in 
competitiveness.'' Intercollegiate Broad. Sys., Inc. v. Copyright 
Royalty Board, 574 F.3d 748, 757 (D.C. Cir. 2009) (emphasis added). 
Apparently, the Services construe the use of the adjective 
``metaphysical'' to require, or at least suggest, that the rates 
reflect some lesser yet nonetheless effective quantum of competition.
    The Services further argue that the legislative history of Section 
114 reflects a Congressional intention for rates to be set at a level 
that avoids ``higher-than-competitive prices.'' See 141 Cong. Rec. 
S11945-04, S11962 (1995). In similar fashion, according to the 
Services, the legislative history makes it plain that the willing 
buyer/willing seller standard in Sec.  114 was intended to direct the 
CARP (now the Judges) ``to determine reasonable rates and terms.''). 
H.R. Rep. No. 105-796 at 86 (Conf. Rep.); see H.R. Rep. No. 104-274 at 
22 (1995) (legislative history of DPRSRA expressly provides ``[i]f 
supracompetitive rates are attempted to be imposed on operators, the 
copyright arbitration royalty panel can be called on to set an 
acceptable rate.''). In this regard, the Services note that the 
Department of Justice's objection to an earlier draft of the statute, 
relating to whether the record companies could negotiate exclusively 
through a common agent, was resolved because the ratemaking body (now 
the Judges) could intercede and establish reasonable rates. 141 Cong. 
Rec. S. 11,962-63 (daily ed. Aug. 8, 1995) (Letter from Assistant 
Attorney General Andrew Fois to Hon. Patrick Leahy, July 21, 1995, 
noting that any noncompetitive rates created by the existence of only a 
single collective could be corrected by the ``rate panel.'').
    The Services also note that, in comparable circumstances, courts

[[Page 26332]]

construe ``reasonable rates'' to be those ``rates that would be set in 
a competitive market.'' ASCAP v. Showtime/The Movie Channel, Inc., 912 
F.2d 563, 576 (2d Cir. 1990); see also NAB PFFCL ]] 706-709 (and cases 
cited therein); In re Pandora Media, Inc., 6 F. Supp. 3d 317, 353-54 
(S.D.N.Y. 2014), aff'd sub nom. Pandora Media, Inc. v. ASCAP, 785 F.3d 
73 (2d Cir. 2015).
    Finally, the NAB asserts that the statutory histories of the DPRA 
and the DMCA reflect a Congressional intent to create a three-tier 
performance right/rate structure, whereby: (1) Terrestrial radio 
continues to enjoy free access to sound recordings; (2) interactive 
services must pay market-negotiated royalties in order to play sound 
recordings on demand; and (3) noninteractive services, falling between 
these two extremes, cannot play sound recordings for free, shall not to 
be subjected to the purely market rates paid by on-demand interactive 
services and, instead, shall pay intermediate rates set by the Judges 
(formerly the CARP arbitrators subject to Librarian review). See NAB ]] 
678 et seq.; 682 et seq. (and authorities cited therein).
    On the other hand, SoundExchange construes Sec.  114(f)(2)(B) as 
precluding the Judges from adjusting an otherwise appropriate benchmark 
in order to reflect ``effective competition.'' In support of this 
position, SoundExchange makes several principal arguments.
    First, SoundExchange emphasizes that the words ``effective 
competition'' or the like are not included within the statute. Thus, 
SoundExchange maintains that the plain language of the statute clearly 
does not include such a standard. SX PCOL ] 21.
    Second, SoundExchange relies upon a statement by the CARP in Web I 
that ``the willing buyer/willing seller standard is the only standard 
to be applied.'' In re Digital Performance Right in Sound Recordings 
and Ephemeral Recordings, No. 2000-9 CARP DTRA 1&2 at 21 (Feb. 20, 
2002), appv'd and modif'd by Librarian, 67 FR 45240 (July 8, 2002) (Web 
I). SoundExchange construes this language as confirming the exclusion 
of the ``effectively competitive'' condition from the ``willing buyer/
willing seller'' marketplace standard.
    Third, SoundExchange argues that the ``willing buyer/willing 
seller'' standard is essentially a restatement of the traditional 
``fair market value'' test. See id. at 45244 (the Librarian's Web I 
decision notes that the statutory standard requires rates that reflect 
``strictly fair market value''). The Supreme Court has defined ``fair 
market value'' as SoundExchange notes, as ``the price at which the 
property would change hands between a willing buyer and a willing 
seller, neither being under any compulsion to buy or sell and both 
having reasonable knowledge of relevant facts.'' United States v. 
Cartwright, 411 U.S. 546, 551 (1931).
    Fourth, SoundExchange argues that statutory enactments of the fair 
market value test and its willing buyer/willing seller component 
constitute adoptions of a recognized common law definition of the test. 
Therefore, the common law meaning should prevail because it is a 
``settled principle of statutory construction that, absent contrary 
indications, Congress intends to adopt a common law definition of 
statutory terms. United States v. Shabani, 513 U.S. 10, 13 (1994); see 
also United States v. Wells, 519 U.S. 482, 491 (1997) (same).
    Fifth, SoundExchange points out that, when Congress intends a legal 
standard to be based on ``effective competition,'' it makes the point 
expressly and explicitly defines ``effective competition.'' Cf. 47 
U.S.C. 543(1)(1) (defining ``effective competition'' in the Cable 
Television Consumer Protection and Competition Act of 1992).
    Sixth, SoundExchange characterizes the references to effective 
competition in Intercollegiate Broad. Sys. and Web I as mere dicta that 
may be ignored by the Judges.
    Seventh, SoundExchange asserts that any attempt to apply an 
``effective competition'' requirement would render the statutory test 
indeterminate, unworkable, and vague. SoundExchange notes that the 
Services' economic experts acknowledged the absence of a ``bright 
line'' separating a market that is ``effectively competitive'' from one 
that is not. Moreover, SoundExchange asserts that there is no evidence 
or testimony setting forth what the level of rates would need to be in 
SoundExchange's proffered interactive benchmark market, in order for it 
to equate with ``effectively competitive'' rates.
    Having considered the issue and the parties' positions, the Judges 
conclude that they are required by law to set a rate that reflects a 
market that is effectively competitive. The Judges reach this 
conclusion through a consideration of the plain meaning of the statute, 
the clear statutory purpose, applicable prior decisions, and the 
relevant legislative history.
    The Judges' starting point is the language of the statute itself. 
The statute requires that the Judges ``shall base their decision on 
[inter alia] competitive . . . information presented by the parties . . 
. .'' 17 U.S.C. 114(f)(2)(B) (emphasis added); accord, 17 U.S.C. 
112(e)(4) (identical language for the setting of rates for the 
ephemeral license). The D.C. Circuit has expressly noted that, by this 
specific language, ``Congress required the Judges to follow certain 
statutory guidelines'' one of which is that ``the Judges must `base 
[their] decision on . . . competitive . . . information presented by 
the parties.' '' Intercollegiate Broad. Sys., Inc. v. Copyright Royalty 
Board, 574 F.3d 748, 753 (D.C. Cir. 2009).
    SoundExchange invites the Judges to ignore this statutory directive 
and judicial command. The Judges cannot. The parties presented the 
Judges with voluminous evidence and testimony comprising the required 
``competitive information'' relating to Dr. Rubinfeld's proposed 
interactive benchmark market, the Services' proposed noninteractive 
benchmarks, the noninteractive market at issue in this proceeding, and 
the alleged differences and similarities among them.\69\ The Judges are 
commanded by the statutory language quoted above to ``base their 
decision'' on precisely this sort of information, and, as 
Intercollegiate Broadcast System makes plain, it would be legal error 
for the Judges to ignore this statutory directive.
---------------------------------------------------------------------------

    \69\ The ``competitive information'' provided by the parties was 
extensive. SoundExchange and the Services provided factual and 
expert testimony regarding: (1) The ``upstream'' market (in which 
streaming services acquire licenses from the record companies); (2) 
the ``downstream'' market (in which streaming services may (or may 
not) compete with each other for listeners); (3) the horizontal 
``upstream'' market (where the record companies compete (or fail to 
compete) with each other; and (4) the interactions of these several 
markets.
---------------------------------------------------------------------------

    The Judges further conclude that, even if the directive that they 
``shall'' consider competitive information could be construed as 
ambiguous, their consideration of ``competitive information'' is 
certainly a permissible, reasonable, and rational application of Sec.  
114, for a number of reasons.
    First, the D.C. Circuit, the Librarian, the Judges, and the CARP 
have all acknowledged that the Judges can and should determine whether 
the proffered rates reflect a sufficiently competitive market, i.e., an 
``effectively competitive'' market. The Judges made this point clearly 
in their decision in the Web III Remand, which included a summary of 
the past decisional language regarding the Sec.  114 standard:

    The D.C. Circuit has held that this statutory section does not 
oblige the Judges to set rates by assuming a market that achieves 
``metaphysical perfection and competitiveness.'' Intercollegiate 
Broad. Sys., Inc. v. Copyright Royalty Board, 574 F.3d

[[Page 26333]]

748, 757 (D.C. Cir. 2009). Rather, as the Librarian of Congress held 
in Web I, the ``willing seller/willing buyer'' standard calls for 
rates that would have been set in a ``competitive marketplace.'' 67 
FR at 45244-45 (emphasis added); see also Web II, 67 FR at 24091-93 
(explaining that Web I required an ``effectively competitive 
market'' rather than a ``perfectly competitive market.'' (emphasis 
added)). Between the extremes of a market with ``metaphysically 
perfect competition'' and a monopoly (or collusive oligopoly) market 
devoid of competition there exists ``[in] the real world . . . a 
mind-boggling array of different markets,'' Krugman & Wells, supra, 
at 356, all of which possess varying characteristics of a 
``competitive marketplace.''

Web III Remand, 79 FR at 23114 n. 37.
    It is noteworthy that SoundExchange has not characterized the Web 
III Remand decision as dicta. Thus, even if the prior language on which 
the Web III Remand Judges had relied was dicta, there is no argument 
that the holding in the Web III Remand was dicta. It is also noteworthy 
that SoundExchange did not assert that the holding in Web II, that an 
excess of market power can preclude a finding that a buyer or seller 
was a ``willing'' participant, was dicta.\70\
---------------------------------------------------------------------------

    \70\ Not only did SoundExchange fail to assert that the Web III 
Remand decision regarding ``effective competition'' was dicta, that 
decision could not possibly be construed as dicta. The distinction 
between a holding and dictum has been thoroughly analyzed and 
succinctly stated:
    A holding consists of those propositions along the chosen 
decisional path or paths of reasoning that (1) are actually decided, 
(2) are based upon the facts of the case, and (3) lead to the 
judgment. If not a holding, a proposition stated in a case counts as 
dicta.
    M. Abramowicz and M. Stearns, Defining Dicta, 57 Stan. L. Rev. 
953, 961 (2005). Courts have long held that, in contrast with a 
``holding,'' dicta as ``language unnecessary to a decision, ruling 
on an issue not raised, or [an] opinion of a judge which does not 
embody the resolution or determination of the court, . . . made 
without argument or full consideration of the point.'' Lawson v. 
U.S., 176 F.2d 49, 51 (D.C. Cir. 1949). As detailed in the text, a 
consideration of the pertinent ruling in the Web III Remand and of 
the ultimate decision in the Web III Remand itself, demonstrates 
that the statements regarding the necessary competitive state of the 
market were clearly holdings rather than dicta.
---------------------------------------------------------------------------

    In Web III, a licensee, Live365, asked the Judges to reject certain 
of SoundExchange's proposed benchmarks that were based on the Webcaster 
Settlement Act (WSA) agreement between SoundExchange and the NAB, and 
the WSA agreement between SoundExchange and Sirius XM. (The parties to 
those agreements agreed to allow those WSA agreements to be introduced 
as evidence in Web III.) Live365 argued ``the rates . . . reflect the 
monopoly power of a single seller in those two contracts.'' 79 FR at 
23113. The Judges rejected that argument and did so by taking a 
``decisional path'' of reasoning based on: (1) A conclusion that an 
effective level of competition was required for the Judges to adopt 
those benchmarks; and (2) the facts of the case that demonstrated the 
sufficiently competitive nature of those benchmarks.\71\ That legal 
conclusion and that factual finding led the Judges to an application of 
law to fact whereby they concluded that the proposed benchmarks were 
reflective of an effectively competitive market and therefore satisfied 
the Sec.  114(f)(2)(B) standard. Specifically, the Judges held in the 
Web III Remand:
---------------------------------------------------------------------------

    \71\ Both Sirius XM and the NAB assert in the present proceeding 
that those two WSA settlement agreements were not reflective of 
effective competition, based on evidence they have presented in this 
proceeding but was not presented in Web III. That issue is addressed 
infra, but, for present purposes, the pertinent point is that the 
Judges found on the Web III record that these WSA settlement 
agreements reflected an effectively competitive market.

    An oligopolistic marketplace rate that did approximate the 
monopoly rate could be inconsistent with the rate standard set forth 
in 17 U.S.C. 114(f)(2)(B), as that standard has been set forth by 
the D.C. Circuit and the Librarian of Congress. . . . [I]n this 
proceeding the evidence demonstrates that sufficient competitive 
factors exist to permit the [benchmarks] to serve as useful 
benchmarks, and does not demonstrate that the rates in the 
[benchmarks] approximated monopoly rates.
* * * * *
    The parties presented no evidence from which the Judges could 
conclude . . . that SoundExchange necessarily wielded a level of 
pricing power sufficient to affect the use of the WSA Agreements as 
benchmarks.

79 FR at 23114 (emphasis added). Thus, in the Web III Remand, the 
Judges unequivocally applied the prior pronouncements of the D.C. 
Circuit, the Librarian, and the Judges to render an unambiguous 
holding: (1) Adopting a competitiveness standard; (2) applying the 
facts to the competitiveness standard; and (3) using that application 
of facts to law to reach their judgment. Alternately stated (and 
applying the D.C. Circuit's Lawson definition of dicta quoted supra), 
this decision regarding ``effective competition'' in the Web III Remand 
was necessary to determine an issue raised in the proceeding (the 
effectively competitive status of the WSA settlement agreements), after 
argument and full consideration.
    Moreover, even past dicta ``deserves serious consideration'' in 
subsequent decisions when ``sufficiently persuasive.'' U.S. v. Libby, 
475 F. Supp. 2d 73, 81 (D.D.C. 2007). Thus, ``persuasive dictum in an 
important early case [can] establish[ ] [a] principle'' to be followed 
by other courts. Committee of U.S. Citizens Living in Nicaragua v. 
Reagan, 859 F.2d 929, 938-39 (D.C. Cir. 1988). Accordingly, although 
SoundExchange assets that the statements relating to an effectively 
competitive market in the D.C. Circuit's Intercollegiate Broadcast 
System decision and the Librarian's Web I decision were dicta, the 
Judges in Web II, the Web III Remand and the present proceeding were 
all clearly able to convert such asserted dicta into binding holdings.
    Thus, the Judges conclude that they are bound to follow the prior 
directives that instruct them to make certain that the statutory rates 
they set are those that would be set in a hypothetical ``effectively 
competitive'' market. In light of this conclusion, based on the 
foregoing reasons, the remainder of the arguments are insufficient to 
alter the Judges' decision in this regard. However, in the interest of 
completeness, the Judges address other arguments, including those 
raised by the parties, that further support their conclusion.
    The Judges agree that the legislative history supports the 
conclusion that Sec.  114 directs the Judges to set rates that reflect 
the workings of a hypothetical effectively competitive market. The 
legislative history equates rates set under the willing buyer/willing 
seller standard with ``reasonable rates.'' As the Services note, the 
phrase ``reasonable rates'' has been construed by the rate court, in an 
analogous context, as ``rates that would be set in a competitive 
market.''
    The Judges are informed by the analogous use of the willing buyer/
willing seller standard in eminent domain law. See, e.g., Kirby Forest 
Ind., Inc. v. U.S., 467 U.S. 1, 10 (1984) (applying willing buyer/
willing seller test in eminent domain valuation dispute). In such 
cases, the courts must consider whether to award a forced seller the 
``holdout'' value of the seller's parcel, an additional value that 
exists solely because the seller's property is a necessary complement 
to the other properties that are needed by the governmental unit. As 
discussed in detail infra, it is precisely this complementary oligopoly 
value that the Judges are declining to include in the statutory rate 
based upon their analyses of the parties' benchmarks proffered in this 
proceeding. Cf. Thomas Miceli and C.F. Sirmans, The Holdout Problem, 
Urban Sprawl and Eminent Domain, 16 J. Housing Econ. 309, 314 (2006) 
(``complementarities among properties in the assembly case that are not 
present in the individual transaction'' are the consequence of ``market 
failure,'' economic ``rent seeking'' and generate

[[Page 26334]]

inefficient ``transaction costs'') (emphasis added).
    The Judges are also persuaded that the structure of the Act with 
regard to the sound recording performance right--as it relates to 
terrestrial radio, noninteractive services, and interactive services--
confirms the necessity of adopting an ``effectively competitive'' 
standard in the rate-setting process. Copyright owners were provided a 
limited performance right with regard to the use of their sound 
recordings by noninteractive services--something less than the purely 
private market-based rate for interactive use, but clearly more than 
the ``zero rate'' required from terrestrial radio. The Judges conclude 
that a rate that simply reflected or overemphasized either of the polar 
extremes would be inconsistent with the three-tier structure of the 
statute.\72\ As the Services note, if the Judges were simply to apply 
the competitive dynamics of the interactive market, they would be 
disregarding the particular statutory history that led to the three-
tier rate structure. See generally, William W. Fisher III, Promises to 
Keep at 104-05 (2004) (different statutory treatment of terrestrial 
radio, interactive services, and noninteractive services based upon 
fundamental ability and limits regarding the performance, promotion of, 
and substitution for sound recordings).
---------------------------------------------------------------------------

    \72\ As discussed infra, the Judges also reject rates proposed 
by several of the Services that attempt to use the ``zero rate'' 
paid by terrestrial radio as a guide in this proceeding. The 
rejection of such proposals can be seen as a bookend to the Judges' 
requirement that the statutory rate reflect effective competition, 
rather than the complementary oligopoly power present in the 
interactive market.
---------------------------------------------------------------------------

    SoundExchange's arguments to the contrary are unavailing. First, 
the fact that the statute requires the Judges to consider ``competitive 
information'' adequately rebuts SoundExchange's contention that the 
statutory language does not address the issue of competitiveness. That 
provision, combined with the legislative history and the prior judicial 
and administrative pronouncements make it clear that the statutory 
language requires the Judges to establish rates that are effectively 
competitive.
    Second, the Judges do not find that the traditional fair market 
value test permits the Judges to ignore the competitive status of the 
hypothetical market in which the statutory rate is established. As 
SoundExchange concedes in the very case law that it quotes, the common 
law meaning of a phrase should only prevail when construing a statute 
``absent contrary indications.'' Here, the requirement that the Judges 
consider ``competitive information,'' the prior judicial and 
administrative holdings and pronouncements, and the legislative history 
all combine to clearly provide more than ``indications'' that the 
Judges must set reasonable rates that reflect ``effective 
competition.''
    Third, the mere fact that, in another setting (regarding the cable 
television industry) Congress chose to define ``effective competition'' 
hardly suggests that such an ``effective competition'' standard does 
not exist in the present case. Indeed, the absence of a definition, 
combined with the requirement that the Judges weigh ``competitive 
information,'' is more consistent with the idea that Congress intended 
to delegate discretion to the Judges to determine whether the rates 
they set reflected an appropriate level of competitiveness.
    Finally, the Judges reject SoundExchange's assertion that there is 
no pre-existing ``bright line'' test sufficient to distinguish a rate 
which is ``effectively competitive'' from one that is not. The very 
essence of a competitive standard is that it suggests a continuum and 
differences in degree rather than in kind. Once again, the statutory 
charge that the Judges weigh ``competitive information'' indicates that 
the Judges are empowered to make judgments and decide whether the rates 
proposed adequately provide for an effective level of competition. 
Moreover, in the present case, the Judges were presented with highly 
specific facts regarding how to use the impact of steering on rate 
setting in order to measure and account for the ``complementary 
oligopoly'' power of the Majors that serves to prevent effective 
competition.

IV. Commercial Webcasting Rates

A. Analyses and Findings

    The rates proposed by the Services and SoundExchange are marked by 
a wide disparity. Although it is unsurprising that adverse parties 
would have strikingly different positions, what is surprising is that, 
despite these differences, the parties' positions are supported to a 
great extent (but not in all cases) by persuasive and logical economic 
analyses. Initially, this created a conundrum for the Judges, because 
none of these persuasive and logical economic analyses could easily be 
rejected.
    On closer inspection, however, what became clear to the Judges was 
that the reason why many of these disparate economic analyses and 
models could all appear to be correct was that they each reflected only 
a portion of the marketplace. That is, to draw on a classic analogy, 
the experts testified to different aspects of the market in much the 
same manner as the several proverbial blind men \73\ who, after 
touching but one part of an elephant, were asked to describe the 
animal, and gave starkly different descriptions based upon whether they 
had touched only the trunk, the torso or the tail. Perhaps an even more 
apt analogy has been made with regard to the testimony of experts as 
similar to the men in another fable:
---------------------------------------------------------------------------

    \73\ The analogy is not meant to suggest that the testifying 
experts were metaphorically blind. Indeed, they were all learned and 
persuasive with regard to the aspects of the market upon which they 
opined.

    In a certain kingdom was a cave containing a treasure, guarded 
by a beast of fierce repute. The king wished to know the nature of 
the beast, and dispatched three of his subjects to invade the pitch 
darkness of the cave and report. The first returned and declared 
that he had felt the head of the beast, and it was toothed and maned 
like a lion. The second reported that he had felt the sides of the 
beast, and that it was winged and feathered like an eagle. The third 
reported that the legs of the beast were long and hoofed like a 
horse. A fearsome portrait of the beast was drawn up, and all were 
thereafter afraid to approach the cave. Of course, in reality, the 
cave contained a lion, an eagle, and a horse.
* * * * *
    Another, less allegorical, way of saying this is that many of 
the problems that the law has had in handling expertise in the 
courtroom have sprung from a failure to examine the concept of 
expertise in appropriate taxonomic detail.

Michael Risinger, Preliminary Thoughts on a Functional Taxonomy of 
Expertise for the Post-Kumho World, 31 Seton Hall L. Rev. 508, 508-09 
(2000).
    This phenomenon among experts has particular applicability to 
economists. As one prominent economist has recently written:

    Rather than a single, specific model, economics encompasses a 
collection of models . . . . The diversity of models in economics is 
the necessary counterpart to the flexibility of the social world. 
Different social settings require different models. Economists are 
unlikely ever to uncover universal, general-purpose models. But . . 
. economists have a tendency to misuse their models. They are prone 
to mistake a model for the model, relevant and applicable under all 
conditions. Economists must overcome this temptation.

Dani Rodrik, Economics Rules 5-6 (2015) (emphasis in original). Each 
party and its experts nonetheless invite the Judges to rely on but a 
single economic model--their model--as representative of the entire 
noninteractive market. As this determination makes clear, the

[[Page 26335]]

Judges decline that invitation. Rather, the Judges have found that no 
single economic model--no one mythic beast--reigns over the 
noninteractive market writ large. Rather, the evidence and testimony 
reveal a marketplace for sound recordings that is segmented, if not 
fragmented. Indeed, the Judges note the economic dichotomies 
demonstrated by the evidence:

     Market Segmentation by WTP

    Services that attract listeners who have no willingness to pay 
(WTP) for access to a noninteractive service, and therefore who listen 
mainly to ad-supported services, versus services that attract 
relatively more listeners who have a WTP greater than zero, and 
therefore can attract more subscription-based listeners.

     Market Segmentation by On-Demand Functionality

    Services that meet the statutory definition of an ``interactive 
service'' and thus provide an on-demand function, i.e., that allow 
listeners to select the sound recording they wish to hear whenever they 
choose, versus noninteractive services, that--despite whatever other 
functionality they may include--do not and cannot provide an on-demand 
feature.

     Market Segmentation by Major or Indie

    The Majors, who have the ability to negotiate relatively higher 
rates, versus the Indies, who have relatively less market power when 
negotiating rates.

     Complementary Oligopoly Power versus Oligopoly Market 
Structure

    ``Complementary oligopoly'' power exercised by the Majors designed 
to thwart price competition and thus inconsistent with an ``effectively 
competitive market,'' versus the Majors' non-complementary 
oligopolistic structure not proven to be the consequence of 
anticompetitive acts or the cause of anticompetitive results.

     Custom Pureplay Webcasting versus Simulcasting

    Custom (Pureplay) noninteractive services that play only sound 
recordings, versus simulcasters, who play principally (but not 
exclusively) the sound recordings and other materials transmitted 
simultaneously on a terrestrial broadcast.
    The presence of such dichotomies is not particularly unusual. For 
example, in Web II, the Judges noted that the marketplace consisted of 
a variety of commercial actors, who had a heterogeneous mix of features 
regarding costs, customers, business plans, and strategies. Such a 
variety exists today, and has been amplified by technological changes 
that have allowed for a greater diversity of music services. The 
directive in Sec.  114, instructing the Judges to establish ``rates and 
terms,'' that is, multiple rates and terms, anticipates the potential 
for more than one set of rates and terms that would have been 
negotiated in the marketplace between various willing buyers and 
willing sellers. Because the marketplace as presented by the record in 
this proceeding reveals important differences across these dichotomies, 
the Judges, as required by Sec.  114, establish rates and terms in this 
proceeding that reflect those marketplace realities.

B. SoundExchange's Rate Proposal

1. Introduction
    SoundExchange proposes a single rate for all commercial webcasters 
using a greater-of structure. All commercial webcasters would pay the 
greater of 55% of revenue attributable to webcasting and the following 
per-performance rate:

              SoundExchange Proposed Per-Performance Rates
------------------------------------------------------------------------
                                                               Per-
                          Year                              performance
                                                               rate
------------------------------------------------------------------------
2016....................................................         $0.0025
2017....................................................          0.0026
2018....................................................          0.0027
2019....................................................          0.0028
2020....................................................          0.0029
------------------------------------------------------------------------

SoundExchange Rate Proposal at 2-3.
2. Dr. Rubinfeld's Proposed Interactive Streaming Services Benchmark
    In support of its proposal, SoundExchange relies principally on an 
analysis undertaken by one of its economic witnesses, Dr. Daniel 
Rubinfeld, of rates set forth in direct licenses from record companies 
to certain interactive streaming services.\74\
---------------------------------------------------------------------------

    \74\ An ``interactive service'' is defined as one that ``enables 
a member of the public to receive transmission of a program 
specially created for the recipient, or on request, a transmission 
of a particular sound recording . . . which is selected by the 
recipient.'' 17 U.S.C. 114(j)(7) (emphasis added). A service that 
fails to meet the definition of an ``interactive service'' is, by 
default, a noninteractive service that may be entitled to a 
statutory license if it meets all other applicable criteria, see 17 
U.S.C. 114(d)(2)(C), including adherence to the ``sound recording 
performance complement'' as defined in 17 U.S.C. 114(j)(13).
---------------------------------------------------------------------------

a. Foundation for Rubinfeld's Proposed Per-Play Rates Benchmark
    Dr. Rubinfeld derived SoundExchange's proposed per-play rates by 
analyzing more than 80 agreements between interactive streaming 
services and record companies. Dr. Rubinfeld identified 60 such 
agreements that contained data on per-play royalty rates. 5/28/15 Tr. 
6297 (Rubinfeld). From those 60 agreements, he selected 26 that 
specified minimum per-play rates. Rubinfeld CWDT ] 205; SX Ex. 59 
(Rubinfeld CWDT, Exhibit 16a) (listing 26 interactive streaming service 
agreements).
    According to Dr. Rubinfeld, interactive streaming service 
benchmarks are more probative in this statutory rate proceeding than 
they were in prior statutory rate proceedings due to: (1) A 
``convergence'' in features that interactive and noninteractive 
streaming services offer to the end-user (``downstream'') market; and 
(2) greater head-to-head competition for listeners between interactive 
and noninteractive streaming services. Rubinfeld CWDT ] 21.
i. Convergence of Features
    SoundExchange avers that the listening choices (i.e., 
functionality) that interactive and noninteractive streaming services 
offer their customers are becoming much more similar than they were in 
previous years, i.e., they are converging. See, e.g., 5/6/15 Tr. 2013 
(Rubinfeld) (``[C]onvergence [m]ean[s] that if I'm very active in 
telling Pandora [a noninteractive service] what I like and don't like, 
the nature of the station can evolve in ways that can become more 
similar to what I might do on Spotify [an interactive service] if I 
were curating my own station.'').
    According to SoundExchange, the increasingly similar functionality 
of interactive and noninteractive streaming services has ``blurred'' 
the previous distinctions between them. See, e.g., SX Ex. 3, ] 13 
(Blackburn WDT); SX Ex. 32, ] 25 (Wilcox WRT). This purported blurring 
has occurred, according to SoundExchange, because of technological 
evolution, marketplace developments, and changes in consumer 
preferences. See, e.g., Kooker WDT at 16; SX Ex. 21 ] 36 (Wheeler WDT). 
SoundExchange asserts that, because of the market changes that it has 
highlighted, interactive and noninteractive webcasters alike recognize 
that any given music consumer ``is both a lean forward and a lean back 
type of listener,'' whose particular preference ``depends very much on 
the situation and the time of day'' and the ``mood that they're in.'' 
5/29/15 Tr. at 6570 (Kooker); Kooker

[[Page 26336]]

WRT.\75\ SoundExchange further notes that even Pandora has recognized 
that for 75% of music consumers it is important that a music service 
afford them both ``effortless listening'' and ``on demand music.'' SX 
Ex. 269 at 17 (Pandora Board of Directors: Strategy Day document, Oct. 
30, 2014).
---------------------------------------------------------------------------

    \75\ ``Lean-forward'' and ``lean-back'' are not statutory 
phrases that define types of services, and the record does not 
reflect any precise meanings in the industry. Importantly, a ``lean-
forward service'' is not necessarily the same as an ``interactive 
service,'' and a ``lean-back service'' is not necessarily the same 
as a ``noninteractive service.'' Compare, e.g., 4/30/15 Tr. 1182-83 
(A. Harrison) (``on-demand services have lean-back listening 
options'' and ``statutory [noninteractive] services have lean-
forward capabilities.'') with 5/13/15 Tr. 3396-97 (Herring) (``lean-
back services are radio-like services, one where you hit play and 
the service kind of chooses for you . . . [w]hereas . . . lean-
forward we consider on-demand services. So you go into the service 
and you choose exactly what you want to listen to.'').
---------------------------------------------------------------------------

    SoundExchange contends that to attract and retain listeners, 
interactive streaming services have moved beyond merely playing, on 
demand, the recordings selected by a listener, and have developed and 
promoted curated playlists, radio components and other lean-back 
methods of music delivery. Blackburn WDT ] 13; Wilcox WRT ] 25; Kooker 
WRT at 14; 5/13/15 Tr. 3448-50 (Herring). To support this point, 
SoundExchange introduced evidence and elicited testimony describing the 
various custom radio features of several predominantly interactive 
streaming services, e.g., Rdio; Rhapsody; Slacker; Beats; Amazon; 
Google; and Apple. See SX PFF ] 266 (and record citations therein).
    SoundExchange asserts that ``lean back'' features are a significant 
part of the consumer listening experience on some of these services. 
For example, SoundExchange points out that nearly [REDACTED]% of UMG's 
plays on Slacker are such programmed streams, rather than the 
traditional on-demand plays of an interactive service. SX Ex. 25 ] 11 
(Harrison WRT). SoundExchange notes that on Spotify, approximately 
[REDACTED]% of total listening to Sony's repertoire occurs through 
playlists created by Spotify or other third parties (i.e., not the 
listener). Kooker WRT ] 15.
    SoundExchange further asserts that listener feature convergence is 
occurring from the other direction as well, with statutory services 
adding new ``lean-forward'' options. In May 2013, SoundExchange notes, 
Pandora, a noninteractive streaming service, initiated its ``Pandora 
Premieres'' feature, which ``allows for on-demand selection of certain 
predetermined albums.'' Pan. Ex. 5002 ] 30 (Fleming-Wood WDT); 
Rubinfeld CWDT ]] 53-54; 5/13/15 Tr. 3444 (Herring). Further, 
SoundExchange notes that a Pandora listener can ``seed'' multiple 
stations with various artists and sound recording tracks, and then 
influence the types of recordings on each station by using Pandora's 
``thumbs up/thumbs down'' button. PAN Ex. 5000 ]] 33-34 (Westergren 
WDT); Fleming-Wood WDT ]] 8-9; Blackburn WDT ]] 9, 12-13; Rubinfeld 
CWDT ] 53; Kooker WRT ]] 10-11. SoundExchange continues that Pandora 
listeners can also skip songs, another form of customization. Rubinfeld 
CWDT ] 53.
    SoundExchange also points out that Sirius XM's noninteractive 
steaming service (``My Sirius XM'') allows listeners to move 
``sliders'' to change the type of music played. For example, a listener 
can direct the service to play ``more acoustic'' or ``more electric'' 
within a particular genre. SX Ex. 232 at 15-21; 5/22/15 Tr. 5419-20 
(Frear).
    SoundExchange also notes that iHeart has developed a custom 
streaming service that, according to SoundExchange, makes it ``very 
likely'' that a listener who is seeking out a highly popular artist or 
song will ``hear the exact song or songs he or she had in mind within 
minutes of starting the station.'' Kooker WRT at 7.\76\
---------------------------------------------------------------------------

    \76\ To demonstrate this point, SoundExchange introduced 
evidence of several experiments that purported to show the high 
frequency with which an iHeart station played the most popular songs 
of a popular artist who was used to seed a custom station--in 
contrast to the uncertain song rotation on terrestrial radio. Kooker 
WRT at 7-8. In these experiments on iHeart's custom radio (i.e., 
non-simulcast), a seeded popular artist, Meghan Trainor, and her 
current highest selling song, would play first 92% of the time. Ms. 
Trainor's first or second current highest selling song would play 
first 100% of the time. In 68% of the trials in the experiment, the 
seeded station played three or more of Ms. Trainor's songs among the 
first seven songs played. SX Ex. 27 at 7.
---------------------------------------------------------------------------

    SoundExchange also notes that the statutory services are developing 
new functionality that would allow even more listener control (while 
still satisfying the DMCA requirements).\77\ These functions 
purportedly would allow listeners to:
---------------------------------------------------------------------------

    \77\ None of the parties requested that the Judges interpret or 
seek an interpretation from the Register on whether any one listener 
feature or combination of features brought a particular 
noninteractive service outside the scope of the statutory license.
---------------------------------------------------------------------------

     Repeat songs, re-listen to songs they've ``thumbed up,'' 
skip additional tracks, and create playlists of ``thumbed up'' songs, 
SX Ex. 1678 at 8;
     ban from stations certain artists, live tracks, 
instrumental recordings and tempos, SX Ex. 269 at 43; 5/13/15 Tr. 3498-
3503 (Herring); and
     create stations that contain only those songs for which 
the listener has indicated a preference. SX Ex. 213.
    SoundExchange notes that a prime catalyst for increased convergence 
between interactive and noninteractive streaming services is the trend 
away from desktop listening toward mobile listening. For example, 
SoundExchange points out that during the first quarter of 2015, 83% of 
the hours streamed by Pandora listeners occurred through mobile 
devices. 5/13/15 Tr. 3443 (Herring). SoundExchange asserts that the 
leading edge of this competition to ``get into the car'' by both 
noninteractive and interactive streaming services should hasten this 
trend. 5/8/15 Tr. 2731-32 (Shapiro). Moreover, because on-demand song 
selection is often incompatible with driving (absent hands-free voice 
controls or self-driving cars), SoundExchange opines that interactive 
streaming services have incentives to add ``lean-back'' functionality, 
such as Spotify's ``Shuffle'' service, to their mobile services. 
Blackburn WDT ] 39.
    Based on the foregoing points, SoundExchange concludes that, 
notwithstanding the requirements noninteractive streaming services must 
meet to be eligible for the statutory license, statutory services are 
increasingly offering enhanced functionality that ``come[ ] close to 
replicating'' the on-demand listening experience of interactive 
streaming services. Rubinfeld CWDT ]] 53-54; Blackburn WDT ] 9; Kooker 
WDT at 16. As summarized by one record company witness, statutory 
services now ``employ sophisticated algorithms, user-interface 
controls, and other computer technology that allow users to communicate 
their preferences to the service, and the service to customize and 
curate programming tailored to the individual user.'' Kooker WDT at 16-
17.
    SoundExchange concludes that ``[i]t is therefore no longer just 
directly licensed interactive services that allow users to select their 
programming. Users of statutory services can also lean forward and 
influence what they hear.'' SX PFF ] 278 (emphases added).\78\
---------------------------------------------------------------------------

    \78\ The words ``select'' and ``influence'' as used by 
SoundExchange and quoted in the accompanying text, supra, are 
italicized to foreshadow the important distinction in meaning 
between those words, as discussed infra, section IV.B.3.b. Suffice 
it to note at present the different meanings of these two verbs: 
``to select'' means ``to choose in preference to another or others; 
pick out; to make a choice; pick,'' whereas ``to influence'' means 
``to . . . affect; sway.'' See Dictionary.com.

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[[Page 26337]]

ii. Increased Competition for Listeners in the Downstream Market 
79
---------------------------------------------------------------------------

    \79\ This proceeding involves two aspects of a vertical market: 
(1) The ``upstream royalty market,'' in which record companies 
charge streaming services for the right to access the record 
companies' repertoires of sound recordings; and (2) the ``downstream 
consumer market'' in which streaming services offer music to 
listeners. Rubinfeld CWRT ] 132.
---------------------------------------------------------------------------

    SoundExchange avers that interactive services and noninteractive 
streaming services compete with each other for listeners. SX Ex. 269; 
5/13/15 Tr. 3462 (Herring). SoundExchange contends that Pandora, 
iHeart, and Sirius XM are all keenly aware of the developing 
competition from interactive services. SoundExchange points to numerous 
examples in the record of this purported competition for listeners 
between interactive and noninteractive streaming services.
    With regard to Pandora, SoundExchange cites the following evidence:
     Pandora's own internal documents confirm that interactive 
services ``compete head-to-head for listener hours with services that 
operate under the statutory license,'' Kooker WDT at 16;
     Pandora identifies Spotify as a ``competitor'' for the 
``consumers [it is] trying to attract to use Pandora,'' SX Ex. 266 at 
12; 5/13/15 Tr. 3483-84 (Herring);
     Pandora identifies as ``competitor services'' Spotify's 
Free Mobile App (described by Pandora as ``enabl[ing] [a] hybrid `lean-
in'/`lean-back' experience'') and Beats Music (a ``[p]ure on-demand 
service with a novel personalization feature''), SX Ex. 266 at 15-21;
     Pandora's ``Competitive Intelligence Report'' details the 
product offerings of services like Beats, Google Play, Rdio, and 
Spotify, SX Ex16 52; SX Ex. 2244;
     In 2014, Pandora briefed its incoming CEO Brian McAndrews 
on the ``[i]ncreased competition [that] exists from Apple, Google, and 
[other interactive] streaming services like Spotify.'' SX Ex. 2367; 5/
27/15 Tr. 6163-65 (Fleming-Wood); and
     Pandora identified Spotify, Rdio, Deezer, Rhapsody, 
Slacker, Google, and Apple as ``competitors'' in Pandora's survey of 
competitors' product strategies and business models in a ``Strategic 
Planning Overview.'' SX Ex. 263 at 23.
    Similarly, with regard to iHeart, SoundExchange notes the following 
evidence of competition between interactive streaming services and 
iHeart's custom noninteractive streaming service:
     iHeart consistently identifies interactive services like 
[REDACTED], [REDACTED], and [REDACTED] as competitors. SX Ex. 1262 at 
4-11; SX Ex. 2157 at 5.
     iHeart has monitored [REDACTED] on its ``competitor 
tracker'' since [REDACTED] first launched [REDACTED]. SX Ex. 211 at 6.
     iHeart has strategized as to how it could ``match or beat 
[[[REDACTED]'s] experience,'' and listed ``major roadmap items to deal 
with [REDACTED].'' Id. at 2.
    Finally, SoundExchange notes that Sirius XM also internally 
identifies interactive streaming services like [REDACTED], [REDACTED], 
[REDACTED], [REDACTED], and [REDACTED] as ``competitors'' for listeners 
of its noninteractive streaming service--My Sirius XM--and highlights 
[REDACTED] as ``offer[ing] the strongest competition in terms of the 
quality of customization.'' SX Ex.1759 at 15; 5/22/15 Tr. 5461-63 
(Frear). Additionally, Sirius XM conducted a service-wide survey of 
``competitive listening'' in which it sought input from listeners not 
only on streaming services like [REDACTED], [REDACTED], [REDACTED], and 
[REDACTED], but also on interactive streaming services like [REDACTED] 
and [REDACTED]. SX Ex. 237 at 26.
    Based on his proffered evidence of ``convergence'' and ``downstream 
competition,'' Dr. Rubinfeld concluded that agreements between 
interactive streaming services and record companies were an appropriate 
foundation upon which to base a marketplace benchmark for determining 
rates in this proceeding. 5/15/15 Tr. 1785 (Rubinfeld).
b. Comparability of Dr. Rubinfeld's Proffered Interactive Streaming 
Services Benchmark to the Hypothetical Market
    Dr. Rubinfeld asserts that his proposed interactive streaming 
services benchmark satisfies the following four part-test that he 
contends comprises the standard that the Judges applied in the Web III 
Remand to determine the usefulness of a proffered benchmark:

    Willing buyer and seller test: Dr. Rubinfeld contends that the 
rates that the Judges are required to set must be those that would 
have been negotiated in a hypothetical marketplace between a willing 
buyer and a willing seller. Rubinfeld CWDT ] 122(a). Dr. Rubinfeld 
opined that the interactive streaming services agreements upon which 
he based his proffered benchmark are indicative of the results of 
negotiations between willing buyers and willing sellers because they 
were entered into voluntarily between parties who did not have the 
option of electing the statutory license. Id. ] 158(a).
    Same parties test: Dr. Rubinfeld contends that the buyers and 
sellers in the hypothetical marketplace that the Judges are tasked 
with replicating (i.e., statutory webcasting services and record 
companies, respectively) are ``similar'' to the buyers and sellers 
in his proffered benchmark. Id. ]] 122(b) and 158(b).
    Absence of Statutory license test: Dr. Rubinfeld contends that 
the hypothetical marketplace is one in which there is no statutory 
license. Id. ] 122(c). He opines that, among the spectrum of 
potential benchmarks that could have been offered, a benchmark based 
upon interactive streaming services agreements is least likely to be 
influenced by the statutory license because interactive services 
cannot default to the statutory license and therefore, according to 
Dr. Rubinfeld, his proffered benchmark is an appropriate replication 
of a market without a statutory license. Id. ] 158(c).
    Same rights test: Dr. Rubinfeld asserts that the products sold 
in the hypothetical marketplace consist of a blanket license for the 
record companies' complete repertoires of sound recordings, to be 
used in compliance with the DMCA requirements. Id. ] 122(d). Unlike 
the other three comparability tests discussed above, with regard to 
the ``same rights test,'' Dr. Rubinfeld contends that certain 
adjustments must be made to enhance the comparability of the 
proffered benchmark to the hypothetical market. Dr. Rubinfeld 
asserts that these adjustments are necessary because the agreements 
upon which his proposed benchmark is based provide various 
functionality that is not permitted by the statutory license (i.e., 
``on demand'' choice of songs; unlimited skips; and ``cached'' 
downloads). Id. ] 158(d).\80\
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    \80\ Dr. Rubinfeld also noted that in the interactive streaming 
services agreements that formed the basis of his proffered 
benchmark, the licensed rights do not consist of a blanket license 
for the record companies' complete repertoires of sound recordings. 
Instead, artist/labels may limit (or exclude) the right to license 
certain content from interactive streaming services. Id. Dr. 
Rubinfeld did not offer any proposed adjustments to account for this 
distinction.

    Therefore, according to Dr. Rubinfeld, ``adjustments can and should 
be made to account for these differences when applying the set of 
interactive benchmarks.'' Id.\81\
---------------------------------------------------------------------------

    \81\ Dr. Rubinfeld made such adjustments, as discussed infra. 
Understanding those adjustments in the proper context requires a 
discussion of Dr. Rubinfeld's basic model, which follows.
---------------------------------------------------------------------------

c. Per-Play ``Ratio Equivalency'' in Noninteractive and Interactive 
Markets
    Dr. Rubinfeld ``assumed that the ratio of the average retail 
subscription price to the per-subscriber royalty paid by the licensee 
to the record label is approximately the same in both interactive and 
noninteractive markets.'' Rubinfeld CWDT ] 169. This ``ratio 
equivalency'' is best presented by the following equation:
[GRAPHIC] [TIFF OMITTED] TR02MY16.000


[[Page 26338]]


Where:

[A] = Avg. Retail Interactive Subscription Price
[B] = Interactive Subscriber Royalty Rate
[C] = Avg. Retail Noninteractive Subscription Price
[D] = Noninteractive Subscriber Royalty Rate

Dr. Rubinfeld testified that this ``ratio equivalency'' assumption is 
not only important, but indeed is foundational to his entire analysis. 
5/6/15 Tr. 2026 (Rubinfeld).\82\
---------------------------------------------------------------------------

    \82\ This ``ratio equivalency'' assumption in Dr. Rubinfeld's 
model is essentially the same as the assumption made by Dr. 
Pelcovits on behalf of SoundExchange in Web II and Web III. See 
Rubinfeld CWDT ] 207 n.124 (acknowledging that he followed ``past 
practices''); 5/6/1/155 Tr. 2026-27 (confirming that his reference 
to ``past practices'' referred to Dr. Pelcovits's approach). Dr. 
Rubinfeld indicates, however, that his application of the 
interactive benchmark analysis does not suffer from the defects in 
Dr. Pelcovits' application of that model in a prior proceeding. Id. 
at 2027-28.
---------------------------------------------------------------------------

    Dr. Rubinfeld calculated the interactive numerator and denominator 
[A] and [B], and the noninteractive numerator [C], from available data 
in the agreements he had analyzed. Dr. Rubinfeld did not have data to 
calculate the noninteractive denominator [D]--i.e., the per-play 
``Noninteractive Subscriber Royalty Rate.'' Therefore, Dr. Rubinfeld 
attempted to estimate this number by: (1) Applying the above equation; 
and (2) making what he describes as the necessary adjustments to the 
rate he derives to account for differences between the interactive and 
noninteractive markets and thus satisfy the ``same rights'' test.
    More particularly, to determine his Interactive Numerator [A] (the 
average monthly retail interactive subscription price), Dr. Rubinfeld 
calculated ``the simple average of the [monthly] subscription prices 
for the interactive services, which turned out to be in this case 
$9.86.'' 5/5/15 Tr. 1797 (Rubinfeld).
    To determine his Interactive Denominator [B] in his ratio (the 
interactive subscriber royalty rate), Dr. Rubinfeld first identified 
the average minimum per-play rate as defined in each of his selected 
interactive agreements. Rubinfeld CWDT ] 205. Next, Dr. Rubinfeld 
identified the various forms of non per-play consideration, if any, in 
these agreements, which included non-recoupable cash payments and 
advertising commitments with an explicit financial value. Rubinfeld 
CWDT ] 218. To convert these lump-sum payments and values into per-play 
values, Dr. Rubinfeld divided these payments by the number of actual 
plays (as set forth in the applicable service's performance 
statements). Id.\83\ He then added this derived per-play value to the 
stated (i.e., headline) per-play rate. Dr. Rubinfeld then took an 
average of these per-play rates, weighted by revenue, id. ] 203, to 
determine the interactive subscriber royalty rate for his interactive 
benchmark agreements.
---------------------------------------------------------------------------

    \83\ If the agreements provided the record companies with rights 
that were not quantifiable (e.g., data provision or equity stakes), 
Dr. Rubinfeld did not account for the possible value of those rights 
in his benchmark calculation. Id.
---------------------------------------------------------------------------

    Having obtained values for [A] and [B], Dr. Rubinfeld was able to 
calculate that the direct agreements with the interactive services 
provided record companies with a minimum revenue share that generally 
ranged between 50 percent and 60 percent of the services' revenues 
(based on the record company's share of total streams), with the 
majority falling between 55 percent and 60 percent. Rubinfeld CWDT ] 
206 and, Appx. 1. Thus, given Dr. Rubinfeld's assumption that the 
ratios should be equal in both markets, the per-play royalty rate for 
noninteractive services [D] (i.e., the statutory rate) would also have 
to provide record companies with the same minimum percentage of revenue 
out of [C] (the average monthly retail noninteractive subscription 
price).
    However, Dr. Rubinfeld needed first to calculate [C] (the average 
monthly retail noninteractive subscription price). Dr. Rubinfeld 
calculated [C]--as he had calculated [A]--as a simple average of the 
monthly subscription prices for the services he had identified as 
``noninteractive.'' Because of varying rates within each service 
(depending on whether the average is computed using monthly or yearly 
fees), the average ranged between $4.84 and $5.25. 5/5/15 Tr. 1797 
(Rubinfeld); Rubinfeld CWDT ] 207.
    Having calculated values for [A], [B] and [C], Dr. Rubinfeld thus 
could, and did, use the ratio of the interactive to noninteractive 
subscription prices (the ratio of [A] to [C] \84\) to solve for [D] 
(the statutory noninteractive per-play royalty rate). Dr. Rubinfeld 
determined that the ratio of the two monthly subscription prices ranged 
between 1.88 and 2.04.\85\ Dr. Rubinfeld applied what he considered to 
be a reasonable and conservative figure within this range, 2.00, as a 
discount factor to make his proffered downward ``interactivity 
adjustment'' to the royalty rate for interactive services, which he 
then applied to determine his proposed royalty rate for noninteractive 
services.
---------------------------------------------------------------------------

    \84\ As a basic mathematical point, if [A]/[B] = [C]/[D], then 
[A]/[C] = [B]/[D]. Thus, assuming Dr. Rubinfeld's approach was 
valid, he could mathematically determine [D] (the statutory 
noninteractive rate) by applying the ratio of [A] to [C], since he 
had calculated a value for [B] (the interactive royalty rate).
    \85\ 9.86/4.84 = 2.04 (rounded). 9.86/5.25 = 1.88 (rounded).
---------------------------------------------------------------------------

i. SoundExchange's Alternative Calculation and Confirmation of Its 
``Interactivity Adjustment''
    Dr. Rubinfeld attempted to confirm the reasonableness of his 2.0 
interactivity adjustment by considering a different method of 
calculating the adjustment, undertaken by another SoundExchange expert 
economic witness, Dr. Daniel McFadden. Rubinfeld CWDT ]] 171, 209. Dr. 
McFadden conducted a ``conjoint survey'' \86\ to determine the value 
that future consumers of digital streaming services place on various 
features of those services. Dr. McFadden determined the value that 
future consumers place on various features that are available on 
streaming services, such as: (1) Limited or unlimited skips; (2) 
offline listening; (3) on-demand (desktop and mobile); (4) addition of 
mobile service; (5) playlists (from algorithms and ``tastemakers''); 
(6) presence or absence of advertising; and (7) catalog size between 
one million and twenty million. SX Ex. 15 ] 9 (McFadden WDT).
---------------------------------------------------------------------------

    \86\ A conjoint survey creates a slate of alternative products 
and asks the consumer to identify which product he or she most 
prefers. The sets of products are designed to realistically mimic 
the actual market process, in which a consumer is presented with and 
chooses among various competing bundles of alternatives. By 
presenting each consumer with several sets of choices, the 
researcher can determine the relative importance and dollar value 
that consumers place on each of the attributes. McFadden WDT ] 13.
---------------------------------------------------------------------------

    Relying upon the entire sample of respondents to Dr. McFadden's 
survey, Dr. Rubinfeld summed the average willingness to pay (WTP) \87\ 
values for various attributes for hypothetical interactive and 
noninteractive services, in the following manner.
---------------------------------------------------------------------------

    \87\ The word ``average'' is italicized in the text, supra, to 
presage an important element of Dr. McFadden's results, one that he 
identified and upon which one of the Services' economic experts, Dr. 
Steven Peterson, elaborated the relationship between the average WTP 
in Dr. McFadden's survey and the bimodal nature of Dr. McFadden's 
WTP results. That issue is discussed further in this determination.
---------------------------------------------------------------------------

     On the interactive side, Dr. Rubinfeld included the 
following attributes: (1) Unlimited skips; (2) offline listening; (3) 
on-demand availability (desktop and mobile); (4) mobile service; (5) 
playlists (from algorithms and ``tastemakers''); (6) absence of 
advertising; and (7) catalog size between one million and twenty 
million).

[[Page 26339]]

     On the noninteractive side, Dr. Rubinfeld included these 
attributes but excluded the following features not offered by statutory 
services: (1) Unlimited skips; (2) offline listening; and (3) on-demand 
availability (desktop and mobile); and catalogs greater than ten 
million (as arguably more reflective of noninteractive catalog sizes in 
the market). Id.

Rubinfeld CWDT ] 209, SX Ex. 56 (Rubinfeld CWDT Ex. 14).
    According to Dr. Rubinfeld, the survey results from Dr. McFadden's 
conjoint survey indicated an interactivity ratio of 1.90, which Dr. 
Rubinfeld noted was less than the 2.0 interactivity ratio calculated by 
Dr. Rubinfeld through his own methodology, discussed supra. (Because 
the interactivity ratio measures the relationship of interactive 
subscription prices to noninteractive subscription prices, the lower 
1.90 ratio would indicate that noninteractive subscription prices are 
closer to interactive subscription prices, raising the benchmark 
interactive royalty rate as compared to Dr. Rubinfeld's 2.0 ratio.) 
Accordingly, Dr. Rubinfeld concluded that Dr. McFadden's alternative 
method of calculating the value of interactivity confirmed that Dr. 
Rubinfeld's own 2.0 interactivity adjustment was not only reasonable, 
but conservative. Rubinfeld CWDT ] 210.
ii. Additional Adjustments Made by Dr. Rubinfeld
    The other differences between the interactive market and the 
noninteractive market that, according to Dr. Rubinfeld, required 
further adjustment before he could determine a per-play royalty rate 
based on his interactive benchmark analysis are described below.
(A) Adjustment for Royalty-Bearing Plays (Skips and Pre-1972 
Recordings)
    In his analysis, Dr. Rubinfeld accounted for the fact that, under 
the statute, a ``skip,'' i.e., a song that that a listener skips after 
several seconds, is considered a royalty-bearing play for a 
noninteractive service. By contrast, interactive services, pursuant to 
their direct license agreements with record companies, typically are 
permitted to exclude from the royalty obligation at least some skips. 
SX Ex.17 ] 212 (Rubinfeld CWDT). Offsetting to some extent this 
downward adjustment, according to Dr. Rubinfeld, was his understanding 
that statutory services (such as Pandora and Sirius XM) contend that 
they are not required to pay royalties for pre-1972 sound recordings 
under federal copyright law.\88\ Id. ] 213 (Rubinfeld CWDT). However, 
Dr. Rubinfeld understood that directly-licensed interactive services, 
such as those in his proffered benchmarks, are usually bound by 
contract to pay royalties on pre-1972 sound recordings. Id.
---------------------------------------------------------------------------

    \88\ The Copyright Act only covers sound recordings fixed after 
February 15, 1972--the effective date of the Sound Recording 
Amendment, Pub. L. 92-140, 85 Stat. 391 (1971). Protection, if any, 
for sound recordings fixed prior to that date derives from state 
law.
---------------------------------------------------------------------------

    In order to make an ``apples-to-apples'' comparison, Dr. Rubinfeld 
therefore corrected for these differences in royalty-bearing plays in 
his interactive benchmark market and the statutory noninteractive 
market. SX Ex. 29 ] 214 (Rubinfeld CWRT). Applying the foregoing 
factors, Dr. Rubinfeld calculated that the ratio of (i) royalty-bearing 
plays in his interactive benchmark market to (ii) royalty-bearing plays 
in the statutory noninteractive market was 1.0:1.1. Accordingly, Dr. 
Rubinfeld divided his per-play rate (as calculated in the prior steps, 
supra) by a factor of 1.1.\89\
---------------------------------------------------------------------------

    \89\ Dr. Rubinfeld calculated the 1.1 adjustment factor by: (i) 
Estimating the number of royalty- bearing plays on a hypothetical 
service that does not pay for skips, utilizing information about the 
number of skips; the average skip length; song length; and ad 
minutes per hour, and then dividing that number by (ii) the 
estimated number of royalty-bearing plays as determined by analyzing 
Pandora's SEC filings. Rubinfeld CWDT ] 216; SX Ex. 57 (Rubinfeld 
CWDT Ex. 15a); SX Ex.58 (Rubinfeld CWDT Ex. 15b).
---------------------------------------------------------------------------

(B) Adjustment for Indies
    Dr. Rubinfeld assumed that, on average, independent record 
companies, commonly known as Indies, (i.e., those not owned by (or by a 
division of) Universal, Sony or Warner) would likely negotiate less 
beneficial arrangements with interactive services than would Majors. 
Rubinfeld CWDT ]] 220, 223. Based on this assumption, he made a further 
assumption that the difference in the consideration received by the 
Majors and the Indies in the interactive market would be reflected 
completely in the assumed fact that Indies ``would not receive any of 
the non per-play financial or other unquantified consideration major 
record companies receive . . . .'' Id. ] 223.\90\ Dr. Rubinfeld then 
determined that the Indies accounted for an average of 24% of the 
streams on interactive services, and he weighted his benchmark by 
assuming that this 24% figure was also applicable to the noninteractive 
market. Id. ] 225.\91\
---------------------------------------------------------------------------

    \90\ Apparently, Dr. Rubinfeld did not separately examine the 
Indies/Services agreements in his collected interactive agreements 
to test his assumptions and apply the actual differences, if any, 
between the headline rates and other compensation received by the 
Indies, on the one hand, and by the Majors, on the other hand. See 
Rubinfeld CWDT ] 223 (``I also assume that these independent record 
companies receive the same per-play rates and proportionate revenue 
shares as the majors.'') (emphasis added). Dr. Rubinfeld later 
modified his direct testimony to note what he described as 
confirmatory evidence--that in [REDACTED]'s [REDACTED] agreements 
with the Majors and the Indies, ``the majors received [REDACTED] and 
the indies did not.'' SX Ex. 128 ] 29 (Rubinfeld CWDT App. 2).
    \91\ Dr. Rubinfeld noted that Nielsen Soundscan information he 
possessed indicated that the independent record companies' 2013 
market share was higher--it was approximately 35%--but he chose to 
use the lower 24% interactive market figure. Rubinfeld CWDT ] 224 
and n.131 (continuing to rely on the 24% figure for interactive 
plays of Indie sound recordings and noting (but not linking, 
logically or evidentially) the unsourced assertion that ``a 
substantial portion of those sound recordings were distributed by 
major labels.'').
---------------------------------------------------------------------------

    After applying the foregoing steps and adjustments, Dr. Rubinfeld 
calculated that, for the year 2014 (the year for which he had and 
applied data), the per-play royalty rate for noninteractive services 
implied by the interactive benchmark equaled $0.002376, or 0.2376 
cents. SX Ex. 59 (Rubinfeld CWDT Ex. 16a).
(C) Adjustment for 2016-2020 Period
    Finally, Dr. Rubinfeld determined that his proposed per-play rate 
should increase by a linear $0.00008 for each year in the statutory 
2016-2020 period. In support of these annual increases, Dr. Rubinfeld 
relied upon: (1) The average $0.00008 annual increase in rates as set 
in Web III; \92\ (2) his belief that there would be an ever-increasing 
convergence in the retail prices of statutory and nonstatutory 
services; (3) the presence of rate escalation provisions in the iHeart/
Warner Agreement and the Pandora/Merlin Agreement; and (4) the presence 
of annual rate escalations in the Web III rates. Rubinfeld CWDT ]] 137-
141; PAN Ex. 5014 at 4, 5 (Pandora/Merlin Agreement). Thus, Dr. 
Rubinfeld increased his 2014 interactive benchmark of $0.002376 by 
$0.00008, for a 2015 benchmark of $0.002456. That 2015 figure was again 
increased by $0.00008 to reflect a rate for 2016 of $0.002536 (rounded 
by Dr. Rubinfeld to $0.0025).
---------------------------------------------------------------------------

    \92\ See 37 CFR 380.3(a)(1) (setting forth Web III rates). 
Although the average rate increased annually by $0.00008, the rate 
remained constant for 2012 and 2013 (at $0.0021) and also remained 
constant for 2014 and 2015 (at $0.0023). Thus, in 50% of the year-
over-year changes, the Judges declined to make any changes in the 
Web III rates.
---------------------------------------------------------------------------

iii. The Interactive Rate Is an ``Effectively Competitive'' Benchmark 
Rate
    SoundExchange maintains that Dr. Rubinfeld's interactive benchmark 
rate reflects effective competition because

[[Page 26340]]

downstream competition mitigates any arguable market power record 
companies may have in the upstream licensing market. (However, it is 
worthy of note that SoundExchange did not attempt to demonstrate that 
the interactive market on which it relies for its benchmark is 
effectively competitive, until its rebuttal case, after the Services 
had made their direct arguments as to why the interactive market is not 
effectively competitive.) In support of its argument, SoundExchange 
relies on the testimony of another of its economic experts, Dr. Eric 
Talley.
    According to Dr. Talley, rates in the interactive market are 
constrained by two factors. First, if there is an ``elastic downstream 
demand curve'' for an input (such as a sound recording), upstream 
prices for that input will be constrained. Second, if the ``expenditure 
on that input versus other inputs''--``the cost intensity of that 
particular input''--is proportionately significant compared to other 
inputs in the downstream market, the constraint on pricing in the 
upstream market will be more pronounced. 5/27/15 Tr. 6054-55 
(Talley).\93\
---------------------------------------------------------------------------

    \93\ Dr. Talley's testimony describes factors pertinent to the 
economic ``Hicks-Marshall'' principle, which provides that the 
upstream demand for a factor of production (such as sound recording 
licenses demanded by a webcaster) is ``derived'' in part from the 
downstream demand for the finished product (such as a subscription 
service that offers such sound recordings). Further, the elasticity 
of demand downstream will be reflected in the upstream demand for 
that factor of production.
---------------------------------------------------------------------------

    According to Dr. Talley, both of these factors are present here. 
First, high price elasticity exists downstream because of the threat 
from piracy and because of competition from other outlets, such as 
YouTube. Second, the variable costs associated with licenses are a very 
significant element of the downstream sellers' expenses. Thus, these 
elasticities would be passed upstream. Id. at 6054-58.
    Dr. Talley then noted that his theoretical modeling demonstrated 
that such downstream competitive forces ``will cause the WBWS price to 
be tightly clustered, reducing variations due to differences in 
bargaining power.'' SX Ex. 19 at 35, 44-45 (Talley WRT); see also SX 
Ex. 29 ] 132 (Rubinfeld CWRT).
    Sound Exchange notes that Dr. Talley's assertions regarding the 
highly competitive state of the downstream market is essentially 
undisputed and borne out by the evidence. See SX PFF ]] 449-458 (and 
record citations therein). Moreover, SoundExchange notes that Drs. 
Shapiro and Katz acknowledged that the presence of some ``free 
alternatives'' in the downstream market have reduced interactive rates 
in the upstream market. 5/20/15 Tr. 5049 (Shapiro); 5/11/15 Tr. 2973 
(Katz).
    SoundExchange also points to its negotiations with interactive 
services as evidence that the upstream interactive market is 
effectively competitive. Dr. Rubinfeld, described the negotiations as a 
``real give and take,'' where the labels ``have in mind a particular 
goal, but they have to give up something,'' which is ``consistent'' 
with the ``view that there's some bargaining power on the part of the 
services.'' 5/5/15 Tr. 1863 (Rubinfeld). He further testified that the 
possible bargaining range would at best only reveal ``something about 
the other party's willingness to pay or willingness to sell.'' Id. at 
1864-65. Dr. Rubinfeld and SoundExchange reached these conclusions 
based on their consideration of the back and forth and ultimate 
concessions record companies make in the final agreements reached (or 
abandoned) with Apple, Google, Beats, Spotify and Amazon. See SX PFF ] 
471-80 (and citations to the record therein).
d. Direct Licenses for Noninteractive Services Corroborate Dr. 
Rubinfeld's Interactive Benchmark
    SoundExchange offered analyses of direct licenses between record 
companies and several noninteractive services to corroborate its 
interactive benchmark analysis. These include two licenses from major 
record companies to Apple, Inc. (Apple) for its iTunes Radio service, 
and several licenses for what SoundExchange describes as noninteractive 
offerings by services that also offer interactive streaming.
i. Apple Agreements
    SoundExchange presented evidence of Apple's license agreements with 
Warner and Sony, respectively, for Apple's iTunes Radio service. iTunes 
Radio is a streaming service that offers users the opportunity to 
listen to playlists selected by industry ``tastemakers,'' as well as 
playlists that are generated by an algorithm based upon a song or 
artist ``seeded'' by the listener (similar to Pandora's service). Dr. 
Rubinfeld described the iTunes Radio service as ``DMCA compliant,'' 
although he acknowledged that the rights granted to Apple are ``not 
identical to the statutory license.'' Rubinfeld CWRT, App. 2, ]] 1-
2.\94\ Dr. Rubinfeld concluded that the effective per-play royalty rate 
under the Apple licenses with Warner and Sony range from $0.[REDACTED] 
to $0.[REDACTED], the low end of which exceeds the highest rate 
proposed by SoundExchange. Id. ]] 30, 42.
---------------------------------------------------------------------------

    \94\ All testimony on the subject of iTunes Radio was taken 
prior to the launch of Apple Music. Consequently, the discussion of 
iTunes Radio in this determination does not reflect any changes 
Apple may have made to the service as a result of that launch.
---------------------------------------------------------------------------

    SoundExchange offered the Apple agreements as part of its rebuttal 
of a number of the licensee services' criticisms of Dr. Rubinfeld's 
interactive benchmark analysis. Dr. Rubinfeld contended that, because 
the (noninteractive) Apple agreements were not susceptible to those 
criticisms, those criticisms would be rebutted by evidence that the 
royalty rates derived from the Apple agreements were roughly equivalent 
to those derived from the interactive benchmark analysis. Id. ] 3.
    Specifically, Dr. Rubinfeld argued that the following critiques 
that the licensee services levied against his interactive benchmark 
analysis would not apply to Apple's agreements with the majors for its 
noninteractive service.
     The majors' repertoires are ``must haves'' for interactive 
services, enabling the majors to charge supracompetitive prices. Id. ] 
4. The majors' repertoires are not ``must haves'' for a noninteractive 
service, since a noninteractive service (and not its customers) 
determines which songs will be played.
     ``[B]ecause noninteractive services purportedly have the 
ability to steer listeners to sound recordings offered by independent 
music labels and away from majors (or away from any particular major's 
repertoire), record label catalogs are substitutes.'' Id. ] 5. iTunes 
Radio would have the same ability to steer listeners as any other 
noninteractive service. Id. ] 7.
     ``[B]ecause interactive services are primarily 
subscription services, they have substantially higher ARPUs than 
noninteractive services, which are primarily ad-supported,'' and would 
therefore pay substantially higher royalties. Id. at 6. iTunes Radio, 
by contrast, is a nonsubscription service that, like other 
noninteractive services, is primarily ad-supported. Id. ] 7.
    Dr. Rubinfeld also offered two additional reasons why the Judges 
should consider the Apple agreements. First, he noted that Apple's 
``unique position in the marketplace'' confers substantial bargaining 
power in its negotiations with record companies, tending to negate any 
argument based on a disparity of bargaining power between licensor and 
licensee. Id. Second, Dr. Rubinfeld argued that the non-precedential 
language in the agreements demonstrates that the parties did not expect 
them to be used

[[Page 26341]]

in this proceeding.\95\ As a consequence, he suggested that the shadow 
of the statutory license may not affect the Apple agreements as 
strongly as other noninteractive benchmarks (e.g., the Pandora-Merlin 
and iHeart-Warner agreements). Id. ] 8.
---------------------------------------------------------------------------

    \95\ That proposition is questionable in light of other evidence 
of what euphemistically could be called ``strategic behavior'' by 
Apple and one of the major record companies. See IHM Ex. 3517 
([REDACTED] email from [REDACTED] to [REDACTED]) (``[REDACTED].'') 
(emphasis added).
---------------------------------------------------------------------------

ii. Other Noninteractive Agreements
    SoundExchange also offered Dr. Rubinfeld's analysis of record 
company licenses to Beats Music's ``The Sentence,'' Spotify's 
``Shuffle'' service, Rhapsody's ``Unradio,'' and Nokia's ``MixRadio'' 
to corroborate its interactive benchmark analysis. SoundExchange 
describes these services as noninteractive offerings, and concludes 
that the effective per-play rates in the agreements exceed the per-play 
rate derived from Dr. Rubinfeld's benchmark analysis of interactive 
service agreements. See Rubinfeld CWRT ]] 179-201.
3. The Services' Opposition to the SoundExchange Rate Proposal and the 
Judges' Determination on the Issues
a. Dr. Rubinfeld's Interactive Benchmark Must Be Adjusted To Reflect 
Effective Competition
    The Services' expert economic witnesses all agreed that 
SoundExchange's proposed interactive benchmark would fail to establish 
rates that are ``effectively competitive.'' See, e.g., Katz WDT ]] 5, 
17, 18-34; Shapiro WDT at 3, 10-16; Fischel & Lichtman AWDT ] 10; 5/11/
15 Tr. 2799:9-16; 2800:3-18; 2801:9-17 (Katz); 5/8/15 Tr. 2604:10-22 
(Shapiro); 5/15/15 Tr. 4094:7-19 (Lichtman); see also, e.g., Shapiro 
WDT at10 n.11 (``My approach here is consistent with the one taken by 
the Judges in the Web III Remand.''). More particularly, the Services' 
economists equate the ``effectively competitive'' requirement as 
essentially equivalent to the economic concept of ``workable 
competition.'' In its essence, ``[a] workably competitive market is one 
not subject to the exercise of significant market power.'' Shapiro WDT 
at 10.\96\
---------------------------------------------------------------------------

    \96\ See J. M. Clark, Toward a Concept of Workable Competition, 
30 a.m. Econ. Rev. 241-56 (1940); Jesse Markham, An Alternative 
Approach to the Concept of Workable Competition, 40 a.m. Econ. Rev. 
349, 349 (1950) (treating ``effective competition'' and ``workable 
competition'' as synonymous).
---------------------------------------------------------------------------

    The NAB's economic expert, Dr. Katz, essentially analogizes the 
D.C. Circuit's contrast between ``metaphysical'' and ``effective'' 
competition to the economists' contrast between ``perfect'' and 
`workable'' competition:

    The theoretical conditions of perfect competition often are not 
satisfied in actual markets . . . . It is thus necessary to consider 
markets that are competitive, but not perfectly so. Economists have 
long examined this concept, beginning with Professor J.M. Clark, who 
introduced the concept of ``workable'' competition. Economists also 
refer to such markets as reasonably or effectively competitive.

Katz WDT ] 29 (emphasis in original).
    Dr. Shapiro describes a ``workably'' or ``effectively'' competitive 
market as follows:

    The hallmark of a workably competitive market is regular, 
significant competition among suppliers for the patronage of buyers. 
. . . A market can be workably competitive even when the products or 
services offered by different sellers are differentiated, so long as 
no single supplier has significant unilateral market power. Indeed, 
this is the norm for information products such as books, video 
programming, or software applications. Workable competition does not 
require marginal cost pricing or anything approaching the textbook 
model of perfect competition. A market can also be workably 
competitive even if it is quite concentrated, so long as the 
suppliers compete regularly and energetically to win business from 
each other. . . . In contrast, a market that is monopolized or 
controlled by a cartel is not workably competitive. If such markets 
were considered workably competitive, the concept of workable 
competition would lose all meaning. Likewise, a moderately or highly 
concentrated market in which the leading suppliers tacitly collude 
is not workably competitive. For example, if the leading suppliers 
have settled into some form of coordinated interaction, e.g., by 
refraining from competing actively to poach each other's customers, 
the market will fail to be workably competitive. More generally, if 
the leading suppliers are colluding--either expressly or tacitly--
the market is not workably competitive.

Shapiro WDT at 10-11 (emphasis in original).
    According to the Services' economists, the presence or absence of 
``workable'' or ``effective'' competition in the present case must be 
determined by recognizing that the noninteractive services are 
``aggregators,'' that is, they aggregate sound recordings they have 
licensed from record companies in the upstream market and then provide 
access to such licensed sound recordings to listeners in the downstream 
market. In such a market, ``workable competition'' is present, 
according to the Services' economists, if ``aggregators can offer 
attractive packages without the products of particular suppliers and to 
the extent to which these aggregators can steer their customers toward 
or away from particular suppliers.'' Shapiro WDT at 11. This ability to 
steer toward or away from certain suppliers is an example of price 
competition, according to Dr. Katz. See Katz WDT ] 32 (``[C]ompetition 
arises only when buyers have the ability to substitute the offerings of 
one seller for those of another. It is this possibility of substitution 
that drives sellers to offer higher quality and lower prices in order 
to attract buyers to themselves rather than their rivals. Conversely, 
when buyers lack the ability to substitute among the offerings of 
different sellers, there is no competition among sellers to attract 
customers.'') (emphasis in original).
    The Services assert that the interactive service agreements that 
SoundExchange proffers as appropriate benchmarks are not the product of 
such an ``effectively competitive'' market. In support of this 
assertion, the Services advance several arguments.
    First, the Services maintain that there is a fundamental difference 
between interactive and noninteractive services that precludes the 
former from serving as an ``effectively competitive'' benchmark for the 
latter. That fundamental distinction arises, they aver, from the fact 
that a sine qua non of on-demand services is that each downstream 
listener chooses the artists, albums, and tracks to which he or she 
listens, as well as the timing and frequency of each play. For this 
reason, on-demand interactive services must always be in a position to 
play any sound recording a listener might demand, and the on-demand 
services therefore lack the ability to steer performances away from 
higher-priced labels and toward lower-cost providers. See Shapiro WRT 
at 23; see also Katz WDT ] 17 (describing buyer choice as the ``essence 
of competition'' and opining that ``[t]he creation of a rate-
determination process and its willing-buyer/willing-seller standard can 
best be reconciled with economic principles and common sense by 
interpreting willing buyers as those who have meaningful choices among 
competing sellers, rather than facing a single, all-or-nothing offer 
from a monopolist.'').
    Second, the Services note that a lack of effective competition in 
the upstream interactive market is confirmed by the testimony of 
numerous SoundExchange witnesses, who conceded that the licenses 
between record labels and on-demand services are the product of a 
market devoid of any price competition between record companies to 
obtain additional plays on on-demand services. See 4/28/15 Tr. 415-16 
(Kooker) (Sony has ``never cut [its] price responding to a competitor's 
proposal or for more

[[Page 26342]]

plays.''); 4/30/15 Tr. 1097-99 (A. Harrison) (Universal has never 
lowered a proposed rate as a consequence of finding out that another 
Major was offering a lower rate, and, more broadly, Universal does not 
take any actions to compete with Sony or Warner with respect to 
services); 5/7/15 Tr. 2485-86 (Wilcox) (Warner has never offered a 
lower rate to an interactive service for more plays).
    Third, the Services' economists concluded that the reason for the 
absence of price competition in the upstream interactive market is that 
the repertoires of each Major are ``complements'' for each other. As 
Dr. Shapiro opined:

    In the parlance of economics, the ``must have'' suppliers are 
complements, not substitutes, because buyers need each of them and 
cannot substitute one for another. . . . This concept is well known 
in economics. When two essential inputs must be used together, they 
are often referred to as ``Cournot Complements.'' The evidence . . . 
shows that the repertoires of the major record companies are Cournot 
Complements for interactive services.
* * * * *
    The evidence shows clearly that the major interactive services 
``must have'' the music of each major record company to be 
commercially viable. The repertoires of the major record companies 
are not substitutes for each other in the eyes of either interactive 
services or the record companies themselves. This means that there 
is no true ``buyer choice'' in this market. Thus, the market for 
licensing recorded music to interactive services is not workably 
competitive. . . .

Shapiro WRT at 15.
    Fourth, the Services note that SoundExchange's economic expert, Dr. 
Rubinfeld, did not perform any separate analysis to determine whether 
the proffered interactive benchmark reflected the dynamics of a 
competitive market. Rather, he assumed, i.e., he took ``for granted,'' 
that his proffered interactive benchmark market was sufficiently 
competitive. 5/5/15 Tr. 1922 (Rubinfeld).
    Fifth, the Services rely upon numerous statements in several 
documents from SoundExchange's own principal advocates in the present 
case that had been submitted to the Federal Trade Commission (FTC) on 
behalf of Universal seeking approval of Universal's then-proposed 
merger with EMI--subsequently approved by the FTC and later 
consummated.\97\ These documents, according to the Services, reveal 
that Universal and its advocates asserted to the FTC that the proposed 
merger would not lessen competition because the market for interactive 
services was already not competitive. Specifically, the Services point 
to statements to the FTC by or on behalf of Universal:
---------------------------------------------------------------------------

    \97\ Professor Rubinfeld acted as economic advisor to UMG and 
EMI in relation to that transaction, and Mr. Pomerantz, 
SoundExchange's lead counsel in this proceeding, acted as UMG's 
counsel. 5/5/15 Tr. 1942-43; 1950-51 (Rubinfeld); PAN Ex. 5345 at 1.

---------------------------------------------------------------------------
    [REDACTED]

PAN Ex. 5349 at 1-2 (Universal).
    [REDACTED]

PAN Ex. 5349 at 17 (Universal).
    [REDACTED]

PAN Ex. 5025 at 2, 18 (Pomerantz).
    [REDACTED]

NAB Ex. 4129 at 41-2 (Rubinfeld).
    [REDACTED]

PAN Ex. 5025 at 18, 21 (Pomerantz); see NAB Ex. 4129 (Rubinfeld) 
([REDACTED]); 5/5/15 Tr. 1956-58, 1946-47 (Rubinfeld) (quoting PAN 
Ex. 5345 (June 22 letter to the FTC) (``[REDACTED].'').
    [REDACTED]

PAN Ex. 5349 at 17 (Universal) (emphasis added); see PAN Ex. 5025 at 
16 ([REDACTED]).

    Additionally, iHeart's economic experts, Drs. Fischel and Lichtman, 
relied upon a [REDACTED] document submitted to the FTC in connection 
with the Universal/EMI merger, contrasting the ``must have'' nature of 
the interactive service market with the more competitive noninteractive 
service market: ``[REDACTED]'' IHM Ex. 3054 ]41 n.70 (Fischel/Lichtman 
WRT) (quoting SNDEX 0266588-665) (emphasis added).
    Sixth, according to the Services, the foregoing points demonstrate 
that Dr. Rubinfeld's proffered interactive benchmark market not only 
fails to be competitive, but also is even worse than a market 
controlled by a single monopoly supplier. Shapiro WRT at 18; see also 
Katz WDT ]] 41-43 (By logic first identified by Antoine Cournot in 
1838, firms offering complementary products tend to set higher prices 
than would even a monopoly seller of the same products, illustrating 
that suppliers of complements do not compete with one another.); PAN 
Ex. 5349 at 19 (Universal White Paper to FTC explaining that 
``[REDACTED]'').
    Seventh, the Services note that the Majors structure their 
contracts with the interactive services to avoid any price competition 
with the other labels and to prevent the on-demand services from 
attempting to steer users away from their repertoires. See 4/28/15 Tr. 
441-42 (Kooker); 4/30/15 Tr. 1142 (Aaron Harrison); 5/7/15 Tr. 2473 
(Wilcox). Even more particularly, the Services note that the Majors' 
agreements with the leading interactive services contain provisions 
that effectively prevent the services from favoring the artists or 
repertoires of one label over another. These provisions apply variously 
to playlists, artist or album features, editorial content, home-page 
placements, advertisements, album recommendations, and/or other ways 
the interactive services may promote particular content to their users. 
See 4/28/15 Tr. 455-56 (Kooker); 4/30/15 Tr. 1144-45 (Harrison); 6/2/15 
Tr. 7202-05 (Harrison); 5/7/15 Tr. 2487-88, 2490-93 (Wilcox).
    The Services disagree with SoundExchange's assertion that 
downstream competition causes Dr. Rubinfeld's interactive benchmark to 
reflect ``effective competition.'' In fact, Dr. Katz asserts that 
SoundExchange's conclusion is 180 degrees wrong:

    [W]hen you have a highly competitive downstream industry, 
there's going to be a smaller markup of [retail] price over cost 
because the competitive pressures are going to tend to drive 
[retail] price to cost. So what that means is . . . for any . . . 
license fees set by the record companies, we have a highly 
competitive downstream market. There's going to be a smaller markup. 
That then makes it profitable, more profitable to set a higher price 
upstream. So, actually, the more intense the competition downstream, 
the greater the incentive to charge a high price upstream because 
you don't have to worry about so-called double marginalization.\98\
---------------------------------------------------------------------------

    \98\ ``Double marginalization'' occurs when the upstream 
supplier has upstream market power and its buyer, the downstream 
seller, has downstream market power. In that situation, ``the price 
of the input is marked up twice: By the upstream firm and, in terms 
of the final product price, by the downstream firm.'' W. Kip 
Viscusi, et al. Economics of Regulation and Antitrust 239 (2005). In 
the absence of downstream market power on the part of the upstream 
buyers/downstream sellers, the upstream firms with market power can 
capture the full benefit of single marginalization, i.e., of price 
above marginal cost.

5/11/15 Tr. 2819 (Katz) (emphasis added).
    The Services take Dr. Talley and SoundExchange to task for failing 
to do any empirical work to confirm whether and to what extent piracy 
and other downstream alternative music delivery competitors may have 
affected upstream interactive rates. The NAB notes that Dr. Talley 
admitted that he had performed no empirical analysis to ascertain 
whether or to what degree ``downstream competition is, in fact, 
impacting the upstream negotiations'' in the interactive market. 5/27/
15 Tr. 6092-93 (Talley); see id. at 6058 (``I haven't done an empirical 
analysis of that market. . . .''). Dr. Tally further admitted that he 
had not studied either the downstream interactive service market or the 
upstream market in which the record companies license interactive 
services. Id. at 6080-83. Finally,

[[Page 26343]]

although Dr. Talley made certain suppositions regarding the elasticity 
of demand flowing from the downstream market into the upstream market, 
the Services note that Dr. Talley admitted that he had not attempted to 
calculate any elasticity of demand whatsoever, because ``within the 
ambit of how I was retained as an expert, I did not view that as part 
of my charge.'' 5/27/15 Tr. 6093 (Talley).
    The Services also note that their own experts, contrary to 
SoundExchange's assertions, had not acknowledged that piracy and other 
forms of downstream competition had or would reduce upstream 
interactive rates to an ``effectively competitive'' level. Rather, as 
the NAB notes, for example, Dr. Katz testified that even if piracy 
imposes some constraint, ``that doesn't render the market effectively 
competitive . . . it may be pressure on the monopoly price, but, 
nonetheless, it's a monopoly price.'' 5/11/15 Tr. 2823 (Katz). As Dr. 
Katz further explained, the merger submissions made by Universal argued 
that the merger would lead to lower prices because it would remove the 
Cournot complements pricing effect between UMG and EMI, and that would 
not have been true if prices had already been squeezed by piracy to 
near the competitive level:

    [T]he parties were saying, if we're allowed to merge, we would 
find that it would increase our profits to lower our price. So 
clearly, piracy had not pushed them down to such a low price that 
going lower would reduce their profit. They actually say, going 
lower would raise our profits. And what that's telling you is, along 
with the fact that the other majors are must have[s] as well, is 
[that] they were actually concerned they were pricing above the 
monopoly level.

5/11/15 Tr. 2825 (Katz) (citing PAN Ex. 5025 at 22).
    Additionally, the NAB, again through Dr. Katz, notes that 
identifying a hypothetical increase in the elasticity of demand in the 
upstream market arising from competition in the downstream market is 
not the same as identifying a competitive price in the upstream market. 
Thus, the Services assert that, although Dr. Katz testified that piracy 
and other forms of downstream competition could have ``some sort of an 
effect, and I believe it's in a downward direction,'' 5/11/15 Tr. 2973 
(Katz), he was not opining how far such competition might have pushed 
down the price. They point out that, when Dr. Katz noted the 
hypothetical possibility that downstream competition could push 
upstream prices down to competitive levels, he was not suggesting that 
such a hypothetical circumstance exists in the interactive market. 
Rather, he was simply saying something is ``conceivable, if you're 
talking about hypotheticals'' or ``possible,'' which does not imply 
that it is likely, or in any way true in this case. See 5/11/15 Tr. 
2976-78 (Katz).
    The Judges find that the impact of piracy and other downstream 
competitors (such as YouTube) does not serve to promote ``effective 
competition'' in any of the relevant upstream markets, including the 
upstream market for sound recordings licensed for use by interactive 
subscription services. SoundExchange, through the testimony of Dr. 
Talley, did note persuasively that in theory these downstream 
competitors would depress the upstream price. SoundExchange also 
correctly noted that Drs. Katz and Shapiro concurred with that 
theoretical point. However, a close reading of the testimony of Drs. 
Talley, Katz, and Shapiro reveals that none of them concluded that the 
impact of such downstream competition would necessarily depress any 
upstream price to a level that would offset the upward pricing effect 
of complementary oligopoly. Rather, Dr. Talley and SoundExchange invoke 
the vague idea that any monopoly effects--after assuming the upstream 
impact of downstream competition--would be ``benign'' or ``pedantic,'' 
and Drs. Katz and Shapiro acknowledged only the hypothetical 
possibility that downstream competition in some circumstance could 
eliminate the anticompetitive power of upstream monopolists or 
complementary oligopolists.
    In the present case, though, the Judges are not left with mere 
hypotheticals regarding whether the anticompetitive elements of the 
interactive market are ``benign'' or ``pedantic.'' Nor are the Judges 
hamstrung, as SoundExchange suggests, by the alleged absence of 
``bright line'' demarcations as to when effective competition is 
present and when it is not. Rather, the Judges were presented with hard 
and persuasive evidence that competitive steering has reduced royalty 
rates in the noninteractive market and would do so in the hypothetical 
market as well. This evidence of steering (provided by Pandora and 
iHeart) demonstrates a measurable range of adjustment to the prices 
that would be set in a market for those streaming services if the 
services could inject price competition via steering. Thus, the rate 
set in Dr. Rubinfeld's upstream interactive benchmark market should be 
adjusted to reflect such price competition, so that it is usable as an 
``effectively competitive'' rate in the segment of the market to which 
that benchmark applies: The noninteractive subscription market.\99\
---------------------------------------------------------------------------

    \99\ It appears that SoundExchange may be making an implicit 
argument that the rates in its interactive benchmark market have 
been so reduced by downstream competition that all supranormal 
profits have been eliminated. However, SoundExchange did not produce 
evidence sufficient to show record company profits overall to 
support such an argument. Also, as the Judges have previously noted, 
and note again in this determination, the rate-setting process under 
section 114(f)(2)(B) is not intended to preserve any parties' 
profits. Moreover, if the Judges were to go down that evidentiary 
road and base their rate decision on profits and reasonable rates of 
return, the process would in essence become a public-utility style 
proceeding and, as noted elsewhere in this determination, no party 
has suggested that section 114(f)(2)(B) proceedings could be 
conducted in such a manner.
---------------------------------------------------------------------------

    The evidence of a range of potential steering adjustments also 
rebuts SoundExchange's argument that the concept of ``effective'' or 
``workable'' competition is ``fuzzy'' and that no ``bright line'' can 
be drawn between effectively competitive and non-competitive rates. The 
Judges find that this ``line'' needs to be drawn on a case-by-case 
basis, from the evidence and testimony adduced at the hearing. Here, 
the range of steering adjustments from direct noninteractive licenses 
has been introduced in evidence, steering experiments have confirmed 
the reasonableness of such an endeavor and expert testimony has 
explained how steering is a mechanism by which to offset the 
complementary oligopoly power of the Majors (while not reducing their 
firm-specific and copyright-specific market power).
    The Services dismiss the idea that the record companies' 
negotiations with interactive services are evidence of an effectively 
competitive market. The Judges agree with the Services criticism of 
this assertion. As Dr. Shapiro explained, the mere existence of such 
negotiations is uninformative as to whether the rates negotiated 
between the interactive services and the Majors are competitive. 
Pandora PFF ] 237 (and citations to the record therein). Moreover, the 
Services note that Dr. Rubinfeld conceded that the existence of such 
negotiations is not evidence of a competitive market, because even 
monopolists negotiate with their customers. See 5/28/15 Tr. 6487-88 
(Rubinfeld) (``Q. Do firms with monopoly power ever bargain with their 
customers? A. Yes. Q. Do firms with monopoly power ever make 
concessions or change their bargaining position in response to 
positions taken by buyers with which they are dealing? A. Yes.''). 
Pandora further notes that, when questioned on this issue by the 
Judges, Dr. Rubinfeld conceded that ``the fact

[[Page 26344]]

that they're in negotiations, per se, doesn't mean the market is 
competitive. . . .'' 5/5/15Tr. 1861-63 (Rubinfeld).
    On this issue, the Judges also agree with Dr. Katz, who noted that 
negotiations over price can occur between a monopolist and its 
customers in order to facilitate price discrimination and increase 
monopoly profits rather than to concede to more competitive prices. 
Specifically, Dr. Katz testified:

    Bargaining with your customers and having some of the give and 
take can even be a form of price discrimination in a way to get 
additional monopoly profits, so the mere fact that your customer 
asks for something and you say, okay, I will give that to you, 
particularly if that is going to help you get more money, the fact 
that you do that doesn't show you lack monopoly power. It shows you 
are economically rational.

5/26/15 Tr. 5715-16 (Katz).
    The Judges reject SoundExchange's argument that evidence of its 
negotiations with interactive services demonstrates that the 
interactive market is effectively competitive. As the Judges pointed 
out in their Commencement Notice in this proceeding, price 
discrimination is a feature of markets such as sound recording markets, 
where the marginal physical cost of licensing a sound recording is 
essentially zero, and is also a relatively common feature in many 
markets. 79 FR 412, 413 (January 3, 2014).
    Further, the Judges cannot ignore the testimony from several record 
company witnesses, discussed in this determination, in which they 
acknowledged that they never attempted to meet their competitors' 
pricing when negotiating with interactive services. Thus, the existence 
of the negotiations noted by SoundExchange cannot override this more 
specific testimony.
    The Judges were presented with substantial, unrebutted evidence 
that the interactive services market is not effectively competitive. 
The Services conclude from this that the interactive services 
benchmarks are wholly uninformative with regard to the rates that would 
be negotiated in an effectively competitive noninteractive market. See 
Shapiro WRT at 47 (explaining that Professor Rubinfeld is requesting 
that the Judges ``replicate and extend the excessive royalty rates from 
interactive services market--where competition is manifestly not 
working--into the market for the licensing . . . to statutory 
webcasters. . . .''). The Judges disagree.
    The Services' own evidence demonstrates persuasively that 
competitive steering has reduced royalty rates in the noninteractive 
market and would do so in the hypothetical market as well. This 
evidence of steering (provided by Pandora and iHeart) demonstrates a 
measurable range of adjustment to the prices that would be set in a 
market for those streaming services if the services could inject price 
competition via steering. Thus, the rate set in Dr. Rubinfeld's 
upstream interactive benchmark market can and should be adjusted to 
reflect such price competition, in order to render it is usable as an 
``effectively competitive'' rate in the segment of the market to which 
that benchmark applies--the noninteractive subscription market.\100\
---------------------------------------------------------------------------

    \100\ SoundExchange may be implying that the rates in its 
interactive benchmark market have been so reduced by downstream 
competition that all supranormal profits have been eliminated. 
However, SoundExchange did not produce evidence sufficient to show 
record company profits overall to support such an argument. Also, as 
the Judges have previously noted, and note again in this 
determination, the rate-setting process under section 114(f)(2)(B) 
is not intended to preserve any parties' profits. Moreover, if the 
Judges were to base their rate decision on profits and reasonable 
rates of return, the process would in essence become a public-
utility style proceeding and, as noted elsewhere in this 
determination, no party has suggested that section 114(f)(2)(B) 
proceedings could or should be conducted in such a manner.
---------------------------------------------------------------------------

    The evidence of a range of potential steering adjustments also 
rebuts SoundExchange's argument that the concept of ``effective'' or 
``workable'' competition is ``fuzzy'' and that no ``bright line'' can 
be drawn between effectively competitive and non-competitive rates. The 
Judges find that this ``line'' needs to be drawn on a case-by-case 
basis, from the evidence and testimony adduced at the hearing. Here, 
the range of steering adjustments from direct noninteractive licenses 
has been introduced in evidence, steering experiments have confirmed 
the reasonableness of such an endeavor, and expert testimony has 
explained how steering is a mechanism by which to offset the 
complementary oligopoly power of the Majors (while not reducing their 
firm-specific and copyright-specific market power).
b. Dr. Rubinfeld's Interactive Benchmark Is Applicable Only to the 
Subscription Market
    The Judges find that the interactive benchmark proposed by 
SoundExchange (adjusted as discussed in the previous section) is 
informative--but only to a particular segment of the noninteractive 
marketplace. The foundational aspect of Dr. Rubinfeld's interactive 
benchmark is his assumed equality between two ratios: (1) Subscription 
revenues to royalties in the interactive market; and (2) subscription 
revenues to royalties in the noninteractive market. The Services claim, 
however, that Dr. Rubinfeld provided no economic basis for this 
``assumption.'' For example, the NAB asserts that Dr. Rubinfeld 
admitted that he was only ``follow[ing] past practices'' of Dr. Michael 
Pelcovits, an economic witness for SoundExchange in Web II and Web III. 
Rubinfeld CWDT ] 207 n.124, 5/6/15 Tr. 2026-27 (Rubinfeld). This 
criticism was echoed by Pandora's economic expert, Dr. Shapiro, who 
testified ``there is simply no plausible economic rationale that would 
support the use of Professor Rubinfeld's interactivity adjustment.'' 
PAN Ex. 5023 at 29-30 (Shapiro WRT).
    However, Dr. Rubinfeld's oral testimony, and the testimony of the 
Services' economic experts, indicated that an economic principle indeed 
underlies his assumed equivalency in these ratios. More particularly, 
Dr. Rubinfeld acknowledged that his ``ratio equivalency'' was intended 
to create a rate whereby every marginal increase in subscription 
revenue would result in the same increase in royalty revenue, whether 
that marginal increase in subscription occurred in the interactive 
market or the noninteractive market. 5/5/15 Tr. 1767 (Rubinfeld). This 
result, Dr. Rubinfeld agreed, reflected an application of rational 
profit maximizing behavior by a willing seller, as explained in 
colloquy with the Judges:

[THE JUDGES]

    [T]hat's an application . . . of a fundamental economic process 
of profit maximization. . . . [The record companies] would want to 
make sure that the marginal return that they could get in each 
sector would be equal, because if the marginal return was greater in 
the interactive space than the noninteractive . . . you would want 
to continue to pour resources, recordings in this case, into the 
[interactive] space until that marginal return was equivalent to the 
return in the noninteractive space. Would that be correct?

[DR. RUBINFELD]
    It would. You said that just the way I would like to have said 
it when I was teaching that subject. Yes, I agree with that.

5/7/15 Tr. 2325 (Rubinfeld); see Rubinfeld CWRT ] 172 (``All else 
equal, the interactivity adjustment sets statutory rates that represent 
the same fraction of subscription prices as paid by the on-demand 
services. . . .'').
    Thus, Dr. Rubinfeld's ``ratio equivalency,'' assumes a 1:1 
``opportunity cost'' for record companies, whereby, on the margin, a 
dollar of revenue spent on a subscription to a noninteractive service 
is a lost opportunity for royalties from

[[Page 26345]]

a dollar to be spent on a subscription to an interactive service. 
Accordingly, and contrary to the Services' criticism, Dr. Rubinfeld's 
``ratio equivalency'' does possess an underlying economic rationale.
    However, the unwarranted assumptions lurking behind Dr. Rubinfeld's 
economic rationale were noted by the Services' economic expert 
witnesses. For example, Dr. Lichtman, an economic expert for iHeart, 
testified:

    [Dr. Rubinfeld] assum[es], I think, a perfect substitution . . . 
assumptions about substitution, competition how all of these markets 
interrelate. . . . [I]t's intuitive. I understand why he was drawn 
to it. It's so nice to say, yes, roughly these will all be the same, 
revenue to royalty, revenue to royalty.

5/16/15 Tr. 4043-44 (Lichtman).
    Dr. Rubinfeld's ``ratio equivalency''--as a means toward profit 
maximization--was more than a theoretical abstraction. The desire of 
the record companies to achieve such pricing parity across markets was 
confirmed by a senior Warner executive who testified on behalf of 
SoundExchange:

    Our goal, aspirationally and in actual results, has been a 
[REDACTED] percent rev[enue] share in this area generally. . . . So 
we've been kind of struggling, if you will, to pull these business 
models up to what we think is the level of consideration that we 
find appropriate for essentially all of these music models, which is 
the [REDACTED] range. So it was a combination of trying to be 
realistic and make major progress towards our ultimate goal.

6/3/15 Tr. 7406 (Wilcox) (emphasis added).
    Mere assumptions as between interactive and noninteractive services 
regarding substitution, competition, market interrelationships and the 
like are inadequate, and thus limit the applicable scope of Dr. 
Rubinfeld's ``ratio equivalency'' approach. The unsupported and 
unrealistic assumptions in the ``ratio equivalency'' approach are 
considered below.
    As Dr. Lichtman noted, the ``ratio equivalency'' in Dr. Rubinfeld's 
model makes assumptions regarding substitution, and how these markets 
interrelate. 5/6/15 Tr. 4043-44 (Lichtman). That is, the ``ratio 
equivalency'' approach assumes that the listeners who willingly pay for 
a subscription to a service have a WTP equal to the WTP of those who 
use ad-supported (free-to-the-listener) services. However, the record 
evidence is overwhelming that there is a sharp dichotomy between 
listeners who have a positive WTP and therefore may pay a subscription 
fee each month for a streaming service and those listeners who have a 
WTP of zero.
    The most persuasive evidence on this point is found in the results 
of the conjoint survey conducted by a SoundExchange witness, Dr. 
McFadden. Dr. McFadden performed his conjoint survey to determine the 
WTP of consumers who were provided with a menu of bundled features that 
reflected bundles that existed in the marketplace. His findings 
revealed the dichotomy regarding the WTP of consumers of noninteractive 
services:

    I find that consumers of streaming services divide between those 
who are willing to pay for these services (and the extra features 
they offer) and those who are averse to paying for music streaming 
services. . . .

McFadden WDT ] 10 (SX Ex. 15) (emphasis added).
    This dichotomy was examined in detail by another economist, Dr. 
Steven Peterson, who was a joint witness for the NAB and Pandora. Dr. 
Peterson noted a critical bimodality in Dr. McFadden's data (consistent 
with Dr. McFadden's finding) that reflected two classes of listeners; 
those who would pay a positive sum for various features available in a 
noninteractive service and those who refused to pay any money for any 
features. As Dr. Peterson explained, SoundExchange and Dr. Rubinfeld 
rely on the average WTP among the survey participants (to confirm Dr. 
Rubinfeld's interactivity adjustment), but that average obscured the 
clear bimodality of Dr. McFadden's results:

    Dr. McFadden presents only the estimated average willingness to 
pay for each feature addressed in his survey. However, it is 
possible to estimate each survey participant's willingness to pay 
for the features addressed in the survey. Based on the information 
for individual respondents, Dr. McFadden notes that there is a group 
of users who are averse to paying for music streaming services. . . 
. Thus, Dr. McFadden's results are consistent with the record 
labels' documents that indicate many consumers have a low 
willingness to pay for subscription streaming services. . . . 
Moreover, the distribution is bimodal, meaning it has two peaks. . . 
. [T]he average willingness to pay for a service with no ads masks 
the fact that there is a bimodal distribution . . . of preferences 
over the willingness to pay for a service with no advertisements and 
that the peaks occur so that consumers at the peaks have divergent 
preferences (i.e., would respond in opposite ways) regarding a 
service with or without advertisements.

NAB Ex. 4013 at 32-34 (Peterson CWRT) (emphasis added; footnotes 
omitted).
    This point is consistent with Dr. McFadden's own testimony, in 
which he stated: ``Most users regard their use of [streaming] services 
as free in the sense that they require no out-of-pocket expenses to 
listen to music.'' McFadden WDT ] 56 (emphasis added). Dr. McFadden 
then testified that his own survey data confirmed ``a group of 
consumers who place a high value on no out-of-pocket expenses . . . who 
are likely to remain [on] or adopt free plans.'' Id.
    The Judges cannot disregard this bimodal chasm. Moreover, the 
record is replete with evidence corroborating this point. For example, 
testimony from industry witnesses underscored the unwillingness of a 
substantial percentage of listeners to pay any price to listen to 
noninteractive services. A Sony executive testifying on behalf of 
SoundExchange stated: ``It's challenging to convince a consumer to open 
their [sic] wallet and pay for something that is similar to something 
that is available to them for free. . . .'' 4/28/15 Tr. 376-77 
(Kooker). Even when the Majors provide incentives and disincentives to 
services in the form of royalty reductions and increases, they are 
unable to induce more than a minority of listeners to convert from a 
``free'' service to a paid subscription service. One of the most 
successful interactive services, Spotify, has only been able to induce 
approximately [REDACTED]% of its listeners to pay for a subscription 
streaming service. Id. at 404-05; see id. at 430 (Mr. Kooker 
acknowledging no evidence of a meaningful group of users willing to pay 
to subscribe to Pandora beyond those who currently subscribe).
    Another industry witness, Aaron Harrison of Universal, acknowledged 
that he had no data to support a conclusion that there is ``some 
meaningful group of users who would be willing to pay to subscribe to 
Pandora beyond those who already have. . . .'' 4/30/15 Tr. 1115 (A. 
Harrison). This was consistent with a broader aspect of Mr. Harrison's 
testimony, in which he noted, ``the music-buying public has never been 
a huge market. . . .'' Id. at 990.
    Pandora's Chief Financial Officer similarly testified that 
``approximately an 80 percent slice of the market . . . is unwilling to 
spend significant money on music,'' as reflected in ``numerous 
studies'' [that] show that about half of Americans will never spend 
another dollar and another . . . 35 percent will spend . . . $15 per 
year.'' 5/13/15 Tr. 3553-54, 3356-57 (Herring). This portion of the 
dichotomized market comprises the core of Pandora's customers: 
``[T]hat's the group that we target . . . people that aren't going to 
be able to be monetized through a $10 a month subscription or even a $5 
a month subscription but want a free lean-

[[Page 26346]]

back experience.'' Id. at 3554. Accordingly, Mr. Herring noted that 95% 
of Pandora's customers listen through the ad-supported free-to-the-
listener, and only 5% are subscribers, which he understood to reflect 
``user preference'' for ``free sources,'' rather than a ``bias'' on the 
part of Pandora toward ``growing market share.'' 5/13 Tr. 3435-36 
(Herring).
    Further supporting this dichotomy from the record company 
perspective, an internal Warner strategy document noted that ``[a]d-
supported services have proven to primarily be additive and to be 
targeting a different demographic than paid services.'' IHM Ex. 3118 at 
11; see 5/7/15 Tr. 2405-06 (Wilcox) (noting that Pandora weaned 
listeners from terrestrial radio whose listening, therefore, had not 
previously been responsible for revenues that could be monetized into 
upstream royalties).
    Expert testimony further confirmed this dichotomy. One of 
SoundExchange's own witnesses, Dr. David Blackburn, acknowledged that, 
at one end of the spectrum, consumers were willing to pay a lot of 
money, and at the other end of the spectrum are people who are 
unwilling to pay anything for music. 5/4/15 Tr. 1679 (Blackburn). An 
expert survey witness for Pandora, Larry Rosin, surveyed consumers and 
found that, annually, for any sort of music, physical or digital, 45% 
of respondents paid zero; 21% spent between $1 and $30, and 18% spent 
between $31 and $60. Further, when asked if they would pay for a 
Pandora subscription if the free-to-the-listener service was 
discontinued, 54% said it was ``not at all likely'' that they would pay 
for a subscription, and 25% said it was ``not very likely'' that they 
would pay for a subscription. Rosin WRT Figures 2 and 9 (PAN Ex. 5021); 
see 5/14/15 Tr. 3727 (Rosin). Mr. Rosin concluded from his survey that 
``the majority of people are essentially . . . seeking free services.'' 
Id. at 3742.
    Despite the overwhelming evidence of this dichotomy in WTP, Dr. 
Rubinfeld's model is based solely on the subscription platform. Thus, 
it is not reasonable to conclude that the ratio of subscription rates 
to royalties in the interactive market is relevant to the opportunity 
cost to a record company of listeners who opt instead for ad-supported 
noninteractive listening. Rather, ad-supported (free-to-the-listener) 
internet webcasting appeals to a different segment of the market, 
compared to subscription internet webcasting, and therefore the two 
products differentiated by this attribute (``ads and free'' vs. ``no 
ads and subscription fee'') cannot be compared to perform a 1:1 measure 
of opportunity costs as is the case in Dr. Rubinfeld's ``ratio 
equivalency'' model.
    Even SoundExchange acknowledges, ``directly licensed interactive 
services . . . allow users to select their programming . . . whereas . 
. . statutory services can [only] . . . influence what they hear. SX 
PFF ] 278 (emphases added). As a SoundExchange economic expert witness 
acknowledged, the consumer who values sound recordings highly is apt to 
have an interest in particular sound recordings, and will be more 
willing to pay for a subscription that allows him or her more 
``functionality,'' including the ability to select songs on demand. By 
contrast, the more casual listener, with a number of free alternatives 
such as terrestrial radio, lacks the same desire to select a particular 
song at a particular time. See 5/4/15 Tr. 1677, 1679 (Blackburn) 
(distinguishing ``music aficionados'' who ``are willing to spend a lot 
of money on music'' and ``additional functionality'' from ``people who 
are unwilling to pay anything for music.''
    This undisputed distinction drives in part the bimodal nature of 
the distribution between listeners with a positive WTP for streaming 
and those with a zero WTP.
c. The Irrelevance of SoundExchange's ``Convergence'' Argument
    The Services dispute the assertion that the increased overlap among 
the features of the statutory and non-statutory services constitutes a 
convergence that is meaningful in this rate setting proceeding. In 
support of this position, the Services make several specific arguments.
i. Fundamental Differences in the Services
    The Services note a fundamental difference between interactive 
services and noninteractive services. They suggest a ``bright line'' 
difference between statutory services and non-statutory services that 
legally prevents convergence with regard to the most critical 
distinction, i.e., the inability of listeners to statutory 
noninteractive services to choose the exact song or playlist of songs 
to which they will listen, as they would if accessing their own music 
collections. 5/13/15 Tr. 3445-46 (Herring) (noting this ``bright line'' 
between statutory and non-statutory service); 5/7/15 Tr. 2304-05 
(Rubinfeld) (none of Pandora's features ``enhance the Pandora users' 
ability to select a particular song for listening at the time he or she 
wants to listen to it.''); see also 5/15/15 Tr. 3397-98 (Lichtman) 
(``on-demand . . . [t]hat's the key thing that makes the services 
different, not the little features that have been added. . . .''); 
Fischel/Lichtman WRT ] 11 (``Clearly, the most important difference 
between interactive and noninteractive services is . . . on-demand 
functionality. . . .'').\101\
---------------------------------------------------------------------------

    \101\ This criticism relates to the distinction between a 
listener's ability to ``select'' a song and a listener's more 
limited ability to ``influence'' the song that is played, as 
emphasized supra, note 76.
---------------------------------------------------------------------------

    In addition to the above ``bright line'' difference, statutory 
licensees are subject to the various other limits imposed by the DMCA 
performance complement. 5/27/15 Tr. 6136-37 (Fleming-Wood) (``[P]andora 
adhere[s] to the performance complement for sound recordings. . .''); 
see 17 U.S.C. 114(j)(13). Specifically, statutory services cannot offer 
to their listeners a pre-designated song; an entire album; more than 
four songs by the same artist or three songs from the same album in any 
given three-hour period; caching for off-line playback; a listener-
created playlist played at the listener's discretion; the rewinding or 
fast-forwarding of songs; and a preview of upcoming songs. 5/6/15 Tr. 
2016-18; 2049; 2088-89 (Rubinfeld).
    Additional differences highlighted by the participants in this 
proceeding include:
     Pandora's ``thumbs up/thumbs down'' feature, which does 
not provide a listener with the ability to select the actual artist or 
song that is played. 5/13/15 Tr. 3446-47 (Herring).
     The increased use of mobile devices, which does not 
address the lack of convergence between the essential functionalities 
of the two services. 5/7/15 Tr. 2304-05 (Rubinfeld); 4/28/15 Tr. 432-33 
(Kooker).
     Spotify's mobile Shuffle service, which is not a 
noninteractive service but rather has numerous on-demand features. See 
IHM Ex. 3371 ] 14 (Fischel & Lichtman SWRT).
ii. Convergence Does Not Create Relevant Competition
    The Services also take issue with the notion that functional 
convergence is probative of competition relevant to this proceeding. 
Specifically, the Services argue:
     The ``convergence theory'' focuses entirely on competition 
between services in the downstream consumer market, and therefore 
offers no insight into the lack of competition in the interactive 
upstream market that SoundExchange seeks to use as its benchmark 
market. Shapiro WRT at 46-

[[Page 26347]]

47; 5/18/15 Tr. 4469-71; 4474-75 (Shapiro).
     The alleged convergence in the downstream market does not 
address the question of whether the upstream market is effectively 
competitive. Shapiro WRT at 46.
     Dr. Rubinfeld failed to consider: (1) Substitution 
patterns among the various modes of music consumption; and (2) market 
shares in the downstream market. PAN Ex. 5022 at 10 (Shapiro WDT).
     Attempts by on-demand services to offer some radio-like 
functionality do not demonstrate competition between interactive and 
noninteractive services in the upstream market, but rather indicate 
only that on-demand services seek to ``cross- over'' and enter the 
``lean-back'' market. 5/13/15 Tr. 3555-57 (Herring).
     The fact that some consumers want both lean-back and lean-
forward functionality does not mean that each type of service is 
competing with the other. IHM RPFF ] 296 (and record citations 
therein).
     When Pandora imposed listening caps in 2013 and 2014, it 
lost listeners to other noninteractive services, not to interactive 
services, indicating that the competition did not crossover into the 
interactive market. Fischel/Lichtman WRT ]] 17-18 and Exs. A & B.
     Statutory noninteractive services compete in the market 
for radio listening, which is distinct from the interactive market, and 
about 80% of music consumption in the United States occurs via ``lean-
back'' radio-listening experience. Fleming-Wood WDT ] 14 n.2; 5/27/15 
Tr. 6138 (Fleming-Wood); 5/13/15 Tr. 3397-99 (Herring); Pandora Ex. 
5016 ] 9 and Figure 2 (Herring AWRT) (showing 76.2% of consumers listen 
to lean-back services); see Shapiro WRT at 9 & Figure 2; 5/18/15 Tr. 
4478-79 (Shapiro) (terrestrial radio, noninteractive webcasting and 
satellite radio comprise 63% of time spent listening to music, and 
interactive services account for 7%).
iii. The Supposed ``Interactive'' Features Made Available by the 
Noninteractive Services Do Not Demonstrate Convergence
    The Services claim that SoundExchange misrepresents the nature of 
their offerings in a manner that falsely implies a convergence of 
features available on noninteractive services with features available 
on an interactive service. The Services make the following points.
     The experiment that Mr. Kooker performed failed to 
demonstrate the purported convergence between interactive and 
noninteractive services. The services note that, on cross-examination, 
Mr. Kooker admitted to a number of acts that increased the chances of 
the desired artist playing during his experiment: (1) He created a new 
account for the experiment, meaning Pandora had no information on what 
tracks or types of music the creator liked other than the ``seed'' 
artist (unlike the typical Pandora listener who has created many 
stations, used the thumbs-up/thumbs-down button, skipped tracks, and 
provided Pandora a host of information on his/her tastes above and 
beyond the first ``seed'' artist); (2) he indicated that the new 
account user was a 25-year-old female, a demographic which Mr. Kooker 
admitted was specifically chosen because it was ``the typical 
demographic, from Sony's experience, that would be looking for pop hit 
type of playlists'' (and who would then be more likely to receive those 
playlists); and (3) he skipped songs until he had listened to five 
songs, even though he acknowledged that such activity could influence 
Pandora's playlist algorithms. See 5/29/15 Tr. 6589-92 (Kooker).
     iHeart's on-demand video service represents a very minor 
element of total listenership for iHeart's service. Fischel/Lichtman 
WRT ] 11 n.14.
     ``Pandora Premieres'' is not a statutory feature and does 
not operate pursuant to the statutory license. 5/15/15 Tr. 3444 
(Herring); see 5/6/15 Tr. 2006 (Rubinfeld).
     Even though noninteractive services compete with 
interactive services ``for music listening generally,'' it is 
``marginal,'' i.e., at that line between 80 percent [lean back] and 20 
percent [lean in],'' and the ``core businesses are very different. . . 
. They're not substitutes for each other.'' 5/13/15 Tr. 3397-99 
(Herring).
    The Judges find that there is significant evidence of functional 
convergence (up to the limits prescribed by the DMCA) between 
interactive and noninteractive services. Further, the Judges find that 
downstream competition exists between such services, based on the 
evidence relied upon by SoundExchange.
    However, such convergence and competition are swamped by the 
overwhelming evidence of the dichotomy regarding the WTP among 
listeners. Therefore, Dr. Rubinfeld's subscription-based benchmark 
approach does not demonstrate how convergence and competition affect 
the relative royalties in the ad-supported, free-to-the listener 
market. The Judges note, though, that such convergence in the 
subscription market is suggested by the fact that the subscription-
based rate derived by Dr. Rubinfeld from 2014 data, $0.002376, is 
proximate to Dr. Shapiro's high-end proposed rate for the subscription 
market of 0.00215. When Dr. Rubinfeld's proposed rate is adjusted 
downward to reflect an effectively competitive market (as calculated in 
the Rate Conclusion section), the two rates are even more proximate. 
Those two benchmark subscription rates therefore indicate that 
competition and convergence indeed do cause interactive and 
noninteractive royalty rates to be similar in the subscription market.
    Thus, the impact of functional convergence and downstream 
competition is relevant only in the subscription market. Therefore, 
once Dr. Rubinfeld's benchmark is limited to the subscription market, 
the Judges find that SoundExchange's emphasis on the functional 
convergence of, and downstream competition between, interactive and 
noninteractive services is pertinent.
    Another important change in opportunity cost arises when the 
upstream purchaser (the noninteractive webcaster in the present 
context) has the ability to: (1) Purchase a substitute input and 
``bypass'' the input from the complementary oligopolists or monopolist; 
and/or (2) the ability to ``use proportionately less'' of the input of 
the complementary oligopolists or monopolist. In the present case, both 
Pandora and iHeart have demonstrated that, by steering,\102\ a 
noninteractive service can: (1) Partially ``bypass'' one or more Majors 
and substitute an increased proportion of songs from Indies or other 
Majors; and (2) thereby reduce their ``proportion'' of purchases from 
higher priced Majors up to a certain level.
---------------------------------------------------------------------------

    \102\ The concept of ``steering'' is discussed at length in 
connection with Pandora's rate proposal.
---------------------------------------------------------------------------

    Another important adjustment necessary to render Dr. Rubinfeld's 
``ratio equivalency'' useful is to make certain that the outcome does 
not simply maintain or import supranormal prices that are the 
consequence of the absence of effective competition. The need to adjust 
for undue market power dates back to Web I, in which the CARP stated:

    Perhaps . . . a showing that the record companies themselves, or 
even the Majors, could exert oligopolistic power would tempt the 
panel to import a device . . . to alleviate the market power 
problem.

Web I CARP Decision at 23 (emphasis added).
    Additionally, Dr. Rubinfeld's model treats the complementary 
oligopoly

[[Page 26348]]

pricing in the input supplier's market as its potential opportunity 
cost. Thus, his ``ratio equivalency'' will simply sustain whatever 
complementary oligopoly price distortions are present in the 
interactive marketplace. In the present case, the ability of 
noninteractive services to steer away from higher priced recordings and 
toward lower priced recordings (or threaten to do so) serves as a 
buffer against the supranormal pricing that arises from the impact of 
complementary oligopoly pricing that was well-documented and admitted 
in the filings with the Federal Trade Commission (FTC) by Universal, 
its economic expert and its counsel in connection with the Universal-
EMI merger. Thus, the Judges must (to borrow language from the CARP 
decision in Web I) ``import a device''--a steering adjustment derived 
from Pandora's benchmark, as discussed at length infra--to lower Dr. 
Rubinfeld's interactive subscription benchmark to reflect the effect of 
price competition and thus excise the complementary oligopoly power and 
reflect an effectively competitive noninteractive subscription market. 
This adjustment is not unlike the adjustments the Judges make to 
proposed benchmarks in proceedings under Sec.  114, in that the 
adjustment is made to align the benchmark rate with the statutory rate.
4. Other Critiques of Dr. Rubinfeld's Interactive Benchmark
a. Dr. Rubinfeld's Use of Revenues Instead of Service Profits
    According to Dr. Katz, the ``ratio equality'' assumption is also 
contrary to a fundamental economic principle. The buyer, i.e., the 
noninteractive service, will determine its valuation based on the 
profits it expects to realize from using the input, i.e., the sound 
recording, not merely the revenue it may earn. Of course, the buyer's 
consideration of profits necessitates the buyer's consideration of 
``cost,'' since, broadly stated, profits equal revenues less costs. 
Katz AWRT ]] 50-51, 70-71; 5/11/15 Tr. 2861 (Katz). Utilizing Pandora's 
non-license fee costs as an example (other noninteractive services' 
cost data were not readily available), and assuming that the non-
licensing costs of interactive services were the same, Dr. Katz 
concluded in rebuttal that Dr. Rubinfeld's interactivity adjustment 
would increase to 7.9 to equalize the ratio of profits per play to 
royalties per play across the two markets. Katz AWRT ]] 74-76 and 
Tables 6 and 7; 5/11/15 Tr. 2870-73 (Katz); 5/12/15 Tr. 3123-25 
(Katz).\103\
---------------------------------------------------------------------------

    \103\ Dr. Katz did not claim that his own cost estimates or 
assumed equivalencies across the two markets were necessarily 
accurate. Rather, he emphasized that his cost-based/profit-based 
adjustment was premised on his estimates showed the invalidity of 
Dr. Rubinfeld's decision simply to ``assume[ ] the costs were 
zero.'' 5/12/15 Tr. 3123-24 (Katz).
---------------------------------------------------------------------------

    The Judges reject this criticism as it pertains to the narrow 
segment of the market to which the Judges apply the interactive 
benchmark. When the segment of the market at issue consists of willing 
buyers/licensees who are providing access through subscription-based 
listening to listeners who have a WTP for either interactive or 
noninteractive services that are close substitutes, then Dr. 
Rubinfeld's ``ratio equivalency'' is reasonably based on revenues. Dr. 
Katz's critique of the revenue-based approach notes that Dr. Rubinfeld 
failed to factor into his analysis how profit, or lack thereof, to be 
realized by the noninteractive service would affect the royalty it 
would agree to pay in the hypothetical market.
    However, in the segment of the marketplace described above, a 
``willing seller'' would not be concerned with the service's calculus 
of its own profits. If those profits were too low to pay a royalty as a 
percentage of revenue equal to the royalties paid by the interactive 
services, the ``willing seller'' simply would not supply the 
noninteractive service in that hypothetical subscription marketplace. 
That decision by the ``willing seller'' may foreclose one or more 
services from participation in the subscription market, but, as the 
Judges noted in the Web II, they are not obliged to set the statutory 
rate at a level that permits a noninteractive service to realize any 
particular profit in the market.\104\ 72 FR at 24088 n. 8.
---------------------------------------------------------------------------

    \104\ Even in the ad-supported market, the Judges are not 
setting a rate in order to provide a service with any level of 
profits or revenues.
---------------------------------------------------------------------------

b. Failure To Adjust for Supposed ``Noninteractive'' Services 
Prohibited by the DMCA
    Dr. Katz further criticized Dr. Rubinfeld's attempt to rely on the 
equivalence of the aforementioned ratios because Dr. Rubinfeld's 
noninteractive numerator [C] is calculated from revenue received by 
services that were not actually ``noninteractive,'' but rather offered 
functionality that rendered them non-DMCA compliant and hence 
``interactive.'' 5/16/15 Tr. 2042-50 (Rubinfeld) (Rhapsody unRadio 
offered on-demand plays, caching, and unlimited skips, and two other 
services; Slacker Radio Plus and MixRadio Plus, offered caching as well 
as unlimited skips). Thus, Dr. Katz, argues, the numerator [C] should 
have been adjusted downward to reflect an additional interactivity 
adjustment, which, ceteris paribus, would have reduced the 
noninteractive royalty rate proposed by Dr. Rubinfeld.
    Dr. Katz correctly notes that the numerator in Dr. Rubinfeld's so-
called ``noninteractive'' ratio contains revenues from services that 
are not DMCA-compliant. Dr. Rubinfeld should have made a further 
interactivity adjustment to reflect whatever marginal value was 
attributable to the additional functionality of his stand-ins for the 
services that he used as proxies for truly DMCA compliant services. 
However, the Judges find that, given the degree of convergence among 
all services in terms of functionality, as discussed supra, as it 
pertains to this subset of the noninteractive market in which listeners 
subscribe, the marginal additions to functionality that Dr. Rubinfeld 
may have improperly captured in his ``noninteractive'' revenue 
numerator do not disqualify the use of that benchmark in this 
subscription market context.\105\
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    \105\ The Judges find that such differences in functionality are 
of relatively low importance in the subscription market in light of 
the evidence of downstream functional convergence. In this regard, 
it is noteworthy that even Pandora's expert Dr. Shapiro (the only 
Service expert to propose a separate subscription rate) has proposed 
a rate quite similar to the rate proposed by Dr. Rubinfeld based on 
a purely subscription-based model (Those rates are even closer to 
each other after an ``effectively competitive'' steering adjustment 
is applied to Dr. Rubinfeld's proposed subscription rate). If there 
was truly a material issue as to how WTP, convergence and 
functionality gradations impacted royalty rates in the 
noninteractive subscription market, the Judges would have expected 
to see a much wider gulf between the SoundExchange and Pandora 
subscription-based proposals.
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c. Failure To Rely on the Advertising-Based Noninteractive Model That 
Predominates in the Market
    An important and fundamental problem with Dr. Rubinfeld's analysis, 
according to Dr. Katz, lies in Dr. Rubinfeld's failure to acknowledge 
in his benchmark analysis that the advertising-based revenue model, 
rather than the subscription-based revenue model, is the dominant 
business model for noninteractive services. Katz AWRT ] 53 (quoting 
Rubinfeld CWDT ] 170 (stating that Dr. Rubinfeld's ``analysis does not 
explicitly account for `free' ad-supported services.''). Katz AWRT ] 
55.
    This criticism was also leveled by one of iHeart's economic 
experts, who testified, ``certainly there is no basis to assume that 
subscribers are a reasonable proxy for all listeners to noninteractive 
services,'' given that subscribers account

[[Page 26349]]

for only four percent of Pandora's listenership and zero percent of 
iHeart's. Fischel/Lichtman WRT ] 55; 5/15/15Tr. at 3989-90 
(Lichtman).\106\
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    \106\ Dr. Rubinfeld declined to use advertising-only interactive 
services as benchmarks in his original WDT. He noted that 
interactive services use ad-supported (``free-to-the listener'') 
alternatives as tools to convert listeners into paid subscribers 
(the so-called ``freemium'' model), thereby distorting (through 
``upsell incentives'') the reliability of ad-supported interactive 
service agreements as benchmarks. Rubinfeld CWDT ]] 126, 128; see 
also Rubinfeld CWRT at 39, n128 (no ``apples to apples'' comparison 
could be made between noninteractive services, on the one hand, and, 
on the other, interactive services that offered an ad-supported 
(free-to-the listener) service using obtrusive advertising as a tool 
to convert listeners to subscription services.). However, in his 
11th hour supplementation to his WDT, Dr. Rubinfeld attempted to 
analyze certain ad-supported services, contained in section 
``III.E'' of his CWDT, that he classified as more like statutory 
noninteractive services. The Judges' analysis of SoundExchange's 
arguments relating to these so-called ``III.E'' licenses is set 
forth in section IV.B.4.l.ii, infra.
---------------------------------------------------------------------------

    Dr. Katz also criticized Dr. Rubinfeld's attempted rebuttal of this 
criticism. Dr. Rubinfeld, in rebuttal, noted that he had estimated a 
1:1.01 ratio of advertising-only revenue to royalties in the 
interactive service market, which he concluded was confirmatory of 
SoundExchange's proposed rates as determined by the interactive 
subscription revenue to royalty ratio. Rubinfeld CWRT ]] 161-169.
    According to Dr. Katz, it is incorrect to compare only the revenues 
of the ad-supported tiers of the two types of services. Rather, the 
proper approach, according to Dr. Katz, would be to compare the overall 
revenue (ad-supported and subscription) per play as between the 
interactive and noninteractive services. Otherwise, gross disparities 
in average revenue per play (resulting from the number of plays in each 
model (ad-based or subscription) and in revenue per play in each such 
model) would be camouflaged. 5/11/15 Tr. 2854-57 (Katz).
    When such an overall revenue approach was applied by Dr. Katz to 
the actual service data, he found that the ratio of interactive service 
revenue to noninteractive service revenue per play was not 1:1, but 
rather 3.96:1. Katz AWRT ] 58, Table 2. This adjustment alone would 
have the effect of reducing the proposed rate derived by Dr. Rubinfeld 
from $0.002668 to $0.001347, approximately a 50% reduction. Katz AWRT ] 
59, Table 3. In similar fashion, iHeart's experts compared overall per 
play (or performance) data for Spotify and Pandora and calculated an 
interactivity adjustment of 3.2, Fischel/Lichtman WRT ] 69, also 
reducing the rate below the rate implied by the 1.01 adjustment 
calculated by Dr. Rubinfeld when he utilized advertising revenue alone 
in his rebuttal testimony.
    As already noted, the Judges acknowledge the validity of this 
criticism by limiting Dr. Rubinfeld's noninteractive benchmark analysis 
to the segment of the market in which listeners are subscribers to 
noninteractive services. Accordingly, there is no reason to apply this 
criticism further to reduce the interactive benchmark in the segment 
where it is otherwise applicable.
d. The Alleged Circularity of Dr. Rubinfeld's Methodology
    Pandora's economic expert, Dr. Shapiro, levies another overall 
criticism of Dr. Rubinfeld's interactive benchmark, characterizing it 
as ``circular'' and thus ``uninformative.'' Dr. Shapiro noted that Dr. 
Rubinfeld asserted that the royalty rates contained in the interactive 
benchmark agreements ``can be expected to reflect the incremental value 
of the granted functionality over-and-above what can be achieved with 
the statutory rights.'' Rubinfeld CWDT ] 145. Thus, according to Dr. 
Shapiro, backing out the incremental value to make an interactivity 
adjustment would simply return the analysis to the subscription rates 
and royalties that are predicated on the existing statutory rates. 
Therefore, Dr. Shapiro criticizes Dr. Rubinfeld's entire interactive 
benchmarking exercise as circular, revealing nothing about the rate 
that would be set absent the statutory rate. Shapiro WRT at 28-29; 5/8/
15 Tr. 2723-24 (Shapiro); accord, 5/5/15 Tr. at 4047-48 (Lichtman) 
(iHeart's' economic expert noting that the noninteractive service 
revenue figure that is the numerator in Dr. Rubinfeld's noninteractive 
ratio is (and must be) dependent upon the statutory rates that serve as 
an input cost).
    The Judges need to consider this criticism in tandem with the 
Services' prior criticism that the so-called ``noninteractive'' 
webcasters selected by Dr. Rubinfeld actually offered non-DMCA 
compliant features as well. Consequently, when Dr. Rubinfeld backs out 
the interactive value of these non-DMCA compliant services (by 
comparing the ratio of interactive to noninteractive subscription 
prices) he is not simply returning to the existing statutory rates, as 
Dr. Shapiro asserted, because the royalty rates for those non-DMCA 
compliant services (as the Services argue) are not merely predicated on 
the prior statutory rates. Simply put, the Services cannot have it both 
ways. If Dr. Rubinfeld's ``noninteractive'' services have some features 
that render them imperfect benchmarks, then the Judges must consider 
whether and how to weigh those imperfections. But those imperfections 
also cut in the other direction, and indicate that the royalty rates 
negotiated by those services reflect market forces in the subscription 
sector, rather than merely the statutory rates for DMCA-compliant 
noninteractive services.
e. Assumed Equivalence of Demand Elasticities in the Interactive and 
Noninteractive Markets
    Dr. Katz notes that Dr. Rubinfeld at one point conceded that the 
``elasticities of demand'' by the interactive services and the 
noninteractive services would differ inter se. However, Dr. Rubinfeld 
failed to address or account for this difference. Moreover, according 
to Dr. Katz, Dr. Rubinfeld later equivocated as to whether, in his 
methodology, he was assuming an equal elasticity of demand for both 
types of services. Katz AWRT ] 47; compare 5/16/15 Tr. 2029-34 with NAB 
Ex. 4233.
    Given that the Judges have dichotomized between the subscription 
and the ad-supported (free-to-the-listener) markets, the Judges do not 
believe that there are any significant uncertainties regarding the 
approximate equivalence of the elasticities between the interactive and 
noninteractive upstream markets for the right to acquire licenses to 
play sound recordings for subscribers.\107\ As Dr. Rubinfeld testified, 
when the downstream subscription market is competitive, the ``Hicks/
Marshall relationship'' \108\ provides that if the elasticities in the 
downstream market are the same then, ceteris paribus, pursuant to the 
Lerner Equation the mark-up of price over cost will be the same in both 
the upstream and downstream subscription markets, thereby supporting 
Dr. Rubinfeld's ``ratio equivalency'' in the subscription market. 5/28/
15 Tr. 6310-11 (Rubinfeld).
---------------------------------------------------------------------------

    \107\ In fact, when the dichotomy in WTP is applied, a 
discussion of overall differences in elasticities is beside the 
point. Elasticity measures percentage change in quantity demanded 
divided by percentage change in price. For the ad-supported 
services, the listeners have already demonstrated an unwillingness 
to pay for internet webcasting. Economically, their demand curve is 
far below the demand curve for subscription listeners (reflecting 
the differences in WTP). It is the difference in location of the 
demand curve, not just the difference in elasticities that is 
important. In the subscriber market though, the price-elasticity of 
the listeners vs. the noninteractive listeners is of some relevance.
    \108\ See infra, note 109.

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

[[Page 26350]]

    In the present case, because: (1) The WTP downstream is positive 
(which it is by definition in the subscription market); and (2) the 
products are converging in terms of functionality; and (3) an 
interactivity adjustment is applied to reflect the critical limits of 
convergence (no on-demand plays on statutory services), it was not 
unreasonable for Dr. Rubinfeld to conclude that the elasticities of 
demand would be approximately the same in both the interactive and 
noninteractive subscription markets.\109\ However, although this likely 
approximate equivalence in downstream elasticities would tend to 
equalize the upstream impact on the derived demand of the 
noninteractive services, it would not be the only factor affecting the 
upstream market, i.e., the market for which the Judges are setting 
rates. More particularly, the inability of listeners to statutory 
services to select a particular song combined with the noninteractive 
services' ability to (competitively) steer music toward or way from 
record companies, serve to distinguish the hypothetical noninteractive 
subscription rate from the benchmark interactive subscription rate 
proposed by Dr. Rubinfeld.
---------------------------------------------------------------------------

    \109\ Dr. Shapiro acknowledged that the Hicks/Marshall 
relationship would serve to import the downstream elasticities into 
the upstream market (the ``derived demand'' effect), unless the 
price effects of those downstream elasticities were swamped by other 
factors. See 5/20/15 Tr. 5044-45 (Shapiro). The principal ``swamping 
factor'' is the unwillingness of a substantial segment of streaming 
listeners to pay a positive price to listen to noninteractive 
services. Since, by definition, subscribers have a positive WTP, 
that ``swamping factor'' does not come into play if the analysis is 
limited to the market for subscription services.
---------------------------------------------------------------------------

f. Failure To Use a Mix of All Interactive Revenues (Advertising and 
Subscription) in the Ratios
    The Services argue that Dr. Rubinfeld, rather than isolating 
subscription revenue ratios from ad-supported ratios, should have 
determined the value of his interactivity adjustment by comparing all 
of the actual revenue in both markets (i.e., a mix of subscription and 
advertising revenue. See Katz AWRT ]] 58-59 NAB PFF ] 368. The Judges 
would find that argument meritorious if they were to attempt to apply 
Dr. Rubinfeld's ``ratio equivalency'' outside of the subscription 
market. The criticism is inapposite, however, given the Judges' 
application of Dr. Rubinfeld's methodology only to subscription 
services. In the subscription market where a positive WTP is self-
evident from the presence of subscribers, convergence and downstream 
competition are particularly relevant. Record companies would want to 
equalize marginal returns across the interactive and noninteractive 
spaces, which would be accomplished by focusing on subscription 
revenues. Thus, given the Judges' finding that the market is segmented 
by a dichotomized WTP, this criticism is simply not relevant to the 
Judges' determination.
g. Dr. McFadden's Survey Results Are Unnecessary To Confirm the Value 
of Dr. Rubinfeld's Interactivity Adjustment, Based on the Limited 
Applicability of Dr. Rubinfeld's Benchmark
    The Services offered numerous criticisms of Dr. McFadden's conjoint 
survey, which was intended by SoundExchange to confirm Dr. Rubinfeld's 
interactivity adjustment. See, e.g., Peterson Corrected WRT ] 110 
(survey measures potential subscribers' WTP rather than actual 
subscription prices); 4/29/15 Tr. 924, 926, 929-33, 936, 938 (McFadden) 
(survey does not measure value of certain features); 5/22/15 Tr. 5562-
63, 5572-73, 5579-80, 5588-89 (Hauser) (survey contains confusing 
feature descriptions); id. at 5570-71 (survey had a high participant 
attrition rate, especially among teenagers); IHM Ex. 3124 ] 12 (Hauser 
WRT) (survey participants were confused by incentive alignment 
language). The Services asserted that Dr. McFadden's survey would have 
supported a rate much lower than the benchmark rate proposed by Dr. 
Rubinfeld had he corrected for Dr. McFadden's purported errors. 
Fischel/Lichtman WRT ] 75 and IHM Ex. 3060 (Fischel/Lichtman WRT, Ex. 
E.).
    The Judges note initially that, in this narrow context of this 
subscription market, Dr. Rubinfeld's methodology for calculating the 
interactivity adjustment is not inappropriate. Dr. Rubinfeld reasonably 
determined the concept of a ``ratio equivalency'' between revenues and 
subscription royalties in a market with both: (1) A WTP sufficient to 
generate subscriptions in each market; and (2) a downstream convergence 
of features as between the two markets, except for the nonconvergence 
arising from the statutory restrictions on noninteractive 
services.\110\ Thus, Dr. McFadden's attempt to confirm Dr. Rubinfeld's 
2.0 interactivity adjustment is unnecessary.\111\ Consequently, the 
Judges need not address the Services' criticisms of Dr. McFadden's 
conjoint survey.
---------------------------------------------------------------------------

    \110\ Also by way of repetition (and emphasis), the existence of 
a sharp dichotomy between listeners with a positive WTP for streamed 
music and those who have essentially a zero WTP for streamed music 
precludes an extension of this ``ratio equivalency'' beyond the 
subscription market.
    \111\ Of course, Dr. McFadden's conjoint survey and his findings 
regarding the bimodal nature of listeners' WTP are relevant to this 
determination, and have been considered in this determination.
---------------------------------------------------------------------------

h. Dr. Rubinfeld's Equalization of the Number of Plays in the 
Interactive and Noninteractive Markets Was Appropriate
    Dr. Katz asserts that Dr. Rubinfeld underestimated the number of 
``skips'' for which an interactive service is not required to pay a 
royalty under the typical interactive service contracts with record 
companies. By contrast, a statutory service must pay a royalty for all 
plays, including such ``skips.'' (SoundExchange requests that the 
Judges continue this requirement. See SoundExchange Proposed Rates and 
Terms, Attach. A at 2-3.). Dr. Rubinfeld utilized an adjustment factor 
of 1.1 for skips, but, according to Dr. Katz, actual data revealed in 
discovery demonstrated that the adjustment factor should have been 1.2, 
a 9.1% increase in the adjustment that would further lower the rate 
proposed by SoundExchange. Katz AWRT ]] 101-102
    The Judges find that Dr. Rubinfeld accurately adjusted for the 
number of plays across the interactive and noninteractive spaces. The 
criticism leveled by Dr. Katz focused only on the number of ``skips.'' 
However, Dr. Rubinfeld made a further adjustment for the fact that 
interactive services typically paid royalties for pre-1972 recordings, 
whereas the noninteractive services did not. This fact required an 
increase in the noninteractive royalty rate relative to the interactive 
royalty rate (i.e., a smaller interactivity adjustment in the 
denominator [D] in the ratios discussed in section I.A.1.c, supra).
    For example, assume there were 100 plays in each market and in each 
market 10 of those plays were pre-1972 recordings. If the royalty rate 
(assumedly) was 0.3 cents in each market, then the interactive average 
rate would be 0.3 cents. However, in the noninteractive market, where 
no royalty was paid on the 10 pre-1972 recordings, the average royalty 
rate was only 0.27 cents.\112\
---------------------------------------------------------------------------

    \112\ (90 royalty bearing songs x 0.3 cents) + (10 pre-1972 
songs x 0 cents) = (0.27 cents + 0 cents) = 0.27 cents.
---------------------------------------------------------------------------

    Thus, to equalize the markets on a per-play basis, the 
noninteractive average rate must be increased. That increase made the 
downward interactivity adjustment smaller, when it was combined with 
the fact that--on the other side of the coin--the noninteractive 
services were required to

[[Page 26351]]

pay royalties for skips as though they were plays, unlike the typical 
interactive service.
i. Incorrectly Weighting Average Royalties by Revenue Instead of by 
Play
    Another defect in Dr. Rubinfeld's approach, according to Dr. Katz, 
was Dr. Rubinfeld's decision to compute his average per-performance 
royalty by weighting that average according to the revenue per play 
earned by a service. See Rubinfeld CWDT ] 203; 5/5/15 Tr. 1824 
(Rubinfeld). According to Dr. Katz, weighting the per-play average by 
service revenue, as done by Dr. Rubinfeld, created an upward bias 
compared to the revenue actually earned by on-demand services that 
comprised Dr. Rubinfeld's benchmarks. Katz AWRT ]] 42-44, 162; 5/11/15 
Tr. 2830-34; 2837-40 (Katz).
    Dr. Katz maintained that the more realistic approach would have 
been to weight the individual on-demand services in the benchmark 
market by the number of plays per service, not by the revenue per 
service. Applying actual data, Dr. Katz demonstrated that using Dr. 
Rubinfeld's revenue weighting approach would have implied that in the 
period considered by Dr. Rubinfeld, the on-demand services would have 
received $112.2 million more (42% more) in revenues than they actually 
received. Katz AWRT ] 162.
    The Judges find this criticism irrelevant as applied to the 
subscription market. In the interactive sphere, record company 
agreements with interactive services are configured pursuant to the 
``freemium'' model, designed to convert ``free'' listeners into paying 
subscribers, who generate user revenue. See 5/7/15 Tr. 2401-02 
(Wilcox); 5/13/15 Tr. 3509 (Herring). In the subscription market where 
the positive WTP and functional convergence engenders strong 
competition for paying listeners, a willing seller in the subscription 
market seeks to maximize subscriber revenue and focuses on average 
revenue per user (ARPU), not revenue per play. See, e.g., 4/28/15 Tr. 
374 (Kooker); 4/30/15 Tr. 970 (A. Harrison); see also supra, section 
IV.B.2.c.
j. The Number of Adjustments Does Not Disqualify Dr. Rubinfeld's 
Interactive Benchmark
    One of the economic experts for iHeart, Dr. Lichtman, asserted that 
the sheer number of adjustments, as discussed supra, needed ``to draw 
any analogy'' between the interactive and noninteractive markets is so 
``overwhelming'' that the result is a ``mess'' and not reliable. 5/15/
15 Tr. 4053-54.
    The Judges reject the notion that there may be some quantum of 
adjustments to proposed benchmarks that disqualifies them from 
consideration. Some variant of a ``three strikes and you're out'' 
approach seems decidedly devoid of legal or economic reasoning. The 
Judges are more concerned with the importance, or weight, of any given 
criticism of a benchmark than they are with the number of potential 
adjustments. Trivial or measurable adjustments may be relatively great 
in number, yet pale in comparison to one or two critical assumptions 
that might necessitate the qualification or rejection of a benchmark.
    This determination is evidence of that point. Dr. Rubinfeld's 
benchmark fails to account for the fact that a large cohort of the 
listening public simply will not pay for streamed music. Thus, his 
subscription benchmark fails to capture the very market of listeners 
who flock to ad-supported (free-to-the-listener) noninteractive 
services. That single qualification circumscribes the usefulness of Dr. 
Rubinfeld's benchmark. One other criticism of his benchmark, viz., its 
failure to capture an ``effectively competitive'' market, permits an 
adjustment within the subscription market rate and does not require the 
Judges to reject the use of Dr. Rubinfeld's benchmark in the 
noninteractive subscription market.
k. SoundExchange's Proposed Annual Rate Increases From 2016-2020 are 
Not Supported by the Evidence
    The Services object to annual increases in the royalties as 
arbitrary and incompatible with the willing buyer-willing seller 
standard, for the following reasons.
    First, the Services contend that there is no basis to assume, 
without supporting theory or evidence, that rates would necessarily 
increase during the next rate period. In that regard, the Services note 
that Professor Rubinfeld admitted that there is no ``theoretical reason 
why we would expect prices just to go up.'' 5/5/15 Tr. 1761 
(Rubinfeld).
    Second, he acknowledged the absence of any basis for his self-
described ```empirical judgment' where we think rates are likely to be 
going for competing products.'' Id. Moreover, as Dr. Rubinfeld, 
testified, his proposed escalating rates are not based on anticipated 
inflation, anticipated increases in music industry inputs, or the 
consumer price index. 5/6/15 Tr. 2226 (Rubinfeld).
    Third, none of the benchmarks on which SoundExchange relied 
contained annual rate escalators. Moreover, out of all the potential 
benchmarks that SoundExchange examined, only one has an escalating rate 
provision. Id. at 2227-28. That lone agreement with an escalating rate 
provision--the iHeart/Warner Agreement--was the subject of substantial 
criticism and ultimate rejection by Dr. Rubinfeld, as inappropriate for 
use as a benchmark in the current proceeding. Id. at 2229.
    Fourth, the record evidence indicates that rates in SoundExchange's 
own proposed benchmark market, interactive streaming services, have 
decreased in recent years. Rubinfeld WDT, Ex. SX 0017, ] 140; 5/8/15 
Tr. 2736-37 (Shapiro); 5/15/15 Tr. 4142 (Lichtman); 5/19/15 Tr. 4611 
(Shapiro). Further, Dr. Rubinfeld testified that he ``actually saw . . 
. decreases in the noninteractive rate'' in the data he reviewed. 5/6/
15 Tr. 2231 (Rubinfeld). Thus, if there were to be annual rate changes, 
the Services argue, the record supports a decrease in webcasting rates 
during the upcoming rate period.
    The Services do note Dr. Rubinfeld's assertion that interactive and 
noninteractive services are converging, id. at 2225-2226, but they 
respond by arguing that this purported (and dubious) convergence does 
not support the conclusion that the Judges should impose on 
noninteractive webcasters what Dr. Rubinfeld himself characterized as a 
``serious increase'' during the rate period. Id. at 2223. Moreover, Dr. 
Rubinfeld admitted that his proposed annual increases were not due to 
past convergence, but to his ``anticipation that the technology will 
create even more convergence going forward.'' 5/5/15 Tr. 1829 
(Rubinfeld). He admitted that this ``anticipation'' was ``not based on 
hard data,'' and he conceded that ``I can't prove to you for sure where 
we're going to be because we are talking about the future.'' Id. 1829-
30.
    For the foregoing reasons, the Services conclude that 
SoundExchange's interactive benchmark does not provide a basis to set 
the statutory rates for commercial webcasters in this proceeding.
    The Judges find that SoundExchange has failed to make a sufficient 
factual showing that would support the linear $0.00008 annual rate 
increase proposed by Dr. Rubinfeld. The Judges find it dispositive that 
Dr. Rubinfeld acknowledged that his opinion in this regard was neither 
based on theory nor on empirical analysis. Further, the fact that some 
agreements in the benchmark markets have annual escalators and some do 
not renders those agreements unhelpful, absent some explanation as to 
the bases for the inclusion or exclusion of such escalators.

[[Page 26352]]

    Additionally, market forces in the future may cause rates to move 
in either direction, or to stay constant, and the record does not 
suggest a basis for a credible prediction. So too is the record devoid 
of any sufficient predictive evidence as to whether there will be 
further convergence and/or competition between interactive and 
noninteractive services or, if so, what impact that might have on the 
rates. That is, the record does not indicate why convergence would not 
occur through a reduction in interactive rates, rather than through (in 
whole or in part) an increase in noninteractive rates. In sum, the 
record does not contain a sufficient basis to adopt any prediction 
about the future direction of noninteractive rates.
l. Dr. Rubinfeld's Analysis of Noninteractive Agreements Does Not 
Corroborate His Interactive Benchmark
    The Services oppose SoundExchange's use of agreements with Apple 
and several interactive services for what Dr. Rubinfeld described as 
noninteractive offerings, and argue that if the Judges consider the 
agreements, a proper analysis corroborates their own rate proposals and 
not SoundExchange's. See, e.g., Pandora PFF ] 344; Shapiro SWRT at 12-
16 & Table 1.
    For the reasons set forth below, the Judges will not consider these 
agreements in establishing or corroborating a willing-buyer, willing-
seller royalty rate.
i. Apple Agreements
    The Services contend that Dr. Rubinfeld's analysis of the Apple 
agreements is deeply flawed and unreliable for several reasons. First, 
the Services argue that Dr. Rubinfeld improperly allocates [REDACTED] 
and other compensation to the licenses for the iTunes Radio service 
rather than to other licensed services that Apple provides. See, e.g., 
Fischel/Lichtman SWRT ] 36. Second, the services argue that Dr. 
Rubinfeld should have analyzed the parties' ex ante expectations, 
rather than ex post performance, in determining what a willing buyer 
and seller would agree to. See, e.g., 5/19/15 Tr. at 4526 (Shapiro). 
Finally, the services critique other adjustments that Dr. Rubinfeld 
makes (or fails to make) to the headline rates in the Apple agreements 
to account for non-statutory functionality in Apple's service.
    The Judges credit Dr. Shapiro's observation that Dr. Rubinfeld's 
conclusion that Apple was willing to pay substantially in excess of the 
statutory license rate for what is essentially a statutory service 
``just doesn't make any sense.'' 5/19/15 Tr. at 4526 (Shapiro). 
Economists for both licensors and licensees agreed that the statutory 
rate effectively sets a ceiling on rates for statutory services, since 
a service can always fall back on the statutory rate if it is unable to 
negotiate an equal or lower rate with the copyright owner. See, e.g., 
id.; 5/27/15 Tr. at 6025-26 (Talley). The fact that Dr. Rubinfeld 
concludes that the effective rates under the Apple agreements are 
substantially higher than the statutory rates strongly suggests that 
something is amiss in his analysis.
    One possible reason Dr. Rubinfeld's analysis finds effective rates 
under the Apple agreements that exceed the statutory rates is that he 
attributes compensation to the iTunes Radio service that should have 
been attributed to other services licensed by Apple. The license 
agreements for the iTunes Radio service between Apple, on one hand, and 
Sony and Warner, respectively, on the other, are one part of a complex 
business relationship between Apple and the record companies, covering 
a number of different services. At or near the time that Apple entered 
into its iTunes Radio agreements with Sony and Warner, the parties 
amended some of their existing agreements for other services, and 
specified that some compensation that Apple was to have paid out under 
other agreements would be characterized as payments for the iTunes 
Radio service. Shapiro SWRT at 4; SX Ex. 2072 ] 2 (Amendment [REDACTED] 
to Apple/Warner Sound Recording cloud Service Agreement); Ex. 2073 ] 2 
([REDACTED] Amendment to Amended and Restated Apple/Sony Digital Music 
and Video Download Sales Agreement).
    SoundExchange argues that the Judges are bound by the parties' 
characterization of these payments as unambiguously expressed in their 
agreements. SoundExchange Reply PFF ] 487. If the Judges were resolving 
a contract dispute between the parties, SoundExchange's argument might 
have merit. However, the Judges' task is to determine the economic 
significance of the compensation that changed hands between the 
parties, and the contracts are but one (albeit vitally important) piece 
of evidence of that economic significance. Where, as here, a 
transaction is part of a complex, interlocking business relationship, 
it is appropriate--even necessary--for the Judges to consider other 
evidence and analysis to determine the true economic value of the 
transaction. See Fischel/Lichtman SWRT ] 31. This is particularly true 
when one party is agnostic as to how certain payments should be 
characterized, and the other party has a strong incentive to 
characterize the payments in a particular way to influence the course 
of a future rate proceeding.
    That additional evidence is lacking here. The Services raise 
sufficient doubt as to the characterization of the compensation flowing 
from Apple to Warner and Sony to persuade the Judges that they cannot 
rely on Dr. Rubinfeld's analysis of the Apple agreements. There is 
insufficient evidence in the record to support SoundExchange's analysis 
and use of the Apple agreements.\113\
---------------------------------------------------------------------------

    \113\ In light of this determination, the Judges need not reach 
the licensee services other arguments concerning the Apple 
agreements.
---------------------------------------------------------------------------

    The uncertainty resulting from a lack of evidence cuts both ways. 
The Judges will not consider the licensee services' alternative 
analyses that seek to demonstrate that the Apple agreements support 
their rate proposals. See, e.g., Pandora PFF ] 344; Shapiro SWRT at 12-
16 & Table 1.
ii. Other Noninteractive Agreements
    The Services urge the Judges to reject Dr. Rubinfeld's analysis of 
four additional agreements for allegedly noninteractive services: Beats 
Music's The Sentence; Spotify's ``Shuffle'' service; Rhapsody's 
``Unradio''; and Nokia's ``MixRadio.'' The Services argue that each 
service has features that exceed what a service operating under the 
statutory license would be permitted to offer. The Judges agree, and 
find that, as with the Apple agreements, there is insufficient record 
evidence to support a useful analysis of these four agreements.
(A) Extra-Statutory Functionality
(1) Beats ``The Sentence''
    The Sentence was a free (to the user) feature offered by Beats 
Music (Beats) as a means of encouraging users to pay for Beats' 
subscription service.\114\ Rubinfeld CWRT ] 179. It allowed users to 
generate a playlist by providing contextual inputs such as location, 
mood, setting and genre. It was subject to limited functionality, such 
as limited skips, no use of off-line or cached content, and no rewind 
feature. Id. ] 179-180. Dr. Rubinfeld describes The Sentence as 
``effectively a noninteractive service involving functionality that is 
closely comparable to other statutory services.'' Id. ] 180.
---------------------------------------------------------------------------

    \114\ Beats was acquired by Apple and, as of December 1, 2015, 
no longer exists as a separate service.
---------------------------------------------------------------------------

    The Services contend the record demonstrates that The Sentence 
includes extra-statutory functionality.

[[Page 26353]]

Specifically, the record company agreements with Beats [REDACTED]. 
Fischel/Lichtman SWRT ] 11. This additional functionality would be 
expected to push the royalty rates up. See id. ([REDACTED] adjusted 
rates upward expressly to account for additional functionality that 
[REDACTED]'') (quoting IHM Ex. 3543 at 8 (1/1/2014 Email from 
[REDACTED] to [REDACTED] and [REDACTED])). Dr. Rubinfeld does not 
account for extra-statutory functionality in his analysis of Beats' 
license agreements.
(2) Spotify ``Shuffle''
    Spotify's Shuffle service is a free-to-the-consumer streaming 
service that permits the user to select a certain number of songs (a 
minimum of 20 songs or a single album) and hear only those songs in a 
random order. Fischel/Lichtman SWRT ] 14. The ability to select 
specific songs and be assured that only those songs will be played 
distinguishes Shuffle from noninteractive services. The increased 
degree of interactivity would be taken into account in setting royalty 
rates. Id. Dr. Rubinfeld does not account for this functionality in his 
analysis of Spotify's agreements with the record companies.
(3) Rhapsody ``Unradio''
    Rhapsody's Unradio service offers users personalized playlists 
based on the users' favorite artists or songs. It is a paid 
subscription service, with a 14-day free (ad-supported) trial period. 
Rubinfeld CWRT ] 196. Unlike statutory services, Unradio permits 
unlimited skips and permits users to play up to 25 favorites and seed 
tracks on an on-demand basis. Fischel/Lichtman SWRT ] 9. Again, this is 
extra-statutory functionality that would be expected to affect the 
royalty rate, and that Dr. Rubinfeld did not account for in his 
analysis.
(4) Nokia ``MixRadio''
    Mobile phone manufacturer Nokia bundled MixRadio, a free-to-
consumer streaming service, with its handsets.\115\ MixRadio provides 
customized, ad-free noninteractive streaming. Unlike statutory 
services, MixRadio permits users to play radio stations that are cached 
on their mobile phones. Rubinfeld CWRT ] 199. In addition, MixRadio 
permits users to share music with non-subscribers. Fischel/Lichtman 
SWRT ] 12.
---------------------------------------------------------------------------

    \115\ The service is now simply ``MixRadio,'' as a result of 
Microsoft's acquisition of Nokia, and subsequent sale of the 
MixRadio service to Line Corporation.
---------------------------------------------------------------------------

    MixRadio thus has significant extra-statutory functionality. Dr. 
Rubinfeld does not account for this in his analysis.
(B) Lack of Analysis of Business Context
    Like the Apple agreements, the record companies' agreements with 
Beats, Spotify, Rhapsody and Nokia, respectively, are part of broader 
economic relationships that include other services. Id. ] 30. Beats, 
Spotify and Rhapsody each license content from the record companies for 
their respective subscription services. Nokia at one time licensed 
music that it offered for unlimited download (bundled with its mobile 
phones). As discussed in connection with Apple, the Judges must 
consider evidence and analysis of context to determine the true 
economic value of a transaction when that transaction is part of a 
complex business relationship. Dr. Rubinfeld does not analyze that 
context.
(C) Conclusion Regarding Corroborative Agreements
    Because Dr. Rubinfeld failed to account for extra-statutory 
functionality, and failed to analyze the broader context of these 
services within the business relationship between the service providers 
and the record companies, the Judges determine that they cannot rely on 
the analyses of these agreements to corroborate SoundExchange's 
interactive benchmark analysis.
5. Conclusion Regarding SoundExchange's Interactive Benchmark Per-Play 
Proposal
    For these reasons, the Judges find that Dr. Rubinfeld's interactive 
benchmark is only applicable when:
     Revenues in both markets are derived from subscription 
revenues and are thus reflective of buyers with a positive WTP for 
streamed music;
     functional convergence and downstream competition for 
potential listeners indicate a sufficiently high cross-elasticity of 
demand as between interactive and noninteractive services, provided the 
noninteractive subscription rate is reduced to reflect the absence of 
the added value of interactivity; and
     a steering adjustment is made to eliminate the 
complementary oligopoly effect and thereby provide for an effectively 
competitive market price.\116\
---------------------------------------------------------------------------

    \116\ The Judges find as well that Dr. Rubinfeld's interactivity 
analysis failed to cure all of the defects that the Judges found to 
exist in the similar interactivity analysis proffered by Dr. 
Pelcovits and rejected by the Judges in the Web III Remand. First, 
and of greatest importance, Dr. Rubinfeld's interactivity model 
fails to take account of, or adequately adjust for, the dominant ad-
supported (free-to-the-listener) segment of the noninteractive 
market. See Web III Remand, 79 FR at 23118. This defect has even 
greater resonance in this proceeding, given the abundant evidence, 
discussed supra, that the vast majority of listeners do not have a 
positive WTP for access to sound recordings on streaming services. 
However, the Judges have ``ring-fenced'' this defect by limiting the 
applicability of Dr. Rubinfeld's analysis to the noninteractive 
subscription market. Second, the Judges also criticized Dr. 
Pelcovits in the Web III Remand for failing to analyze agreements 
between the interactive services and independent labels. Id. As 
discussed supra, Dr. Rubinfeld looked at certain independent deals, 
but only made an adjustment on the assumption that Indies' royalties 
would be lower by the absence of the value of [REDACTED] found in 
some of the Majors' agreements with interactive services. Third, the 
Judges also criticized Dr. Pelcovits in the Web III Remand for 
failing to adjust for the downward trend in rates in the interactive 
benchmark market. Id. Both Dr. Pelcovits and Dr. Rubinfeld used 
periods ending during the year in which the proceeding started (2009 
and 2014 respectively). Dr. Pelcovits used an 18-month period, while 
Dr. Rubinfeld used a 12-month period. Compare id. with Rubinfeld 
CWDT ] 32. However, Dr. Rubinfeld acknowledged--but failed to 
account for--the continuing downward trend in his interactive 
benchmark rates. Instead, he merely assumed that the interactive and 
noninteractive rates would converge through an increase in 
noninteractive rates in the hypothetical market and a decrease in 
rates in the interactive market. Again, such an assumption may be 
reasonable in the subscription market, where convergence in 
functionality appears to exist (as nonetheless limited by the DMCA 
performance complement). Again, the Judges' decision to ``ring-
fence'' a subscription rate eliminates any improper use of this 
assumed convergence in the ad-supported (free-to-the listener) 
noninteractive market. Finally, in the Web III Remand, the Judges 
also observed that the value of Dr. Pelcovits' benchmark analysis 
was ``diminished by [the] lack of sufficient data'' relating to the 
number of noninteractive performances per subscriber. Id. Dr. 
Rubinfeld essentially avoided this problem by not accounting for 
differences in the number of performances made by subscribers to 
interactive and noninteractive services, respectively. Again, the 
Judges find that because a willing seller in the streaming 
subscription markets would seek to equalize Average Revenue per User 
(ARPU) (through Dr. Rubinfeld's ratio equivalency approach) this 
issue as well has been adequately addressed by the Judges through 
their ``ring-fencing'' of Dr. Rubinfeld's benchmark analysis to the 
subscription market only.
---------------------------------------------------------------------------

    The rate derived from this analysis is set forth in the Rates 
Conclusion, infra.

C. GEO's Rate Proposals

    In this Web IV proceeding, the Judges had the opportunity to hear 
directly from a singer-songwriter who produces and markets his own 
music. Mr. George Johnson, dba GEO Music, filed a Petition to 
Participate in the proceeding. He filed all the necessary papers and 
testified on both direct and rebuttal, as well as delivering an opening 
statement and closing argument.
    Mr. Johnson eloquently stated the plight of the singer-songwriter-
artist who is self-published and self-produced. He also proposed an 
overarching reform to the way in which rights owners of music--written,

[[Page 26354]]

published, performed, recorded, broadcast--would be paid for their 
artistic creations. However, the current law thoroughly segments both 
the copyrights and the licensing mechanisms. The rights and their 
treatment have evolved over time, barely keeping pace with the 
technology that uses them. Further, part of the music royalty process, 
i.e., royalties for use of published ``musical works'' is managed by a 
U.S. District Court in New York, with statutory admonition to the court 
not to consider the effect of the rates set by the Judges. See 17 
U.S.C. 114(i). The complete picture urged by Mr. Johnson can only come 
into focus with a new copyright law.
    Nonetheless, by comparing an artist's revenues from physical 
phonorecords to the current ten-thousandths of a cent ``per spin'' 
calculations for digital performances, Mr. Johnson highlighted very 
effectively one of the paramount factors complicating this proceeding. 
The music makers, the music recorders, and the music ``consumers''--
both broadcasters and listeners--are struggling with how to address and 
``monetize'' the change of the music product paradigm from an ownership 
model (purchase of physical recordings) to an access model (log in to 
Internet services and use as much or as little control as one wants to 
direct the music programming).
    GEO makes three separate rate proposals.
1. GEO Proposal 1
    GEO proposes that royalty rates for nonsubscription webcasting be 
the greater of a per-performance rate and a percentage revenue rate:

------------------------------------------------------------------------
                                                   Per-
                     Year                       performance   Percentage
                                                   rate       of revenue
------------------------------------------------------------------------
2016.........................................         $0.10           70
2017.........................................          0.12           68
2018.........................................          0.14           66
2019.........................................          0.16           64
2020.........................................          0.18           62
------------------------------------------------------------------------

Introductory Memorandum to the Amended Testimony and Written Direct 
Statement of George D. Johnson at 4 (Jan. 13, 2015).
    GEO proposes that royalty rates for subscription webcast streams be 
the greater of a per-performance rate and a percentage revenue rate:

------------------------------------------------------------------------
                                                   Per-
                     Year                       performance   Percentage
                                                   rate       of revenue
------------------------------------------------------------------------
2016.........................................         $0.22           70
2017.........................................          0.24           68
2018.........................................          0.26           66
2019.........................................          0.28           64
2020.........................................          0.30           62
------------------------------------------------------------------------

Id.
2. GEO Proposal 2
    As an alternative, GEO proposes a combination of a one-time fee 
(described as a ``cloud locker'' fee) and a ``usage'' fee that is the 
greater of a per-performance royalty and a percentage of revenue. As 
with Proposal 1, GEO proposes separate rates for subscription and 
nonsubscription webcast streams.
    GEO's proposed nonsubscription rates are:

----------------------------------------------------------------------------------------------------------------
                                                                 Copyright cloud       Per-
                              Year                                 locker-- one     performance    Percentage of
                                                                     time fee          rate           revenue
----------------------------------------------------------------------------------------------------------------
2016...........................................................            $0.50           $0.01              70
2017...........................................................             0.55            0.02              68
2018...........................................................             0.60            0.03              66
2019...........................................................             0.65            0.04              64
2020...........................................................             0.70            0.05              62
----------------------------------------------------------------------------------------------------------------

Id. at 5.
    GEO's proposed subscription rates are:

----------------------------------------------------------------------------------------------------------------
                                                                 Copyright cloud       Per-
                              Year                                 locker-- one     performance    Percentage of
                                                                     time fee          rate           revenue
----------------------------------------------------------------------------------------------------------------
2016...........................................................            $0.50           $0.10              70
2017...........................................................             0.55            0.12              68
2018...........................................................             0.60            0.14              66
2019...........................................................             0.65            0.16              64
2020...........................................................             0.70            0.18              62
----------------------------------------------------------------------------------------------------------------

Id.
3. GEO Proposal 3
    As a third alternative, GEO Proposal 3 consists of a one-time 
``cloud locker'' fee and a per-performance rate. Proposal 3, which GEO 
describes as being derived from the inflation-adjusted cost of a record 
album in 1964, would apply to both subscription and nonsubscription web 
streams. Id. at 6-7.

------------------------------------------------------------------------
                                         Copyright cloud       Per-
                  Year                     locker-- one     Performance
                                             time fee          rate
------------------------------------------------------------------------
2016...................................            $0.50           $0.01
2017...................................             1.00            0.02
2018...................................             1.50            0.03
2019...................................             2.00            0.04
2020...................................             2.50            0.05
------------------------------------------------------------------------

Id. at 6.
4. Judges' Conclusions With Respect to GEO's Rate Proposals
    GEO requests that the Judges adopt either Proposal 3 or Proposal 2, 
``or in between.'' Id. at 23.\117\ As discussed above, the Judges 
conclude that the evidence in the record before us does not support a 
greater-of rate structure or a percentage-of-revenue rate in the 
current proceeding. GEO provided no evidence to change that holding.
---------------------------------------------------------------------------

    \117\ See also id. at 5 (``the Per-Performance Rate and 
Copyright Cloud Locker One-Time Fee Rate are what GEO is 
proposing'').

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

[[Page 26355]]

    Likewise, the Judges find no persuasive evidence to support a 
``cloud locker'' fee of the type that GEO (and only GEO) proposes. Mr. 
Johnson presented no expert testimony to support a ``cloud locker'' 
rate, nor did he provide any evidence that such a rate structure even 
exists in the market. What he did provide is his statement: ``The 
streamer's economic model leaves out one crucial element--the customer, 
and the bundled copyright cloud locker or `streaming account' forces 
payment for all music copyrights up-front, one time, like all other 
products.'' Id. at 5-6. The rates the Judges adopt must be based on 
substantial evidence in the record. As Mr. Johnson is the only 
participant to propose a cloud locker rate and he provided no evidence 
to support such a rate, the Judges find that there is insufficient 
evidence in the record to support a cloud locker rate.
    Therefore, the Judges are left with Mr. Johnson's proposed per-
performance rates. The per-performance rates he proposes range from a 
low of $0.01 per stream ((2016 in Proposal 2 (nonsubscription) and 
Proposal 3) to $0.30 per stream (2020 Subscription). As with the cloud 
locker proposal, Mr. Johnson provides no evidence, other than his 
personal view, that such rates are reasonable, or reflect what a 
willing buyer and a willing seller would agree to.\118\ In the absence 
of such evidence, the Judges cannot adopt Mr. Johnson's proposed per-
performance rates.
---------------------------------------------------------------------------

    \118\ See, e.g., id. at 7 (``[w]hoever says that songs are too 
expensive in this rate hearing at $.00 are nothing more than con-men 
since they expect American music creators to work literally for $.00 
per-song when a song really costs $5 dollars [sic] per song using 
government low-end inflation calculations and a real world 1964 
benchmark.''). To establish his proposed cloud locker rate, Mr. 
Johnson requests that the Judges adopt as a benchmark a 2-cent 
mechanical (section 115) license rate for musical works in effect in 
1909, which Mr. Johnson would then adjust for inflation and round to 
50 cents per song). Id. at 7-8. Mr. Johnson also estimates that a 
Beatles record purchased for $5 in 1964 would have cost, after 
adjusting for inflation, $38 in 2014. Id. at 6. Since the Judges 
decline to adopt a cloud locker rate, they need not decide whether 
the mechanical rate in effect in 1909, adjusted for inflation, would 
be a suitable benchmark for Section 114 and 112 rates for 2016-2020. 
Interestingly, the Beatles released two albums in 1964, ``Beatles 
for Sale'' and ``A Hard Day's Night,'' both of which are still (or 
again) available, in vinyl, on Amazon.com for prices generally 
ranging from $15 to $20. See beatlesbible.com, referenced on Dec. 
14, 2015; Amazon.com, referenced Dec. 14, 2015.
---------------------------------------------------------------------------

D. Pandora Rate Proposal

1. Proposed Royalties
    Pandora is a noninteractive licensee, and it represents itself as 
``the leading Internet Radio Service in the United States.'' PAN Ex. 
5002 ] 5 (Fleming-Wood WDT). Like SoundExchange, Pandora proposes a 
greater-of rate structure. Commercial webcasters would pay the greater 
of 25% of revenue from eligible transmissions and a range of per-
performance royalty rates. Pandora proposes separate ranges of royalty 
rates for subscription and nonsubscription (advertisement supported) 
commercial webcasting as follows:

                      Low End of Proposed Range 119
------------------------------------------------------------------------
          A royalty equal to the greater of (i) or (ii) below:
-------------------------------------------------------------------------
                                    Per-performance     Per-performance
              Year                 (nonsubscription)    (subscription)
------------------------------------------------------------------------
(i) Per-Play Rate:
    2016........................            $0.00110            $0.00215
    2017........................             0.00112             0.00218
    2018........................             0.00114             0.00222
    2019........................             0.00116             0.00226
    2020........................             0.00118             0.00230
------------------------------------------------------------------------
(ii) 25% of Revenue from
 Eligible Transmissions
------------------------------------------------------------------------


                       High End of Proposed Range
------------------------------------------------------------------------
          A royalty equal to the greater of (i) or (ii) below:
-------------------------------------------------------------------------
                                    Per-performance     Per-performance
              Year                 (nonsubscription)    (subscription)
------------------------------------------------------------------------
(i) Per-Play Rate:
    2016........................            $0.00120            $0.00224
    2017........................             0.00123             0.00228
    2018........................             0.00125             0.00232
    2019........................             0.00127             0.00236
    2020........................             0.00129             0.00240
------------------------------------------------------------------------
(ii) 25% of Revenue from
 Eligible Transmissions
------------------------------------------------------------------------

Pandora's Second Amended Proposed Rates and Terms at 2-3.
2. Pandora's Noninteractive Benchmark
    Pandora relies upon the Pandora/Merlin Agreement to support its 
rate proposal. On June 16, 2014, Pandora and Merlin entered into the 
Pandora/Merlin Agreement, which established terms and conditions under 
which Merlin granted Pandora the right to perform of all the sound 
recordings in the catalogs of those Merlin record companies that would 
ultimately decide to opt-in to the Pandora/Merlin Agreement. PAN Ex. 
5014; Shapiro WDT at 23, 26; PAN Ex. 5007 ] 24 (Herring WDT).
---------------------------------------------------------------------------

    \119\ The low and high ends of the proposed range correspond to 
levels of overspinning (or ``steering'') of Merlin-member tracks 
under Pandora's benchmark agreement. The issue of steering and the 
rate calculations derived from steering are described elsewhere in 
this determination.
---------------------------------------------------------------------------

a. Merlin
    Merlin is a global rights agency that represents and collectively 
negotiates on behalf of thousands of independent

[[Page 26356]]

record companies in the United States and 38 other countries. Van Arman 
WDT at 10; 6/1/15 Tr. 6865 (Lexton); see also 5/18/15 Tr. 4204 
(Herring). Merlin's members include numerous prominent independent 
labels, which produce commercially and critically successful music. See 
Pandora PFF ]] 123-126 (and record citations therein).
    These independent record companies negotiate with digital services 
collectively through Merlin in order to obtain more favorable terms and 
transaction cost savings than they otherwise could achieve on an 
individual basis. Van Arman WDT at 10; 4/28/15 Tr. 626-7 (Van Arman); 
6/1/15 Tr. 6856-7 (Lexton). Pandora notes that one of the Majors has 
acknowledged that Merlin is a ``virtual [ ] major.'' PAN Ex. 5349 at 9 
(``[REDACTED]); 5/5/15 Tr. 1969:19-23, 1975:8-1977:4 (Rubinfeld).
    Merlin established a procedure for its members to either opt-in or 
opt-out of the Pandora/Merlin Agreement (most members could [REDACTED], 
whereas a small number of members reserved the right to [REDACTED]). 
Members who were represented by independent distributors (i.e., 
distributors unaffiliated with the Majors) delegated the decision as to 
whether to opt-in to these distributors. In total, [REDACTED] of 
approximately [REDACTED] members, covering approximately [REDACTED] 
tracks--opted in to the Pandora/Merlin Agreement. 5/18/15 Tr. 4221, 
4235 (Herring); 6/1/15 Tr. 6870 (Lexton).
    Pandora notes that, by statute, the opting-in Merlin members could 
have declined to enter into the Pandora/Merlin Agreement and thus 
remained bound in 2014 and 2015 by the statutory rates that 
incorporated the Pureplay settlement rates. See PAN Ex. 5014 ] 1(r); 
Herring WDT ] 25.\120\
---------------------------------------------------------------------------

    \120\ The statutory Pureplay settlement rates for 2014 and 2015, 
respectively, are 13[cent] and 14[cent] per 100 plays for 
advertising-supported services (or 25% of revenue, whichever is 
greater), and 23[cent] and 25[cent] per 100 plays, respectively, for 
subscription services in 2014 and 2015. Notification of Agreements 
Under the Webcaster Settlement Act of 2009, 74 FR 34796, 34799 (July 
17, 2009).
---------------------------------------------------------------------------

b. Key Provisions of the Pandora/Merlin Agreement.
    According to Pandora, the key terms of the Pandora/Merlin Agreement 
are those that set forth the rate structure, royalty payments, and 
steering provisions:

Rate Structure and Royalty Payments
     The agreement employs a greater-of royalty structure, with 
Pandora paying the greater of a per-play prong and a percent-of-revenue 
prong. The percent-of-revenue prong specifies 25% of Pandora's revenue, 
prorated based on the share of performances on Pandora accounted for by 
the Merlin Labels.
     The 2014 ``headline'' per-play rates are $0.[REDACTED] for 
each ad-supported performance and $0.[REDACTED] for each subscription 
performance. The 2015 ``headline'' per-play rates are $0.[REDACTED] for 
each ad-supported performance and $0.[REDACTED] for each subscription 
performance. PAN Ex. 5014 ] 3(a); Herring WDT ] 26; Shapiro WDT at 
26.\121\
---------------------------------------------------------------------------

    \121\ There is no separate fee in the agreement for ephemeral 
copies of the recordings; such copies are covered under and included 
within the performance fees above. PAN Ex. 5014 ] 3(d); Herring WDT 
] 26.

Steering Provisions
    Steering is the term Pandora uses to describe a licensee's 
``ability to control the mix of music that's played on the service in 
response to differences in royalty rates charged by different record 
companies.'' 5/8/15 Tr. 2683-4 (Shapiro). Just as the ``ratio 
equality'' is foundational to SoundExchange's rate proposal, the 
concept of ``steering'' is foundational to Pandora's rate proposal. 
Shapiro WDT at 27 (``This reduced per-play rate in exchange for 
increased plays is the central piece of the Merlin Agreement.'').
    According to Pandora, steering and the concomitant discounting 
terms are feasible in the noninteractive market because Pandora has now 
tested and proven its ability to modify its playlist-selecting 
algorithms to rely more or less heavily on the music of particular 
record companies so that it can steer its listeners toward or away from 
the music from any one record company, thereby permitting ``workable 
competition'' to emerge in the relevant, noninteractive webcasting 
market. 5/19/15 Tr. 4557 (Shapiro). By contrast, Pandora notes, no 
evidence of such a steering capability existed at the time of the Web 
II or Web III proceedings. Shapiro WDT at 16.
    Pursuant to the Pandora/Merlin Agreement, the ``headline'' per-play 
rates can be reduced by steering as follows.

           For Pandora's Ad-Supported Nonsubscription Service
------------------------------------------------------------------------
 
------------------------------------------------------------------------
                                  2014
------------------------------------------------------------------------
Headline Rate.............................  Steered Rate.
    $0.[REDACTED].........................     $0.[REDACTED].
------------------------------------------------------------------------
                                  2015
------------------------------------------------------------------------
Headline Rate.............................  Steered Rate.
    $ 0.[REDACTED]........................     $0.[REDACTED].
------------------------------------------------------------------------


                   For Pandora's Subscription Service
------------------------------------------------------------------------
 
------------------------------------------------------------------------
                                  2014
------------------------------------------------------------------------
Headline Rate.............................  Steered Rate.
    $0.[REDACTED].........................     $0.[REDACTED].
------------------------------------------------------------------------
                                  2015
------------------------------------------------------------------------
Headline Rate.............................  Steered Rate.
    $0.[REDACTED].........................     $0.[REDACTED].
------------------------------------------------------------------------

    Thus, Pandora claims that steering reduced the headline rates for 
its ad-supported, nonsubscription service by [REDACTED]% in 2014 and 
would reduce those headline rates by [REDACTED]% in 2015. Moreover, 
Pandora claims that steering reduced the headline rates for its 
subscription service by [REDACTED]% in 2014 and would reduce that 
headline rate by [REDACTED]% in 2015. PAN Ex. 5014 ] 4; Herring WDT ] 
27; Herring AWRT ] 48; Shapiro WDT at 27.
    The calculation of these effective steered rates is explained in 
paragraph 4 of the Pandora/Merlin Agreement, which sets forth the 
following provisions for calculating the rates resulting from steering, 
using the 2014 ad-supported headline rate of $0.[REDACTED] as an 
example.
    Pandora promises to increase ``quantity'' (spins) by at least 
[REDACTED]% in the aggregate above Merlin's ``Natural Performance 
Rate.'' \122\ However, Pandora will not pay a ``price'' equal to the 
$0.[REDACTED] headline rate for these additional spins. Instead, in 
exchange for its promise to play at least [REDACTED] % additional 
spins, Pandora will receive a ``discount'' on the price paid for 
[REDACTED].
---------------------------------------------------------------------------

    \122\ The Pandora/Merlin Agreement defines ``Natural Performance 
Rate'' as [REDACTED]. PAN Ex. 5014 ] 1(k). More specifically, 
Pandora promised an aggregate increase of Merlin-label spins of at 
least [REDACTED]%, while promising to [REDACTED] to increase the 
spins of individual Merlin member labels by at least that amount. 
Id. ] 4(a).
---------------------------------------------------------------------------

    That discount is calculated as [REDACTED]. PAN Ex. 5014 ] 4(a)-(c).
    In support of a statutory rate based on the steering aspects of the 
Pandora/Merlin Agreement, Pandora advances several arguments. First, 
Pandora maintains that steering embodies ``price competition at work,'' 
and therefore reflects an ``effectively competitive'' market. 5/19/15 
Tr. 4561-64 (Shapiro). Effective competition results from the power to 
steer because, according to Dr. Shapiro, a streaming service that 
possesses an ability to ``steer'' towards certain recordings, and away 
from others, will have ``much more

[[Page 26357]]

bargaining power and be able to negotiate a lower royalty rate.'' 
Shapiro WRT at 19.
    In theoretical terms, a service's ability to steer increases its 
price elasticity of demand, reducing the extent to which a licensor can 
mark up its price over marginal cost. 5/19/15 Tr. 4561-64 (Shapiro); 5/
8/15 Tr. 2725-27 (Shapiro); Pandora PFF ]] 147-148, 152-157 (and record 
citations therein). The relationship among elasticity, price and costs 
as a basis to measure market power is described by the Lerner Equation 
(or Lerner Index)--a fundamental economic pricing rule. Shapiro WDT at 
5. In mathematical terms, the Lerner Equation \123\ can be expressed 
as:
---------------------------------------------------------------------------

    \123\ The Lerner Equation states that there is an inverse 
relationship between the firm's margin (the gap between price and 
marginal cost) and the firm's elasticity of demand. That is, the 
increase in a buyer's (licensee's) own elasticity of demand (n) 
reduces the price (P) paid by the licensee over the licensor's 
marginal cost (MC) pursuant to the Lerner Equation. Thus, an 
increase in own-elasticity n (holding MC constant) reduces the value 
of each side of the equation. See generally Edwin Mansfield and Gary 
Yohe, Microeconomics 376 (11th ed. 2004) (``Economists often use the 
Lerner Index . . . to measure monopoly power or market power.''). 
[NB: The formula for the Lerner Equation appeared in a footnote in 
the determination as issued to the parties and the public, but it 
appears here in the body of the publication because of Federal 
Register drafting requirements.]
[GRAPHIC] [TIFF OMITTED] TR02MY16.001

    Second, Pandora asserts that steering is not only theoretical and a 
contractual commitment, it is occurring under the Pandora/Merlin 
Agreement. Specifically, Pandora is actually steering [REDACTED]% above 
Merlin's ``natural performance rate'' of sound recordings, greater than 
the [REDACTED]% it has contractually committed to steer--evidencing 
that Pandora's steering behavior is motivated by ``price differences,'' 
not merely by the contractual ``steering commitment.'' Shapiro WRT at 
41; see 5/18/15 Tr. 4229 (Herring); Herring AWRT ] 50.
    Dr. Shapiro noted that when steering is possible, the mere threat 
(explicit or implicit) by the service to divert performances from one 
record company to another gives the service negotiating leverage.'' 
Shapiro WRT at 20 (emphasis added). In such a market, he opines, ``[a] 
record company facing a webcaster with considerable ability to steer 
customers away from its music has a strong incentive to discount its 
music to increase the number of performances of its music made by that 
webcaster.'' Shapiro WDT at 9-10. Thus, according to Pandora, the 
ability to steer creates price competition that can obviate the need 
for any actual steering in the hypothetical market. Shapiro WDT at 9 
(``The net result in a workably competitive market may well be 
relatively little actual steering . . . .'').
    Pandora avers that the Pandora/Merlin Agreement's steering 
provisions reflect these competitive forces, i.e., a supplier offering 
a lower price in an attempt to gain volume. Shapiro WDT at 27 (``This 
reduced per-play rate in exchange for increased plays is the central 
piece of the Merlin Agreement. This feature plainly demonstrates that 
the Merlin Agreement is embracing the workings of a competitive 
market.''); Shapiro WRT at 19; see 5/19/15 Tr. 4574-5 (Shapiro).
    According to Pandora, from the ``willing buyer'' perspective, the 
ability to steer provides Pandora with the ``competitive incentive to 
play directly-licensed tracks more heavily than [it] would otherwise.'' 
Herring AWRT ] 48. On the other side of the transaction, according to 
Pandora, the record shows that for a ``willing seller,'' i.e., a Merlin 
member who opted-in, this steering-based agreement, constituted a 
``good competitive move,'' taken in the record company's ``self-
interest.'' 4/28/15 Tr. 610-11 (Van Arman).
    Pandora further avers that its ``overspinning'' of Merlin tracks by 
[REDACTED]% has not resulted in any negative feedback from Pandora 
listeners or any negative financial impact. 5/18/15 Tr. 4229-33 
(Herring) (explaining that Pandora increased plays of Merlin tracks, on 
an aggregate basis, by approximately [REDACTED]% in 2014, but this 
change in the mix of spins did not cause any increase in ``complaints 
about song quality from Pandora listeners).
c. Pandora's Steering Experiments
    In support of its assertion that the effects of potential steering 
can be pervasive in the noninteractive market, Pandora relies in part 
on its own internal ``steering experiments.'' More particularly, in 
2014, at Dr. Shapiro's direction, Pandora conducted a set of steering 
experiments to test its ability to overspin recordings owned by each of 
the Majors.
    The 2014 steering experiments were conducted by Pandora's in-house 
``Science Team'' which has primary responsibility for designing and 
analyzing ``controlled experiments.'' PAN Ex. 5020 ] 7 (McBride WDT). 
Pandora witness Dr. Stephen McBride is a member of Pandora's Science 
Team, which performs research and analyses to measure the effectiveness 
of features offered by Pandora. McBride WDT ]] 1, 5. The Science Team 
is composed of 15 individuals, 13 of whom hold doctorate degrees in 
computer science, engineering, statistics, or economics from leading 
academic institutions. Id. ] 5.
    Pandora's controlled experiments (including the steering 
experiments) consist of comparisons between randomly selected groups of 
listeners, one group receiving a manipulated experience (the 
``treated'' group) and the other group receiving the standard Pandora 
experience (the ``control'' group). Id. These experiments are 
randomized, controlled, and blind. Id.\124\
---------------------------------------------------------------------------

    \124\ ``Randomized'' means listeners are assigned randomly to 
either the ``treated'' group or the ``control'' group, to ensure 
valid causal inference. Id. at n.1. ``Controlled'' means the outcome 
is a comparison between those receiving the exposure and those not 
receiving the exposure, to account for the ``placebo effect.'' Id. 
``Blind'' means experimental subjects are unaware of their 
participation in an experiment and, therefore, are also unaware of 
whether they have been assigned to the treatment group or the 
control group. Id.
---------------------------------------------------------------------------

    Pandora initiated the steering experiments because: (1) It had the 
general technological capability to perform more of one record 
company's sound recordings and/or fewer of another record company's 
sound recordings; and (2) it recognized that, as a noninteractive 
service it has the economic incentive to ``steer'' its performances 
toward music owned by a particular record company if that music is 
available at a lower royalty rate. Shapiro WRT at 22-25. Therefore, 
Pandora decided to determine through its steering experiments whether 
and to what extent it could use this technological ability to steer 
performances without negatively affecting listenership. Herring WDT ]] 
22, 31-32; McBride WDT ]] 12-22; Shapiro WDT at 27; Shapiro WRT at 22-
25.
    Thus, from June 4, 2014, to September 3, 2014 (13 weeks), Dr. 
McBride and his colleagues at Pandora conducted a series of steering 
experiments in order to answer two questions: (1) Whether increases or 
decreases in performances of sound recordings owned by a particular 
record company would have a measurable impact on a key listener metric 
(average hours listened per registered user; and (2) whether Pandora's 
engineers could precisely manipulate the share of music played 
according to the record company that owns the recordings. McBride WDT 
]] 7, 12, 15.
    The Steering Experiments consisted of a group of 12 experiments. 
Each experiment involved a combination of one of three target ownership 
groups

[[Page 26358]]

(UMG, Sony or WMG) and a target ``deflection'' in share of spins 
(treatment group) as compared to spins that would occur according to 
the standard Pandora music recommendation results (control group). 
McBride WDT ] 15.\125\ The spin share deflections (the ``steering'') 
were: -30%, -15%, +15%, and +30% for each of the three ownership groups 
manipulated. Id. The experimental subjects of the Steering Experiments 
were all Pandora listeners, each of whom was randomly assigned to one 
of the 12 treatment groups, to the single control group, or were 
included in the portion of listeners excluded from all experiments. 
McBride WDT ] 16.
---------------------------------------------------------------------------

    \125\ The Steering Experiments operated through Pandora's ``A/B 
Framework,'' by which the Science Team intentionally changes one 
aspect of the Pandora experience for a sample group of listeners 
(the ``B'' group, or treated group) and then compares the effects to 
groups of listeners who did not experience the change (the ``A'' 
group, or control group). McBride WDT ]] 7-8 and 16.
---------------------------------------------------------------------------

    The experiments demonstrated that Pandora was able to steer -15% or 
+15% for all three Majors without causing a statistically significant 
change in listening behavior. McBride WDT ] 21. However, Pandora was 
unable to steer -30% or + 30% for Universal or Sony without creating a 
statistically significant change in listening behavior. Id.
d. Additional Terms in the Pandora/Merlin Agreement \126\
---------------------------------------------------------------------------

    \126\ Dr. Shapiro's decision as to whether and to what extent to 
adjust his benchmark to reflect such additional terms is considered 
elsewhere in this determination.
---------------------------------------------------------------------------

    The Pandora/Merlin Agreement contains the following additional 
terms that are specifically addressed by Dr. Shapiro in his benchmark 
analysis:
     [REDACTED]: Pandora also agreed to provide the Merlin 
members who opted in with a [REDACTED] in the event Pandora [REDACTED]. 
PAN Ex. 5014 ] 3(e); Herring WDT ] 26; Shapiro WDT at 28-29. This 
provision has not been triggered, 6/1/15 Tr. 6897 (Lexton), and 
Merlin's negotiators understood it was unlikely ever to be triggered. 
Id. at 6956-57; PAN Ex. 5110.
     Compensable Performances: Performances of [REDACTED] are 
non-compensable. All other performances are subject to a fee. 5/18/15 
Tr. 4227 (Herring). Certain tracks designated as [REDACTED] are 
compensable at only [REDACTED] the headline rates. 5/18/15 Tr. 4227 
(Herring).
     [REDACTED]: The Merlin members who opt-in are [REDACTED] 
to receive a specified [REDACTED]. PAN Ex. 5014 ] 5; Herring WDT ] 29.
     Ancillary Promotional Benefits: Additional non-pecuniary 
promotional benefits for Merlin, including [REDACTED]. See PAN Ex. 5014 
]] 6-11.

See Herring WDT ] 30; Shapiro WDT at 29.
e. Pandora's Conclusion Regarding the Benchmark Status of the Pandora/
Merlin Agreement
    Based on the foregoing, Pandora asserts that the Pandora/Merlin 
Agreement is the best benchmark in this proceeding because
     it constitutes a competitive and arms-length direct 
license between a noninteractive webcaster and thousands of record 
companies;
     it concerns the same rights as are covered by the 
statutory license;
     it covers the same type of products at issue in this 
proceeding--public performances of sound recordings on noninteractive 
Internet radio; and
     it involves the same ``willing sellers'' (record companies 
that own sound recording copyrights) and a ``willing buyer'' (Pandora) 
that exist in the hypothetical market.

PAN Exs. 5014-5015; Shapiro WDT at 24-25; see also 5/28/15 Tr. 6323-24 
(Rubinfeld) (agreeing that the Pandora/Merlin Agreement satisfied each 
such criterion).
3. Pandora's Calculation of Royalty Rates Implied by Its Proposed 
Benchmark
    Pandora and its economic expert, Dr. Shapiro, did not simply apply 
the steering-adjusted rates implied by the Pandora/Merlin Agreement, 
but rather also considered potential further adjustments that might be 
required for an ``apples-to-apples'' comparison of the terms in the 
Pandora/Merlin Agreement with the statutory terms applicable to 
noninteractive licenses. See Shapiro WDT at 20-21, 23-37, Appendix D 
(``Analysis of Merlin Agreement'').
a. Potential Additional Adjustments
    The three principal aspects of the Merlin Agreement that Dr. 
Shapiro considered for potential additional adjustments were:
    1. Differences in the determination of which performances are 
compensable as compared to the statutory license (i.e., consistent 
treatment of [REDACTED] and [REDACTED]);
    2. additional financial terms of the Pandora/Merlin Agreement, 
including [REDACTED]; and
    3. non-pecuniary terms in the Pandora/Merlin Agreement.

5/19/15 Tr. 4592-93 (Shapiro); Shapiro WDT Appendix D at D-1-D-9; see 
Shapiro WDT at 30.
i. Adjustment for Royalty Bearing Plays ([REDACTED])
    This adjustment is required, according to Dr. Shapiro, because, on 
the one hand, the Pandora/Merlin Agreement treats [REDACTED] as non-
compensable and the performance of [REDACTED] as compensable, but the 
statutory licenses takes the opposite tack on both issues--treating 
[REDACTED] as compensable and the performance of [REDACTED] as non-
compensable. Id. To adjust for both of these factors Dr. Shapiro took 
the following steps.
    First, he calculated the total payment Pandora expected to make to 
the opting-in Merlin members for all sound recordings under the 
Pandora/Merlin Agreement.
    Second, he divided that total payment by the number of performances 
of Merlin Label recordings that would be compensable under the 
statutory license (as currently defined). Shapiro WDT at 30-31; 
Appendix D.
    Dr. Shapiro describes this calculation as yielding a per-play rate 
that the Pandora/Merlin Agreement would establish if Pandora and Merlin 
had negotiated an agreement with a fixed per-play rate that treated 
[REDACTED] as compensable and performances of [REDACTED] as non-
compensable. Id. To make the point more clearly, Dr. Shapiro offered 
the following example:

----------------------------------------------------------------------------------------------------------------
                                                            Calculation                         Value
----------------------------------------------------------------------------------------------------------------
Pandora Performances of Merlin Music...........  [a]..............................                     1,000,000
    Number of [REDACTED].......................  [b]..............................                       200,000
    Number of [REDACTED].......................  [c]..............................                       100,000
Compensable Performances Under Merlin License..  [d] = [a]-[b]....................                       800,000
Payment Per Compensable Play Under Merlin        [e]..............................                      $0.00125
 License.
Total Royalty Payment Under Merlin License.....  [f] = [d] x [e]..................                        $1,000

[[Page 26359]]

 
Compensable Performances Under Statutory         [g] = [a]-[c]....................                       900,000
 License.
Effective Per-Play Rate Under Statutory License  [h] = [f] / [g]..................                      $0.00111
----------------------------------------------------------------------------------------------------------------

Shapiro WDT at 30-31; 5/19/15 Tr. 4589-92 (Shapiro); see id.at 4594 
(noting that $0.[REDACTED] rate was ``an illustrative example,'' and 
``not a rate proposal'').\127\
---------------------------------------------------------------------------

    \127\ Dr. Shapiro also made a small adjustment in his effective 
royalty rate calculation to reflect that certain tracks [REDACTED]. 
PAN Ex. 5014 (1)(c) and 3(c) . Dr. Shapiro assumed that [REDACTED] 
would represent [REDACTED]% of Merlin tracks overall. Shapiro WDT at 
App. D-7.
---------------------------------------------------------------------------

ii. Potential Adjustments for Additional Financial Terms
    The Pandora/Merlin Agreement contains additional financial terms 
not permitted in the statutory license. Dr. Shapiro attempted to 
determine whether it was appropriate to increase his proposed rate to 
reflect values for these items. Dr. Shapiro ultimately found no basis 
to increase his proposed rates to reflect these items. Shapiro WDT at 
28-29 (Appendix D); see 5/19/15 Tr. 4592-93 (Shapiro). Broadly, Dr. 
Shapiro found no value in these additional terms because neither 
Pandora nor Merlin had calculated or even estimated any value 
attributable to these items. More particularly, Dr. Shapiro analyzed 
these additional financial terms in the following manner.
(A) The [REDACTED] Provision
    Dr. Shapiro assigned no separate value to Merlin's contractual 
right to receive [REDACTED]. According to Dr. Shapiro, he made no 
adjustment to his proposed rate to reflect this term because Pandora's 
financial projections did not show that Pandora would [REDACTED] in 
2014 or 2015. Id. at 4689-90.
(B) The [REDACTED]
    Dr. Shapiro also assigned no separate value to the [REDACTED] that 
provided Merlin with [REDACTED]. He testified that he declined to add a 
separate value for [REDACTED] because:

    [The] rate proposal is based on payments that Pandora is making 
and will be making to Merlin where the guarantee is binding. So the 
insurance is coming in. And those payments are included and, of 
course, raise the amounts of money that Pandora is paying and, 
therefore, they raise the rate that's in my proposal, so it includes 
that.

Id. at 4696.
iii. Potential Adjustments for Non-Pecuniary Terms
    The Pandora/Merlin Agreement also contains non-pecuniary financial 
terms that are not permitted in the statutory license. Dr. Shapiro 
attempted to determine whether it was appropriate to increase his 
proposed rate to reflect any values for these items. Shapiro WDT at 29-
31; Appendix D at D-10-19 (``Non-Pecuniary Terms in the Merlin 
Agreement''); see 5/19/15 Tr. 4595-98 (Shapiro).
(A) [REDACTED] on Pandora
    Dr. Shapiro did make an adjustment to increase his calculated 
``steered'' rate by 0.0002[cent] (i.e., $0.000002) per-performance to 
reflect [REDACTED] made available by Pandora to Merlin in [REDACTED] of 
the Pandora/Merlin Agreement. Shapiro WDT at 31; Shapiro WDT at 31; 
Appendix D at D-11 to D-12.
(B) [REDACTED]
    Pursuant to the Pandora/Merlin Agreement, Pandora agreed to allow 
each Merlin member that had opted-in to [REDACTED]. PAN Ex. 5014 Sec.  
7. Dr. Shapiro did not make an adjustment to increase the value his 
benchmark for this non-statutory benefit, because Pandora personnel 
told him that ``[REDACTED] are mutually beneficial to the Merlin Labels 
and to Pandora.'' Shapiro WDT at D-12. With regard to the benefit to 
Pandora, Dr. Shapiro was informed by Pandora personnel that ``Pandora 
considers that [REDACTED] strengthen artist engagement with Pandora and 
thereby drive incremental listening and listeners to the service, build 
brand loyalty, and enhance listener retention.'' Id.; see Westergren 
WDT ] 38. Accordingly, Dr. Shapiro could not determine that the value 
of such [REDACTED] was greater to the Merlin members than to Pandora, 
and, consequently, he concluded that no adjustment to the effective 
royalty rate was necessary. Shapiro WDT at D-13.
(C) [REDACTED]
    Each Merlin member that opted-in to the agreement could elect to 
[REDACTED]. PAN Ex. 5014 (Pandora/Merlin Agreement Sec.  8).
    According to Dr. Shapiro, [REDACTED] are mutually beneficial to the 
opting-in Merlin members and to Pandora. Shapiro WDT at D-13. Dr. 
Shapiro took note that Pandora believed the presence of [REDACTED] 
might be ``accretive to the listener experience'' as well as a form of 
advertising, and that Pandora was in fact planning controlled tests to 
measure listener responses and solicit listener feedback in order to 
determine the appropriate nature and frequency of [REDACTED] on 
[REDACTED] stations.'' Id. In light of the mutually beneficial nature 
of bumpers, Pandora personnel informed Dr. Shapiro that, even without a 
contractual obligation to do so, Pandora offered [REDACTED], gratis, 
along with Pandora Premieres tracks. Shapiro WDT at D-13 & n.26.
    In light of the foregoing, Dr. Shapiro could not conclude that the 
[REDACTED] provision on balance created more value for Merlin than for 
Pandora, and therefore he made no adjustment to his proposed effective 
royalty rate on that basis.
(D) Access to Pandora Metrics
    Pursuant to the Pandora/Merlin Agreement, opting-in Merlin members 
will receive [REDACTED] metrics regarding [REDACTED]. PAN Ex. 5014 
Sec.  9 (Pandora/Merlin Agreement) see also Shapiro WDT at D-14 & 
n.29); Herring WDT ] 30.
    However, Dr. Shapiro noted that, at the time he prepared his 
testimony, Pandora was also developing a service called the Artist 
Marketing Platform (``AMP''), expected to launch in October 2014, 
through which Pandora proposed to provide these same metrics to all 
artists, not only to artists on the labels of Merlin members. Pandora 
did not plan to charge for AMP. Shapiro WDT at D-14 & n.30; see Herring 
WDT ] 30.
    Since Pandora stated that it intended to make its AMP available to 
all artists at no charge, Dr. Shapiro concluded that no adjustment to 
the effective royalty rate was necessary to account for the Pandora 
Metrics to which Merlin Labels would have access. Shapiro WDT at D-14.
(E) [REDACTED]
    Under the Agreement, Pandora, [REDACTED], may create a [REDACTED]. 
PAN Ex. 5014 Sec.  10 (Pandora/Merlin Agreement); see also Shapiro WDT 
at D-14, D-15 & n.31.
    Pandora personnel explained to Dr. Shapiro that such [REDACTED] 
were potentially mutually beneficial to the Merlin members and to 
Pandora. Id. at

[[Page 26360]]

n.32. The Merlin members benefit from [REDACTED], generating benefits 
to the Merlin members in the form of enhanced royalties and discovery 
of their other artists. Id. For Pandora, these [REDACTED] offer another 
context for engaging listeners and, by increasing the number of Merlin 
member plays on Pandora, these [REDACTED] work in tandem with the 
steering provisions in the Pandora/Merlin Agreement.
    By way of comparison, Dr. Shapiro noted that Pandora is working 
with another entity to [REDACTED] that will feature specific artists. 
Id. at n.34; see Herring WDT ] 30 n.11. Pandora personnel informed Dr. 
Shapiro that neither Pandora nor the entity [REDACTED] is [REDACTED], 
which suggested to Dr. Shapiro that such [REDACTED] create ``mutual and 
roughly equalized benefits for both Pandora and the [REDACTED] 
creator.'' Shapiro WDT at D-15.
    For these reasons, Dr. Shapiro concluded that no adjustment to the 
effective royalty rate was necessary to account for the [REDACTED] 
provision in the Merlin Agreement. Id. at D-15 to D-16.
(F) Pandora Presents and Pandora Premieres Events
    Pursuant to the Pandora/Merlin Agreement, opting-in Merlin members 
receive [REDACTED] in ``Pandora Presents'' and ``Pandora Premieres'' 
events. PAN Ex. 5014 Sec.  11 (Pandora/Merlin Agreement). Dr. Shapiro 
considered these two types of events separately.
(1) Pandora Presents
    Pandora Presents is a program launched in December 2011, through 
which artists perform live before an audience of fans that Pandora 
identifies and invites without charge. Fleming-Wood WDT ] 29. Each of 
these events is designed for and sponsored by an advertiser. Pandora 
essentially plays the role of a concert producer and promoter, choosing 
artists to feature in Pandora Presents events that will best speak to 
the target audience of the sponsoring advertiser. Id. Pandora 
identifies and matches advertisers and artists that appeal to a 
particular demographic, then books a location for the event and markets 
the event to Pandora listeners with a demonstrated interest in the 
featured artist. Pandora [REDACTED]. Pandora [REDACTED]; sometimes 
Pandora [REDACTED]. Shapiro WDT D-17 n.43.
    There have been between [REDACTED] Pandora Presents events per year 
featuring artists on Merlin labels. Id. Pandora estimates that Merlin 
member artists [REDACTED]. Id.
    Pandora acknowledges that Pandora Presents generates promotional 
benefits for the featured artists. However, Pandora also understands 
that Pandora Presents also generates marketing benefits for Pandora 
with respect to advertisers, listeners, artists, and labels. Id. More 
particularly, Pandora not only views the program as a marketing 
platform that adds value for Pandora's service, but Pandora has also 
required that Pandora Presents events [REDACTED]. Fleming-Wood WDT ] 29 
& n.5; see Westergren WDT ] 38. Pandora Presents events thus generate 
additional advertising revenue for Pandora as well as promotion of the 
Pandora brand with Pandora listeners. Over the long run, Pandora 
considers that Pandora Presents events lead to increased listener 
satisfaction and retention, and thus to greater advertising and 
subscription revenue. Id.
    Because of the foregoing, Dr. Shapiro likened Pandora's role in 
coordinating Pandora Presents events to that of an independent concert 
producer and promoter. Therefore, Dr. Shapiro concluded that the 
[REDACTED] Pandora Presents events, on balance, did not call for any 
adjustment to the effective royalty rate he had calculated. Shapiro WDT 
at D-17.
(2) Pandora Premieres
    Pandora Premieres is a program through which Pandora promotes 
albums in the week prior to their release. Fleming-Wood WDT ] 30. 
Pandora sends an email inviting certain listeners (selected based on 
their listening tastes and profiles) to listen to a new album during 
the week prior to its release date. Id.; see also Shapiro WDT at D-17 
n.45. When selecting albums to feature on Pandora Premieres, Pandora 
reviews albums and artists proposed by the record companies to ensure 
``a good fit with the program'' and to ``generate a high volume of 
listening.'' Fleming-Wood WDT ] 30. Pandora provides these selected 
Pandora Premieres listeners with ``click-to-buy functionality.'' Id. at 
n.46.
    Pandora requires the labels to waive royalties for the one-week 
period that an album is on Pandora Premieres. Shapiro WDT at D-18. 
Pandora personnel informed Dr. Shapiro that Pandora has never charged 
labels for their participation in Pandora Premieres and has no plans to 
do so. Id. at D-18 n.49.
    Pandora Premieres features two to five albums per week, or about 
150 albums annually. Fleming-Wood WDT ] 30. Pandora personnel informed 
Dr. Shapiro that approximately [REDACTED] percent of these albums are 
by artists whose labels are Merlin members and Pandora estimates that 
participation by artists whose labels are Merlin members will 
[REDACTED] to [REDACTED] percent. Shapiro WDT at D-18 nn.51, 52. 
Pandora also estimates that the number of Merlin label albums featured 
on Pandora Premieres will [REDACTED] from around [REDACTED] per year to 
around [REDACTED] per year. Id. at n.53.
    Dr. Shapiro acknowledges that Pandora Premieres generates 
promotional benefits for the featured artists and their labels, but 
that benefit is offset by (and evident from) the fact that labels waive 
royalties for the one-week period that an album is on Pandora 
Premieres. Shapiro WDT at D-18. Pandora also receives significant 
benefits from Pandora Premieres, because it offers a benefit to Pandora 
listeners, who receive an early opportunity to listen to entire new 
albums from artists they like and to buy the music. Fleming-Wood WDT ] 
30.
    On balance, therefore, Dr. Shapiro concluded that Pandora Premieres 
generates significant benefits both to the artists and label, on the 
one hand, and to Pandora as well. Because the program is mutually 
beneficial, and because Pandora [REDACTED], Dr. Shapiro concluded that 
the [REDACTED] in Pandora Premieres does not call for an adjustment to 
the effective royalty rate he had calculated. Shapiro WDT at D-19.\128\
---------------------------------------------------------------------------

    \128\ Dr. Shapiro also considered two factors enumerated in the 
statutory willing buyer/willing seller formulation--Pandora's 
potential role in promoting or substituting for other Merlin label 
revenue streams, and Pandora and Merlin's ``relative contribution.'' 
He concluded that, as rational economic actors with access to 
information regarding such factors, the parties would attempt to 
make sure that such elements were ``fully baked in'' and 
``automatically included'' in the negotiated rates. 5/19/15 Tr. 
4605-06 (Shapiro). Given this fact, Dr. Shapiro made no further 
adjustments to the rates he derived from the Pandora/Merlin 
Agreement.
---------------------------------------------------------------------------

iv. Adjustments Over the 2016-2020 Period
    Dr. Shapiro adjusted his proposed rates higher to reflect 
anticipated inflation over the 2016-2020 statutory period. Shapiro WDT 
at 35. However, at the hearing, Dr. Shapiro testified that he would 
have preferred not to predict future inflation, but rather to include a 
statutory term requiring the rates to be adjusted annually to reflect 
actual inflation. 5/19/15 Tr. 4608-10 (Shapiro). Dr. Shapiro did not 
make any other adjustments to reflect anticipated or predicted changes 
over the statutory

[[Page 26361]]

period. His adjusted rates are set forth in the table below: \129\
---------------------------------------------------------------------------

    \129\ The rates in the table differ from the rates proposed by 
Pandora because the proposed rates are rounded.
    \130\ Dr. Shapiro blended the ad-supported and subscription 
rates to create his ``blended'' rate. However, Pandora does not 
propose that the Judges adopt such a ``blended'' rate.

                               Effective Per-Play Royalty Rates After Adjustments
                                          [2016 Through 2020 ([cent])]
----------------------------------------------------------------------------------------------------------------
                                                  Inflation rate   Advertising-
                                                       * (%)         supported     Subscription    Blended \130\
----------------------------------------------------------------------------------------------------------------
30% Steering:
    2016........................................            2.20          0.1105          0.2146          0.1225
    2017........................................            1.73          0.1124          0.2183          0.1246
    2018........................................            1.74          0.1144          0.2221          0.1268
    2019........................................            1.76          0.1164          0.2260          0.1290
    2020........................................            1.78          0.1185          0.2300          0.1313
12.5% Steering:
    2016........................................            2.20          0.1205          0.2238          0.1324
    2017........................................            1.73          0.1226          0.2276          0.1347
    2018........................................            1.74          0.1247          0.2316          0.1370
    2019........................................            1.76          0.1269          0.2357          0.1394
    2020........................................            1.78          0.1291          0.2399          0.1419
----------------------------------------------------------------------------------------------------------------
* The inflation rate reported for 2016 accounts for expected inflation from the mid-point of the period Q4 2014
  through 2015 (May 2015) to the midpoint of 2016 (August 2016). The other inflation rates account for annual
  expected inflation to the mid-point (August) of each calendar year listed.

    Dr. Shapiro explained why he proposed two alternative rates: ``[The 
rate selected] depends on how much steering Pandora is doing. If they 
do more steering, that lowers the rate they're going to be paying, in 
fact, and so then that lowers the corresponding statutory rate derived 
from the Merlin Agreement.'' 5/19/15 Tr. 4603-04 (Shapiro).
b. Pandora's Proposed Greater-of Rate Structure Including a 25% of 
Revenue Prong
    In addition to the proposed per-play rates, Dr. Shapiro's rate 
proposal employs a greater-of structure, with the second prong set at 
``25 percent of the revenue attributable to the licensed music,'' as 
such revenue is defined in the regulations proposed by Pandora. Shapiro 
WDT at 20 & n.30; 5/19/15 Tr. 4608:16-23 (Shapiro). This is the same 
greater-of rate structure adopted by the parties to the Pandora/Merlin 
Agreement. PAN Ex. 5014 ] 3(a). According to Dr. Shapiro, a greater-of 
formula with a ``percent-of-revenue'' prong is proper for the following 
reasons.

    [T]he Merlin Agreement . . . specifies that Pandora's royalty 
payments to the participating Merlin Labels . . . will be at least 
25 percent of its revenue attributable to the music of those labels. 
These agreements show that, as a practical matter, royalties for 
recorded music can indeed be based on webcaster revenues, at least 
in the case of Pandora. Furthermore, webcasters and many other types 
of music users pay royalties to music publishers and composers, 
through ASCAP and BMI that are set as a percentage of revenue. For 
example, the ASCAP rate court recently established a royalty rate 
for Pandora of 1.85 percent of revenue for the period 2011-2015 for 
its performance of musical compositions in the ASCAP repertoire. 
This indicates to me that webcasting revenues can serve as a 
practical basis for royalty payments.

Shapiro WDT at 23.\131\
---------------------------------------------------------------------------

    \131\ Dr. Shapiro assigned no separate value to the 25% of 
revenue prong for adjustment of the per-play prong, because he 
understood that the per-play prong would result in a payment by 
Pandora to Merlin of approximately [REDACTED]% of revenue 
attributable to Merlin, thus not triggering the lower 25% prong. 5/
19/15 Tr. 4683-4 (Shapiro). Further, because Dr. Shapiro included a 
second prong incorporating the 25% of revenue royalty payment, he 
concluded that it would be ``double counting or just nonsensical'' 
to add the value of that prong into the per-play prong. Id. at 4686.
---------------------------------------------------------------------------

c. Pandora's Proposed Application of the Pandora/Merlin Rates to the 
Majors
    Pandora avers that the effective rates established by the Pandora/
Merlin Agreement are not only representative of the rates that Indies 
would receive as willing sellers in the hypothetical marketplace, but 
are also representative of the rates that the Majors would receive in 
the hypothetical marketplace. Pandora's explanation as to why this 
extrapolation is warranted is based on its distinction between greater 
revenue derived from a higher number of plays as opposed to greater 
revenue from a higher per-play rate. As Dr. Shapiro opined, Majors have 
a higher share of the overall plays on Pandora than the Merlin Labels 
do, and thus they receive more in royalty income because that ``occurs 
automatically under a per-play rate structure or a percent-of-revenue 
structure with payments prorated according to label share.'' Shapiro 
WDT at 37-38. The relevant question for purposes of rate-setting, 
therefore, according to Dr. Shapiro, ``is whether the repertoires of 
the [Majors] would command a higher rate per play or a higher percent-
of-revenue than the Merlin Labels in a workably competitive market.'' 
Id.
    Pandora answers this question in the negative, for two reasons. 
First, according to Dr. Shapiro, the empirical evidence demonstrates 
that there is no greater promotional effect on the sale of songs from 
the Majors (as compared to the Indies) from performances on Pandora to 
support an upward adjustment to the Merlin benchmark. 5/19/15 Tr. 4623-
64 (Shapiro). Second, Pandora has the same ability to steer toward and 
away from the repertoires of each of the Majors, just as it has done 
with the Merlin Labels. See 5/19/15 Tr. 4624-30 (Shapiro); Shapiro WDT 
Appendix F at F-6.\132\
---------------------------------------------------------------------------

    \132\ Dr. Shapiro's conclusion that noninteractive services can 
steer away from the Majors as well as the Indies is based upon 
Pandora's ``steering experiments.''
---------------------------------------------------------------------------

    To bolster this argument, Pandora notes that Dr. Rubinfeld's 
analysis vis-[agrave]-vis his own interactive benchmark reveals that 
Merlin receives essentially the same level of monetary consideration as 
the Majors in the interactive market. Pandora concluded therefore that 
the effective rates derived from the Pandora/Merlin Agreement

[[Page 26362]]

indeed can serve as benchmarks for the rates to be paid by the Majors. 
See Pandora PFF ]] 158-163 (and citations to the record therein).
4. SoundExchange's Criticisms of the Pandora Rate Proposal
    SoundExchange opposes the use of the Pandora/Merlin Agreement as a 
benchmark in this proceeding. Its opposition is based upon several 
principal arguments.
a. The Pandora/Merlin Agreement Creates New Rights and New Obligations 
That Are Unavailable Under the Statutory License
    SoundExchange asserts that the Pandora/Merlin Agreement does not 
cover the same rights that are available under the statutory license 
and also creates new obligations that are unavailable under the 
statutory license. Specifically, SoundExchange avers that the Pandora/
Merlin Agreement contains the following extra-statutory rights and 
duties:
     [REDACTED];
     [REDACTED];
     [REDACTED];
     [REDACTED];
     [REDACTED];
     [REDACTED];
     [REDACTED]; and
     [REDACTED].

See PAN Ex. 5014, Sec. Sec.  1(c)(v), Sec.  2(c) and 13; see generally 
SX PFF ]] 559-562 (and record citations therein).
    Given these differences between the Pandora/Merlin Agreement and 
the statutory license, SoundExchange concludes that the former at best 
is but a weak benchmark for the latter. See SX PFF ] 558 (quoting SDARS 
II, 78 FR at 23064 (Apr. 17, 2013)) (Additional considerations and 
rights granted in [a proposed benchmark] that are beyond those 
contained in the Section 114 license weaken the [benchmark's] 
``comparability as a benchmark.'').
b. Dr. Shapiro Failed Adequately To Value the Non-Statutory 
Consideration and Thus Wrongly Failed To Increase His Benchmark
    According to SoundExchange, not only is the Pandora/Merlin 
Agreement a deficient benchmark, Dr. Shapiro also wrongly failed to 
increase the value of that benchmark to reflect the value of the non-
statutory consideration in the Pandora/Merlin Agreement. SoundExchange 
asserts that Dr. Shapiro instead focused only on the lack of value 
attributed by Pandora to these other forms of consideration. See 
Shapiro WDT App. D at 1; 5/19/15 Tr. 4670 (Shapiro). However, 
SoundExchange notes that Dr. Shapiro acknowledged on cross-examination 
that he thought it would be important to know Merlin's expectations as 
to value in order to do a ``proper analysis'' of the value of the 
Pandora/Merlin Agreement.'' Id. at 467-71. Moreover, SoundExchange 
notes that the value analysis undertaken by Dr. Shapiro is not based on 
Pandora's expectations that existed before the execution of the 
Pandora/Merlin Agreement, but rather on the valuation evidence he 
obtained from Pandora after the Pandora/Merlin Agreement had been 
executed. Id. at 4669.
    SoundExchange asserts that, had Dr. Shapiro considered the value 
placed on these extra-statutory elements of consideration by Merlin and 
its members, the total value of the consideration would have at least 
equaled the existing Pureplay statutory settlement rates for 2014 and 
2015. In support of this point, SoundExchange relies in substantial 
measure on the testimony of one of Merlin's two chief negotiators of 
the Pandora/Merlin Agreement, Charlie Lexton, Merlin's Head of Business 
Affairs and General Counsel. SX Ex. 13 ] 1 (Lexton WRT). Mr. Lexton 
testified that, in Merlin's view, the consideration provided to Merlin 
members by the Pandora/Merlin Agreement was, ``at worst, no lower than 
the compensation under the existing statutory rate paid by Pandora.'' 
Id. at 17.
    More particularly, SoundExchange relies on the following evidence 
and testimony with regard to items of extra-statutory consideration.
i. The [REDACTED] Provision and Merlin's [REDACTED]
    According to SoundExchange, the evidence shows that Merlin and its 
members placed a value on the [REDACTED] provision, because Merlin 
obtained this provision through its negotiations with Pandora. 6/1/15 
Tr. 6894-95 (Lexton). Specifically, Merlin had initially asked for 
[REDACTED], which Pandora refused to provide, leading to this 
[REDACTED] provision as an alternative to [REDACTED]. Id. Further, Mr. 
Lexton testified that Merlin ``definitely'' would not have entered into 
the Pandora/Merlin Agreement if the [REDACTED] provision had not been 
part of the agreement. Id. at 6898-99.
    Mr. Lexton said that this provision was important because Merlin 
believed, after considering [REDACTED], that there was a reasonable 
chance that [REDACTED] provision would be triggered, particularly 
during Pandora's fourth quarter of 2014. 6/1/15 Tr. 6896-98 (Lexton). 
Mr. Lexton further noted that Pandora offered Merlin the [REDACTED] the 
Pandora/Merlin Agreement as a counterproposal to Merlin's proposal to 
[REDACTED]. SX Ex. 310 at 1; 6/1/15 Tr. 6986 (Lexton). In the same 
vein, Mr. Van Arman, co-founder and co-owner of the Indie record 
company (and Merlin member) Secretly Group, testified that the presence 
of the [REDACTED] provision was one of the reasons his labels opted-in 
to the Pandora/Merlin Agreement. 6/2/15 Tr. 7172 (Van Arman).
ii. The [REDACTED] Provision
    The Pandora/Merlin Agreement obliges Pandora to [REDACTED] to the 
opting-in Merlin members. PAN Ex. 5014 Sec.  5. These [REDACTED] are 
not available under the statutory license and are not replicated in 
Pandora's rate proposal. SoundExchange notes that Mr. Lexton testified 
that Merlin would not have entered into the Pandora/Merlin Agreement if 
it had not contained these [REDACTED] commitments. 6/1/15 Tr. 6906 
(Lexton). SoundExchange also notes that Pandora itself viewed the 
[REDACTED] as a valuable [REDACTED] provision. See SX Ex. 310 at 2 (a 
contemporaneous Pandora negotiating document, in which Mr. Herring 
wrote: ``[REDACTED]'').
iii. Advertising/Promotional Benefits
    Mr. Lexton testified that Merlin would not have entered into the 
Pandora/Merlin Agreement if it had not included the advertising and 
promotion benefits ultimately embodied in the agreement. 6/1/15 Tr. 
6909 (Lexton). According to Mr. Lexton, these benefits clearly were of 
value to Merlin's members. Id. at 6880. He explained that these 
advertising and promotion provisions ``provided considerable value that 
could not be replicated by the statutory license.'' SX Ex. 13 ] 43 
(Lexton WRT).
    In like fashion, Simon Wheeler, Director of Digital for another 
Merlin member, Beggar's Group, testified that one of his company's 
motivations for opting-in to the Pandora/Merlin Agreement was that it 
afforded Beggar's Group the ability to ``tap into'' these promotional 
opportunities that were unavailable under the statutory license. SX Ex. 
31 ] 23 (Wheeler WRT).
    SoundExchange also notes that Mr. Herring, one of Pandora's 
negotiators, likewise recognized that these promotional tools had 
potential value to Merlin, and, indeed, he acknowledged his awareness 
that ``Merlin believed that [these provisions] added value.'' 5/18/15 
Tr. 4275-76 (Herring). He further acknowledged his awareness that 
Merlin had ``sold'' the promotional

[[Page 26363]]

benefits of the Pandora/Merlin Agreement ``pretty strongly'' to its 
members. Id. at 4279; see SX Ex. 2237 at 1.
iv. Access to Data
    When Pandora first proposed a direct license to Merlin, Pandora 
offered Merlin and its members access to Pandora's internal data. SX 
Ex. 104 at 5. The right to such access was embodied in the final 
Pandora/Merlin Agreement. PAN Ex. 5014 Sec.  9. Mr. Lexton testified 
that licensors do not have access to this type of data under the 
statutory license. Lexton WRT ] 40.
    Both Pandora and Merlin acknowledged that such data are valuable to 
record labels generally. Westergren WDT at 16-17; SX Ex. 1736 at 5; 6/
2/15 Tr. 7157 (Van Arman); see 6/1/15 Tr. 7099-7100, 7106-07 (Simon 
Wheeler) (Access to data is something Beggar's Group ``expect[s] of 
[its] major direct licenses'' and is ``a part of every negotiation.'').
    SoundExchange also criticizes the usefulness of the Pandora/Merlin 
Agreement as a benchmark for more general reasons:
c. The Pandora/Merlin Agreement Is Unrepresentative of the Larger 
Market
    SoundExchange asserts that the Pandora/Merlin Agreement pertains 
only to record companies that represent less than [REDACTED]% of 
Pandora's performances and therefore cannot represent what the record 
companies--including all three Majors--comprising Pandora's other 
[REDACTED]% of performances, would negotiate for in the hypothetical 
marketplace. SX RPFF ] 753; SX PFF ] 507 (both relying on Shapiro WDT 
at 76). SoundExchange also avers that the Pandora/Merlin Agreement is 
not sufficiently probative of the rates that Indies would agree to 
voluntarily because the bulk of the Indies who opted-in [REDACTED]. 6/
1/15 Tr. 6860, 6865-66 (Lexton). SoundExchange also notes that roughly 
30% of the Merlin labels that opted-in do not regularly operate in the 
United States. 6/1/15 Tr. 6863-64 (Lexton). Additionally, Mr. Lexton 
estimates that of the [REDACTED] or so Merlin members that opted-in 
directly (rather than through distributors or aggregators), 
approximately [REDACTED] have been affirmatively rejected by Pandora 
for inclusion in the Merlin license, based on Pandora's [REDACTED]. Id. 
at 6871.
d. The Pandora/Merlin Agreement Applies Only to a Single Webcaster With 
Substantial Market Power
    SoundExchange notes that the Pandora/Merlin Agreement applies to 
only one licensee, Pandora, and the terms of that license were not 
replicated in any other contract with any other licensee. SoundExchange 
finds this point relevant because of Pandora's ``significant 
competitive strengths'' among webcasters, including its 77.6% share of 
internet radio listening. PAN Ex. 5012 at 11. According to 
SoundExchange, this large market share afforded Pandora with market 
power that was a meaningful factor in the negotiations of the license 
with Pandora. See SX Ex.19 at 6, 24-27 (Talley WRT) (noting that Dr. 
Shapiro failed to perform any analysis of meaningful allocations of 
buyer-side power, including, for instance, whether Pandora's unique 
position in the market affected the terms of the Merlin license.).
e. The Pandora/Merlin Agreement Was ``Experimental''
    SoundExchange asserts that the Pandora/Merlin Agreement was merely 
an ``experimental'' modification of the restrictions created by the 
sound recording performance complement. SX PFF ]] 576-580 (and record 
citations therein). At the hearing, Merlin characterized the Pandora/
Merlin Agreement as ``experimental.'' SX Ex. 13 ] 27 (Lexton WRT) 
(describing the license as ``an exercise in experimenting with direct 
licensing derived from the existing statutory rates''); see id. ] 25 
(``Due to the fact Pandora offered us so many additional benefits and 
other added value that is not required by their statutory license, we 
understood this as an opportunity for experimentation given and within 
the constraints imposed by Pandora's existing statutory rates.''); 
Wheeler WDT ] 9 (``We knew from the start that this was a short-term 
experiment. . . .'') (emphases added).
f. No Major Has Accepted a Similar Direct License With Pandora
    SoundExchange emphasizes the absence of what might otherwise be an 
important piece of evidence: No major record company has agreed to a 
direct license with Pandora or any other webcaster on the same rates 
and terms of the Merlin license. SoundExchange notes that this is 
unsurprising, in that Pandora's C.F.O. Mr. Herring, acknowledged that 
Pandora regularly had conversations with the Majors, but did not 
replicate the terms of the Pandora/Merlin Agreement. 5/18/15 Tr. 4203 
(Herring). In fact, Mr. Herring recognized that Pandora would have been 
unable to negotiate the same terms with the Majors and would have to 
offer the Majors better terms. 5/18/15 Tr. 4253 (Herring) 
(acknowledging that he ``expected [to] . . . have to give more 
favorable economic terms to a major record company than you would have 
to give to an independent record company.'').
    To drive home this point, SoundExchange contrasts the absence of 
evidence of any agreement between a Major and Pandora with the record 
evidence of the iHeart/Warner Agreement. SoundExchange notes that, 
pursuant to the iHeart/Warner Agreement, SX Ex.33, per-play rates 
(i.e., even before any potential inclusion of the value of other 
consideration) range from $0.[REDACTED] to $0.[REDACTED] over the 
[REDACTED] period, greater than the rates in the Pandora/Merlin 
Agreement.\133\ From this evidentiary distinction, SoundExchange 
concludes that the Services have not demonstrated that the rates in 
licenses between noninteractive services and Majors would match the 
lower rates in the Pandora/Merlin Agreement. SX PFF ] 654; see also id. 
] 656 (asserting iHeart/Warner Agreement ``confirm[s] that major record 
companies receive more consideration than independent record companies 
when negotiating directly for licenses covering noninteractive 
services.'').
---------------------------------------------------------------------------

    \133\ SoundExchange also notes that [REDACTED]'s licenses with 
[REDACTED], [REDACTED], and independent record companies for its 
[REDACTED] service likewise demonstrate that the major record 
companies receive considerably more consideration than independent 
record companies. SX PFF ] 655, and Section XI.A therein (and record 
citations therein).
---------------------------------------------------------------------------

g. The Steering Provisions in the Pandora/Merlin Agreement Are Not 
Useful in Setting the Statutory Rate
    SoundExchange rejects Pandora's foundational assumption that the 
steering provisions of the Pandora/Merlin Agreement can be used to 
determine the statutory rate. SoundExchange's rejection of steering as 
a relevant benchmarking tool is based on several factors:
i. Steering Allegedly Creates ``First Mover'' Advantages That Cannot Be 
Replicated for All Licensees
    SoundExchange argues that as a matter of simple arithmetic a 
webcaster cannot commit to steer to every record company or label, 
because there is only a total of 100% subject to steering. As one of 
its economic experts noted:


[[Page 26364]]


    [A]n affirmative obligation to steer just can't be implemented 
on a market-wide basis. It's just not possible for a service to say 
I'm going to steer listenership towards each label that I contract 
with.

5/27/15 Tr. 6070 (Talley).
    Similarly, SoundExchange notes that an iHeart executive, Mr. 
Cutler, recognized the impossibility of promising steering to all 
record companies: ``Certainly, the share has to--its math has to add up 
to--a hundred, so if someone goes from 20 to 30, the rest of the pool 
must--those ten points must come from somewhere else.'' 6/2/15 Tr. 7239 
(Cutler).
    Thus, as Dr. Rubinfeld noted, the steering provisions provided 
Merlin with ``first mover'' advantages. Rubinfeld CWRT ] 70. 
SoundExchange concludes therefore that Pandora cannot escape from this 
``quandary'' by discarding the [steering commitment], yet retaining the 
[discounted rates] from the Pandora/Merlin Agreement. According to 
SoundExchange, discarding the [steering commitment] would separate the 
rate in the agreement from the specific bargained-for consideration 
that Merlin obtained in exchange for that rate. SX RPFF ] 764.
ii. Revenue From Steering Is a Valuable Benefit Not Available Under the 
Statutory License
    SoundExchange asserts that the steering provision provides Merlin 
with a financial advantage that cannot be duplicated under the 
statutory scheme. Therefore, SoundExchange avers, Pandora's proposed 
benchmark must be adjusted upward to reflect that this non-statutory 
value, like all non-statutory consideration, permitted a reduction in 
the benchmark royalty rate. See SX PFF ]] 701-708 (and citations to the 
record therein).
iii. Pandora Has Not Provided Support for Its Claim That a ``Threat'' 
of Steering Will Lead to Lower Rates
    SoundExchange challenges Dr. Shapiro's assertion that, in the 
hypothetical market, the ability of a noninteractive service to steer 
among record companies would necessarily create a ``threat'' of 
steering that would cause rates to decline to an effectively or 
workably competitive level. SoundExchange asserts that the record is 
bereft of any benchmark agreement that reflects a ``threat of 
steering,'' let alone that a ``threat of steering'' had allowed a 
noninteractive service to obtain a lower rate. See SX PFF ]] 609, 709.
iv. Pandora Did Not Test Steering Under ``Real-World'' Conditions
    SoundExchange argues that Pandora failed to test steering under 
real-world conditions, because there is no evidence that listeners were 
ever aware that steering was occurring. More particularly, 
SoundExchange points out that Pandora has yet to experience any 
potential negative listener reaction that may arise if and when 
competitors advertise that Pandora has modified its algorithm in a 
manner that contradicts its long-standing claim to play ``only the 
music listeners want'' \134\ in order to save money on royalty rates. 
See 5/19/15 Tr. 4775 (Shapiro) (admitting that Pandora did not test how 
people would react to learning ``that Pandora was factoring in royalty 
rates [in] how they constructed the playlist.''). Indeed, Dr. Shapiro 
``worried about'' the question whether a competitor could use such an 
advertisement to ``magnify'' a negative reaction to steering. Id. at 
4635-36. Because successful steering in the real world depends on 
consumer reactions, SoundExchange concludes that Pandora has failed to 
demonstrate a credible threat of steering.
---------------------------------------------------------------------------

    \134\ Timothy Westergren, Pandora's founder, had publicly stated 
that Pandora's recommendations would ``be based on the genome, they 
will never be based on somebody buying the space.'' SX Ex. 2369 at 
1. In fact, Mr. Westergren explained in 2013 that ``[t]he only thing 
that drives what song [Pandora] play[s] next for a listener is 
trying to deliver the best possible listening experience for that 
individual.'' Id. at 3.
---------------------------------------------------------------------------

    Additionally, SoundExchange notes that Pandora has been unable to 
generate as much ``real world'' steering as it intended under the 
Pandora/Merlin Agreement. Specifically, the evidence actually shows 
that Pandora has not achieved the [REDACTED]% steering target for most 
Merlin labels. 5/19/15 Tr. 4676-16 (Shapiro). Dr. Shapiro also admitted 
that, as of November 2014, Pandora had been unable to achieve the 
[REDACTED]% target for ``a good number'' of record labels. Id. 
Moreover, for [REDACTED]% of Merlin labels, Pandora's steering has been 
negative. SX Ex. 2310.
    From these facts, SoundExchange concludes that Pandora has failed 
to provide sufficient real world evidence regarding its ability to 
steer, demonstrating a disconnect between the theoretical case it has 
presented and the realities it faces in the marketplace.
v. A Record Company Could Rebuff a Steering Proposal by Withholding Its 
Entire Repertoire
    SoundExchange argues that a record company could respond to a 
steering threat by refusing to license 100% of its repertoire to 
Pandora. In support of this position, SoundExchange quotes Dr. Shapiro, 
who acknowledged that ``a record company with market power'' could use 
that power to disable a webcaster's threat of steering. 5/19/15 Tr. 
4576-77 (Shapiro). Dr. Talley similarly noted that, ``in the 
hypothetical market where there is no background statutory rate . . . a 
label might say, okay, if you're going to [steer against us], we may 
just walk away. . . .'' 5/27/15 Tr. 6074 (Talley); see also 5/1/15 Tr. 
1429 (Harleston) (``If a service were to say we're just not going to 
play your records because it costs too much, the reality is we can go--
we have other choices. We could lean into other services.'').
    SoundExchange finds support for this position because the Services' 
economic experts declined to conclude that the Majors were not ``must 
haves'' for noninteractive service. See 5/11/15 Tr. 2989-90 (Katz) 
(``Q. Is it fair to say that you . . . believe that the [M]ajors are 
must-haves for customized services such as Pandora? A. I would say I 
believe that's a possibility, yes.''); 5/19/15 Tr. 4582 (Shapiro) (Dr. 
Shapiro testified that he was ``offering no opinion whether the 
[M]ajors are must-have for Pandora.'').
vi. Record Companies Can Utilize Contract Clauses To Thwart Steering
    SoundExchange asserts that it can contract around a noninteractive 
service's proposal or threat to steer by insisting upon a specific 
anti-steering clause or a more general ``Most Favored Nation'' (MFN) 
clause.\135\ See SX Ex. 25 ]] 14-19 (A. Harrison WRT) (``UMG has long 
recognized in our negotiations with interactive services that they have 
the ability to steer users away from UMG music through the music they 
feature and recommend through the service thereby decreasing our plays 
on the service and the revenue that flows to UMG and its artists. . . . 
We therefore have negotiated for protections against such steering. . . 
. [I]f we did not have these commitments the interactive services could 
effectively steer users toward other record labels artists and sound 
recordings through the music they highlight.''); accord, 4/28/15 Tr. 
455-56 (Kooker); 4/30/15 Tr. 1144-45 (Harrison); 6/2/15 Tr. 7202-05 
(Harrison); 5/7/15 Tr. 2487-88, 2490-93 (Wilcox) (all acknowledging on 
behalf of major record companies that anti-steering provisions are 
commonly used

[[Page 26365]]

in their agreements with the on-demand services).
---------------------------------------------------------------------------

    \135\ ``In general, an MFN clause is a contractual provision 
that requires one party to give the other the best terms that it 
makes available to any competitor.'' U.S. v. Apple, Inc., 791 F.3d 
290, 304 (2d Cir. 2015).
---------------------------------------------------------------------------

    Several such anti-steering contract clauses were in evidence in the 
proceeding:
     The agreement between [REDACTED] and [REDACTED] contains 
an anti-steering clause that prevents [REDACTED] from steering towards 
lower-priced music, including on playlists, if that steering would 
result in lowering [REDACTED]'s share of total plays to a level that is 
less than [REDACTED]'s market share. SX Ex. 37; see also 6/2/15 Tr. 
7202-06 (Harrison);
     The agreement between [REDACTED] and [REDACTED] contains 
an anti-steering provision to prevent [REDACTED] from steering 
listeners away from [REDACTED] content and towards that of another 
label. 4/30/15 Tr. 1145 (Aaron Harrison);
     Mr. Harrison testified that [REDACTED]; 6/2/15 Tr. 7206 
(Aaron Harrison); see Harrison WRT ]] 15-16; SX Ex. 36 ] 7;
     The agreement between [REDACTED] and [REDACTED] prohibits 
[REDACTED] from promoting another label's repertoire if it would then 
exceed its market share, unless Spotify offers the same increase in 
market share to [REDACTED]. SX Ex. 80 at 25537-38; see 4/28/15 Tr. 455-
56 (Kooker). The practical effect of the clause is to prohibit 
[REDACTED] from increasing another label's promotional opportunities 
above its market share if that would lower [REDACTED]'s promotional 
opportunities to below its market share. 4/28/15 Tr. 456 (Kooker);
     The agreement between [REDACTED] and [REDACTED] contains 
an anti-steering provision that guarantees [REDACTED] will get 
[REDACTED] equivalent to its market share [REDACTED]. The provision 
further provides that if any other record company receives an 
``uplift'' over its Soundscan market share, [REDACTED] will receive the 
same ``uplift.'' SX Ex. 343 at 20; SX Ex. 1814 at 26; SX Ex. 346 at 5; 
see 5/7/15 Tr. 2490-93 (Wilcox).
    More broadly, as noted above, SoundExchange asserts that, as in the 
interactive market, the Majors could insist upon a general MFN clause 
in each contract with a service, which would ensure that each Major 
gets the benefit of the rates and terms set forth in the service's 
contracts with the other Majors. See 4/28/15 Tr. 449-450, 542 (Kooker); 
4/30/15 Tr. 1142 (Harrison); 5/7/15 Tr. 2473 (Wilcox). Several such MFN 
contract clauses were in evidence in the proceeding:
     The agreement between [REDACTED] and [REDACTED] contains 
an MFN provision providing that if [REDACTED] enters into an agreement 
with another major record label that provides more favorable terms for 
that label regarding specified key provisions (including [REDACTED]), 
then [REDACTED] must notify [REDACTED] of those more favorable terms 
and give [REDACTED] the option to avail itself of those terms. SX Ex. 
80 at 25542-43; PAN Ex. 5091; see also 4/28/15 Tr. 447-50 (Kooker);
     The agreement between [REDACTED] and [REDACTED] contains 
an MFN providing that if [REDACTED] grants another label more favorable 
financial terms, then [REDACTED] must also offer those terms to 
[REDACTED]. SX Ex. 36; see also 4/30/15 Tr. 1142-44 (Harrison) 
(``[REDACTED]'');
     The agreement between [REDACTED] and [REDACTED] contains 
the equivalent of an MFN provision (an ``equal treatment'' clause) by 
which [REDACTED] warrants that it has not provided [REDACTED] to 
another label. In the event that [REDACTED] has violated this warranty, 
the [REDACTED] clause permits [REDACTED] to receive an immediate 
[REDACTED] to match the superior terms. SX Ex. 343; see also 5/7/15 Tr. 
2474-79 (Wilcox).
vii. Record Companies Could Thwart Steering by Requiring Up-Front Lump 
Sum Royalties
    SoundExchange notes that, as Dr. Katz candidly acknowledged, a 
record company could neutralize a steering threat by seeking a lump sum 
payment instead of per-play rates. 5/11/15 Tr. 3015-6, 3019-20 
(Katz).\136\
---------------------------------------------------------------------------

    \136\ The dynamic economic effect of an up-front lump-sum 
royalty payment is discussed elsewhere in this determination.
---------------------------------------------------------------------------

h. Merlin's Economic Interests Were Not Fully Aligned With Those of Its 
Members
    SoundExchange addresses what it suggests may be conflicts of 
interest as between Merlin and its distributor/aggregator-members, on 
the one hand, and the Merlin label members, on the other. First, Merlin 
and the distributors/aggregators typically receive [REDACTED] from 
members only if that member has opted-in. Second, Pandora paid Merlin a 
license fee directly that would vary, up to $375,000 (but in any event 
no less than $250,000), depending upon the Merlin members [REDACTED]. 
SX Ex. 13 ] 56 (Lexton WRT). Thus, SoundExchange avers that Merlin had 
economic incentives to complete the Pandora/Merlin Agreement and to 
urge its members to opt-in--incentives that were not necessarily 
consistent with the interests of its members.
i. Pandora Has Been Unable To Perform Its Contractual Obligations
    SoundExchange avers that, even assuming the Pandora/Merlin 
Agreement otherwise had merit as a potential benchmark, Pandora has 
been unable to perform its contractual obligations. In this regard, 
SoundExchange notes the following problems that have hindered Pandora's 
ability to perform its contractual duties.
     Staffing and capacity constraints;
     lack of reporting and payments,
     a low fraction of labels who are receiving payments 
pursuant to deal;
     a low participation in the [REDACTED] program; and
     a low percentage of labels receiving steering at or above 
[REDACTED]%.

SX Ex.1748 at 2 ; SX Ex. 2310.

    SoundExchange further notes that Mr. Herring candidly acknowledged 
that Pandora had waited until after it executed the Pandora/Merlin 
Agreement to determine the actual cost to Pandora of performing its 
contractual duties. 5/18/15 Tr. 4280 (Herring). Afterward, Pandora's 
Chief Scientist estimated that Pandora would incur an annual cost of 
$[REDACTED] for the ``initial build'' and $[REDACTED] annually in 
``ongoing support maintenance.'' Id. at 4282; SX Ex. 1706 at 1. Pandora 
calculated internally that, just to provide the opting-in Merlin 
members with the contractually promised access to data, Pandora would 
incur $[REDACTED] in initial costs and $[REDACTED] in ongoing annual 
costs. Id. at 20. Similarly, Pandora would need to spend almost 
[REDACTED] dollars in initial costs and $[REDACTED] in annual costs to 
[REDACTED], two of the advertising benefits contained in the Pandora/
Merlin Agreement. Id.
    SoundExchange notes that these implementation issues have 
``impacted negatively'' the willingness of Merlin members who opted-in 
to consider entering into this license in any future period. For 
example, Mr. Van Arman testified that, [REDACTED] 6/5/15 Tr. 7158 (Van 
Arman); see also 6/1/15 Tr. 7104-10 (Simon Wheeler) (detailing 
implementation issues and concluding [REDACTED].
5. Judges' Conclusions Regarding Pandora's Benchmark Evidence
    For the reasons set forth below, the Judges find that the 
noninteractive benchmark proposed by Pandora is informative as to the 
rates they shall set in this proceeding for a particular segment of the 
noninteractive marketplace. That is, the Pandora benchmark is probative 
of the two distinct royalty rates that a

[[Page 26366]]

noninteractive service would pay to Indies in the: (1) Ad-supported 
(free-to-the-listener) market; and (2) the subscription market, 
respectively.
    Pandora's proposed benchmark is premised principally on the 
provisions of the Pandora/Merlin Agreement. SoundExchange raises two 
principal challenges to Pandora's benchmark: (1) The ability, vel non, 
of a noninteractive service to ``steer'' or credibly ``threaten'' to 
steer in the hypothetical market; and (2) the potential value of other 
(non-steering) elements of consideration Pandora provided to Merlin 
that might offset the lower stated rates, thus leaving the effective 
rate unchanged from the nonprecedential statutory Pureplay Settlement 
rate.
    In light of the importance of these two issues, the Judges first 
analyze these two contentious points, followed by a discussion of 
SoundExchange's other objections to Pandora's benchmark proposal.
a. ``Steering'' as a Mechanism for Achieving Effective Competition in 
the Hypothetical Market
i. Could a noninteractive service steer and credibly threaten to steer 
in the hypothetical market?
    SoundExchange argues that steering creates merely a ``first mover'' 
advantage for those licensors who are able to enter into steering 
arrangements before their competitors are able to obtain such 
advantages. This argument is seductively simple: In its essence, it is 
based on the elementary proposition that no noninteractive service can 
steer more than 100% of its sound recordings. To take a simple example, 
assume there are three Majors, U, S, and W, and one Indie, M. Assume 
the ex ante steering allocation of plays was 40% for U, 30% for S, 20% 
for W and 10% for M, and all plays were priced at $0.0020. Now, the 
noninteractive service strikes a deal with M to increase plays of M's 
sound recordings by 50% over the ex ante percentage, in exchange for, 
say, a 10% reduction in per-play rates to only M. Then, M's 
noninteractive market share increases by 50% from 10% to 15% (while its 
per-play rate declines by only 10%, resulting in more revenue for M ex 
post steering). As a ``first mover,'' M thus benefits.
    However, the noninteractive licensee cannot promise all three other 
licensors, U, S, and W, the same 50% increase in plays via steering in 
the same contract period. If it did, U would realize a market share 
increase from 40% to 60%; S would realize a market share increase from 
30% to 45%; and W would realize a market share increase from 20% to 
30%. All four licensors, including M, would thus be promised 60% + 45% 
+ 30% + 15% = 150%.
    SoundExchange's point is that, by definition, it is mathematically 
impossible for a noninteractive licensor to allocate more than 100% of 
its plays. Thus, SoundExchange concludes, steering can only work in a 
non-statutory setting and, even then, never for all licensors. See 5/
28/15 Tr. 6301 (Rubinfeld); see also 5/27/15 Tr. 6070 (Talley) 
(``[I]t's almost like a Lake Wobegon effect, that not everyone can be 
above average, not everyone can receive steering.'').
    This argument of course, in the static sense, is mathematically 
correct. But, in the dynamic sense, is it economically correct? Dr. 
Shapiro, for Pandora, responded to this argument in the following 
colloquy with the Judges regarding the ``threat'' of steering:

    [THE JUDGES]
    Let's . . . take . . . the market we're dealing with here [and] 
address the first-mover criticism . . . that well, sure, you can 
steer to . . . record company A . . . but you can't steer to all of 
them because you can't play more than 100 percent of the music. Is 
it . . . the threat of steering that pushes everybody . . . towards 
their original percentages to avoid being that odd man out who was 
the holdout for the higher price?

[DR. SHAPIRO]
    That's exactly--yes, absolutely. The competitive outcome is when 
each of the record companies is at a rate where they're . . . not 
disadvantaged relative to the other guys . . . . This notion that 
you can't steer, the 100% thing, it's kind of offensive to an 
antitrust economist . . . because it's basically saying . . . price 
competition is some horrible thing.

5/19/15 Tr. 4561-63 (Shapiro); see Shapiro WDT at 9 (noting that the 
``net result'' of steering ``in a workably competitive market may well 
be relatively little actual steering.''). Dr. Shapiro further notes 
that, in the absence of steering, ``[y]ou would be basically going to 
the rate that a cartel or monopolist would set.'' 5/19/15 Tr. 4575 
(Shapiro).

    The Judges find that steering in the hypothetical noninteractive 
market would serve to mitigate the effect of complementary oligopoly on 
the prices paid by the noninteractive services and therefore move the 
market toward effective, or workable, competition. Steering is 
synonymous with price competition in this market, and the nature of 
price competition is to cause prices to be lower than in the absence of 
competition, through the ever-present ``threat'' that competing sellers 
will undercut each other in order to sell more goods or services.
    This process does not result, as some record industry witnesses 
suggested, in a ``race to the bottom.'' \137\ Rather, it typifies a 
``race'' to a workably or effectively competitive price. On the 
licensees' side of the market (the buyers' side), the limit on the 
demand for lower rates through steering is reached when the 
noninteractive service is no longer in a position to make further 
substitutions of one record company's sound recordings for another's 
because the potential for lost revenues exceeds the cost savings.\138\ 
On the licensors' side of the market (the sellers' side), the limit on 
the willingness to supply recordings at reduced rates is reached when 
the licensor determines that any further reduction in the rate will not 
be sufficiently to cover all marginal and recurring fixed costs 
(including opportunity costs) for its particular repertoire. (This is 
essentially stating in words the fundamentals of the Lerner Equation 
discussed at note 123 supra).
---------------------------------------------------------------------------

    \137\ See, e.g., Van Arman WDT at 14.
    \138\ The existence and identification of such a limit was the 
point of Pandora's steering experiments.
---------------------------------------------------------------------------

    Because the Judges are utilizing the benchmark approach to rate 
setting--as both SoundExchange and Pandora endorse--the limits to 
steering (like the value of promotion and substitution) are implicit in 
(``baked-in'') the terms of the relevant benchmarks. That is, Pandora 
and Merlin entered into their agreement because each concluded that its 
steering terms were advantageous.\139\
---------------------------------------------------------------------------

    \139\ Likewise, iHeart and Warner entered into their steering-
based agreement because it was mutually advantageous. By 
``advantageous,'' the Judges are noting the essence of the willing 
buyer/willing seller paradigm--that sophisticated commercial buyers 
and sellers are presumed to act rationally in their self-interest 
when entering into agreements that are not coercive.
---------------------------------------------------------------------------

    SoundExchange argues that, even if the threat of steering could 
cause a reduction in rates in the hypothetical noninteractive market, 
the Services have not provided any proof of an actual threat of 
steering in the direct noninteractive licensing market, but rather have 
presented only evidence of actual (not threatened) steering. See, e.g., 
5/27/15 Tr. 6076 (Talley) (``[N]ot one of these transactions . . . is 
either negotiated in the shadow of a threat to steer away or negotiated 
with an undertaking to steer away. It's in the opposite direction . . . 
a promise to steer towards . . . as opposed to away from. . . .'').
    SoundExchange's argument is unpersuasive, for two reasons. First, 
the evidence shows that Merlin members opted-in to the Pandora/Merlin 
Agreement specifically because they anticipated that Pandora might 
enter

[[Page 26367]]

into steering agreements with other record companies, including the 
Majors. In fact, SoundExchange's' own witness testified that it was in 
his record company's self-interest to act ``defensive[ly]'' to enter 
the Pandora/Merlin Agreement, in light of the fact that Pandora might 
enter into ``similarly structured deals'' with other record companies. 
4/28/15 Tr. 610-11 (Van Arman); see 6/1/15 Tr. 6963 (Lexton). These 
facts reflect the general power of steering as a threat in the 
marketplace.
    The Judges also find unpersuasive the criticism by SoundExchange 
that there is no record evidence of direct noninteractive agreements 
that were forged solely through a threat of steering. The point of the 
steering argument is to demonstrate what would transpire in the 
hypothetical effectively competitive market in which no statutory rate 
existed--not to demonstrate that a particular form of agreement is 
pervasive in the market with the extant statutory rate.\140\ It is 
imperative not to confuse the hypothetical market with the actual 
regulated market.\141\
---------------------------------------------------------------------------

    \140\ One reason why steering is not yet more widespread in the 
market, as Dr. Shapiro noted, is that noninteractive services have 
developed the steering technology only in the past few years since 
the Web III proceeding. Shapiro WDT at 15 (``Pandora has now tested 
and proven its ability to modify its playlist-selecting algorithms 
to rely more or less heavily on the music of particular record 
companies.'') (emphasis added). Now that this technological genie is 
out of the bottle, the Judges cannot minimize its impact in the 
hypothetical market.
    \141\ By way of comparison, Dr. Rubinfeld's ``ratio equality'' 
benchmark royalty rate likewise does not ``exist'' in the actual 
market. Rather, he derived that benchmark rate by: (1) Looking at 
market data from direct licenses; and (2) applying his economic 
expertise to express certain economic opinions regarding the 
necessary equality of the revenue-to-royalty ratio in the 
interactive and noninteractive markets. (As noted infra, Dr. 
Rubinfeld's ``assumption'' was revealed at the hearing to be 
premised on a model that serves to limit its applicability.). So too 
the steering-based proposed royalty rate is based on a benchmark 
analysis that is tied to certain expert economic opinions regarding 
market behavior. The Judges must weigh and apply ``economic . . . 
information presented by the parties'' as the bases for their rate 
determinations, 17 U.S.C. 114(f)(2)(B), and therefore the expert 
opinions set forth by the parties' economists as to how the 
hypothetical market will perform are vital aspects of the record to 
be considered by the Judges. More broadly, the Judges note that the 
benchmarking approach, while highly instructive, is not the sole 
method for ascertaining the statutory rate--indeed, the statute does 
not require the Judges to utilize the benchmark approach. Here, the 
threat of steering has been demonstrated by a combination of 
benchmarks, experiments and expert economic theorizing using 
fundamental principles of profit maximization and opportunity cost. 
This combination of proofs and arguments is actually more persuasive 
to the Judges than a mere benchmark standing alone.
---------------------------------------------------------------------------

    Moreover, the Judges find the economic opinion expressed by Dr. 
Shapiro--equating steering with price competition--to be correct. The 
ability of noninteractive services to steer toward lower priced 
recordings (and, by necessity therefore, away from higher priced 
recordings) is the essence of price competition. With Pandora (and 
iHeart) having demonstrated the capacity and willingness to steer in 
this manner, it would be economically irrational for the other record 
companies (that had not agreed to steering) to maintain their position 
and incur losses. To assume that record companies would ignore the 
``opportunity cost'' of steering away from their repertoires would be a 
fundamental economic mistake. See 5/4/15 Tr. 1516-17(Lys) (emphasizing 
that ``opportunity costs are real costs'').
    Dr. Shapiro's point regarding the economic ``threat'' posed, now 
that steering is technologically possible, can be made clear through a 
hypothetical example:
     Assume a Licensee was paying a market price of $0.0020 and 
historically (``naturally'') played 1,000,000 of its total number of 
songs from Licensor A, thus paying $2,000 to Licensor A.
     Now, assume the Licensee and Licensor A enter into a 
``steering'' deal, whereby Licensee promises to play an additional 
200,000 songs whose copyrights are owned by Licensor A, representing a 
20% increase over the historical (``natural'') quantity of 1,000,000 
noted above.
     In exchange, Licensee demands, and Licensor agrees, that 
Licensor A will receive less than $0.0020 per play, specifically, 10% 
less, i.e., only $0.0018.
    Compare the two scenarios:
     Before steering, the money exchanged equaled $2,000.
     After steering, the money exchanged is more, $2,160 
(1,200,000 units x $0.0018).
    That is clearly a benefit to Licensor A, who has made an additional 
$160 ($2160-$2000).
    The corresponding benefit to Licensee arises from the fact that it 
can now--ex post steering--play 1,200,000 songs at $0.0018 per song for 
a total cost of $2160. Ex ante steering, Licensee would have been 
required to pay the old market price of $0.0020 per song to another 
Licensor (call it Licensor B) for those 200,000 songs (which equals 
$400), plus the $0.0020 Licensee also paid to Licensor A ex ante 
steering for 1,000,000 songs (which equals $2,000), for a sum of $2,400 
for 1,200,000 songs. Thus, Licensee has saved $240 in costs ($2,400-
;$2,160). Since there is no ``free lunch,'' who loses? The loser is 
Licensor B, who has lost the revenue from the foregone licensing of 
200,000 songs.
    How can Licensor B avoid this loss? By responding to this steering 
by competing on price and lowering its own price to $0.0018.
    How can Licensee obtain the lower price of $0.0018 without any 
actual steering? By threatening to steer and thereby compelling 
Licensors A and B to compete for Licensee's business by offering to 
accept a price of $0.0018. Moreover, if Licensor B incurs the loss 
described above in one contracting period, that loss serves as the 
``threat'' necessary to avoid such losses in the subsequent contracting 
periods by also entering into an appropriate steering arrangement.
    Will there be a ``race to the bottom?'' No. The so-called 
``bottom'' will be marked by the rate that equates: (1) An acceptable 
return to the Licensors given their costs (including opportunity costs) 
and the differentiated values of their repertoires; and (2) an 
acceptable return to the Licensee by steering as far as possible (but 
no further), as limited by the potential loss of revenue if steering 
interferes with revenue as a consequence of an inferior mix of sound 
recordings.
ii. Is steering in the hypothetical market sufficient to establish an 
``effectively competitive'' rate?
    The Judges conclude, based on the record evidence and expert 
testimony, that the injection of steering into the hypothetical market 
provides for the ``effective competition'' that the law requires. Both 
Dr. Shapiro and Dr. Katz opined, and the Judges agree, that effective 
or workable competition arises when licensees have the reasonable 
(albeit still constrained) ability to select sound recording inputs 
based upon price.
    The injection of steering into the hypothetical market can occur in 
two ways, as it has in this determination. First, as in the case of the 
Pandora/Merlin Agreement (and the iHeart/Warner Agreement discussed 
infra), steering is incorporated by adopting a benchmark that 
explicitly includes steering. Second, a steering adjustment can be made 
to a benchmark rate that is not otherwise effectively competitive. Such 
is the case with SoundExchange's interactive benchmark, which needs a 
steering adjustment in order to eliminate the ``complementary 
oligopoly'' effect discussed supra. The Judges note that adjustments to 
benchmark rates have regularly been made in Sec.  114 proceedings--and 
indeed are required to be made--in order to allow the benchmark to 
correspond to the hypothetical market required by the statute. Here, as 
concluded supra, the

[[Page 26368]]

Judges have found as a matter of law that Sec.  114 requires that they 
set a rate which is effectively competitive. Thus, the steering 
adjustment is of a class with any other adjustments necessary to 
harmonize the benchmark rate with the statutory requisites. See Web II, 
72 FR at 24092 (noting the Judges' duty ``to determine if the benchmark 
agreements require any further adjustments based on any evidence of 
differences between the benchmark market and the target hypothetical 
market.'').
    It is important to emphasize the limited nature of this sort of 
effective competition. Price competition through steering does not 
diminish the stand-alone monopoly value of any one sound recording. 
Further, effective competition through steering does not diminish the 
firm-specific monopoly value of each Major's repertoire taken as a 
whole. Although Dr. Katz urged the Judges to reduce the statutory rate 
to eliminate that market power as well, Katz WDT ] 43, the Judges 
decline to do so. There is absolutely no record evidence to suggest 
that the market power that a Major enjoys individually by ownership of 
its collective repertoire is in any sense the consequence of improper 
activity or that it is being used individually by a Major to diminish 
competition. That is, the Judges have no evidence before them to 
demonstrate that the Majors' size and individual market power is not 
the result of the efficiencies and economies of scale and/or their 
superior operations. See generally, Harold Demsetz, Industry Structure, 
Market Rivalry, and Public Policy, 16 J.L. Econ. 1, 3 (1973) (noting 
that ``scale economies,'' ``[n]ew efficiencies'' and ``superior 
ability'' can form a ``competitive basis acquiring a measure of 
monopoly power''). In the absence of evidence that the Majors' market 
shares preclude effective competition, the Judges have no basis on this 
record to adjust rates lower to reflect that market concentration.
    This holding must not be confused with the Judges' holding 
regarding the anticompetitive effects of the complementary oligopoly 
that exists among the Majors. Because the Majors could utilize their 
combined market power to prevent price competition among them by virtue 
of their complementary oligopoly power--as proven by the evidence of 
the pro-competitive effects of steering and the admissions of Universal 
and its agents discussed supra, section IV.B.3--the Judges must 
establish rates that reflect steering, in order to reflect an 
``effectively competitive'' market.\142\ Indeed, even economists quite 
unwilling to assume that a given monopoly or oligopoly structure is 
inefficient and anticompetitive bristle at the idea that supranormal 
pricing arising from a complementary oligopoly is reflective of a well-
functioning competitive market. See, e.g., Francesco Parisi and Ben 
DePoorter, The Market for Intellectual Property: The Case of 
Complementary Oligopoly in The Economics of Copyrights: Developments in 
Research and Analysis (W. Gordon and R. Watt eds. 2003) (noting the 
economic benefits of blanket licenses in reducing the greater-than-
monopoly pricing of complementary oligopolists); Mark Lemley and Philip 
Weiser, Should Property or Liability Rules Govern Information? 85 Tex. 
L. Rev. 784, 786-87, 824 (2007) (comparing the ``hold up'' (``rent 
seeking'') strategies of copyright owners seeking supranormal 
complementary compensation and of the owner of a parcel of real 
property that is complementary to multiple other parcels required for a 
large scale development, and noting that a compulsory license with a 
royalty rate set by a regulatory authority (noting the CRB by name) can 
``minimize the opportunity for rent-seeking behavior'').
---------------------------------------------------------------------------

    \142\ The Judges' findings on this issue are not only consonant 
with the expert opinions of Drs. Shapiro and Katz, but are also 
consistent with the expert economic testimony of SoundExchange's own 
witness in Web III, Dr. Ordover. See Web III Remand at 23114 
(summarizing Dr. Ordover's testimony as concluding that ``if the 
repertoires of all [Majors] were each required by webcasters (i.e., 
if the repertoires were necessary complements) . . . each [Major] 
would have an incentive to charge a monopoly price to maximize its 
profits . . . constitut[ing] higher monopoly costs . . . paid by 
webcasters to each of the [Majors].'') (emphasis added). The Judges 
in this determination adopt this economic reasoning and will not 
allow such complementary oligopoly power to be incorporated into the 
statutory rate.
---------------------------------------------------------------------------

iii. Did Pandora test steering under ``Real World'' conditions?
    The Judges do not agree with SoundExchange's criticism that the 
impact of steering is uncertain because listeners were unaware that 
such steering was being undertaken. The Judges reach this conclusion 
for three reasons.
    First, there is no evidence that Pandora, or any noninteractive 
service, obtains and retains listeners by describing in any detail the 
technical methodology it uses to select songs. The purpose of a 
streaming service is to provide songs to listeners--if they enjoy the 
music they will be satisfied, if they do not enjoy the music they will 
be unsatisfied, to the commercial detriment of the service. While it is 
true that Pandora promotes its service as playing only the music the 
listener wants to hear, the proof of the pudding, so to speak, is in 
the listening, not in the puffery used in advertising.
    Second, it is clear that Pandora has not taken any steps to conceal 
that it has engaged in such steering or that it intends to do so going 
forward. In the present proceeding, the parties had the ability, which 
they exercised with regularity, to enter into closed session to avoid 
public disclosure of commercial information they intended to maintain 
as confidential. However, at no time did Pandora attempt to close the 
proceedings to prevent the public from learning of the introduction of 
steering into its music delivery model. The Judges note that no 
competing service has advertised against Pandora or iHeart, attacking 
its use of steering. 5/19/15 Tr. 4775-76 (Shapiro). Thus, the evidence 
is not sufficient to indicate that Pandora would suffer an economic 
loss merely from listener awareness that Pandora engages in steering.
    Third, although the extent of the steering may be economically 
significant to the licensors and licensees, the extent of steering at 
issue in this proceeding may have little noticeable impact on 
listeners. For example, consider the result if, hypothetically, a 
noninteractive service were to steer away from Major A (which had a 
pre-steering natural (historic) play rate of 40% on that service) by 
12.5%.
    Ex ante steering, the copyright on 4 in every 10 songs played on 
that noninteractive service was owned by Major A. Steering away from 
Major A by 12.5% would reduce Major A's play rate by 5 percentage 
points (12.5% of 40% is 5 percentage points). Thus, ex post steering, 
Major A's songs would constitute 35% of the plays on this 
noninteractive service instead of 40% of the plays.
    Consider a consumer who listened to this noninteractive service for 
a period of time sufficient to hear 20 songs.
    Ex ante steering, the consumer would have heard 8 songs from Major 
A's repertoire (40% x 20 songs = 8 songs).
    Ex post steering, the consumer would have heard 7 songs from Major 
A's repertoire (35% x 20 songs = 7 songs).
    The one replacement song from another record company's repertoire 
would not be a random song, but rather would be the song the algorithm 
or tastemaker selected after disqualifying the eighth song from Major 
A.\143\ The

[[Page 26369]]

issue thus is whether such a change in song delivery would diminish 
listenership to a noninteractive service to a point that would be 
economically harmful to the service, thus dissuading the service from 
steering. In fact, Pandora presented evidence regarding this issue, to 
which the Judges now turn.
---------------------------------------------------------------------------

    \143\ In his oral testimony, Dr. Shapiro utilized another 
example, assuming a 15% steering ``boost'' to a Major with a prior 
``natural'' performance rate of 20%. According to Dr. Shapiro, such 
a steering change would have ``almost no perceptible impact on the 
listening experience, as it would entail a change in ``one [song] 
out of 30'' or ``one song every couple hours.'' 5/19/15 Tr. 4630-35 
(Shapiro) (and also explaining that steering need not result in a 
change with regard to the seeded song or artist, but rather would 
affect only subsequent songs played on the listener's station).
---------------------------------------------------------------------------

iv. What is the impact of Pandora's Steering under the Pandora/Merlin 
agreement and in Pandora's Steering experiments?
    Pandora's steering under the Pandora/Merlin Agreement, which 
guarantees a [REDACTED]% level of steering, has not resulted in any 
negative feedback or other deleterious consequence for Pandora. 
Likewise, the series of steering experiments conducted by Pandora 
indicated that Pandora could steer away from or toward a Major's 
repertoire by a change of  15% without causing a 
statistically significant change in listening behavior. McBride WDT ] 
21.
    Importantly, SoundExchange levels no criticisms at Pandora's 
steering experiments, save to make the point, rejected above, that the 
experiments did not reflect ``real world'' conditions. See SX RPFF ]] 
780-784 (and record citations therein).\144\ The Judges likewise fail 
to identify any problems with regard to Pandora's steering experiments. 
Thus, the evidence is undisputed that Pandora can steer at least  15% of its music toward or away from the Majors without a 
negative impact on listenership.\145\
---------------------------------------------------------------------------

    \144\ This is a curious criticism of an economic experiment. By 
its very nature, an economic experiment, or an economic model, is 
intentionally not designed to replicate real world conditions, but 
rather to isolate certain conditions of the real world for testing 
and to hold the other conditions constant. The particular condition 
that SoundExchange claims the steering experiments held constant--
listener knowledge of steering in the algorithm--seems wholly beside 
the point to the Judges. To state the obvious, consumers listen to 
noninteractive services because of the quality of the music, not 
because of their interest in what goes into the algorithmic ``black 
box.'' If the music is of poor quality, then listeners will vote 
with their feet--or, more correctly,--with their ears.
    \145\ iHeart did not run experiments regarding its steering of 
sound recordings [REDACTED]. However, iHeart [REDACTED] and received 
complaints from noninteractive custom listeners that [REDACTED]. See 
6/2/15 Tr. 738-51 (Cutler); SX Ex. 1037 [REDACTED]'').
---------------------------------------------------------------------------

v. Is the value of steering available under the statutory license?
    SoundExchange argues that any benefits from steering must be 
treated like any other consideration in a direct license that is not 
authorized under the Act. That is, SoundExchange asserts that steering 
must be independently valued, and the separate value must be added to 
the statutory rate. The Judges disagree.\146\
---------------------------------------------------------------------------

    \146\ The Pandora/Merlin Agreement allows for a very limited and 
conditional [REDACTED]. See PAN Ex. 50141(c)(v) and (2)(c). However, 
there is no evidence in the record to suggest that such a limited 
and conditional [REDACTED] would be exercised and, if so, how often. 
There is also no evidence in the record to demonstrate the extent 
this [REDACTED] would impact the effective rate under the Pandora/
Merlin Agreement. Therefore, this contractual safeguard does not 
constitute a basis to adjust the Pandora/Merlin benchmark.
---------------------------------------------------------------------------

    Steering, as Dr. Shapiro emphasized, is simply an example of price 
competition at work. Further, Sec.  114(f)(2)(B) of the Act and prior 
decisional law require that the commercial rate reflect an 
``effectively competitive'' market. Therefore, the value of steering is 
a component of the statutory license--not extraneous to it--and should 
not be excluded through an adjustment process or otherwise from the 
rate ultimately set by the Judges.\147\
---------------------------------------------------------------------------

    \147\ SoundExchange attempts to impeach Dr. Shapiro on this 
point by seeking to use his rebuttal testimony against him. See SX 
PFF ] 705 (``[Dr.] Shapiro also acknowledged that steering 
commitments have value. In response to [Dr.] Rubinfeld's statement 
that ``a direct license containing a binding steering commitment is 
unsuitable as a benchmark unless some adjustment is made to reflect 
the value of the commitment to the record company,'' [Dr.] Shapiro 
agreed with [Dr.] Rubinfeld that ``some adjustment is appropriate.'' 
Shapiro WRT at 41. However, SoundExchange omitted the remainder of 
Dr. Shapiro's testimony, which omission seriously distorts his 
opinion: Without the omission, Dr. Shapiro's full testimony on this 
point states: ``[Dr.] Rubinfeld takes the position that a direct 
license containing a binding steering commitment is unsuitable as a 
benchmark unless some adjustment is made to reflect the value of the 
commitment to the record company. I agree that some adjustment is 
appropriate, but only to the extent that the steering commitment 
exceeds the amount of steering that the webcaster would engage in 
just based on price differences. Id. (emphasis in original).
---------------------------------------------------------------------------

b. Does the Pandora/Merlin Agreement contain non-statutory value that 
either (i) disqualifies the Pandora/Merlin Agreement as a benchmark; or 
(ii) diminishes the value of steering in the Pandora/Merlin Agreement?
i. The Potential Presence of Non-Statutory Value Does not Disqualify 
the Pandora/Merlin Agreement as a Benchmark
    SoundExchange and Pandora both note that several additional 
elements of potential value are present in the Pandora/Merlin 
Agreement. Dr. Shapiro, on behalf of Pandora's direct case, went 
through each item of additional consideration and explained why he 
either adjusted his benchmark value higher (as in the case of certain 
advertising consideration) or declined to adjust the benchmark for 
other elements of potential value.
    The Judges do not find that the mere presence of other items of 
potential value serves to disqualify the Pandora/Merlin Agreement as a 
suitable benchmark. Benchmarks may be imperfect in the sense that they 
include features that are ill-suited for adoption in the statutory 
rate. To reject a proposed benchmark for that reason alone would be--to 
put it colloquially--throwing out the baby with the bathwater. Because 
there is no single undifferentiated market for the statutory service, 
benchmarks must be borrowed from other markets or sub-markets and will 
always be imperfect to some degree and either in need of adjustment or 
limited in their applicability. But to ignore a benchmark for that 
reason alone would be an inappropriate indictment of the benchmarking 
process itself.
    Further, Dr. Shapiro testified that he found these elements of 
additional consideration to either: (1) Provide joint value to Pandora 
as well as Merlin members; (2) be unlikely to be achieved; or (3) be 
already incorporated into his valuation. There was no sufficient 
rebuttal by SoundExchange witnesses to these points. As the Judges 
explain infra in their discussion of the same issue in connection with 
the iHeart/Warner Agreement, an important general consideration 
relating to this issue is the absence of evidence of value from a party 
with regard to such additional terms, when that party has the incentive 
(as well as the means) to provide the Judges with such evidence.
    Additionally, SoundExchange's assertion that the additional items 
created sufficient value to offset the lower rate in the Pandora/Merlin 
Agreement strikes the Judges as economically irrational. If the 
supposed additional value of the non-steering items in the Pandora/
Merlin Agreement equals the difference between the non-steered rates 
and the lower steered rates, then what is the point of the parties 
incurring the transaction costs associated with negotiating such a 
deal? Why would Pandora commit to incur significant expenses to begin 
to set up an infrastructure necessary to perform the steering function?

[[Page 26370]]

ii. The Evidence Does not Support a Lessening in the Usefulness of the 
Pandora/Merlin Agreement as a Benchmark for the Rates Indies Would Pay 
in the Hypothetical Market Beyond the Adjustments Made by Dr. Shapiro
    In rebuttal to Dr. Shapiro's item-by-item consideration of the 
potential additional items of value in the Pandora/Merlin Agreement, 
SoundExchange did not introduce expert testimony to establish 
alternative values. Rather, SoundExchange relied on the narrative 
testimony of industry witnesses Glen Barros, Darius van Arman and Simon 
Wheeler to support the position that these other items had some 
unquantified value to the Merlin members. Although such after-the-fact 
assertions can carry some weight, the Judges find such testimony to be 
inconsistent with Merlin's conduct during the negotiations.
    More particularly, although Merlin has the ability to negotiate and 
evaluate agreements in a sophisticated manner, it failed to value these 
additional elements of consideration. See, e.g., 5/1/15 Tr. 125-52 
(Simon Wheeler) (Merlin, is ``just as capable of understanding the 
complexity of the rights and licenses at issue in digital streaming as 
major record labels.''); 5/28/15 Tr. 6513 (Barros) (agreeing that 
independent label ``Concord's assessment of the value it receives from 
licensing its repertoire is just as sophisticated as any other 
label.''); 6/1/15 Tr. 6924-25 (Lexton) (``Merlin brings expertise to 
bear on its negotiations with digital music services.''). If the extra-
statutory items were of particular and essential value to Merlin, the 
Judges would have expected to be presented with evidence as to how 
Merlin valued these several items. However, as noted, no such evidence 
was presented.\148\
---------------------------------------------------------------------------

    \148\ In fact, with regard to one of the unquantified items of 
alleged value--the [REDACTED] provision--contemporaneous 
correspondence among Merlin members and personnel discounted any 
value in the [REDACTED] provision in the Pandora/Merlin Agreement. 
PAN Ex. 5110 at SNDEX0374284 (Correspondence from [REDACTED] stating 
that ``[REDACTED]'').
---------------------------------------------------------------------------

    Additionally, one Merlin member presented as a witness by 
SoundExchange, Glen Barros, President and C.E.O. of Concord Record 
Group, testified that ``in all likelihood'' he would have opted-in to 
the Pandora/Merlin Agreement even if these other elements of value had 
not been included in that agreement. 5/28/15 Tr. 6537-39 (Barros) 
(emphasis added).\149\
---------------------------------------------------------------------------

    \149\ SoundExchange asserts that Mr. Barros' subsequent 
testimony that he found the ability for his record company to 
receive royalties on pre-1972 royalties to be a ``gating'' issue and 
that such testimony undercut the testimony quoted in the text, 
supra. The Judges find Mr. Barros' testimony as cited in the text, 
supra, to be credible, and they find that his subsequent attempt to 
qualify that testimony to be lacking in credibility.
---------------------------------------------------------------------------

    Although Mr. Barros represents only one Indie, SoundExchange 
selected him as a representative of the Indies' position regarding the 
value of the Pandora/Merlin Agreement. Clearly, SoundExchange could not 
present the testimony of more than [REDACTED] opting-in Merlin members, 
and the Judges therefore find the testimony against interest by this 
Merlin member selected by SoundExchange to be particularly probative.
    Additionally, a May 15, 2014 internal email written by Mr. Lexton 
appeared to the Judges to reference Merlin's strategy to attempt to 
obfuscate the usefulness of the Pandora/Merlin Agreement as a benchmark 
in this proceeding:

[REDACTED]
SX Ex. 102. Thus, it appears to the Judges that Merlin's negotiation 
of additional terms was intended (at least in part) ``to 
facilitate'' the very argument SoundExchange now asserts through Mr. 
Lexton's testimony regarding the purported significance of the 
unvalued additional terms.
    In a subsequent email to Pandora dated June 3, 2014, Mr. Lexton 
made Merlin's position in this regard even more explicit, by asking 
Pandora to include the following proposed language in the final 
agreement:
[REDACTED]

PAN Ex. 5116 at SNDEX0315243. That request was rejected by Pandora and 
the requested language was never included in the final Pandora/Merlin 
Agreement. Id. Nonetheless, Merlin proceeded to enter into the Pandora/
Merlin Agreement, anticipating that it would be used by Pandora as 
evidence in this proceeding. See, e.g., 6/1/15 Tr. 6962, 6966 (Lexton); 
id. at 7095 (Wheeler); SX Ex. 102 at 3 (5/14/15/14 email among Merlin 
executives); PAN Ex. 5117 at SNDEX0437582 (6/9/14 internal email from 
Mr. Lexton).
    The foregoing emails and testimony, combined with Merlin's and 
SoundExchange's failure to separately value the other elements of 
consideration either during negotiation or during the proceeding, 
strongly indicate to the Judges that Merlin found the value in the 
Pandora/Merlin Agreement to lie in the steering--that is, the trade-off 
of more plays at a lower rate for more total revenue.
    In sum, if there was any additional value to Merlin from the other 
items sufficient to reduce the overall value of steering as adopted for 
a statutory license, the record evidence fails to provide a basis for 
such an adjustment. For these reasons, the Judges decline to increase 
the Pandora/Merlin benchmark to reflect any extra-statutory 
consideration that was not already accounted for by Dr. Shapiro.
c. Is Merlin sufficiently representative of a segment of the sound 
recording market?
    The Judges reject SoundExchange's argument that Merlin is not 
sufficiently representative of the independent sector of the sound 
recording industry. The Judges rely on several facts in reaching this 
conclusion.
    First, the Judges note that between [REDACTED] and [REDACTED] 
Merlin members, out of approximately [REDACTED] total members opted-in 
to the Merlin Agreement. Thus, it is accurate to state that the 
evidence regarding the Pandora/Merlin Agreement relates--to use Dr. 
Talley's term--to [REDACTED] to [REDACTED] ``dyads'' between licensors 
and a licensee. The Judges find this quantity of contracts to be 
significant and probative with regard to: (1) Steering rates that 
Indies would accept; and (2) the principle that steering can be 
utilized as means of price competition in the noninteractive market.
    In addition, the Judges do not find persuasive SoundExchange's 
argument that a majority of Merlin members who opted-in to the Pandora/
Merlin Agreement did so through their agreements with aggregators and/
or distributors. These opting-in members delegated the decision whether 
to opt-in to these distributors and aggregators and there was certainly 
no evidence or testimony to suggest that these arrangements were 
coerced or that any Merlin members who opted-in through this process 
disagreed with the decision. Thus, the decision by Merlin members to 
delegate the decision whether to opt-in to its agents is a component of 
the business model these Merlin members chose to follow. The Judges 
cannot criticize the decision of these Merlin members, and by 
extension, call into question their intention to be bound by the 
Pandora/Merlin Agreement, merely because they have arranged their 
licensing affairs in this manner. By way of analogy, just as 
SoundExchange's criticism of Pandora's business model is not relevant 
to the setting of rates in this proceeding, the Judges do not find 
relevant the business judgments of Merlin members to utilize 
aggregators and/or distributors as their agents in this regard.
    Relatedly, the Judges find that the fact that Merlin negotiated 
collectively on behalf of its members does not diminish the value of 
Merlin as a party capable of entering into an agreement that is

[[Page 26371]]

otherwise an appropriate benchmark. Merlin members utilize the 
collective capacities of Merlin in order to transact licensing business 
in a more efficient manner, as described by a Merlin's testifying 
executive, Mr. Lexton:

    Merlin's purpose is to allow independent record companies to 
benefit from direct deals negotiated by Merlin on a collective 
basis. As such Merlin is a one stop shop for recorded music rights 
licensing. It represents recorded music rights owned and/or 
controlled by independent record labels and distributors who are 
eligible and choose to join Merlin. . . . Merlin's core remit is to 
represent its members in negotiating licenses with digital music 
services in the hope of overcoming market fragmentation issues that 
have historically challenged the independent music sector 
particularly in the digital domain.

Lexton WRT ]] 11-12. Indeed, Merlin apparently is sufficiently 
successful in this endeavor that one of the Majors, [REDACTED], has 
characterized Merlin as the ``fifth Major.'' PAN Ex. 5349 at 9 
([REDACTED] approvingly noting to [REDACTED] that Merlin publicly 
presents itself as a ``fifth major'').\150\
---------------------------------------------------------------------------

    \150\ At the time, there were four Majors, Universal, Sony, 
Warner, and EMI.
---------------------------------------------------------------------------

    Further, the Judges reject SoundExchange's assertion that Merlin as 
a collective had different incentives than its members that somehow 
diminish the value of the Pandora/Merlin Agreement as a benchmark. 
These incentives included financial and status benefits to Merlin if 
its members opted-in, which were distinct from whatever benefits 
individual members might obtain by opting in to the Pandora/Merlin 
Agreement. The Judges understand this criticism to be based upon the 
classic principal-agency problem, in which the interests of the 
principals (Merlin members) may not be fully aligned with the interests 
of the agent (Merlin). However, this is a common problem when 
principals delegate functions to agents. Unless the evidence 
demonstrates that the agent (Merlin) has engaged in a breach of duty 
toward its principals (Merlin members), the lack of a complete 
alignment of interests does not invalidate the benchmark status of the 
agreement entered into by the principal. Indeed, because this is the 
principal-agent arrangement that the Merlin members voluntarily 
created--including whatever misalignments in incentives might 
theoretically exist--it is especially representative of a marketplace 
transaction. The fact that approximately [REDACTED]-[REDACTED]% of 
Merlin's [REDACTED] members opted-in to the Pandora/Merlin Agreement is 
compelling evidence that the Merlin members found the terms of the 
agreement beneficial to them, notwithstanding any alleged separate 
benefits to Merlin as a collective organization.
    The Judges also reject the criticism that Merlin has not uniformly 
represented its members because Pandora has used its editorial 
discretion to exclude (as of the time of the hearing) from its playlist 
sound recordings owned by some of the opting-in Merlin members. There 
is no allegation that Pandora promised to make all sound recordings 
available on its service, and therefore each Merlin member accepted the 
risk that Pandora, in its editorial judgment, might not include some or 
all of its sound recordings.
    Finally, the Judges do not find merit in SoundExchange's argument 
that Merlin is not a sufficient representative of Indies in the 
marketplace. SoundExchange did not produce any witnesses from Indies 
who were not members of Merlin to testify to this effect. Rather, 
SoundExchange produced witnesses whose Indie record companies did opt-
in to the Pandora/Merlin Agreement. Given Merlin's capacity to 
negotiate and its well-regarded industry status, the fact that non-
Merlin Indies are not covered by the Pandora/Merlin Agreement, in the 
absence of other evidence, is not sufficient to call into question the 
usefulness of this benchmark.
d. Did Pandora have substantial market power that is reflected in lower 
effective rates in the Pandora/Merlin Agreement?
    The Judges reject SoundExchange's assertion that Pandora had 
significant market power that caused the effective rates in the 
Pandora/Merlin Agreement to be lower than effectively competitive 
rates. Initially, the Judges note that this assertion is not supported 
by any empirical market data, analysis, or comparison with other 
negotiated comparable interactive rates.
    More importantly, the issue of Pandora's ``market power,'' vel non, 
was anticipated and addressed by Pandora's economic expert, Dr. 
Shapiro, who explained:

    Pandora is the largest noninteractive webcaster. I have 
considered specifically whether Pandora had undue market power in 
its negotiations with Merlin. In the language of antitrust 
economists, I have considered whether Pandora has monopsony power 
over Merlin. Pandora's share of listening among noninteractive 
webcasters is not the key variable for determining whether or not 
Pandora has monopsony power over Merlin. Rather, the correct 
variable upon which to focus is the share of the Merlin Labels' 
revenues that comes from Pandora. If a very large share of the 
Merlin Labels' revenues came from any single music user, then that 
music user could well have monopsony power over Merlin. But this is 
demonstrably not the case for Pandora. The Merlin Labels generate 
revenues from many different users of their sound recordings, 
including other noninteractive webcasters, interactive services, and 
from the sale of physical albums and digital downloads. In fact, I 
estimate, based on data for the recorded music industry overall, 
that Pandora accounted for roughly 5 percent of the revenues 
received by the Merlin Labels in 2013 for the licensing of their 
music in the United States. Thus, Pandora's share of the Merlin 
Labels' revenues is far short of the level that would be necessary 
for Pandora to have undue market power in its negotiations with 
Merlin.

Shapiro WDT at 24-25 (emphasis added). The Judges find this explanation 
sufficient to contradict the assertion that Pandora exercised undue 
market power in negotiating the terms of the Pandora/Merlin Agreement.
    There is an additional and separately sufficient reason why 
SoundExchange's claim of Pandora's monopsony power cannot be adopted. 
The assertion that Pandora exercised market power in these negotiations 
ignores the fact that Merlin did not have to accept any of Pandora's 
terms--Merlin and its members could have fallen back on the Pureplay 
statutory settlement rates rather than accede to any demand by Pandora. 
That is, by this particular assertion, SoundExchange is assuming 
arguendo that the effective Pandora/Merlin rates are below an 
appropriate market rate because of Pandora's market power.\151\ But why 
would Merlin and its members voluntarily enter into an agreement to 
accept rates lower than the statutory alternative and lower than what 
would exist in a competitive market?
---------------------------------------------------------------------------

    \151\ SoundExchange is thus assuming here that, under section 
114(f)(2)(B), a benchmark rate must reflect an adequate level of 
competition.
---------------------------------------------------------------------------

    Therefore, the Judges reject the assertion that Pandora exercised 
undue market power in negotiating the effective rates contained in the 
Pandora/Merlin Agreement.
e. Was the Pandora/Merlin Agreement merely ``experimental?''
    Two of SoundExchange's witnesses characterized the Pandora/Merlin 
Agreement as an ``experiment,'' as distinguished from an actual 
marketplace agreement. The Judges reject this attempt to characterize 
this real agreement, involving the exchange of actual consideration, as 
an ``experiment.''
    An economic experiment is undertaken under controlled laboratory 
conditions, as distinguished from

[[Page 26372]]

market transactions that take place in the real world. See Guillaume R. 
Frechette and Andrew Schotter, Handbook of Experimental Economic 
Methodology 21 (2015) (``[T]o run an experiment . . . experimenters are 
of necessity engaged in market design in the laboratory.'') (emphasis 
added). Quite clearly, the Pandora/Merlin Agreement was not and is not 
an ``economic experiment.''
    SoundExchange's witnesses may have used the word ``experiment'' to 
suggest a tentative or impermanent relationship between Pandora and 
Merlin. If so, that criticism proves too much, as all benchmark 
agreements--indeed virtually all agreements--could be characterized as 
``experiments,'' in that they have stated durations, and the parties 
are free to vary the terms of their economic relationship after the so-
called ``experiment'' has expired. In this sense, the word 
``experiment'' is misused to cast a wide disqualifying net on all 
benchmark agreements.
f. Has Pandora's performance under the Pandora/Merlin Agreement 
compromised the usefulness of that benchmark? \152\
---------------------------------------------------------------------------

    \152\ A general issue of proof arose in this proceeding as to 
whether a benchmark's value can be measured by the parties' 
performance under a proposed benchmark agreement, in addition to the 
parties' expectations of value when the benchmark was created. This 
issue arose in a different context, regarding whether iHeart's 
``incremental'' rate analysis of its iHeart/Warner Agreement 
benchmark should be analyzed by reference only to the parties' 
expectations at the time of contracting, or whether the Judges 
should also consider the parties' performance under the iHeart/
Warner Agreement. As discussed in detail infra, the Judges have 
rejected iHeart's ``incremental'' rate analysis, thereby mooting the 
issue of whether the parties' performance under that agreement 
affected the so-called ``incremental'' rate. With regard to the 
Pandora/Merlin Agreement, SoundExchange argues that Pandora's 
performance under the Pandora/Merlin Agreement indicates that the 
agreement is not usable as a benchmark. Because--as explained in the 
text, infra--the Judges find that Pandora's performance does not 
cause them to reject the Pandora/Merlin Agreement as a usable 
benchmark, the question of whether evidence of performance is 
generally appropriate to consider when setting rates need not be 
decided by the Judges in this determination.
---------------------------------------------------------------------------

    Even assuming that the Pandora/Merlin Agreement is, in principle, a 
useful benchmark, SoundExchange asks the Judges to look to Pandora's 
alleged poor performance of its obligations under the Pandora/Merlin 
Agreement. As detailed supra, SoundExchange alleges that Pandora has 
failed to perform certain contract obligations (such as, e.g., 
[REDACTED]) and that the cost of performance is daunting for Pandora, 
which combine to create what one might call ``seller's remorse'' among 
Merlin participants with regard to the licensing of rights under the 
Pandora/Merlin Agreement.
    Pandora does not dispute that it had not (as of the hearing date) 
been able to implement all the benefits promised in the Pandora/Merlin 
Agreement. However, the Judges note that SoundExchange did not produce 
any correspondence from Merlin or its members complaining about the 
failure of Pandora to perform, or any threat to terminate the agreement 
or sue Pandora for nonperformance. Rather, the evidence suggests that 
Merlin recognized that the structuring of performance needed to be an 
ongoing and collaborative effort. As Pandora's Chief Financial Officer, 
Mr. Herring, testified:

[REDACTED]

5/18/15 Tr. 4318 (Herring); see also PAN Ex. 5014 (Pandora/Merlin 
Agreement, ``Feature Implementation Timeline''), Exhibit C thereto 
([REDACTED]'' (emphasis added). SoundExchange did not produce evidence 
to call into question Pandora's performance under this [REDACTED] 
clause.

    More importantly, the evidence indicates that Pandora has performed 
its core obligation under the Pandora/Merlin Agreement: The increase in 
spins of Merlin recordings, in the aggregate, by at least [REDACTED]%, 
above their collective ``natural'' rate. In fact the evidence shows 
that Pandora is overspinning Merlin member recordings collectively by 
[REDACTED]%. On the individual Merlin label level, the results have 
been uneven--some Merlin labels have been overspun by [REDACTED]- 
[REDACTED]% of their natural rate, see 5/18/15 Tr. 4229-30, 4291-4293 
(Herring); SX Ex. 2310 (showing hundreds of Merlin Labels with rates of 
overspinning exceeding [REDACTED]%)--but other Merlin Labels are 
spinning at less than a [REDACTED]% increase their above their prior 
levels. SX Ex. 1748 at 2; SX Ex. 2310.\153\
---------------------------------------------------------------------------

    \153\ Labels owned by Beggars Group (whose officer, Simon 
Wheeler claimed the Pandora/Merlin Agreement was a failure)--
including XL Recordings, Matador and Nation Records--are being 
overspun on Pandora by as much as [REDACTED]%. SX Ex. 2310.
---------------------------------------------------------------------------

    However, the only specific promise by Pandora of increased spins in 
the Pandora/Merlin Agreement was its promise [REDACTED] to increase 
Merlin spins collectively by [REDACTED]%, and it appears undisputed 
that Pandora has performed this obligation and, in fact, has far 
exceeded the [REDACTED]% minimum. With regard to the underspinning of 
individual Merlin Labels, Pandora represented in the Pandora/Merlin 
Agreement only to [REDACTED] to increase spins by at least [REDACTED]% 
above the natural rate. Thus, the individual members objectively cannot 
complain about the level of overspinning at any point in time, unless 
they can also claim that Pandora had not been [REDACTED]. As noted 
above, SoundExchange did not produce any evidence suggesting that any 
individual members had lodged such a complaint.
    With regard to SoundExchange's claim that Pandora has incurred 
substantial unexpected capital costs in implementing a steering system, 
Mr. Herring testified that these investments, although motivated in the 
short-term and in part by the Merlin Agreement, in fact laid the 
groundwork for Pandora to implement steering more broadly across the 
non-interactive webcasting market. 5/18/15 Tr. 4313-17 (Herring) 
(``some of these costs are fixed costs to be amortized over time with 
the anticipation of being applied to other direct licenses with other 
record companies, and expensed at the time that the costs are incurred, 
and therefore ``spread over those deals.''). Thus, the existence of 
these costs does not establish any fact to contradict the Judges' 
finding that the Pandora/Merlin Agreement is a useful benchmark. In 
fact, Pandora's commitment to incur substantial build-out costs to 
create the steering architecture underscores that this agreement (and 
the iHeart/Warner Agreement) represents the cutting-edge of a 
technological advance that can ameliorate the anticompetitive effects 
of a complementary oligopoly.
g. Do the steering experiments and the Pandora/Merlin Agreement 
demonstrate the rate to which a major would agree?
    The Judges find this SoundExchange criticism to be meritorious. 
These steering experiments reflect only a quantity adjustment that 
could be attempted with regard to the Majors, not a rate adjustment 
arising from steering to or from a Major. By contrast, the Pandora/
Merlin Agreement does reflect the impact of steering on negotiated 
rates (as does the iHeart/Warner Agreement). Thus, while the Judges 
find the steering experiments to be probative of the general principle 
that steering can be effected to some extent without a negative impact 
on listenership, the Judges do not accept that this constitutes direct 
evidence sufficiently probative of the rates that would result

[[Page 26373]]

from steering writ large in the marketplace.\154\
---------------------------------------------------------------------------

    \154\ The use of benchmarking serves to tie the quantity aspect 
of steering to its impact on rates, and the absence of a relevant 
Majors' benchmark in Pandora's evidence prevents the Judges from 
determining a steered price for Majors from that evidence. Although 
Dr. Shapiro asserts that the steering experiments demonstrate that 
the Majors should receive the same rate as the Indies in a market 
with steering, that opinion is contradicted by the higher rate set 
forth in the [REDACTED] Agreement which also contains a significant 
steering component. Dr. Shapiro attempts to explain the higher 
[REDACTED] rate as a function of a so-called ``focal point,'' 
``anchor'' or ``magnet'' effect created by the extant applicable 
statutory rate, that allegedly raises the negotiated rate toward 
(yet still below) the statutory rate. However, although this 
theoretical effect is discussed in the economic literature, Dr. 
Shapiro acknowledged that it is not an ``ironclad'' economic law, 
and there is scant evidence in this proceeding why such a potential 
``focal point'' or ``magnet'' effect would cause unconstrained 
licensors to eschew a lower market rate that would produce greater 
revenue.
---------------------------------------------------------------------------

    Moreover, Pandora's own witness testified in a manner that 
contradicts Pandora's attempt to bootstrap the Pandora/Merlin rates 
onto the Majors. Mr. Herring, Pandora's C.F.O., testified that Pandora 
would have to offer a higher steering-based rate to a Major than 
Pandora obtained in the Pandora/Merlin Agreement. 5/18/15 Tr. 4253 
(Herring). The Judges have noted previously that the Majors' 
repertoires must be distinguished from those of the Indies. See SDARS 
II, 78 FR at 23063 (the Majors are distinguishable from the Indies ``by 
virtue of the depth and breadth of their music catalogues [which] make 
up a critical portion of the sound recording market.'').\155\
---------------------------------------------------------------------------

    \155\ Dr. Shapiro opines that the Majors' advantage in the 
hypothetical market would be reflected economically solely through 
the greater number of noninteractive plays, rather than also in a 
higher per-play rate. See, e.g., 5/20/15 Tr. 5058 (Shapiro) 
(testifying that the larger repertoires of the Majors ``does not 
mean'' that the Majors deserve a ``greater value per-
performance.''); 5/19/15 Tr. 4730 (Shapiro) (rejecting use of market 
share alone in determining ``value per spin''). However, Dr. Shapiro 
ignores the fact that there is apparently a greater per-song value 
overall for songs in the Majors' repertoire, as evidenced by 
Pandora's own data--showing that the Majors account for [REDACTED]% 
of ``top 5% weekly spins,'' [REDACTED]% of the ``top 10% weekly 
spins,'' and [REDACTED]% of the ``top 20% weekly spins''--despite 
the fact that the Majors account for only [REDACTED]% of the total 
spins on Pandora. Compare SX Ex. 269 at 74 with SX Ex. 269 at 73. 
These ``top spin'' figures are indicative of the ``must have'' 
aspect of the Majors' repertoire (leaving aside the anticompetitive 
complementary nature of their combined repertoires). Indeed, the 
record suggests to the Judges that the popularity of the Majors' 
spins is the reason why steering away from their repertoires cannot 
be pursued beyond a certain level, and why Dr. Shapiro candidly 
declined to reject the idea that the Majors' repertoires were ``must 
haves'' even though noninteractive services could steer away from 
them to an extent. To use an imperfect yet helpful analogy: A 
regular restaurant diner might prefer steak to chicken, to the 
extent that she orders steak 7 out of every 10 meals at the 
restaurant. This greater demand for steak versus chicken can result 
in both: (1) More revenue to the restaurant for each steak dinner 
compared with each chicken dinner; and (2) more total revenue 
attributable to the greater number of steak dinners arising from the 
patron's more frequent visits to the restaurant to eat steak. In 
more formal economic terms, the typical listener (or the restaurant 
patron) gets more ``utility'' from the Majors' songs (or from the 
steak) each time one is ``consumed,'' and also consumes those songs 
(and steaks) more often. The seller can benefit from both the 
greater ``utility'' and the frequency of purchases.
---------------------------------------------------------------------------

    Therefore, the Judges consider the rate established by the Pandora/
Merlin Agreement to establish only one guidepost (i.e., a relevant 
financial point of reference) to a statutory rate. The Judges are 
informed as to the limited weight of this rate in the ultimate 
statutory rate they shall set, by the fact that Indie sound recordings 
reflect approximately [REDACTED]% of the sound recordings played on 
Pandora. SX Ex. 269 at 73.
h. Can the Majors avoid steering in the hypothetical market?
    SoundExchange argues that any attempt by a noninteractive service 
to impose steering on the record companies would be rebuffed by the 
Majors. In particular, SoundExchange argues that the record companies 
would respond to a steering threat by: (1) Withholding their entire 
repertoires; (2) imposing Anti-Steering or ``Most Favored Nation'' 
contract clauses; and/or (3) requiring up-front lump sum royalty 
payments from the noninteractive services.
i. Withholding the Entire Repertoire
    A Major could respond to a threat of steering by threatening to 
withhold its entire repertoire from that noninteractive service. There 
appears to be a consensus that the repertoire of each of the three 
Majors is a ``must have'' in order for a noninteractive service to be 
viable. See 5/18/15 Tr. 4254 (Herring) (admitting that without the 
repertoire of a Major, it would be a much different service); 5/18/15 
Tr. 4472 (Shapiro) (declining to state the majors are not ``must 
haves'' for noninteractive services); see also SX Ex. 269 at 74 (noting 
disproportionate share of top spins from Majors' repertoires).
    However, the ability of the Majors to utilize such a boycott to 
defeat steering would be a function of their complementary market 
power. Simply put, demands by the Majors to prevent steering by 
insisting that a noninteractive service not deviate from an historical 
(``natural'') division of market shares would be a classic example of 
anticompetitive conduct. See, e.g., Blue Cross & Blue Shield United of 
Wisconsin v. Marshfield clinic, 65 F.3d 1406, 1415 (7th Cir. 1995) 
(Posner, J.) (``It would be a strange interpretation of antitrust law 
that forbade competitors to agree on what price to charge, thus 
eliminating price competition among them, but allowed them to divide 
markets, thus eliminating all competition among them.'').\156\
---------------------------------------------------------------------------

    \156\ The Judges emphasize that their analysis in the text, 
supra, is not intended to suggest any antitrust violations by any 
actor in the interactive or noninteractive market. The Judges' 
concern under section 114(f)(2)(B) is to set rates that reflect a 
hypothetical market that is effectively competitive. If the 
hypothetical market posited by one of the parties to this action 
would result in rates that were not effectively competitive, then 
such a hypothetical market must be rejected--even if it would be the 
result of tacit or other conduct that might not rise to the level of 
a violation of the antitrust laws.
---------------------------------------------------------------------------

    While the Majors' individual market power is not in itself 
necessarily improper, the hypothetical exercise of that power in this 
manner in the noninteractive market would be antithetical to the 
``effective competition'' requirement inherent in the Sec.  
114(f)(2)(B) standard. That is, each Major may well be entitled by its 
firm-specific market power to higher rates than the Indies, but the 
Majors cannot bootstrap that power into a further capacity to reap the 
benefits of a complementary oligopolist by brandishing such power as a 
sword against steering.
    Thus, in the present case, the hypothetical use by one or more of 
the Majors of its power to boycott a noninteractive service--one that 
had sought to inject some price competition into the market via 
steering--would undermine the ``effective competition'' standard that 
the D.C. Circuit, the Librarian of Congress and the Copyright Royalty 
Judges have declared to be an essential element of the Sec.  
114(f)(2)(B) standard.
ii. Anti-Steering or MFN Clauses
    In the interactive market, the Majors commonly include anti-
steering or MFN clauses in their agreements with the services. The 
Judges find that such clauses have no purchase vis-[agrave]-vis 
steering in exchange for lower rates in the noninteractive market. In 
the noninteractive market, an insistence by a Major that a 
noninteractive service abide by an anti-steering clause, or a MFN 
clause that has the same effect, is tantamount to importing the 
anticompetitive complementary oligopoly power of the Majors from the 
interactive market into the noninteractive market. Dr. Rubinfeld's 
rebuttal testimony at the hearing is telling:


[[Page 26374]]


Q: Now [Dr.] Shapiro has testified that the threat of steering, 
alone, would lead to lower rates from record companies. What's your 
view of that opinion?
[DR. RUBINFELD]
I don't think it's likely to happen because I don't think the threat 
. . . is a credible threat--that would be the term we use in 
economics--and the reason is . . . that, first of all, the record 
companies, as I have said a number of times before, do have 
substantial bargaining power and they have responses to the threat 
that takes away its credibility. In the rather strong version, they 
could . . . look to other sources of listeners and say we're going 
to consider not using your service, but . . . they could say we're 
not going to feature all of the same artists, maybe we'll take some 
of our top artists off our offerings . . . .
    * * *
[THE JUDGES]
Professor, do you think that the smaller independents have that same 
bargaining power . . . to respond to the threat of steering . . . ?
[DR. RUBINFELD]
No. They wouldn't have . . . quite the same bargaining power.
    * * *
[THE JUDGES]
What do the independents lack that the [M]ajors have that makes the 
independents unable to exercise that threat?
[DR. RUBINFELD]
[T]ypically, they're only going to have a few artists that have 
really the name recognition and the power to make a difference.
[THE JUDGES]
So if the record company industry was more atomistic, the threat of 
steering would be more credible, but because it's not that atomistic 
. . . it makes the ability of the [M]ajors to rebut the threat . . . 
more likely to be successful?
[DR. RUBINFELD]
I think that's true. . . . [T]hat's a harder world for me to imagine 
because I have been in the world of seeing three or four major 
companies having a pretty big impact.

5/28/15 Tr. 6302-05 (Rubinfeld) (emphasis added).
    This testimony underscores the point that the Majors' capacity to 
undermine ``price competition-via steering'' is a function of their 
complementary oligopoly power. Once again, the Judges do not find that 
the mere size of the Majors or their share of the noninteractive market 
is in itself anticompetitive (especially on this record), but the 
Judges find that the ability of the Majors to leverage that market 
power to create the complementary oligopoly pricing problem can neither 
be imported into the noninteractive market nor assumed to be part of 
the hypothetical effectively competitive noninteractive market. Indeed, 
in the hypothetical market without a statutory rate, such anti-steering 
clauses (and other anti-steering tools) would be ripe for judicial 
invalidation. See U.S. v. American Express Co., 88 F. Supp. 3d 143, 
189, 194 (E.D.N.Y. 2015) (``anti-steering rules'' can ``block pro-
competitive efforts'' to the extent that ``the market is broken,'' when 
such rules prevent ``price competition,'' by not permitting buyers ``to 
use their lowest cost supplier, as they can in other aspects of their 
businesses.''); United States v. Apple, 791 F.3d at 320 (``we are 
breaking no new ground in concluding that MFNs, though surely proper in 
many contexts, can be ``misused to anticompetitive ends in some 
cases.''). The Judges likewise find the hypothetical use by the majors 
of anti-steering clauses in response to the threat of price 
competition-via-steering would thwart ``effective competition.'' \157\
---------------------------------------------------------------------------

    \157\ Dr. Rubinfeld also speculated that in the hypothetical 
market the Majors could ``take some of our top artists off our 
offerings'' in response to an attempt at price competition-via 
steering. 5/28/15 Tr. 6302 (Rubinfeld). But in that hypothetical 
market, such an attempt by an entity with rights to collectively 
license a substantial market share would invite scrutiny as 
anticompetitive. See ``Dept. of Justice Sends Doc Requests, 
Investigating UMPG, Sony/ATV, BMI and ASCAP Over Possible 
`Coordination,' '' Billboard.com (July 13, 2014). (``The Department 
of Justice has sent out CIDs (Civil Investigative Demand for 
Documents) to ASCAP, BMI, Sony/ATV Music Publishing and Universal 
Music Publishing Group in connection with their review of . . . 
whether partial withdrawals of digital rights should be allowed.''). 
Thus, such behavior would not necessarily be consonant with 
``effective competition,'' but rather an anticompetitive leveraging 
of market power. The Judges thus decline to incorporate such 
licensor responses in the hypothetical effectively competitive 
market.
---------------------------------------------------------------------------

iii. Up-Front Royalty Payments
    SoundExchange asserts that a record company could frustrate an 
attempt at steering by requiring noninteractive services to pay their 
royalties up-front in a lump sum, instead of on a per-performance 
basis. Such a lump-sum requirement would frustrate steering in the 
following manner: If a licensee has already paid Record Company A a 
required, large up-front fee (equal to its natural/historic play level 
multiplied by the old, higher per-play rate) then the marginal cost 
going forward to the noninteractive service of playing a sound 
recording from Record Company A would be zero. By contrast, Record 
Company B--even if it offered a reduced steering rate--would still be 
insisting on a rate greater than the marginal rate of zero the licensee 
would be paying to Record Company A. The noninteractive service would 
thus be compelled to either pay the up-front lump sum and lose the 
benefits of price competition, or refuse to pay the lump sum and lose 
access to 100% of the repertoire of Record Company A.
    This up-front lump sum strategy in actuality is merely another way 
in which a Major could bootstrap its otherwise unobjectionable market 
power to preserve complementary oligopoly power in the noninteractive 
market. The Judges note that SoundExchange's expert economic witness, 
Dr. Rubinfeld, has written that ``[i]n dynamically competitive 
industries, where new product and features are an important part of 
competition, even licenses that include only fixed, or lump-sum 
payments, can result in an anticompetitive lessening of competition.'' 
Daniel L. Rubinfeld and Robert Maness, ``The Strategic Use of Patents: 
Implications for Antitrust,'' reprinted in Francois Leveque and Howard 
Shelanski, Antitrust, Patents and Copyright 85, 91-92 (2005). In the 
present context, the noninteractive service that would be compelled to 
pay to a Major an up-front lump-sum license based on the old per-play 
rate (or lose access to 100% of the Major's repertoire) would need to 
recover those fixed and sunk costs and thus forego price competition-
via steering.\158\
---------------------------------------------------------------------------

    \158\ The Judges are not stating that a requirement of an up-
front payment lump-sum royalty type provision is per se inconsistent 
with effective competition. For example, in the [REDACTED] 
Agreement, discussed infra, [REDACTED] is obligated to pay 
[REDACTED] to [REDACTED] even if [REDACTED]. SX Ex. 33 at 14-17, ]] 
3(a) and (d). However, there is no evidence that this provision 
would frustrate effective competition.
---------------------------------------------------------------------------

    In sum, each of the three contract devices relied upon by 
SoundExchange to defeat steering are dependent upon the exercise of 
market power to preserve the power of complementary oligopoly, which 
would thwart effective competition in the noninteractive market. Thus, 
all three contracting devices would be inconsistent with the statutory 
direction to set rates, based on competitive information, that would be 
set between willing buyers and willing sellers in an effectively 
competitive marketplace in the absence of a statutory license.
i. Conclusion Regarding the Pandora Benchmark
    For the foregoing reasons, the Judges will utilize Pandora's 
steering-based benchmark as a guidepost to establish the zone of 
reasonableness for the noninteractive royalty rates that would be paid 
by Indies in the ad supported (free-to-the listener) and subscription 
markets. Pandora has proposed two sets of such benchmarks, depending 
upon the level of steering the Judges find to be appropriate for rate-
setting purposes.
    The Judges find that this guidepost should be established by 
applying a rate

[[Page 26375]]

premised upon the lower of the two steering alternatives presented by 
Pandora: the [REDACTED]% steering figure, rather than the higher 30% 
figure.\159\ The lower [REDACTED]% level is appropriate because it is 
the level to which Pandora was willing to commit [REDACTED]. PAN Ex. 
5014 ] 4(a). The Judges recognize the relatively nascent nature of 
steering. Although these factors certainly do not invalidate the 
Pandora/Merlin Agreement as a usable benchmark, they do suggest to the 
Judges that the more prudent course is to incorporate only the 
guaranteed 12.5% level of steering, and use the resultant rates as the 
appropriate guideposts for the rates attributable to the Indies portion 
of the statutory market.\160\
---------------------------------------------------------------------------

    \159\ The lower steering level results in a higher per-play 
rate.
    \160\ Pandora attempted to corroborate its Pandora/Merlin 
benchmark by introducing, in rebuttal, its agreement with a 
classical music record company, Naxos of America, Inc. (Naxos), that 
had been entered into as of January 1, 2015. PAN Ex. 5018 (the 
Pandora/Naxos Agreement). However, the Judges reject the Pandora/
Naxos Agreement as a corroborating benchmark for several reasons. 
First, Naxos, as a classical music label, is at best representative 
of a narrow genre and therefore its agreement cannot serve to be 
representative of a wider variety of sound recordings. 5/13/15 Tr. 
at 3512 (Herring). Second, the Pandora/Naxos Agreement does not 
contain any steering terms, but rather sets a statutory per-play 
rate ($0.[REDACTED]), lower than the default rate ($0.0014) 
established by the Pureplay settlement. PAN Ex. 5018. Although this 
difference, ceteris paribus, would create an incentive for Pandora 
to play more classical music owned by Naxos, there was evidence, 
acknowledged by Dr. Shapiro, that Pandora was constrained in any 
potential steering toward Naxos by the fact that there was only one 
other classical label, Decca, which would make it hard for Pandora 
to steer away from the latter given its share of the market. 5/17 
Tr. 4706-07 (Shapiro) (considering Naxos's and Decca's presence in 
classical music market and acknowledging ``there are issues with 
some specialized areas of music where it might be harder to 
steer.'') Further, Pandora did not conduct any steering experiments 
with regard to steering away from Decca, as it did with regard to 
steering away from the Majors. Third, Dr. Shapiro opined that, if 
steering did occur at the 30% level, Naxos would pay two different 
rates for plays on Pandora's ad-supported and subscription services, 
respectively. Shapiro WRT, at 37-38. However, the Pandora/Naxos 
Agreement does not bifurcate rates in this manner, but rather sets a 
single per-play rate of $0.[REDACTED] that would apply to Pandora's 
ad-supported and subscription services. PAN Ex. 5018.
---------------------------------------------------------------------------

E. iHeart Rate Proposal

1. Introduction
    iHeart proposes a per-play rate of $0.0005 for the Sec.  114 
license. In support of this proposal, iHeart relies on the analysis 
undertaken by its expert witnesses, Drs. Daniel Fischel and Douglas 
Lichtman, of rates set forth in certain agreements entered into by 
iHeart in the market for noninteractive services.
2. The Fischel/Lichtman Proposed Benchmark
a. The iHeart/Warner Agreement
    Effective October 1, 2013, iHeart and Warner entered into an 
agreement (the iHeart/Warner Agreement) that addressed, inter alia, the 
rates that iHeart would pay to Warner for iHeart's plays of Warner 
sound recordings on iHeart's custom noninteractive service. SX Ex. 33 
(iHeart/Warner Agreement). As it pertained to these noninteractive 
plays, the iHeart/Warner Agreement provided that iHeart would pay the 
greater of: (1) A per-performance fee on custom performances; and (2) 
Warner's pro rata share of a specified percentage of iHeart's non-
simulcast noninteractive revenue. Specifically, the iHeart/Warner 
Agreement calls for the following rates:

               iHeart/Warner Per-Performance Royalty Rates
------------------------------------------------------------------------
               Calendar year                    Per-performance rate
------------------------------------------------------------------------
2013......................................  $0.[REDACTED].
2014......................................  $0.[REDACTED].
2015......................................  $0.[REDACTED].
2016......................................  $0.[REDACTED].
Each calendar year during the Renewal Term  $0.[REDACTED].
 if any.
------------------------------------------------------------------------


             iHeart/Warner Percentage Revenue Royalty Rates
------------------------------------------------------------------------
                  Period                             Percentage
------------------------------------------------------------------------
First [REDACTED] months after Effective     [REDACTED]%.
 Date.
Months [REDACTED] after Effective Date....  [REDACTED]%.
Each month during the Renewal Term if any.  [REDACTED]%.
------------------------------------------------------------------------

SX Ex. 33 at 15-16 (iHeart/Warner Agreement).
    The iHeart/Warner Agreement incorporates the same economic steering 
logic as the Pandora/Merlin Agreement. Specifically, at the time of the 
execution of the iHeart/Warner Agreement, Warner's actual share of 
iHeart's custom noninteractive webcasts was approximately [REDACTED]%. 
However, under the iHeart/Warner Agreement, iHeart is obligated to 
[REDACTED]. Drs. Fischel and Lichtman concluded that this provision 
created an incentive for iHeart to increase Warner's share of 
performances substantially [REDACTED]. Fischel/Lichtman AWDT ] 36.
    The iHeart/Warner Agreement also contains the following additional 
elements that, according to iHeart: (1) Were not independently valued 
by the parties on a monetary basis; (2) benefited both parties; and (3) 
therefore had an uncertain net value:
     Warner's grant to iHeart of sound recording rights 
[REDACTED];
     iHeart's commitment to provide Warner with no less than 
[REDACTED] percent of total airplay devoted to a music advertising 
campaign that iHeart provides on its webcast stations, known as the 
Artist Integration Program (``AIP''); \161\
---------------------------------------------------------------------------

    \161\ According to Drs. Lichtman and Fischel, under the AIP 
program, iHeart dedicates airtime to promoting particular artists or 
songs, typically new artists or recently-released songs. These 
promotions may include [REDACTED]. SX Ex. 33 at 19.
---------------------------------------------------------------------------

     Warner's [REDACTED] right to [REDACTED] and iHeart's 
[REDACTED] right to [REDACTED]); and
     iHeart's ``most favored nation'' protection vis-[agrave]-
vis [REDACTED], such that, if Warner were to enters into an agreement 
to license sound recording rights for [REDACTED]'s [REDACTED] and 
provide [REDACTED] with terms that are more favorable than those 
offered to iHeart, then iHeart would be afforded the option to adopt 
those [REDACTED] terms.
    Fischel/Lichtman AWDT ] 38.
    Drs. Fischel and Lichtman described the [REDACTED] as an 
``insurance policy'' that benefited iHeart in the event it would 
[REDACTED]. Likewise, they described the AIP provision as an 
``insurance policy'' that benefited Warner, because iHeart's commitment 
to continue to provide the AIP benefit meant that Warner did not have 
to assume the risk that iHeart might charge Warner for the right to 
access the benefits of AIP. See iHeart PFF ]] 179-180 (and record 
citations therein).
    Drs. Fischel and Lichtman recognized the difficulty in quantifying 
the values of what they described as these ``insurance policy'' 
equivalents. However, they aver that neither party assigned any values 
to these (and the other) non-rate terms and that the net value of these 
items therefore can only be set at zero. Fischel/Lichtman AWDT ] 39. As 
Dr. Fischel further testified:

    We followed the . . . real-world example of the parties . . . 
who did not price any of these terms. . . . [T]here was no separate 
pricing in the agreement or separate valuation in the agreement in 
terms of the spreadsheets . . . that I reviewed as background for 
the contract. . . . For that reason . . . the best answer, given the 
real-world data that we have, is to place a net value of zero on 
them because that's what the parties themselves did.

5/21/15 Tr. at 5336-40 (Fischel).
    Moreover, according to iHeart, even SoundExchange's economic 
expert, Dr.

[[Page 26376]]

Rubinfeld, admitted that none of the experts in this proceeding 
likewise ``actually put[ ] a numerical value on these additional 
items.'' 5/28/15 Tr. 6289 (Rubinfeld). In addition, iHeart notes, Dr. 
Rubinfeld acknowledged that several of these items were ``terms that 
favor iHeart,'' and yet were not separately valued and priced by the 
parties. Id. at 6435.
    However, iHeart does not conclude from the foregoing that the 
iHeart/Warner Agreement sets forth a usable benchmark rate that mirrors 
the stated rates of $0.[REDACTED] to $0.[REDACTED], or even the 
purported lower rates of $0.[REDACTED] to $0.[REDACTED] resulting from 
the [REDACTED] adjustment applied by Drs. Fischel and Lichtman (as 
discussed infra). Rather, according to Dr. Fischel, the foregoing rates 
reflect only the average rates in or derived from the iHeart/Warner 
Agreement. Dr. Fischel asserts that such an average rate ``does not 
necessarily reflect the rate . . . that a willing buyer and willing 
seller would have reached in a marketplace'' unconstrained by 
government regulation or interference.'' Fischel/Lichtman AWDT ] 44.
    In an attempt to correct for this alleged defect, Dr. Fischel 
conceptualizes the Warner plays on iHeart as comprising two distinct 
economic bundles. Dr. Fischel states:

    As an economic matter, the [iHeart]-Warner agreement reflects a 
bundle of two distinct sets of rights. The first set provides a 
license for iHeartMedia to play the same number of Warner 
performances as it would have played absent the agreement. The 
second set of rights provides a license for iHeartMedia to play 
additional Warner performances, above and beyond those it would have 
played absent the agreement.

Id. ] 45.
    Accordingly, Dr. Fischel opines that compensation for the first 
``bundle'' of rights is directly affected by the existing statutory 
rate, and therefore ``provides essentially no information about the 
rate willing buyers and sellers would negotiate in the absence of 
government regulation.'' Id. ] 48.
    However, Dr. Fischel opines that the second ``bundle'' he 
conceptualizes is ``highly relevant to what willing buyers and willing 
sellers would negotiate if unconstrained by government regulation.'' 
Id. ] 49. In support of this opinion, Dr. Fischel testified:

This part of the bundle involves a license for iHeart to play 
additional Warner performances, above and beyond those it would have 
played absent the agreement. Those additional performances are not 
directly influenced by the existing statutory rate, because absent 
the agreement, iHeart wouldn't play them and Warner wouldn't receive 
any compensation for them. The royalty rate negotiated for this 
second part of the bundle, therefore, is a more appropriate measure 
of what a willing buyer and a willing seller would negotiate if 
unconstrained by government regulation. Warner licensed the rights 
to those performances to iHeart, and iHeart compensated Warner for 
that license, at rates that were acceptably profitable for both 
parties. The rate here was not determined by regulation; it was 
determined by the give-and-take of a true negotiation.

Id.
    Thus, Dr. Fischel needed to distinguish between the two bundles 
that he had conceptualized, which required him to consider the 
projected number of Warner plays in each bundle. To perform this 
analysis, he relied upon a set of projections that iHeart's Board of 
Directors used when evaluating and approving the iHeart/Warner 
Agreement. Fischel/Lichtman AWDT ] 40 (projections also served as basis 
for iHeart Board's approval of stated rates in iHeart/Warner 
Agreement). According to iHeart's Head of Business Development and 
Corporate Strategy, Steven Cutler, this set of projections, referred to 
by iHeart as the ``Today's Growth'' model, was [REDACTED], representing 
the parties' ``best estimates'' of performance under the iHeart/Warner 
Agreement. 6/2/15 Tr. 7247-48 (Cutler); see Fischel/Lichtman AWDT ] 40; 
5/21/15 Tr. 5365 (Fischel).
    The Today's Growth model projected that iHeart would play 
[REDACTED] total performances of all labels' sound recordings over the 
[REDACTED] term of the agreement. Fischel/Lichtman AWDT ] 41 and Ex. A 
thereto (``Projected Performances During Initial Term of iHeartMedia 
Agreement with Warner''); IHM Ex. 3034 at 170. iHeart estimated 
Warner's share of those performances under two key scenarios: (1) The 
[REDACTED] scenario, which reflected iHeart's expectations if no 
agreement with Warner was reached; and (2) the ``Warner Direct License 
Terms'' scenario, which reflected its projections under the terms and 
conditions of the Warner agreement as signed. Fischel/Lichtman AWDT ] 
42 and Ex. B thereto (``Projected iHeartMedia/Warner Royalty Rates''); 
IHM Ex. 3034 at 172.
    Under scenario (1), iHeartMedia expected Warner music to constitute 
[REDACTED]% of total performances, or [REDACTED] performances, on the 
iHeart custom service. Under scenario (2), iHeart expected to increase 
Warner's share of performances to [REDACTED] percent, and thus expected 
to play [REDACTED] Warner performances over the duration of the 
agreement. Fischel/Lichtman AWDT ] 42; IHM Ex. 3034 at 172 (``Projected 
iHeartMedia-Warner Royalty Rates'').
    Under scenario (1), without the steering of additional plays at 
lower average rates, iHeart expected to pay Warner a total of 
$[REDACTED] in royalties. Under scenario (2), with the steering of 
additional plays at lower average rates, iHeart expected to pay Warner 
a total of $[REDACTED]. Fischel/Lichtman AWDT ]] 43, 51.
    Dr. Fischel then divided the total expected compensation under the 
Today's Growth Model ($[REDACTED]) by the total number of performances 
projected in that model ([REDACTED]). This calculation projected an 
average per-play rate of $0.[REDACTED], rounded to $0.[REDACTED]. 
Fischel/Lichtman AWDT ]43; IHM Ex. 3034 at 172 (``Projected iHeart 
Media/Royalty Rates'').
    Even before Dr. Fischel attempted to determine his ``incremental 
rate'' under the iHeart/Warner Agreement, he emphasized that this 
average rate itself was [REDACTED]% lower than the statutory rate of 
$0.0025 that iHeart would otherwise pay under the applicable NAB/
SoundExchange settlement. Fischel/Lichtman ] 43.
    Additionally, Drs. Fischel and Lichtman opined that this 
$0.[REDACTED] rate needed to be adjusted downward for a [REDACTED] 
adjustment, to reflect the fact that, under the iHeart/Warner 
Agreement, [REDACTED] are not subject to a royalty payment by iHeart to 
Warner. Id. ] 35. They then noted that iHeart, had projected that an 
adjustment for [REDACTED] would reduce the effective average per-play 
rate under the iHeart/Warner Agreement ``to between $0.[REDACTED] and 
$0.[REDACTED].'' Id.
    Dr. Fischel then turned his analysis toward the calculation of his 
so-called ``incremental rate.'' He noted the simple math demonstrating 
that, according to the Today's Growth Model, the difference in the 
number of Warner plays on iHeart's custom noninteractive service 
between Scenario (2) ([REDACTED] plays) and Scenario (1) ([REDACTED] 
plays) equaled [REDACTED] plays. He further noted that the difference 
in royalties--again according to the Today's Growth Model--between 
Scenario (2) ($[REDACTED]) and Scenario (1) ($[REDACTED]) equaled 
$[REDACTED]. Fischel/Lichtman AWDT ]] 50-51; IHM Ex. 3034 at 172 
(``projected iHeart Media/Warner royalty rates.
    Dr. Fischel then divided the $[REDACTED] additional revenue by the 
additional [REDACTED] plays to

[[Page 26377]]

derive his ``incremental rate'' of $0.0005. Id. As noted supra, Dr. 
Fischel opined that his so-called ``incremental rate of $0.0005 was a 
better benchmark than the average rate of $0.[REDACTED] implied by the 
Today's Growth Model or the rates actually set forth in the iHeart/
Warner Agreement, because the so-called ``incremental rate'' was not 
tainted by the upward influence of the statutory rate. Accordingly, Dr. 
Fischel opined, ``this $0.0005 per-performance rate is the best 
available evidence on the question at issue in this proceeding.'' 
Fischel/Lichtman AWDT ] 52.\162\
---------------------------------------------------------------------------

    \162\ Dr. Fischel then speculates as to whether even the non-
incremental plays would be priced higher or lower than $0.0005, but 
he comes to no conclusion in that regard. Fischel/Lichtman AWDT ] 
53.
---------------------------------------------------------------------------

    As noted at the outset of this section, the iHeart/Warner Agreement 
contains a greater-of rate structure. However, Drs. Fischel and 
Lichtman declined to incorporate any greater-of formula into their rate 
structure and they did not include any percentage-of-revenue 
alternative rate in their proposed benchmark. Dr. Lichtman explained 
this deviation from the iHeart/Warner Agreement: ``[N]o one thought 
that provision would be binding. So they have a number that both 
parties looked at and said that number would never actually be used in 
the real world, so who cares what the number is . . ..'' 5/15/15 Tr. 
4016-17 (Lichtman); see also 5/21/15 Tr. 5334 (Fischel) (same).\163\
---------------------------------------------------------------------------

    \163\ iHeart speculates that the percentage-of-revenue prong was 
added to the iHeart/Warner Agreement by Warner to set a precedent 
for future rate-setting proceedings for sound recordings and points 
to a document pertaining to Warner's negotiations with [REDACTED] 
for support. See IHM Ex. 3435 at 5; 5/15/15 Tr. 4024-25 (Lichtman). 
However, iHeart does not identify any sufficiently similar evidence 
that suggests the percentage-of-revenue prong in the iHeart/Warner 
Agreement was included for this reason.
---------------------------------------------------------------------------

b. The 27 iHeart/Indies Agreements
    iHeart also relies upon its separate agreements with 27 Indies 
that, as of July 2014, accounted for approximately [REDACTED] percent 
of performances on its custom service. Fischel/Lichtman AWDT ] 57 and 
Ex. C thereto; IHM Exs. 3340, 3342, 3343, 3345, 3347, 3349, 3351-3370, 
3642. Despite this relatively small percentage of plays (compared to 
Warner), Drs. Fischel and Lichtman opine that ``these 27 deals provide 
important additional evidence as to the rates negotiated by willing 
buyers and willing sellers.'' Fischel/Lichtman AWDT ] 57.
    The principal custom noninteractive rate in these 27 agreements is 
[REDACTED]. Indeed, the 27 Warner/Indies Agreements contain the 
following provision:

[REDACTED]

    See generally IHM Exs. 3340, 3342, 3343, 3345, 3347, 3349, 3351-
3370, 3642. However, iHeart states that [REDACTED] of these 27 
webcasters has paid royalties under the percentage of revenue prong, 
because the per-play rate has generated the higher royalty. Fischel/
Lichtman AWDT ] 61.
    Each of these 27 iHeart/Indies Agreements contains a [REDACTED]-
year term. Id. These iHeart/Indies Agreements also contain other rates 
that are not applicable to custom noninteractive webcasting. Id.; see 
Fischel/Lichtman AWDT ] 58.
    As in the iHeart/Warner Agreement, the iHeart/Indies Agreements 
contain various additional items, some of which iHeart claims inure to 
its benefit, and some of which benefit the labels. iHeart points, by 
way of example, to the provision in all 27 agreements that iHeart 
received a license for [REDACTED] and thereby avoided the risk of 
[REDACTED] Additionally, in many of those agreements, the Indies agreed 
[REDACTED]. Fischel/Lichtman AWDT ] 62.
    As they analyzed the iHeart/Warner Agreement, Drs. Fischel and 
Lichtman concluded that the value of these terms cannot be determined 
in isolation, and found that there was no evidence indicating that the 
parties had explicitly assigned value to them when analyzing whether to 
enter into these 27 agreements. Accordingly, they concluded that it is 
appropriate to assign a zero net value to the non-pecuniary terms. Id.
    Therefore, Dr. Fischel proceeded to derive a so-called 
``incremental rate'' for the 27 iHeart/Indies Agreements. He determined 
that, between 2012 and 2014, and prior to the execution of these 27 
agreements, iHeart expected to pay to all these Indies $[REDACTED] (of 
which $[REDACTED] was for custom webcasts) covering [REDACTED] 
performances (of which [REDACTED] were custom webcasts), resulting in 
an average royalty rate of $0.[REDACTED] (iHeart was subject to the 
SoundExchange/NAB settlement rates). IHM Ex. 3034 (Fischel/Lichtman 
AWDT, Ex. D).
    Dr. Fischel then determined that, after the execution of these 27 
iHeart/Indies Agreements, total performances would increase to 
[REDACTED] (of which [REDACTED] were custom webcasts) and total 
royalties would increase to $[REDACTED] (of which $[REDACTED] was for 
custom webcasts), resulting in an average royalty rate of 
$0.[REDACTED]. Id.
    As with the iHeart/Warner analysis, Dr. Fischel then calculated his 
so-called ``incremental rate'' by applying his ``two bundles'' 
approach. He noted that iHeart expected to play an additional 
[REDACTED] performances and expected to pay $[REDACTED] more in 
royalties. This incremental difference yielded the so-called 
``incremental rate'' of $0.[REDACTED] ($[REDACTED]/[REDACTED] plays). 
Fischel/Lichtman AWDT ] 68; IHM Ex. 3034 (Fischel/Lichtman AWDT, Ex. D 
thereto).
    Unlike the iHeart/Warner Agreement, these 27 Warner/Indies 
Agreements were not supported by an internal projection of expected 
increased plays, such as the ``Today's Growth'' model upon which Dr. 
Fischel relied for his iHeart/Warner ``incremental'' analysis. Rather, 
Dr. Fischel testified that he and Dr. Lichtman ``assumed (consistent 
with our understanding) that iHeart believed that, after signing each 
of these deals, it would increase each label's share of all webcasts 
([REDACTED]) by [REDACTED] percent.'' Fischel/Lichtman AWDT ] 66. 
Apparently, Dr. Fischel did not use iHeart's or his own ``projections'' 
of increased performances, as he did for his iHeart/Warner analysis, 
but rather ``assume[d] iHeart approximately met its projections for . . 
. custom performances,'' and therefore ``the projections in [this] 
category[y] [are] equal to the actual number of performances.'' 
Fischel/Lichtman AWDT ] 66 (emphasis added).
    Drs. Fischel and Lichtman concluded from the foregoing that the 
$0.[REDACTED] ``incremental rate'' that they estimated for the 27 
iHeart/Indies Agreements ``demonstrates our main conclusion, regarding 
the $0.0005 per-performance rate.'' Fischel/Lichtman ] 69.\164\
---------------------------------------------------------------------------

    \164\ Drs. Fischel and Lichtman acknowledged the obvious--that 
the $0.[REDACTED] ``incremental'' rate derived from the iHeart/
Indies Agreements was lower than the $0.[REDACTED] ``incremental'' 
rate derived from the iHeart/Warner Agreement. See 5/21/15 Tr. 5383 
(Fischel). They opined that the Indies might receive a lower rate 
because the Indies artists may be ``less well-known,'' and because 
Indies may have repertoires that are not ``already familiar to 
listeners.'' Fischel/Lichtman AWDT ] 69. This testimony is generally 
consistent with the Judges' finding, supra, with regard to the 
Pandora/Merlin Agreement, that Indies in fact receive lower royalty 
rates than the Majors.
---------------------------------------------------------------------------

3. SoundExchange's Criticisms of the iHeart Rate Proposal
a. Introduction
    SoundExchange attacks the iHeart rate proposal on six separate 
fronts. First, SoundExchange sets forth an overview that purports to 
provide a different and more accurate understanding of the terms of the 
iHeart/Warner Agreement, compared with the presentation put forth by 
iHeart. Second, SoundExchange

[[Page 26378]]

seeks to demonstrate the invalidity of Dr. Fischel's ``incremental 
rate'' approach. Third, SoundExchange avers that iHeart's analysis is 
also flawed because it fails properly to consider and give value to 
other elements of consideration in the iHeart/Warner Agreement, which 
would result in a significantly higher benchmark per-play rate. Fourth, 
SoundExchange takes issue with iHeart's failure to account for the 
parties' actual performance under the iHeart/Warner Agreement. Fifth, 
SoundExchange takes issue with iHeart's reliance on a single projection 
made by iHeart during negotiations (the ``Today's Growth'' model) to 
establish a benchmark in this proceeding, and its failure to consider 
other contemporaneous alternative projections. Sixth, SoundExchange 
seeks to discredit the 27 Warner/Indies Agreements as proper 
benchmarks.
b. SoundExchange's Overview of the iHeart/Warner Agreement
    SoundExchange begins its critique by referring to the negotiation 
period before the iHeart/Warner Agreement was executed. It notes that 
iHeart originally offered Warner [REDACTED]. IHM Ex. 3114 at 10. Warner 
rejected that proposal and according to Dr. Fischel, Warner ultimately 
achieved a ``better deal than [REDACTED]. 5/22/15 Tr. 5542, 5551 
(Fischel).\165\
---------------------------------------------------------------------------

    \165\ SoundExchange also notes that Sony and Universal turned 
down a similar offer from iHeart because ``[REDACTED].'' SX Ex.1139; 
SX Ex. 25 at 12, ] 35 (Harrison WRT); 4/28/15 Tr. 509-510 (A. 
Harrison) (describing iHeart's proposal as ``[REDACTED].'')
---------------------------------------------------------------------------

     When SoundExchange turns its attention to the several non-
rate and non-steering aspects of the iHeart/Warner Agreement, it notes 
the following provisions that were essentially ignored by iHeart. 
iHeart agreed to provide to Warner the greater of [REDACTED]% of all 
AIP inventory that iHeart offers in the marketplace and AIP having a 
``fair market value,'' as stated in the iHeart/Warner Agreement, of at 
least $[REDACTED] per agreement year. SX Ex.33 at 19-20 Sec.  5(a).
     In addition to this ``[REDACTED] AIP,'' iHeart agreed to 
provide Warner with another advertising opportunity, to participate in 
two ``[REDACTED]'' campaigns each year. This ``[REDACTED]'' guarantees 
at least [REDACTED] insertions of ads in duration up to [REDACTED] 
seconds each on iHeart's terrestrial stations for artists selected at 
Warner's discretion. Each advertisement also must include a [REDACTED]. 
SX Ex. 33 at 19-20 Sec.  5(a); 81, Exhibit F. Warner calculated the 
value of a single [REDACTED] campaign at $[REDACTED], yielding a 
combined value for [REDACTED] such campaigns of close to $[REDACTED] 
over the initial term of the agreement. SX Ex. 32 at 14 n.9 (Wilcox 
WRT); 6/3/15 Tr. 7403 (Wilcox).
     iHeart also agreed to pay royalties to Warner for 
[REDACTED]. SX Ex. 33 at 10 Sec.  1(pp); SX Ex. 32 at 14 (Wilcox WRT).
     iHeart agreed to pay Warner a $[REDACTED] fee for a 
[REDACTED] provision, the [REDACTED] agreement, which iHeart requested 
be in a separate agreement but ultimately was included in the iHeart/
Warner Agreement. 6/3/15 Tr. 7387 (Wilcox).\166\
---------------------------------------------------------------------------

    \166\ In pertinent part, the [REDACTED] Agreement provided that, 
in exchange for a $[REDACTED] to Warner by iHeart, Warner granted to 
iHeart [REDACTED] SX EX. 1339.
---------------------------------------------------------------------------

    Through testimony at the hearing, SoundExchange and Warner asserted 
that Warner perceived the additional items it received, combined with 
the rate and steering terms, as greater than what it would have 
received under the statutory license. 5/7/15 Tr. 2370 (Wilcox) (Warner 
received ``a package of consideration that is material and greater and 
different in positive ways than what we would be obtaining just through 
a compulsory statutory deal.''). Further, Mr. Wilcox testified that he 
did not think this ``deal'' would ``go forward on the existing terms if 
one of these were missing.'' 6/3/15 Tr. 7416 (Wilcox). However, 
SoundExchange did not proffer evidence or testimony that was 
contemporaneous with the negotiation of the iHeart/Warner Agreement 
that was probative as to whether Warner required the other contract 
terms in order to avail itself of the rate and steering terms. 
SoundExchange notes, however, (regarding the additional contract items 
of potential value to Warner) that iHeart did not produce a fact 
witness who testified regarding the actual value of these terms to 
iHeart.
    SoundExchange also notes, as did iHeart, that the latter also 
received additional contractual consideration beyond the right to 
perform Warner's sound recordings under the agreement. See Fischel/
Lichtman AWDT at 20 (``insurance policy'' allowing iHeart to avoid 
[REDACTED] if [REDACTED] and [REDACTED] protection if [REDACTED] 
granted better terms to [REDACTED] for [REDACTED] service); SX Ex. 33 
at 31.
    However, despite the absence of any actual values being placed by 
the parties on these additional items, Mr. Wilcox concluded that the 
net value of all the other consideration provisions is ``heavily 
weighted to the Warner Music Group.'' 6/3/15 Tr. 7385 (Wilcox).
    SoundExchange also notes in this context, as it did in its 
opposition to Pandora's rate proposal, that the steering elements of 
the iHeart/Warner Agreement provide only ``first mover'' advantages'' 
that would be ``mathematically impossible'' to replicate across the 
industry. 5/7/15 Tr. 2374 (Wilcox); Rubinfeld CWDT at 46 ] 183; 6/2/15 
Tr. 7239 (Cutler). Moreover, SoundExchange noted that iHeart found its 
ability to steer toward any particular record company to be limited. As 
noted in the Judges' discussion of the Pandora rate proposal, 
SoundExchange asserts that, when iHeart tried to [REDACTED] it created 
``challenging listening experiences.'' For example, a listener's seeded 
``[REDACTED] Radio Station'' [REDACTED] turned into a de facto 
``[REDACTED] Radio Station,'' [REDACTED] and a listener's seeded 
``[REDACTED] Radio Station'' [REDACTED] turned into a de facto 
``[REDACTED] Radio Station [REDACTED]. Thus, iHeart concluded that too 
much steering (to [REDACTED]%) was ``[REDACTED] all to the detriment of 
our custom product.'' SX Ex. 1037.
c. SoundExchange's Criticism of the ``Incremental Rate'' Approach of 
Drs. Fischel and Lichtman
    SoundExchange begins its critique with these undisputed assertions:

     None of these agreements--or any other agreement submitted 
by any other party--has $0.[REDACTED] as the stated per-performance 
rate or within any range of stated rates.
     There is not a single document in evidence showing that 
any parties--not just Warner and iHeart--ever had a ``meeting of the 
minds'' as to a rate of $0.[REDACTED] per-performance.
     There is not a single communication between iHeart and 
Warner citing a rate of $0.[REDACTED] under the iHeart-Warner 
agreement.
     No internal iHeart document shows such a rate for the 
iHeart-Warner agreement.
     There is no evidence in the record showing that a willing 
copyright owner would agree to license the performance of its sound 
recordings at a rate of $0.[REDACTED].
     None of the other economic experts who testified used such 
an approach in his written testimony.

SX PFF ]] 768-69 (citing 5/22/15 Tr. 5489-90 (Fischel); Rubinfeld CWRT 
] 23); Id. ]] 784-88 (and additional citations to the record therein).
    Next, SoundExchange takes substantive aim at the ``two bundles'' of

[[Page 26379]]

rights approach. SoundExchange (accurately) summarizes this opinion as 
stating that, according to Drs. Fischel and Lichtman, the only relevant 
information regarding the rate to which willing buyers and willing 
sellers would agree, absent a statutory license, can be found in the 
number of performances and revenue in the second bundle.\167\ As 
SoundExchange continues to correctly note, they then claim that 
dividing the so-called ``incremental'' revenue by the ``incremental'' 
number of performances yields the precise per-play royalty rate to 
which the parties would have agreed for 100% of the performances 
expected under their agreement in a world without the statutory 
license. See SX PFF ] 771 (and record citations therein).
---------------------------------------------------------------------------

    \167\ SoundExchange also accurately summarizes the contents of 
the two bundles: ``The first is a `bundle' for the purported right 
to perform sound recordings up to the number of performances [Drs.] 
Fischel [and]Lichtman say the parties expected to occur under the 
statutory license in the absence of a direct license,'' and ``[t]he 
second is a `bundle' for the purported right to make all the 
additional performances over and above those in the first bundle 
that [Drs.] Fischel [and]Lichtman say the parties expected to occur 
because of the direct license.'' SX PFF ] 770.
---------------------------------------------------------------------------

    The fundamental problem with this ``incremental'' approach, 
according to SoundExchange, is that it artificially and erroneously 
divides the royalty payments by breaking the single actual bundle of 
performances under the agreement into two hypothetical bundles. 
According to SoundExchange, that approach artificially and erroneously 
divides consideration into separate bundles that the parties did not 
negotiate. To make the point, Dr. Rubinfeld, on behalf of 
SoundExchange, applied an analogy: In a ``buy one, get one free'' 
transaction, the price of the second product is not zero; the second 
product could not be obtained without paying the full price for the 
first. Accordingly, the appropriate price for each of the two products 
is not the ``incremental price'' of the second item, but rather the 
average price of the two items. Rubinfeld CWRT at 6, ] 24.
    SoundExchange also notes that Drs. Fischel and Lichtman analyzed 
the Pandora/Merlin Agreement through the lens of their so-called 
incremental approach and concluded that the proper rate derived from 
that agreement--for use as the statutory benchmark--is between $0.0002 
and negative $0.0002 (i.e., a rate at which the record companies would 
pay the noninteractive services rather than receive royalties from 
these services). See Fischel/Lichtman AWDT at 40-41. In attempting to 
highlight the purported absurdity of this result, SoundExchange notes 
that, despite the clear economic appeal of such a range of rates to 
Pandora, its own expert, Dr. Shapiro, did not adopt such an incremental 
rate, but rather recommended a rate that was multiple times greater. 
Rubinfeld CWRT at 22, ] 79.
    For these reasons, SoundExchange asserts that the so-called 
incremental per-play approach of Drs. Fischel and Lichtman must be 
rejected, in favor of an approach that determines per-play rates on an 
average royalty basis.
d. The Alleged Importance of the Value of Non-Rate/Steering Items in 
the iHeart/Warner Agreement
    SoundExchange criticizes Drs. Fischel and Lichtman for failing to 
make a sufficient attempt to attach monetary values to provisions in 
the iHeart/Warner Agreement. See Fischel/Lichtman AWDT ] 39. More 
particularly, SoundExchange rejects their assumption that the non-
royalty rate term provisions benefiting Warner, and those benefiting 
Heart, have a net value of zero. See 5/21/15 Tr. 5/21/15 Tr. 5340 
(Fischel); (Fischel/Lichtman AWDT at 20-21).
    Rather, SoundExchange asserts the record reflects that this ``net 
zero value'' conclusion is inaccurate. The ``record'' to which 
SoundExchange cites to support this position is a conclusory statement 
made by Warner's testifying executive, Mr. Wilcox, who stated that the 
net value of the non-royalty rate provisions is ``heavily weighted to 
the Warner Music Group.'' 6/3/15 Tr. 7385 (Wilcox).\168\ SoundExchange 
further seeks to buttress its argument that the iHeart benchmark fails 
to adjust for the value of items that favored Warner by reciting the 
list of such items and noting that Mr. Wilcox, in his oral and written 
testimony, characterized such items as ``incredibly important'' 
([REDACTED]); ``so important'' ([REDACTED]); a ``floor valuation'' 
([REDACTED]); an ``immediate uptick'' in value ([REDACTED]). SX PFF ]] 
810-814, 827 (and citations to the record therein).
---------------------------------------------------------------------------

    \168\ Actually, Mr. Wilcox made this statement with regard to a 
list of contractual items that would provide value only to Warner, 
not the entirety of other non-royalty/steering items that Drs. 
Fischel and Lichtman asserted had value to both parties and should 
be weighed and deemed for rate purposes to have a net value of zero. 
See id. at 7384-85 (Mr. Wilcox responding to a question regarding a 
demonstrative list of contractual items and testifying that 
``they're heavily weighted to the Warner Music Group. These were, 
every one of them, things that were important wins for us, if you 
will, in the negotiation and were key to getting to yes.''). Drs. 
Fischel and Lichtman did not dispute that some contractual items had 
value to Warner, but rather concluded that the absence of valuations 
by the parties required an expert to net the offsetting values at 
zero. Thus, the cited testimony does not support SoundExchange's 
assertion in the text, supra, that ``the record'' reflects a net 
value for these other items tilted toward Warner.
---------------------------------------------------------------------------

    SoundExchange also takes issue with iHeart's claim, as asserted by 
Dr. Fischel, that the absence of any projections or spreadsheets 
detailing the value of these additional items is evidence that the 
parties did not assign values to them. However, SoundExchange 
acknowledges that ``when the Judges asked Mr. Wilcox whether Warner had 
assigned a number value to . . . many of these provisions,'' his 
``consistent'' response was that he ``could not be certain'' of the 
number value. SX PFF ] 827.
i. AIP and [REDACTED]
    Among the non-royalty and non-steering elements within the iHeart/
Warner Agreement, SoundExchange emphasizes iHeart's failure to adjust 
its benchmark to reflect the value of two items referred to supra, AIP 
and [REDACTED].
(A) AIP
    SoundExchange notes that the iHeart/Warner Agreement itself states 
that AIP has a ``fair market value'' of at least $[REDACTED] over 
[REDACTED] years. SX PFF ]] 807-808 (and citations to the record 
therein). Thus, according to SoundExchange, it is irrelevant whether 
the parties had internal projections or spreadsheets establishing the 
value of AIP. See SX Ex 33 at 19, ] 5(a)(ii) (declaring that AIP has a 
``fair market value of at least [REDACTED] Dollars USD $[REDACTED] per 
Agreement Year'').
    Additionally, SoundExchange points to internal iHeart documents in 
which Bob Pittman, iHeart's C.E.O., asked of his employees, with regard 
to AIP, [REDACTED]'' SX Ex. 207. SoundExchange further notes that, in 
an attempt to bridge differences in the ongoing negotiations, Mr. 
Pittman suggested that iHeart asked Warner if AIP has value to Warner, 
because it has value to iHeart. SX Ex. 1372. Additionally, 
SoundExchange points to Mr. Wilcox's written and oral testimony, in 
which he claims to recall that [REDACTED] indicated that iHeart 
intended to [REDACTED], but he cannot identify a document confirming 
that alleged representation by [REDACTED]. Wilcox WRT ] 23, 6/3/15 Tr. 
7460-61 (Wilcox)
    SoundExchange also points to numerous documents in which iHeart 
confirms the substantial value to record companies of AIP 
participation. See, e.g., IHM Exs. 3114 at 5, 10; 3121 at 4; 3225 at 2. 
Further, during negotiations, iHeart emphasized to Warner that AIP had 
substantial stand-alone value. See

[[Page 26380]]

SX Ex. 93 at 1. Additionally, at the hearing, witnesses for both iHeart 
and Warner acknowledged the significant value of AIP to a record 
company. 5/21/15 Tr. 5194-95 (Poleman) (iHeart executive describing AIP 
as ``invaluable''); 6/3/15 Tr. 7392 (Wilcox); Wilcox WDT at 12-13; 
(Warner executive describing AIP as ``[REDACTED]'').
    Based on such reasoning, iHeart estimated the quantity of AIP to be 
given to Warner not only [REDACTED], but also [REDACTED], as set forth 
on iHeart's rate card.'' See 5/20/15 Tr. 4885-86 (Pittman). As 
SoundExchange further points out, Mr. Poleman also noted that access to 
AIP slots could in the future be [REDACTED], and, if so, Warner would 
[REDACTED]. 5/21/15 Tr. 5189-90 (Poleman). See also SX Ex. 1139 
([REDACTED].
    For these reasons, SoundExchange avers that iHeart erred in 
declining to attribute value to AIP in its iHeart/Warner 
benchmark.\169\
---------------------------------------------------------------------------

    \169\ SoundExchange, noting one of iHeart's rebuttals on this 
issue, acknowledges that in the past, iHeart provided AIP 
[REDACTED]. Therefore, SoundExchange recognized that AIP provisions 
could be construed as a form of ``insurance'' against [REDACTED]. 
SoundExchange asserts that the threat that iHeart would [REDACTED] 
AIP was real, so any ``insurance'' value would be quite high, albeit 
indeterminate. See SoundExchange PFF ] 823 (and citations to the 
record therein).
---------------------------------------------------------------------------

(B) [REDACTED]
    According to SoundExchange, the value of [REDACTED] is different 
from [REDACTED] AIP in a way that enhances record company promotional 
programs on iHeart. First, unlike AIP, Warner was not [REDACTED], and 
iHeart did not [REDACTED]. 6/3/15 Tr. 7405 (Wilcox).
    The iHeart/Warner Agreement's [REDACTED] provision guarantees 
Warner at least [REDACTED] of up to [REDACTED] for [REDACTED] on all of 
iHeart's [REDACTED] of [REDACTED] chosen by Warner. SX Ex. 33 at 19-20 
Sec.  5(a); id. at 81, Exhibit F, Sec. Sec.  1-2. According to Warner, 
both the [REDACTED] and the fact that [REDACTED] are unique to this 
program, [REDACTED]. 6/3/15 Tr. 7401 (Wilcox). Further, the [REDACTED] 
provisions require iHeart to include a [REDACTED] and give Warner the 
right to [REDACTED], and to [REDACTED]. SX Ex. 33 at 82, Exhibit F, 
Sec.  7.
    Warner did not attempt to value [REDACTED] contemporaneous with the 
negotiations, and did not include a stated value for [REDACTED] in the 
iHeart/Warner Agreement. SoundExchange did not utilize an expert to 
value [REDACTED] in the hearing. However, for this proceeding, a non-
expert, Mr. Wilcox, the Warner executive, calculated his understanding 
of the value of a [REDACTED] campaign at $[REDACTED] per year, or 
approximately $[REDACTED] for the [REDACTED] campaigns to which Warner 
was entitled over the initial term of the agreement. Wilcox WRT at 14 
n.9; 6/3/15 Tr. 7403 (Wilcox). SoundExchange notes that no iHeart fact 
witness disputed this attempted valuation.
    For these reasons, SoundExchange disputes the decision by Drs. 
Fischel and Lichtman to assign no independent value to the [REDACTED] 
benefits contained in the iHeart/Warner Agreement.
ii. [REDACTED] Agreement
    Another non-royalty/steering provision identified in the iHeart/
Warner Agreement is a reference to a separate agreement--the 
``[REDACTED] Agreement'' between the parties. SoundExchange avers that 
Drs. Fischel and Lichtman wrongly omitted the value of this $[REDACTED] 
payment from their calculation. According to SoundExchange, this 
omission was improper because Mr. Wilcox testified that ``it was 
``worth . . . $[REDACTED]'' 6/3/15 Tr. 7385 (Wilcox). Mr. Wilcox 
further testified that iHeart had requested that this ``[REDACTED] 
transaction be set forth in a separate agreement, but Warner preferred 
that it be included--as it ultimately was--in the iHeart/Warner 
Agreement. 6/3/15 Tr. 7387 (Wilcox). SoundExchange also notes that 
iHeart does not dispute that the $[REDACTED] was executed on the same 
day. 6/2/15 Tr. 7304 (Cutler); 5/22/15 Tr. 5505 (Fischel). Further, 
SoundExchange points out that none of iHeart's fact witnesses testified 
that the $[REDACTED] was not consideration tied closely to the 
webcasting agreement.
    SoundExchange acknowledges that the ``[REDACTED] Agreement'' 
contains an [REDACTED]. See SX Ex. 1339 at 1-2. However, SoundExchange 
argues that iHeart is inconsistent by claiming that the Judges should 
apply that express clause, yet they should ignore the express valuation 
of AIP at $[REDACTED] in the iHeart/Warner Agreement. See SX PFF ] 830. 
Additionally, SoundExchange avers that Warner would not have executed 
the webcasting agreement (all else equal) absent the $[REDACTED] 
payment. 6/3/15 Tr. 7388 (Wilcox) (``It was a material amount of money 
and important to us as part of the total list of consideration we were 
getting . . .'').
    In sum, when Dr. Rubinfeld and SoundExchange account for all of the 
value they claim was missing from the valuation undertaken by Drs. 
Fischel and Lichtman, they conclude that under iHeart's ``Today's 
Growth'' model, the benchmark per-play rate would equal or exceed 
$0.[REDACTED]. See SX PFF ]] 846-853 (and record citations therein).
e. Performance Under the iHeart/Warner Agreement Has Not Matched the 
Projections in iHeart's ``Today's Growth'' Model
    In this proceeding, SoundExchange did not rely in its direct case 
upon any of Warner's projections reflecting its expectations at the 
time the iHeart/Warner Agreement was negotiated and executed. Rather, 
SoundExchange relies upon an analysis by Dr. Rubinfeld of available 
data regarding performances and royalties paid during the first eight 
months of the iHeart-Warner agreement--from October 2013 to May 2014. 
Dr. Rubinfeld relied upon this slice of performance data, rather than 
the expectations of the contracting parties, because he found that 
``performance data reflect actual experiences in the marketplace [and] 
[t]he most recent performance data is likely to be the best predictor 
of what will happen in the immediate future.'' Rubinfeld CWRT ] 27. 
However, Dr. Rubinfeld also cautioned that ``review of a longer period 
of performance data may offer additional value if the review reveals 
important trends in the industry.'' Id. SoundExchange also points out 
that Dr. Katz (the NAB's economic expert), Mr. Cutler (an iHeart 
executive), and Aaron Harrison (a Universal executive) all recognized 
the importance of using current performance data to update prior 
projections or expectations. See SX PFF ]] 800, 803-04 (and citations 
to the record contained therein).
    From the 8-month slice of data that he reviewed and about which he 
opined, Dr. Rubinfeld calculated an alternative average per-play 
royalty rate. Rubinfeld CWDT at 57-59, ]] 229-236); SX Ex. 64 
(Rubinfeld App. 1b, backup calculations).\170\ For custom 
noninteractive performances, Dr. Rubinfeld calculated a per-play rate 
of $0.[REDACTED] ($0.[REDACTED] rounded). When he attributed the value 
of AIP to the per-play rate, his eight-month performance-based rate 
rose to $0.[REDACTED] per play ($0.[REDACTED] rounded). SX Ex. 66. Dr. 
Rubinfeld then attempted to equalize the iHeart/Warner and derived 
potential statutory rate to equalize

[[Page 26381]]

royalty-bearing performances by adjusting for skips and for the playing 
of [REDACTED]. To that end, he used the same adjustment factor, 1.1, as 
he had used when performing his own interactive benchmarking analysis. 
Rubinfeld CWDT at 58 ] 234; SX Ex. 66.
---------------------------------------------------------------------------

    \170\ Dr. Rubinfeld also updated his calculations to include 
June to September 2014). SX Ex. 133.
---------------------------------------------------------------------------

    SoundExchange avers that Dr. Rubinfeld's calculations as they 
relate to custom webcasting are conservative for the following reasons:
     He makes no adjustment upward for the certainty of value 
that Warner receives as a result of getting [REDACTED]. Rubinfeld CWDT 
at 57, ] 229.
     He does not account for any additional value from 
[REDACTED].\171\
---------------------------------------------------------------------------

    \171\ Dr. Rubinfeld claims his estimate is also conservative 
because he applies the conservative pre-deal market share of 
[REDACTED]% despite a claim by Warner that its actual market share 
on iHeartRadio was approximately [REDACTED]%. Rubinfeld CWDT at 59 
n. 135.
---------------------------------------------------------------------------

f. iHeart Relies on Projections From Only One Model--the ``Today's 
Growth'' Model
    SoundExchange avers that Drs. Fischel and Lichtman relied 
exclusively on one specific projection that applied certain 
``assumptions'' regarding future performance under the iHeart/Warner 
Agreement. These expectations were contained in the ``Today's Growth'' 
model presented to iHeart's Board of Directors in mid-2013. Fischel/
Lichtman AWDT at 21 ] 40.
    Although Drs. Fischel and Lichtman state that they chose the 
``Today's Growth'' model because the iHeart Board purportedly ``relied 
on [it] as the most realistic [case]'' when approving the iHeart-Warner 
Agreement, 5/21/15 Tr. 5322 (Fischel), SoundExchange notes that iHeart 
actually [REDACTED]. IHM Ex. 3338 (Cutler WDT); see also 6/2/15 
Tr.7263-64 (Cutler).\172\
---------------------------------------------------------------------------

    \172\ [REDACTED]. Cutler WDT, Ex. DD.
---------------------------------------------------------------------------

    Although there is no evidence that the iHeart Board relied on the 
``[REDACTED]'' or ``[REDACTED]'' models, SoundExchange avers (albeit 
without supporting evidence) that because iHeart executives [REDACTED], 
``it was wrong for Drs. Fischel and Lichtman to ignore them 
completely.'' SX PFF ] 779. SoundExchange further notes that, although 
Mr. Cutler testified that he viewed the Today's Growth model as the 
best estimate, neither he nor any other iHeart witness testified that 
[REDACTED]. Id. Consequently, SoundExchange asserts that the Fischel/
Lichtman analysis is compromised because they failed to test 
[REDACTED]. See 5/22/15 Tr. 5496-97 (Fischel).
    SoundExchange noted when it looked at actual performance under the 
iHeart/Warner Agreement, one of the models that was [REDACTED]--the 
``[REDACTED]'' Model--proved to be a more accurate estimate of 
[REDACTED]. See 5/22/15 Tr. 5494 (Fischel); 6/2/15 Tr. 7264-65 
(Cutler). This consistency between the ``[REDACTED]'' model and initial 
actual performance existed, according to SoundExchange, because iHeart 
had [REDACTED]. 5/22/15 Tr. 5522 (Fischel); 5/20/15 Tr. 4839-40 
(Pittman) ([REDACTED]).
    SoundExchange surmises that such [REDACTED] policies were put into 
effect, and thus contributed to the actual initial performance under 
the iHeart/Warner Agreement that resembled the ``[REDACTED]'' model 
rather than the ``Today's Growth'' model. Whatever the reason, as Mr. 
Cutler of iHeart acknowledged, iHeart's growth in Warner plays over the 
initial contract period has been [REDACTED]. 6/2/15 Tr. 7264-65 
(Cutler).
    SoundExchange notes as well that Dr. Fischel admitted on cross-
examination that he had performed an analysis of the effective 
incremental rates under the ``[REDACTED]'' model (but did not submit 
evidence of that calculation or testify as to that calculation). On 
cross-examination, Dr. Fischel further acknowledged that the 
incremental rate he had calculated equaled $0.[REDACTED] per play under 
the ``[REDACTED]'' model. 5/22/15 Tr. 5523 (Fischel).\173\
---------------------------------------------------------------------------

    \173\ Although Dr. Fischel did not identify the average rate 
derived from the ``[REDACTED]'' model, the basic math derived from 
iHeart's ``[REDACTED]'' model projections reveal an average royalty 
rate of $0.[REDACTED]. for the entirety of performances under the 
iHeart/Warner Agreement if the ``[REDACTED]'' model had been 
applied. SX Ex 207; See SX PFF ] 793.
---------------------------------------------------------------------------

    SoundExchange additionally points to an effective per-play rate 
that iHeart supposedly wrongly ignored--the rate derived from a model 
[REDACTED]. See SX Ex. 367 at 005; 6/3/15 Tr. 7552-53 (Wilcox); see 
also SX Ex. 92 at 15 (alternative model comparisons). Applying this 
model, according to SoundExchange, yielded an average performance rate 
above $0.[REDACTED], and an incremental rate of approximately 
$0.[REDACTED]. Once again, these rates were mathematically derived by 
SoundExchange, not its witnesses, based on ``the simple math that Prof. 
Fischel described'' as applicable to calculating these rates. See SX 
PFF ] 794.\174\
---------------------------------------------------------------------------

    \174\ Although Mr. Wilcox testified that this model indicating 
higher rates was [REDACTED], he did not clearly identify a model 
upon which [REDACTED]. Indeed, Mr. Wilcox testified that that the 
model that he identified as having been [REDACTED] ``was just one of 
many sets of assumptions we used throughout the course of 
negotiating this deal to stress-test the, you know, edge cases, you 
know, trying to figure out that this deal would perform positively 
for us in as many situations as we can throw at it. That's, sort of, 
the point.'' 6/3/15 Tr. 7421 (Wilcox). Thus, it is unclear as to 
exactly what model or models were [REDACTED]. Moreover, Mr. Wilcox 
did not identify in his written testimony which model or models were 
[REDACTED]. The Judges find Mr. Wilcox's oral testimony on this 
subject to be neither credible nor informative.
---------------------------------------------------------------------------

g. The Alleged Deficiencies in the 27 iHeart/Indies Agreements and in 
The Analysis of Their Terms by iHeart's Experts
    SoundExchange raises several challenges to iHeart's attempt to use 
the 27 iHeart/Indies Agreements as benchmarks in this proceeding. 
First, SoundExchange avers that the status of these licensees as Indies 
renders them unrepresentative of the rates and terms that a 
noninteractive webcaster would negotiate with a major recorded music 
company. SoundExchange notes that even Dr. Fischel acknowledged, 
``Warner got a [[REDACTED]%] better deal than the Indies'' from iHeart. 
5/22/15 Tr. 5542 (May 22, 2015) (Fischel).
    Second, SoundExchange notes that the greater-of rate structure in 
the iHeart/Indies agreements for custom noninteractive webcasting are 
[REDACTED], and thus are unduly influenced by that statutory rate. See, 
e.g., IHM 3340, Tab 7/Ex. F (agreement between Indie DashGo and iHeart 
at 4, 8) Third, SoundExchange avers that these Indies comprise in total 
no more than [REDACTED]% of plays on the service in July 2014, and most 
account for less than [REDACTED]% of plays See SX PFF 863.\175\
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    \175\ SoundExchange does not provide a citation to the record 
for these statistics, referring only to ``iHeart's data.'' SX PFF ] 
863. By contrast, Drs. Fischel and Lichtman stated in their written 
testimony that ``[a]s of July 2014, these 27 labels accounted for 
approximately [REDACTED]% of webcast performances on iHeart,'' but 
it was unclear from their testimony whether that percentage combined 
custom and simulcast performances. See Fischel/Lichtman AWDT ] 57 & 
n.51. Thus, the record is unclear what percentage of plays on 
iHeart's custom noninteractive service is comprised of these 27 
Indies' recordings.
---------------------------------------------------------------------------

    SoundExchange notes that Drs. Fischel and Lichtman determined both 
average and incremental rates related to these 27 iHeart/Indies 
Agreements. iHeart calculated an average royalty rate of $0.[REDACTED] 
from these 27 agreements, and an incremental rate of $0.[REDACTED] from 
these 27 agreements. Fischel/Lichtman AWDT, Ex. D.
    However, with regard to the incremental rate, SoundExchange notes 
that Drs. Fischel and Lichtman did not possess the same contemporaneous 
projections from iHeart (or the Indies) as

[[Page 26382]]

they had relied upon to determine the incremental rate under the 
iHeart/Warner Agreement. 5/22/15 Tr. 5543 (Fischel). Accordingly, the 
presumption by Drs. Fischel and Lichtman that iHeart would increase 
performances by [REDACTED]% is not based on any iHeart projection, nor 
is it supported by any provision of the 27 contracts. 5/22/15 Tr. 5544 
(Fischel). Moreover, the starting point, pre-agreement performance 
numbers were based upon iHeart's actual performances of Indie 
recordings. Id. at 5545.\176\ From this number, Drs. Fischel and 
Lichtman extrapolated an ``expectations''-based [REDACTED]% increase in 
the number of post-execution performances. Id.
---------------------------------------------------------------------------

    \176\ SoundExchange also points out that Drs. Fischel and 
Lichtman only had performance data for [REDACTED] of the 27 Indies, 
so they extrapolated the data that they had. Id. at 5548; see also 
SX Ex. 2347.
---------------------------------------------------------------------------

    Finally, SoundExchange notes the testimony of one Indie 
representative, Mr. Barros of Concord, who stated that Concord would 
not have entered into this agreement with iHeart to reduce custom 
noninteractive webcasting rates to [REDACTED] if the agreement did not 
also include the [REDACTED] and compensation for performances of 
[REDACTED]. 5/28/15 Tr. 6506 (Barros).\177\ According to SoundExchange, 
Drs. Fischel and Lichtman erred by failing to adjust their proposed 
rates to account for this additional consideration.
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    \177\ As noted in the Judges' analysis of the Pandora/Merlin 
Agreement, Mr. Barros did not indicate that Concord, or anyone on 
its behalf, established a monetary value for these other contractual 
items.
---------------------------------------------------------------------------

4. The Judges' Analyses and Findings Regarding iHeart's Rate Proposal
a. The Judges Reject iHeart's ``Incremental'' Rate Analysis
    The Judges agree with SoundExchange's critique that the 
``incremental approach'' advanced by iHeart is an inappropriate method 
for determining rates under Sec.  114. There are a number of reasons 
why the ``incremental approach'' is improper.
    First, the basic premise of the approach is erroneous. In an effort 
to avoid the so-called ``shadow'' of the statutory rate, Drs. Fischel 
and Lichtman essentially substitute a rate of zero for the number of 
sound recordings played under the existing statutory rate. Then, they 
conceptually divide the expected total of performances under the direct 
license (the iHeart/Warner Agreement) into two value-bundles. The first 
conceptual value-bundle (Scenario 1) consists of the lower number of 
performances (without steering) that iHeart expected to be played under 
the higher existing statutory rate. The second conceptual value-bundle 
(Scenario 2) consists of the number of performances (with steering, 
from [REDACTED]% to [REDACTED]% market share) iHeart expected to be 
played under the lower direct deal rate. Drs. Fischel and Lichtman then 
consider the expected difference between the higher revenues arising 
from the direct deal. Finally, they divide the incremental revenue by 
the number of incremental plays to determine their ``incremental 
rate.''
    This methodology intentionally attributes no market value to the 
rate and revenue paid for the pre-incremental performances. Although, 
as noted above, Drs. Fischel and Lichtman engage in this process in 
order to remove the alleged impact of the ``shadow'' of the statutory 
rate, they merely replace one supposed problem with a very real and 
more serious problem. That is, they replace the statutory rate with an 
effective rate of zero for the pre-incremental performances. There was 
no evidence presented in this proceeding, indeed no logical evidence 
could be presented, to support an assertion that the bulk of the pre-
incremental performances under iHeart's ``two bundle'' concept would be 
priced at zero in an actual market. To state the obvious, the creation 
of sound recordings is not costless, and prices are positive because 
costs must be recovered.\178\
---------------------------------------------------------------------------

    \178\ It is also unsupported by the evidence that record 
companies would forego all royalties in the hypothetical market 
merely to obtain a promotional value from the playing of their 
recordings on a noninteractive service.
---------------------------------------------------------------------------

    Relatedly, although iHeart would like the Judges to focus only on 
the incremental number of performances and the incremental revenue, 
those incremental values cannot exist without iHeart first paying for 
the pre-incremental performances at pre-incremental rates. To put the 
point colloquially, ``you cannot get there from here.'' That 
tautological point is not avoided by arbitrarily attributing a zero 
value to the pre-incremental performances.
    SoundExchange makes this point well by analogizing to a ``buy one, 
get one free'' offer. If a vendor offered an ice cream cone (to adopt 
SoundExchange's demonstrative example at the hearing) for $1.00, but 
offered two ice cream cones for $1.06, it would be absurd to conclude 
that the true market price of an ice cream cone is the incremental six 
cents. Rather, this offer indicates a market price of $0.53, the 
average price for the two ice cream cones. Or, to take a common 
example, tire sellers will often advertise a special offer: A buyer can 
pay for three tires and get the fourth tire free. This is economically 
(and mathematically) equivalent to a 25% reduction in the price of four 
tires. No one could go to the automotive store and receive only the 
``free'' fourth tire!
    iHeart attempts to distinguish the ice cream cone example by noting 
that, in the present case, Drs. Fischel and Lichtman are not 
eliminating a market-based price for the pre-incremental bundle, but 
rather are eliminating a government-set rate that casts a ``shadow'' on 
the market. There are several errors in this reasoning. First, the 
statutory rates were set after market participants provided the Judges 
in the prior proceeding with market evidence. There is no a priori 
reason to conclude that the rates set in that earlier proceeding failed 
to reflect or approximate market forces, and iHeart does not provide 
evidence as to why the Judges should re-litigate prior rates and reach 
such a conclusion.\179\ Second, to use a zero rate in order to remove 
the alleged shadow of the Judges' statutory rate or a settlement rate 
would be, to put the matter colloquially, ``throwing out the baby with 
the bathwater.'' A functionally zero rate for the pre-incremental 
performances is no mere potential ``shadow;'' it is an ink blot that 
obliterates any economic value inherent in the majority of the 
performances for which the rates must be established.\180\
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    \179\ Similarly, iHeart has not proffered evidence sufficient to 
show why the rates set in settlements between parties, that both 
parties agree may be evidence of a market rate, fail to reflect, or 
at least approximate, market rates as of the time they were set.
    \180\ On a less colloquial and more economic basis, iHeart has 
confused an elasticity-type concept with price. iHeart calculates 
the change in total revenue divided by the change in quantity. Such 
a proportionate change is not equivalent to a unit price.
---------------------------------------------------------------------------

    Accordingly, the Judges reject iHeart's incremental approach and 
they reject the $0.0005 rate its experts derived by using the 
incremental approach. To be clear, that incremental $0.0005 proposed 
rate does not constitute a benchmark or a guidepost which the Judges 
have relied for any purpose, and that incremental rate and the analysis 
from which it was derived has not influenced the Judges in their 
determination of the statutory rate in this proceeding.\181\
---------------------------------------------------------------------------

    \181\ iHeart attempts to support its ``incremental'' analysis 
with three arguments that it claims are confirmatory of the $0.0005 
rate. See iHeart PFF ]] 236-260 (and citations to the record 
therein). The Judges note that their rejection of this 
``incremental'' analysis moots the relevance of any attempt to 
confirm its purported contextual reasonableness. Further, the fact 
that iHeart did not propose these approaches as benchmarks or as 
other independent bases to set the rates makes them unhelpful and 
inappropriate as evidence to support iHeart's rate proposal. 
However, in the interest of completeness, the Judges note the 
following with regard to those arguments. First, Drs. Fischel and 
Lichtman undertook what they called a ``thought experiment,'' 
whereby they attempted to estimate a rate necessary for sound 
recording copyright holders to maintain revenue at current levels if 
100% of all listening to recorded music migrated to noninteractive 
webcasting. (They concluded that the rate would be $0.[REDACTED] per 
play.) They also did the same analysis on the assumption that only 
25% migrated to noninteractive services. (They concluded that the 
rate would be $0.[REDACTED] per play.) However, Drs. Fischel and 
Lichtman acknowledge that this ``thought experiment'' is ``not 
evidence of what a willing buyer and willing seller would 
negotiate.'' Fischel/Lichtman AWDT ] 128 (emphasis added). 
Therefore, such speculation is irrelevant to the Judges. Second, 
Drs. Fischel and Lichtman performed an ``Economic Value Added 
(``EVA'') analysis of the costs, revenues and necessary ROI of a 
``hypothetical simulcaster'' to determine the rate necessary for it 
to remain in business in the long-run, which they determined to be 
between $0.[REDACTED] and $0.[REDACTED] per play. However, as the 
Judges have repeatedly held, rate proceedings under section 114 are 
not public utility style proceedings whereby parties are guaranteed 
a rate of return. See, e.g., Web III Remand, 79 FR at 23107. 
Further, their EVA model was based on a sample of terrestrial radio 
firms that is not necessarily representative of simulcasters. 
Additionally, their EVA analysis fails to consider the rates 
necessary for record companies to obtain a sufficient rate of 
return, so they have simply focused on the demand side of the market 
and ignored the ``willing sellers'' on the supply side. Third, Drs. 
Fischel and Lichtman compare the statutory rate for satellite 
digital audio radio services (SDARS) and find that it suggests a 
per-play rate of $0.[REDACTED] to $0.[REDACTED]. However, rates set 
by the Judges in other types of proceedings are not probative of 
rates that should be set in this proceeding, especially when the 
standards in the two proceedings are different. The rate standard in 
SDARS proceedings is different from the standard in section 
114(f)(2)(B) for noninteractive services. See 17 U.S.C. Sec.  
801(b)(1)(A)-(D) (setting forth particular objectives that the rates 
must achieve).

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

[[Page 26383]]

b. The Judges Find the Average per-Play Rate Indicated by the iHeart/
Warner Agreement to be a Useful Benchmark
    Unlike the incremental rate derived by iHeart's experts, the 
``average rate,'' i.e., the stated per-play rate contained in the 
iHeart/Warner Agreement is a useful benchmark that, after adjustment, 
is probative of the rate that would be paid by a Major, as a willing 
seller/licensor, to a noninteractive service, as a willing buyer/
licensee.\182\
---------------------------------------------------------------------------

    \182\ In discussing the reasons why this average rate is a 
useful benchmark, the Judges find it helpful to organize their 
finding by adopting Dr. Rubinfeld's characterization of the elements 
of the statutory test implicitly set forth in section 114. See 
Rubinfeld CWDT ] 122(a)-(d).
---------------------------------------------------------------------------

i. The Benchmark Passes the ``Four-Part Test'' Derived From the Judges' 
Prior Decisions
    The iHeart/Warner Agreement satisfies the sub-tests implicit in the 
Judges' prior determinations, as outlined by Dr. Rubinfeld:
    Willing buyer and seller test: The rates are intended to be those 
that would have been negotiated in a hypothetical marketplace between a 
willing buyer and a willing seller.
    There is no dispute that Warner was a willing seller in connection 
with the iHeart/Warner Agreement. As one of the three Majors, Warner is 
a sophisticated entity capable of negotiating direct agreements in a 
manner that it understands will advance its economic interests. 
Likewise, iHeart is a leading noninteractive webcaster--not to mention 
one of the largest transmitters of music across various platforms. 
iHeart thus without dispute is also clearly capable of representing its 
economic interests in negotiating direct agreements.
    In the present case, the record is replete with voluminous 
submissions and substantial testimony indicating the diligence of both 
iHeart and Warner in negotiating this direct agreement. Clearly, each 
party was a willing participant in the legal sense; that is, each party 
was under no compulsion to enter into the iHeart/Warner Agreement, and 
each party had the opportunity to avail itself fully of all facts that 
it deemed pertinent before executing that agreement. See, e.g., Amerada 
Hess Corp. v. Comm'r, 517 F.2d 75, 83 (3d Cir. 1975) (defining a 
``willing buyer'' and a ``willing seller'' as parties not ``being under 
any compulsion to buy or to sell and both having reasonable knowledge 
of relevant facts.' '').
    Same parties test: The buyers in this hypothetical marketplace are 
the statutory webcasting services and the sellers are record companies.
    In the iHeart/Warner Agreement, the buyer/licensee, iHeart, is a 
statutory webcasting service. The seller/licensor, Warner, is a record 
company. Clearly, this aspect of the benchmark test is satisfied.
    Statutory license test: The hypothetical marketplace is one in 
which there is no statutory license.
    The iHeart/Warner Agreement is a direct agreement between the 
parties. The rates established in this agreement are not statutory 
rates. More particularly, at the time the iHeart/Warner Agreement was 
executed, iHeart was obligated to pay royalties to Warner according to 
the schedule of rates set forth in the SoundExchange/NAB 
settlement.\183\
---------------------------------------------------------------------------

    \183\ See note 28, supra.
---------------------------------------------------------------------------

    SoundExchange asserts that, nonetheless, the rates in the iHeart/
Warner Agreement are too heavily influenced by the ``shadow'' of the 
statutory rates to satisfy this ``statutory license test.'' The Judges 
disagree. As with regard to the Pandora/Merlin Agreement, it is crucial 
to appreciate that the adjusted effective rate \184\ in the direct 
license is less than the default rate that would otherwise control (the 
SoundExchange/NAB settlement rates for iHeart, and the Pureplay rates 
for Pandora). Accordingly, Warner was under no compulsion to accept the 
lower rate (compared to the SoundExchange/NAB settlement rate) set 
forth in the iHeart/Warner Agreement; it could have rejected that rate 
and defaulted to the higher SoundExchange/NAB settlement rate. Instead, 
Warner agreed to the lower rate, in exchange for the anticipated 
steering by iHeart of additional webcast performances of Warner sound 
recordings (from approximately [REDACTED]% to [REDACTED]% of total 
sound recordings). Accordingly, the Judges find that the ``statutory 
license test'' has also been satisfied by the iHeart/Warner Agreement.
---------------------------------------------------------------------------

    \184\ The Judges' determination of the adjusted effective rate 
under the iHeart/Warner Agreement is discussed infra.
---------------------------------------------------------------------------

    Further, and as discussed in connection with the Pandora/Merlin 
Agreement, the steering aspects of the iHeart/Warner Agreement also 
satisfy a statutory ``test'' omitted from Dr. Rubinfeld's four-part 
approach: The ``effective competition'' test. The steering aspect of 
the iHeart/Warner Agreement reflects price competition--an increase in 
quantity (more performances) in exchange for a lower price (a lower 
rate). All of the reasons set forth in this determination in the 
analysis of the Pandora/Merlin Agreement regarding the pro-competitive 
aspects of such steering, including the dynamic effect of a threat of 
steering, apply with equal force to the iHeart/Warner Agreement.\185\
---------------------------------------------------------------------------

    \185\ iHeart notes that the threat of steering could cause 
steering to occur in a number of differentiated ways, e.g., with one 
service making steering deals with several licensors, several 
licensees making similar deals with the same licensor(s), or a 
licensee making different deals with different licensors over time. 
See iHeart RPFF at 6 n.15. However, the Judges need not rely on such 
specific predictions. In whatever ways in which the reality of 
steering and the concomitant threat of steering-induced price 
competition develop, it is clear to the Judges that, as Dr. Shapiro 
explained, steering is the mechanism by which the complementary 
oligopoly power of the Majors is offset, allowing the Majors to 
realize only their considerable (non-complementary) oligopolistic 
power generated by their repertoires and their organizational 
acumen.
---------------------------------------------------------------------------

    Same rights test: The products sold consist of a blanket license 
for digital transmission of the record companies' complete repertoire 
of sound recordings, in compliance with the DMCA requirements.

[[Page 26384]]

    It is not disputed that the iHeart/Warner Agreement provides in 
pertinent part for a license from Warner to iHeart to play Warner sound 
recordings on iHeart's noninteractive webcasting service. See SX Ex. 33 
at 8 ] 1(y) (defining ``[REDACTED]''); id. at 11, ] 2(a)(1) (granting 
right to play ``[REDACTED]'' on ``[REDACTED]''). Pursuant to the 
iHeart/Warner Agreement, a ``[REDACTED]'' must ``[REDACTED]. Id. at 8, 
] 1(y). In turn, Exhibit A to the iHeart/Warner Agreement permits 
[REDACTED]; requires iHeart to [REDACTED]; and allows a listener 
[REDACTED]. Id., Ex. A.
    Accordingly, the Judges find that iHeart/Warner Agreement satisfies 
the core of the ``same rights test.''
ii. The Average Rate in the iHeart/Warner Agreement
    The Judges agree with SoundExchange that any use of the iHeart/
Warner Agreement as a benchmark must apply the effective average rate 
contained in that agreement.\186\ See SX RPFF ] 844 (``The average 
effective rate approach . . . is the proper analytical method. . . .'') 
(emphasis in original). The iHeart/Warner Agreement sets forth 
different per-play rates for [REDACTED]. The record does not reflect 
the reason(s) why iHeart and Warner negotiated an increase in the rates 
from a low of $0.[REDACTED] in [REDACTED] to a high of $0.[REDACTED] in 
[REDACTED] (and for any renewal term thereafter). In any event, the 
parties' inclusion of specific per-play rates paid to Warner in 
exchange for the right granted to iHeart to play Warner's sound 
recordings reflects the parties' WTA and WTP for the particular years. 
In the absence of relevant evidence necessitating adjustments or legal 
conditions extrinsic to the parties' agreement, the Judges cannot 
second-guess the rates to which the parties have agreed in a benchmark 
contract that otherwise satisfies the statutory test for a usable 
benchmark.
---------------------------------------------------------------------------

    \186\ The stated per-play rate is the equivalent of the 
``average'' rate because it is the same rate paid for each 
performance. To use iHeart's parlance, there is only one ``bundle'' 
of rights, with each performance priced at the same rate. The issue 
of how to adjust, if at all, that ``average'' rate into the average 
``effective'' rate is discussed infra.
---------------------------------------------------------------------------

    By applying the average rate explicitly set forth in the iHeart/
Warner Agreement (subject to potential adjustments), the Judges have 
obviated the protracted dispute between the parties regarding the 
probative value of different models and projections of future growth of 
performances and royalties. That is, in the absence of a ``two-bundle'' 
theory, the parties' expectations and projections are baked into the 
single explicit annual rate contained in the iHeart/Warner Agreement. 
Regardless of whether actual performance eventually resembles the 
``Today's Growth Model'' relied upon by the iHeart Board, or some more 
pessimistic or optimistic model of projections considered by iHeart or 
Warner, iHeart was contractually bound to pay a fixed royalty per year, 
and Warner had the duty to provide iHeart with access to Warner's sound 
recordings if those fixed per-play payments were made. Accordingly, the 
Judges look to the average rate agreed to by the parties in the iHeart/
Warner Agreement for 2016, which coincides with the first year of the 
statutory 2016-2020 period. That agreed-upon rate is $0.[REDACTED] per 
play.
    However, that average, stated per-play rate is not necessarily 
applicable, standing alone, as a benchmark, if it is subject to 
necessary upward or downward adjustments to account for other forms of 
consideration or to more accurately account for probative evidence 
related to the rights available under the statutory license. The Judges 
turn to these issues in the next section of this determination.
iii. Potential Adjustments to the Rate Derived From the iHeart/Warner 
Agreement
(A) General Considerations
    A potential benchmark can include terms that provide a licensor 
with additional compensation, whether in cash or in kind, beyond the 
simple receipt of money in exchange for the right to play sound 
recordings. In similar fashion, a potential benchmark can also provide 
a licensee with additional compensation, beyond the basic right to play 
sound recordings in exchange for the payment of money. When the 
parties' proposed benchmark agreement has bundled such other items with 
the simple payment-for-plays obligation that mirrors the rate 
provisions of Sec.  114, the issue arises as to whether and how, if at 
all, to value these non-statutory items.
    As an initial matter, the Judges note that the parties have a 
strong self-interest to establish values for non-statutory items that 
would support their positions. Thus, the Judges would anticipate that 
the record companies and SoundExchange would present specific evidence 
of the monetary value for the non-statutory consideration they received 
under the contract that must be added to the stated (``headline'') rate 
on a per-play basis. More particularly, the Judges would expect that 
the record companies' internal valuations and spreadsheets would set 
forth their understanding of these monetary values (not merely the 
existence of some unquantified value). Similarly, the Judges would 
anticipate receiving expert testimony from SoundExchange's economic 
witnesses, ascribing a monetary value to such additional contractual 
consideration allegedly benefiting the record companies, especially if 
there were no contemporaneous internal valuations made by the record 
companies themselves.
    Reciprocally, the Judges would also expect to receive evidence from 
the webcasters/licensees with regard to their contemporaneous 
calculation of the monetary value of contractual consideration they 
allege to have received in addition to the basic right to play sound 
recordings. Also, and especially if such evidence did not exist, the 
Judges would expect to receive evidence from the economic experts 
testifying on behalf of the webcasters/licensees regarding the monetary 
value of such additional forms of consideration supposedly benefiting 
the webcasters/licensees.
    The Judges' expectation that such evidence would be proffered is 
heightened by the accurate accusations hurled by each side that the 
other side was manipulating the terms of the potential benchmark in 
order to influence the Judges in this proceeding. See, e.g., 4/30/15 
Tr. 1141-42 (A. Harrison) ([REDACTED]); 4/28/15 Tr. 508-09 (Kooker) 
[REDACTED]); 6/1/15 Tr. 6962 (Lexton) (acknowledging that any deal 
Merlin concludes will be available as evidence in CRB hearings); SX 
Ex.102 at 3 (5/14/14 email among Merlin executives); PAN Ex. 5117 
(same); 5/19/15 Tr. 4760 (Shapiro) (``My working assumption is that 
everybody is aware of this proceeding and how . . . deals they cut 
might affect it.'') (emphasis added); IHM Ex. 3517 [REDACTED]). It 
would be surprising, to say the least, if parties who anticipated that 
a direct deal would be used by an adversary improperly in this 
proceeding did not develop evidence sufficient to rebut that attack, 
unless no such evidence--factual or expert--could reasonably be 
presented. Thus, when a party fails to provide such important, 
competent and probative factual or expert evidence, the Judges are left 
with no evidentiary basis to support the assertion that the alleged 
additional value of other contractual items is sufficient to alter the 
rates and terms of

[[Page 26385]]

the benchmark agreements in which they are contained.
    With those general considerations in mind, the Judges now analyze 
particular issues disputed by the parties regarding the valuation of 
certain items in the iHeart/Warner Agreement.
(B) AIP
    AIP, iHeart's Artist Integration Program, allows Warner's artists 
to benefit from particular advertising on iHeart's music-formatted 
radio stations and iHeart's Web sites, in the form of [REDACTED].'' SX 
Ex 33 at 19 Sec.  5(a)(i). Clearly, such advertising inures to Warner's 
benefit.
    Additionally, the iHeart/Warner Agreement contains an express 
provision stating that this ``[REDACTED] AIP Commitment'' has an annual 
``fair market value of [REDACTED] Dollars (USD $[REDACTED]).'' Id. at 
Sec.  5(a)(ii) (emphasis added). SoundExchange argues that there is no 
reason to require evidence of an internal valuation when the parties 
have agreed to a ``fair market value'' on the face of their contract.
    iHeart makes several arguments in an attempt to disavow this 
agreed-upon valuation:
     AIP provides value to iHeart and to Warner because AIP 
content is valuable to listeners and therefore also ``helps build 
[iHeart's] brand . . . as [a] trusted curator[] . . . .'' 5/21/15 Tr. 
5189-92 (Poleman).
     Warner received [REDACTED] AIP [REDACTED] and the 
$[REDACTED] reference was intended to reflect [REDACTED]. 6/2/15 Tr. 
7312 (Cutler).
     iHeart's commitment to [REDACTED] AIP therefore was in the 
nature of ``insurance,'' rather than a granting of an additional right. 
See IHM RPFF ] 815 (and citations to the record therein).
     Neither iHeart, Warner, nor Universal treated AIP as a 
``[REDACTED],'' and iHeart [REDACTED]. Id. ] 817 (and citations to the 
record therein).
     The $[REDACTED] was derived from iHeart's advertising 
``rate card'' as a means to measure that Warner got [REDACTED]. 5/21/15 
Tr. 5190 (Poleman).
     In its own projections, Warner declined to value AIP 
because AIP ``[REDACTED].'' 6/3/15 Tr. 7500 (Wilcox).
    The Judges find that the AIP provision in the iHeart/Warner 
Agreement does not support an increase in the effective average per-
play rate derived from that benchmark. As an initial matter, the AIP 
language in the iHeart/Warner Agreement does not state that the parties 
agreed, inter se, that the value of the AIP terms is $[REDACTED]. 
Rather, the iHeart/Warner Agreement sets forth a purported general 
economic fact regarding a ``market,'' i.e., that that there [REDACTED]. 
However, that assertion of supposed ``fact'' is belied by the record. 
It is undisputed that iHeart provided AIP [REDACTED] to Warner (and to 
Sony and Universal) prior to the formation of the iHeart/Warner 
Agreement, and that iHeart continued to provide AIP--[REDACTED]--to 
Sony and Universal after the execution of the iHeart/Warner Agreement. 
5/21/15 Tr. 5343-44, 5348 (Fischel); 6/2/15 Tr. 7312, 7335 (Cutler). It 
is also undisputed, and clear from the iHeart/Warner Agreement, that 
[REDACTED], further negating the existence of any market value. SX Ex. 
33 at 34, ] 18(g).
    As Mr. Poleman, an iHeart witness, testified: ``these monetary 
figures serve no other purpose than [REDACTED]. These monetary figures 
do not reflect [REDACTED] Poleman WRT ] 22.
    The Judges find these undisputed facts to demonstrate that there 
was no actual ``market'' in which Warner procured AIP from iHeart. If 
such a market existed, with a fair market value of $[REDACTED] for the 
AIP provided to Warner, it would have been irrational for iHeart simply 
to give away such substantial value (e.g., the equivalent of 
[REDACTED]% of Dr. Rubinfeld's proposed rate for 2016 and of the NAB/
SoundExchange settlement rate for 2015). See 5/28/15 Tr. 6284 
(Rubinfeld) (AIP at a value of $[REDACTED] per year would raise the 
effective rate by $0.[REDACTED] per play).
    Rather, the Judges find guidance for the meaning and of this 
``$[REDACTED]'' figure as it relates to the setting of rates in this 
proceeding in the context of the contractual clause in which the figure 
is contained. The contract states: ``[iHeart] shall provide Warner AIP 
insertions in each Agreement year . . . that (i) have a fair market 
value of at least . . . $[REDACTED] per Agreement Year; and represent 
at least . . . [REDACTED]% of all AIP inventory in each daypart and 
market.'' SX Ex. 33 at 19 ] 5(a)(ii). This provision is consonant with 
iHeart's explanation that the $[REDACTED] figure was used to establish 
[REDACTED], and therefore is not a monetary value that the Judges may 
simply pro-rate, and thereby grossly inflate the benchmark rate.\187\
---------------------------------------------------------------------------

    \187\ The Judges find that the contractual remedial provisions 
relating to AIP support their findings in this regard. Performance 
of the AIP terms required iHeart and Warner to [REDACTED]. Id. ] 
5(a)(i). In turn, the iHeart/Warner Agreement provides that, if 
Warner and iHeart disagree regarding [REDACTED], then ([REDACTED]) 
Warner may [REDACTED]. Id. Thus, as a remedy for breach [REDACTED]. 
This remedial provision further indicates that Warner had obtained 
in the iHeart/Warner Agreement [REDACTED] which, upon an iHeart 
breach, [REDACTED]. Additionally, [REDACTED]. See id. 
(``[REDACTED]'').
---------------------------------------------------------------------------

    The Judges also find that iHeart's willingness to provide AIP 
[REDACTED] to record companies was rational. As Mr. Poleman testified, 
see supra, AIP campaigns provided information about sound recording 
artists that served to build iHeart's brand as a trusted ``curator'' of 
music for its listeners. Thus, AIP had value to both the record 
companies and iHeart, which would explain why a sophisticated entity 
such as iHeart would [REDACTED] AIP time [REDACTED] to record 
companies. Relatedly, the Judges note internal iHeart communications 
indicating that iHeart [REDACTED].
    The Judges further find that the testimony by Warner's executive, 
Mr. Wilcox, confirms that the ``$[REDACTED]'' figure was used as 
[REDACTED] rather than a statement of value that the Judges could 
simply add to the effective rate under the iHeart/Warner Agreement. The 
following testimony on direct examination is telling:

    Q: Did iHeart represent to you [AIP] had value, monetary value?
    A: Yes.
    Q: What was that amount?
    A: Well, ultimately it was agreed on that we would say that it 
was [REDACTED]. They were contending it was worth more and that was 
a conservative estimate. Ultimately, they gave us the $[REDACTED] 
CPM number as a way to value the different impressions that were 
available to us through AIP. So that was ultimately where we agreed 
to settle in terms of valuing it.\188\
---------------------------------------------------------------------------

    \188\ ``CPM'' is cost per thousand advertising impressions. 4/
28/15 Tr. 419 (Kooker). Thus, the $[REDACTED] per 1,000 impressions 
factor can be used to determine the quantity of impressions if 
$[REDACTED] is substituted for the $[REDACTED] figure. Impressions 
are viewed or heard ads. 6/3/15 Tr. 7403-04 (Wilcox).

    6/3/15 Tr. 7388-89 (Wilcox). This testimony reveals two points: 
First, the valuation was negotiated to establish a quantity term for 
AIP. Second, this testimony does not indicate any reference in the 
negotiations to a ``fair market value'' for AIP that the parties later 
simply plugged into the iHeart/Warner Agreement. See also 6/2/15 Tr. 
7318 (Cutler) (``This is a sort of a quick-and-dirty formula where we 
took a hugely averaged rate and applied it to what we--you know, 
ultimately these promotional spots in these AIP programs.'').
    The Judges also find credible and important the undisputed fact 
that no party, and no record company,

[[Page 26386]]

considered that AIP could be valued as a cash equivalent. That is 
consistent with the finding that the AIP term in the iHeart/Warner 
Agreement was intended as an [REDACTED], rather than a valuing 
mechanism for dramatically inflating the effective per-play rate in 
that agreement.
    The Judges' decision on this issue is also informed by the 
negotiating position taken by Warner. In particular, under cross-
examination, Mr. Wilcox, the testifying Warner executive, when asked if 
``you told the iHeart representatives during negotiations that you 
thought AIP was worth zero,'' testified: ``I don't have a specific 
recollection right now, but . . . that would have been consistent with 
the negotiating posture that I might have taken.'' 6/3/15 Tr. 7466 
(Wilcox) (emphasis added). This testimony undermines Warner's assertion 
that the Judges should simply add $0.[REDACTED] to the per-play rate 
derived from this benchmark, when Warner's own witness had claimed in 
negotiations that AIP had no value. Moreover, even if Mr. Wilcox's 
assertion represented only his ``negotiating posture,'' then the Judges 
find that iHeart's representation of a positive value, including the 
$[REDACTED] figure plugged into the agreement, was also the consequence 
of negotiation rather a declaration of fact as to the existence of a 
``fair market value'' of $[REDACTED].\189\ Finally, the Judges do not 
find credible Mr. Wilcox's testimony that he was informed by iHeart 
that it would [REDACTED] AIP, in light of the absence of any document 
sufficient to corroborate that assertion, and in light of the fact that 
iHeart has not [REDACTED] AIP. Moreover, even if iHeart had taken such 
a negotiating position, the Judges do not find, after listening to Mr. 
Wilcox's testimony, that he genuinely believed such a change in AIP 
policy was forthcoming.
---------------------------------------------------------------------------

    \189\ The irony surrounding this issue is not lost on the 
Judges. In this proceeding, Warner claims AIP has significant value, 
in order to inflate the benchmark, but claimed during negotiations 
that AIP had no value, in order to [REDACTED]. 6/3/15 Tr. 7466 
(Wilcox). Likewise, during negotiations, iHeart touted the benefits 
of AIP, but minimizes its significance during this proceeding, in an 
attempt to avoid an increase in the effective benchmark rate. Such 
switching of positions, combined with the other issues discussed in 
this section regarding AIP, underscore the indeterminacy of AIP's 
impact, if any, on this benchmark.
---------------------------------------------------------------------------

    The Judges do recognize that, by converting AIP from a 
discretionary, voluntary program to a contractually binding commitment, 
iHeart provided Warner with what Drs. Fischel and Rubinfeld both 
considered to be ``insurance'' value. However, neither party through a 
fact or expert witness presented any basis to create a monetary value 
for this ``insurance.'' Therefore, the Judges are presented in this 
context with the conundrum of an item of ostensible (insurance) value 
that has not been valued by the parties, but is tendered to the Judges 
without evidentiary guidance. The Judges return to the point made in 
the General Considerations section. SoundExchange, through Dr. 
Rubinfeld, acknowledges that there is some insurance value in the 
conversion of AIP into a contractual commitment, yet SoundExchange did 
not present a method for valuation. iHeart, through Dr. Fischel, avers 
that this ``insurance'' value would be quite small, and he too did not 
provide a monetary value. If a party had the understanding that an 
element within a benchmark could be valued in a manner that would 
further support its position, the Judges would expect that party to 
present evidence in that regard. Here, SoundExchange declined to do so 
with regard to the ``insurance'' value of the conversion of AIP into a 
contractual commitment. The Judges therefore find that such 
unquantified ``insurance'' value cannot be added to the effective per-
play rate under the iHeart/Warner Agreement.\190\
---------------------------------------------------------------------------

    \190\ Also, the unquantified value of any ``insurance'' aspect 
of the contractual AIP commitment would have had to be offset 
against the value of other non-pecuniary items in the iHeart/Warner 
Agreement that favor iHeart, as discussed infra.
---------------------------------------------------------------------------

(C) [REDACTED]
    [REDACTED] the [REDACTED], is a program by which Warner may 
[REDACTED]. See SX Ex. 33, Ex. F thereto. SoundExchange asserts that it 
has a quantifiable value to Warner that must be pro-rated across the 
number of performances and added to the per-play rate. However, the 
record indicates that Warner did not engage in any valuation of 
[REDACTED] contemporaneous with the negotiation of the iHeart/Warner 
Agreement and that Dr. Rubinfeld did not perform any such expert 
economic valuation. 5/28/15 Tr. 6437 (Rubinfeld).
    Rather, SoundExchange's entire argument in support of a valuation, 
in excess of $[REDACTED], for [REDACTED] is based upon the hearing 
testimony of Mr. Wilcox. He derived this value from a single [REDACTED] 
campaign undertaken by Warner after the iHeart/Warner Agreement had 
been executed. Wilcox WRT at 14 n.9. However, as iHeart points out, 
Warner's post-execution performance--or more accurately, non-
performance--contradicts this attempt at a performance-based valuation. 
That is, Mr. Wilcox did not dispute that Warner had [REDACTED]. 6/3/15 
Tr. 7452 (Wilcox). Thus, the Judges find that, even to the extent that 
post-contract performance might be helpful in determining value, Mr. 
Wilcox's testimony as to a value in excess of $[REDACTED] for 
[REDACTED] is simply not credible.
    In this context as well, neither party's negotiators nor its 
economic experts set forth a monetary value. The rebuttal performance-
based testimony that SoundExchange relies upon from Mr. Wilcox to 
demonstrate that [REDACTED] had value is simply insufficient when 
considered against Warner's failure to [REDACTED], and in light of the 
fact that the Judges did not find Mr. Wilcox to be a particularly 
credible witness. Accordingly, the Judges do not find that the 
inclusion of [REDACTED] rights in the iHeart/Warner Agreement supports 
an increase in the effective average per-play rate derived from that 
agreement.
(D) The [REDACTED] Agreement
    The Judges decline to include in the average effective rate any 
value derived from the $[REDACTED] payment by iHeart to Warner for 
rights under the [REDACTED] Agreement. As an initial matter, this 
agreement is not even part of the iHeart/Warner Agreement. Second, the 
[REDACTED] Agreement contains an integration clause that, as iHeart 
correctly notes, by its plain language declares that it is the entire 
agreement between the parties and thus excludes reference to any other 
agreement, such as the iHeart/Warner Agreement. SX Ex. 1339. The Judges 
further note that the iHeart/Warner Agreement [REDACTED]. SX Ex. 33 ] 
18(c). Third, the [REDACTED] Agreement provides for a payment of 
$[REDACTED] in exchange for a specific set of rights unrelated to 
iHeart's right to play Warner sound recordings on iHeart's 
noninteractive service. Fourth, it is irrelevant that Warner was aware 
of, and made reference to, the [REDACTED] Agreement value when it 
considered the value of its forthcoming relationship with iHeart. 
Indeed, as iHeart points out, Warner's internal models and other 
documents identified the [REDACTED] Agreement's $[REDACTED] payment 
obligation as a distinct payment for [REDACTED]. See iHeart RPFF ] 828 
(and citations to the record therein).
    The Judges also agree with iHeart's argument that the $[REDACTED] 
payment obligation in the [REDACTED] Agreement presents the Judges with 
an issue of allocation rather than valuation. See iHeart RPFF ] 830. 
The fact that the [REDACTED] Agreement contains an

[[Page 26387]]

unambiguous integration clause underscores the fact that the rights and 
payments under that contract must be allocated only to that contract. 
The Judges therefore find that the $[REDACTED] payment to Warner by 
iHeart under the [REDACTED] Agreement is properly allocated to that 
agreement for the provision of [REDACTED], and cannot be attributed to 
the valuation of the parties' rights--and rates--under the iHeart/
Warner Agreement.
(E) Other Unvalued Contract Items
    As noted supra, SoundExchange asserts that the effective average 
rate under the iHeart/Warner Agreement must be increased to reflect the 
value of additional contract items, including:
     The guarantee that iHeart would [REDACTED] even if such 
steering fell short of that level.\191\
---------------------------------------------------------------------------

    \191\ The parties disputed whether the pre-agreement pro rata 
level was [REDACTED]% or [REDACTED]%. That dispute related to a 
measurement of the ``two bundles'' hypothesized by Drs. Fischel and 
Lichtman, but rejected by the Judges in this determination. Under an 
average rate approach with a steering-based [REDACTED]% pro rata 
share, it is irrelevant whether the pre-contract pro rata Warner 
share on iHeart was [REDACTED]% or [REDACTED]%.
---------------------------------------------------------------------------

     The alternative percentage-of-revenue rate in the greater-
of formulation.
     The additional $[REDACTED] payment guarantee by iHeart 
even if it never played any Warner sound recordings.
     The guarantee that Warner would receive at least the same 
[REDACTED], as it did prior to the iHeart/Warner Agreement.
     Warner's [REDACTED], which iHeart could [REDACTED].
     Royalties paid for [REDACTED].
    See SX RPFF ] 889 (and citations to the record therein).
    With regard to all of these items, notwithstanding any potential 
monetary value that might be associated with them, neither Warner nor 
SoundExchange established values for these items. Indeed, SoundExchange 
acknowledges that, when the Judges asked Mr. Wilcox whether Warner had 
assigned a number value to ``these provisions,'' he admitted that 
Warner ``could not be certain.'' 6/3/15 Tr. 7409 (Wilcox). As the 
Judges noted in the General Considerations section of this analysis of 
the iHeart proposal, if the party that seeks to increase (or decrease) 
an otherwise effective benchmark rate to account for other items of 
potential value cannot or has not provided evidence of such value, when 
it was in its self-interest to do so, the Judges cannot arbitrarily 
adjust or ignore that otherwise proper and reasonable benchmark.
(F) Offsetting Value to iHeart in the iHeart/Warner Agreement
    iHeart points out that the iHeart/Warner Agreement also provides 
value to iHeart in the form of: (1) A [REDACTED] royalty ceiling that 
serves as de facto insurance against [REDACTED] and (2) most-favored-
nation status at least equalizing iHeart's terms with Warner's terms in 
any agreement with [REDACTED] Fischel/Lichtman AWDT ] 38. However, the 
chronic problem the Judges have referenced supra applies here as well: 
iHeart did not attempt to place a value on such items. Id. ] 39 (``It 
is difficult to precisely quantify the value of these various non-
pecuniary terms'' and iHeart ``made no explicit attempt to value these 
terms.'').
    However, Drs. Fischel and Lichtman point out that because both 
parties failed to value such terms, it is acceptable to ``assume[] a 
net value of zero for these terms.'' Id.; see 5/28/15 Tr. 6435-37 
(Rubinfeld) (acknowledging that he failed to attribute numerical dollar 
values to items in the iHeart/Warner Agreement that benefited each 
party respectively).
    The Judges disregard these unvalued items; not because, as Drs. 
Fischel and Lichtman assert, they should be presumed to have a net 
value of zero. Rather, as stated in the General Considerations section, 
the Judges tie the indeterminacy of the net value of these offsetting 
items to a (perhaps tactical) failure of proof of value by 
sophisticated parties. As Dr. Rubinfeld acknowledged in a colloquy with 
the Judges:

    [JUDGES]
    [I]f iHeart is paying a . . . rate based on dollar denominated 
items and gets some other non-dollar denominated value--net value to 
iHeart as if it was paying some lower rate because it got new items 
of value--. . . we just can't value them because nobody did and we 
don't have the evidence to do so.
    [DR. RUBINFELD]
    Yeah, that's possible.

5/28/15 Tr. 6439. Continuing, the Judges reiterated that for these 
other items of value, ``the sign is moving plus and minus'' but 
``without dollar values attached by the experts or the parties in their 
contracts or their negotiations,'' and lamented that they ``have no way 
of valuing them . . . .'' Dr. Rubinfeld responded by commiserating, 
acknowledging that he too did not, and instead he simply fell back to a 
non-sequitur: that his proposed rate was closer to the ``actual NAB 
rates . . . than [Dr.] Fischel's proposed incremental rate.'' Id. at 
6439.
(G) Adjusting the iHeart/Warner Benchmark Rate to Account for 
[REDACTED] and Thereby Equalizing the Number of Royalty-Bearing Plays 
Between the Benchmark and the Statute
    Drs. Fischel and Lichtman note that an iHeart listener is entitled 
to [REDACTED] \192\ per hour per station or channel, for which iHeart 
is not required to pay royalties. Fischel/Lichtman AWDT ] 35; SX Ex 33 
at 15 ] 3(b)(i); id. at 38 Ex A therein. They note, after setting forth 
the number of [REDACTED] and performances that, ``[i]n July 2014, 
[REDACTED] . . . constituted approximately [REDACTED] percent of all 
iHeart custom performances, so that the functional per-performance rate 
paid on these contracts is approximately [REDACTED]% lower than the 
statutory per-performance pureplay rate.'' Fischel/Lichtman AWDT ] 61 & 
n.9. This [REDACTED] adjustment is very close to Dr. Rubinfeld's skips 
adjustment factor of [REDACTED], which also included an offset for 
increased plays by virtue of the royalty value of [REDACTED] under his 
interactive benchmark agreements).
---------------------------------------------------------------------------

    \192\ [REDACTED] custom performances are defined in the iHeart/
Warner Agreement as performances ``that are [REDACTED].'' SX Ex. 33 
at p. 15, ] 3(b)(i).
---------------------------------------------------------------------------

    If Drs. Fischel and Lichtman had applied that [REDACTED]% reduction 
to the otherwise stated average rate of $0.[REDACTED] for 2013 in the 
iHeart/Warner Agreement, they would have equalized that rate to a 
statutory rate of $0.[REDACTED]. However, Drs. Fischel and Lichtman 
adjust their 2013 stated average rate from $0.[REDACTED] to 
$0.[REDACTED]. SoundExchange avers that it appears from iHeart's own 
documents however that this $0.[REDACTED] rate reflects an 
incorporation of the Pureplay rate rather than a calculation to adjust 
for [REDACTED] See SX Ex. 221 at 1, 4 & n.21.
    In response to this criticism, iHeart does not refer the Judges to 
any evidence of calculations it did to support a [REDACTED] reduction 
from $0.[REDACTED] to $0.[REDACTED]. Rather, iHeart simply declares 
SoundExchange's reliance on SX Ex. 221, iHeart's own document, is 
insufficient to call into question the [REDACTED] adjustment proposed 
by iHeart. See iHeart RPFF at 119-20.
    The Judges find that SoundExchange's criticism is appropriate. In 
order to reflect not only the [REDACTED] adjustment, but also to make 
an

[[Page 26388]]

adjustment to reflect plays of [REDACTED], the Judges adopt Dr. 
Rubinfeld's [REDACTED] adjustment to equalize the number of plays as 
between this benchmark and the statutory rate. Thus, the 2013 rate of 
$0.[REDACTED], as noted above, would equalize to $0.[REDACTED].
    More importantly, for the first year of the statutory period at 
issue, 2016, the stated average rate is $0.[REDACTED]. Applying a 
[REDACTED] adjustment of [REDACTED] results in an equalized rate of 
$0.[REDACTED]. (Even applying iHeart's proffered [REDACTED]% rate 
reduction for this factor would result in an adjusted rate of 
$0.[REDACTED], before any consideration of additional 
[REDACTED].).\193\
---------------------------------------------------------------------------

    \193\ SoundExchange also takes issue with iHeart's alleged 
application of a [REDACTED] adjustment to [REDACTED] webcasts 
[REDACTED], which SoundExchange avers cannot be adjusted for 
[REDACTED] because these stations, [REDACTED], do not [REDACTED]. 
See SX PFF ]] 849-850 (and citations to the record therein). iHeart 
disputes that assertion. See IHM RPFF at 120 (and citations to the 
record therein). SoundExchange also combined its [REDACTED] 
criticism in this regard with a separate criticism regarding the 
treatment of ``digital only'' transmissions by iHeart, leading Dr. 
Rubinfeld to make a $0.[REDACTED] upward adjustment to account for 
both of these issues. See SX PFF ] 851 (and citations to the record 
therein). SoundExchange did not clearly and sufficiently explain its 
position on these combined issues, and the Judges therefore decline 
to make the $0.0001 upward adjustment advocated by Dr. Rubinfeld.
---------------------------------------------------------------------------

c. The Percentage of Revenue Provision in the iHeart/Warner and iHeart/
Indies Agreements
    The iHeart/Warner Agreement contains a greater-of rate formula that 
includes a [REDACTED]%-[REDACTED]% rate, depending upon the year of the 
agreement. SX Ex. 33 at 15-16, ] 3(b)(ii).\194\
---------------------------------------------------------------------------

    \194\ The iHeart/Indies Agreements contain a greater-of 
structure that, as noted above, fixes the percentage-of-revenue 
prong at [REDACTED]%. See, e.g., IHM Ex. 3353, at 7-8, ] 
4(a)(iii)(A). However, as stated in the text, supra, the Judges find 
these agreements not to be probative.
---------------------------------------------------------------------------

    For the reasons set forth in the Judges' comprehensive rejection of 
a greater-of structure with a percentage-of-revenue prong, the Judges 
do not include these iHeart greater-of provisions in the benchmarks 
they derive from the iHeart/Warner Agreement and the iHeart/Indies 
Agreements.
d. The Judges Consideration of the 27 iHeart/Indies Agreements
    iHeart has calculated an average royalty per play for Indies of 
$0.[REDACTED]. Fischel/Lichtman AWDT Ex. D therein.\195\ However, the 
iHeart/Indies Agreements apply the per-play rates that have a set 
(i.e., average) per-play rate that controls for each year.\196\ Those 
per-play rates are all equal to the [REDACTED] rates and therefore are 
less than $0.[REDACTED]. See, e.g., IHM Ex. 3353 ] 1(w) (the iHeart/
Next Plateau Entertainment Agreement). Thus, iHeart apparently has 
derived that $0.[REDACTED] rate by adding to the stated custom rates 
its per-play calculation of additions to the rate arising from the 
[REDACTED] revenue to which Indies are entitled under the iHeart/Warner 
Indies Agreements. As the Judges noted with regard to the [REDACTED] 
revenues in their analysis of the proposed rates for simulcasting, 
these revenues are simply too indeterminate to support a rate analysis 
by the Judges. The Judges incorporate those findings here, and find 
that the 27 iHeart/Indies Agreements are not usable as benchmarks, 
guideposts or other evidence to support the rates set in this 
proceeding.\197\
---------------------------------------------------------------------------

    \195\ Drs. Fischel and Lichtman also calculated an 
``incremental'' per-play rate for Indies of $0.[REDACTED]. Id. The 
Judges reject that rate for the same reason they rejected the 
$0.0005 ``incremental'' rate they proffered under the iHeart/Warner 
Agreement.
    \196\ The greater-of percentage of revenue alternative was never 
triggered. Fischel/Lichtman AWDT ] 61.
    \197\ To be clear, the Pandora/Merlin effective rate is 
$0.[REDACTED]--below the Pureplay rate because of the steering 
provisions in that agreement. See supra. Pandora had been subject to 
the Pureplay rates and utilized steering to induce the Merlin 
members to agree to a lower rate in exchange for more plays. The 
same concept (albeit with different rates) underlies the 27 iHeart/
Indies Agreements. These 27 Indies agreed to reduce the rate to 
$0.[REDACTED] in [REDACTED], from the $0.[REDACTED] settlement rate 
on which they could have insisted, in exchange for a lower rate that 
incentivizes iHeart to steer more plays to them plus some 
indeterminate amount of [REDACTED] revenues.
---------------------------------------------------------------------------

F. Sirius XM Rate Proposal

1. Proposed Royalties
    Sirius XM proposes that the Sec.  114 digital sound recording 
public performance royalty rate applicable to commercial webcasters for 
the 2016-2020 rate period be $0.0016 per-performance. Introductory 
Memorandum to Sirius XM WDS at 1 (October 7, 2014). In support of this 
rate, Sirius XM avers that a zone of reasonableness can be established 
for the statutory rate. The high end of the zone, according to Sirius 
XM, is the $0.0016 per-performance rate, which represents the lowest 
rate contained in the 2009 WSA settlement agreement between 
SoundExchange and Sirius XM. The low end of the zone, according to 
Sirius XM, is represented by several ``guideposts,'' i.e., the low end 
of the estimated range of proposed rates proffered by the economic 
experts who testified on behalf of the other Services who participated 
in this proceeding. That lower bound, according to Sirius XM, is 
$0.0011. See Sirius XM PFF ]] 65-68.\198\
---------------------------------------------------------------------------

    \198\ Although Sirius XM asks the Judges to rely on the low end 
of these ``guideposts,'' it notes that the high end of these 
``guidepost'' ranges from the other Service economic experts is 
$0.0017, higher than the top of its proposed range and its proffered 
benchmark of $0.0016.
---------------------------------------------------------------------------

    Sirius XM did not produce an expert witness to testify in support 
of its rate proposal. Rather, as noted above, Sirius XM relies upon the 
lowest rate within its WSA with SoundExchange and the work of the other 
Services' economic witnesses to support its range, endpoints and 
proposed rate. Thus, the probative value of the Sirius XM rate is 
dependent in large measure upon the Judges' analysis and conclusions 
regarding the models proffered by these other experts. Indeed, Sirius 
XM does not attempt to independently support the work of those other 
experts. Instead, Sirius XM devotes the bulk of its independent 
argument to an analysis of its WSA settlement agreement.\199\
---------------------------------------------------------------------------

    \199\ For this reason, the Judges need not discuss the merits of 
Sirius XM's proposed range or, in particular, the low end of that 
range. The relative merits of the benchmarks on which Sirius XM 
relies are discussed in the sections of this determination dealing 
directly with those other benchmarks.
---------------------------------------------------------------------------

2. Sirius XM's Arguments in Favor of Its Rate Proposal
    Sirius XM's primary business is broadcasting on a subscription fee 
basis over its two proprietary satellite systems. However, it also 
provides a simulcast of its satellite broadcast over the Internet. SXM 
Ex. 6000 ] 20 (Frear WDT). Thus, Sirius XM's Internet radio service is 
primarily a simulcast of Sirius XM's satellite service. Id. ] 27 
(emphasis added).
    Sirius XM also offers as an Internet service a noninteractive 
feature, ``My Sirius XM,'' at no extra charge to its Internet radio 
subscribers. Id. ] 28. (Sirius XM also offers an on-demand service, 
``Sirius XM On Demand,'' that is not subject to the Sec.  114(f)(2)(B) 
rates). The noninteractive, non-simulcast service, My Sirius XM, allows 
subscribers to slightly personalize a select group of music and comedy 
channels from the satellite service, to adjust for characteristics like 
library depth, familiarity, and music style. Id. ] 28.
    Although introduced as a response to truly customized Internet 
radio like Pandora, My Sirius XM does not provide the same amount of 
customization. My Sirius XM begins from the same playlist created by 
human curators for a satellite radio channel, and narrows that playlist

[[Page 26389]]

slightly by manipulating a few sliders, which emphasize or deemphasize 
broad characteristics common to the relevant genre. 5/22/15 Tr. 5419-21 
(Frear). For example, listening to the `60s channel through My Sirius 
XM might allow the subscriber to emphasize more late `60s music, more 
early `60s music, more electric music, or more acoustic music. Id. at 
5419:19-25. My Sirius XM allows users to shrink the playlist by 
adjusting for these characteristics--but does not permit users to 
expand the playlist from that of the satellite radio channel. Id.
    The Sirius XM Internet radio service is a minor part of Sirius XM's 
overall business, with its self-pay subscription revenue (i.e., 
excluding trial subscriptions) accounting for only [REDACTED]% of 
Sirius XM's total revenue. Frear WDT ] 29. Usage of the non-simulcast 
My Sirius XM is low even in comparison to the usage of Internet radio 
simulcast channels. Id. ] 28.
    Sirius XM points out the relatively low importance of 
noninteractive services to its overall business model in order to 
explain why it entered into the WSA with SoundExchange in 2009--and why 
that settlement agreement was and remains not probative of market value 
and lacked the persuasive value attributed to it in the Web III Remand. 
In this regard, Sirius XM avers:
     As a result of the Webcasting II rates, Sirius XM made the 
decision to drop all free streaming on both the Sirius and XM 
platforms, a decision that resulted in a [REDACTED]- [REDACTED]% drop 
in the Internet radio service's reported listening hours and a 
resulting decrease in royalty payments to SoundExchange. Id. ] 35; 5/
22/15 Tr. 5416-17 (Frear).
     By late 2008, Sirius XM had insufficient cash to repay 
hundreds of millions of dollars of debt scheduled to come due in 
February 2009, and was unable to access the capital markets to 
refinance this, and other, debt. Frear WDT ] 40.
     The pre-merger predecessors to Sirius XM, Sirius and XM, 
had recently spent over $150 million on merger costs alone. Id. ] 46.
     Sirius XM narrowly avoided filing for bankruptcy 
protection when a potential lender agreed to provide a loan that 
narrowly enabled Sirius XM to avert a default on its debt and 
bankruptcy. Id.; 5/22/15 Tr. 5430 (Frear).
     The Sirius XM stock price fell from over $4.00 per share 
in January 2007 to a low of $0.05 per share on February 11, 2009. Frear 
WDT ] 45. On September 15, 2009, Sirius XM received a delisting notice 
from NASDAQ. Id.
    In the context of the severe financial stress affecting Sirius XM's 
entire business, and the Internet radio services' extremely low usage 
and importance to its core business, Sirius XM believed it had no 
sensible option other than to accept the deal offered by SoundExchange. 
If it had not taken the deal, Sirius XM would have been required to 
continuing paying the higher Webcasting II rates. At the same time, NAB 
simulcasters with which Sirius XM's Internet radio service competes 
would be paying the lower WSA settlement rates, and Pandora would be 
paying a small fraction of the Webcasting II rates, putting Sirius XM 
at a significant competitive disadvantage.
    Although Sirius XM could have refused to sign the WSA with 
SoundExchange and instead sought lower rates in the then-forthcoming 
Web III proceeding, the low listenership to the Internet radio service 
meant that the cost of participation in that proceeding could far 
exceed any possible future savings in royalty payments. Although Sirius 
XM attempted repeatedly to negotiate a more significant reduction, 
SoundExchange consistently refused to materially move off its opening 
offer of essentially matching the NAB rates. 5/22/15 Tr. 5435-36 
(Frear). With no other option that would have a less costly net result, 
Sirius XM entered into the WSA settlement agreement with SoundExchange. 
Id. at 5434-35.
    Then, according to Sirius XM, two days before the deadline on which 
Sirius XM and SoundExchange were required to close negotiations--and 
after the parties had already agreed on the rate schedule and finalized 
their deal--Michael Huppe (the party negotiating on behalf of 
SoundExchange) added an extra term into the Agreement, requiring that 
it be precedential under the WSA. 6/3/15 Tr. 7627-29 (Huppe); 5/22/15 
Tr. 5443-54 (Frear). Having already failed to advance its other 
interests in negotiations, Sirius XM agreed to this new term requiring 
its WSA settlement agreement to be precedential, concluding 
negotiations and consummating the agreement before the statutory 
deadline. Id. at 5444.
    For the foregoing reasons, Sirius XM maintains that the rates in 
the Sirius XM WSA settlement agreement do not reflect any industry-wide 
fair market value for the license. Instead, it claims that the rates 
are a product of: (1) The Web II rates, which, in Sirius XM's view, 
Congress found to be so wildly supracompetitive as to warrant 
Congressional intervention and which would continue to apply in the 
absence of a settlement; (2) SoundExchange's monopoly power as the only 
entity that could provide any effective relief from those rates; and 
(3) the exacerbation of that imbalance in bargaining power caused by 
various unrelated circumstances affecting Sirius XM at the time of the 
negotiations. Sirius XM Ex. 6000 ] 52. Sirius XM further avers that, by 
contrast, neither SoundExchange nor its constituent record companies 
had similar countervailing pressures that could have mitigated this 
extreme imbalance. Id. ] 57 (and citations to the record therein).
    Nonetheless, Sirius XM proposes that the Judges rely on the WSA 
settlement agreement between Sirius XM and SoundExchange, by adopting 
its lowest rate, $0.0016, not only as the ``the outer boundary of a 
range of reasonable rates,'' but also as the rate to be set in the 
present proceeding. See Sirius XM PFF ] 64. Additionally, Sirius XM 
does not propose any rate escalation or reduction over the 2016-2020 
period, whether to reflect inflation, deflation, or any other factor. 
Finally, Sirius XM does not propose a two-prong rate structure 
embodying any other rate formula than the per-play structure.
3. SoundExchange's Opposition to the Sirius XM Rate Proposal
    SoundExchange opposes the Sirius XM rate proposal on several 
grounds. First, SoundExchange rejects Sirius XM's suggestion that its 
settlement contained above-market rates, because Sirius XM voluntarily 
agreed to those rates, even though it was under no compulsion to 
negotiate with SoundExchange. See SX RPFF ] 1022. Second, SoundExchange 
states that Sirius XM is flatly wrong to suggest that its negotiation 
with SoundExchange did not ``mov[e] the needle with respect to royalty 
rates.'' In fact, Sirius XM was not only able to negotiate rate lower 
than the then-prevailing statutory rates for 2009, 2010, and 2011, but 
it was also able to negotiate lower rates for 2013, 2014, and 2015 than 
were contained in the NAB settlement. SX PFF ] 1079; SX RPFF ] 1027.
    Third, when SoundExchange, through Mr. Huppe, informed Sirius XM 
that SoundExchange wanted the settlement agreement to be precedential 
under the WSA, Sirius XM voiced no objection whatsoever in its email 
response less than an hour later. NAB Ex. 4235.
    Fourth, SoundExchange argues that basic economics suggests that any 
financial distress Sirius XM was experiencing at the time should have 
reduced, not increased, its willingness to pay royalties for 
webcasting. SX Ex. 29 ] 228 (Rubinfeld Corr. WRT).
    Fifth, Sirius XM had a number of alternative options in addition to

[[Page 26390]]

agreeing to the settlement with SoundExchange. Specifically, 
SoundExchange notes that Sirius XM instead had the option to:
     litigate in the Web III proceeding and seek lower rates 
from the Judges;
     avoid the cost of litigating Web III and simply awaited 
the Judges' rate determination (a ``costless option'' according to 
SoundExchange); or
     avoid the statutory license completely and enter into 
direct licenses with the various record companies.
    SX PFF ] 1077 (and citations to the record therein).
    Sixth, SoundExchange notes that Sirius XM--despite its asserted 
financial difficulties--continued and expanded its noninteractive 
services, even though it asserted that such services were an 
insignificant portion of Sirius XM's total subscribership revenue. 
Moreover, SoundExchange notes, Sirius XM's internet revenue grew from 
$[REDACTED] in 2010 to $[REDACTED] in 2014 while Sirius XM was paying 
rates under its WSA settlement agreement with SoundExchange. SX PFF ] 
1078 (and citations to the record therein).
    Seventh, SoundExchange asserts that Sirius XM's rate proposal has 
no sound basis. According to SoundExchange, the proposal was simply 
plucked from the first year of the Sirius XM WSA settlement. Id. ] 61. 
Moreover, according to SoundExchange, Sirius XM's reliance on the low-
end rate in an agreement that its principal witness, Mr. Frear, now 
expressly disavows, is arbitrarily selective and internally 
inconsistent. SX PFF ] 1081.
4. The Judges' Analysis of the Sirius XM Rate Proposal
    The Judges reject Sirius XM's argument for a number of reasons. 
First, the Judges decline to re-litigate the probative value of the 
2009 WSA settlement agreement between Sirius XM and SoundExchange. That 
agreement was entered into more than six years ago, and therefore does 
not represent the present state of the noninteractive market, absent 
affirmative evidence to the contrary. Whether Sirius XM was compelled 
by its financial circumstances or not to enter into that settlement 
might have affected the relevance of that agreement as a benchmark in 
Web III, but it has no significance to the Judges in the present 
proceeding. Indeed, as SoundExchange notes, it is inconsistent for 
Sirius XM, on the one hand, to criticize the benchmark value of its 
2009 WSA settlement agreement, and then to expressly adopt the lowest 
rate from that agreement as its proposed rate in the present 
proceeding.\200\
---------------------------------------------------------------------------

    \200\ The Judges have also analyzed the impact, if any, of the 
other 2009 WSA settlement agreement--between the NAB and 
SoundExchange. See supra.
---------------------------------------------------------------------------

    Second, the Judges are unpersuaded by the fact that Sirius XM 
apparently can afford the $0.0016 rate it now proposes, in contrast to 
earlier years when it was financially in extremis. As the Judges held 
in the Web III Remand, and have consistently held, Sec.  114(f)(2)(B) 
does not require the Judges to set a rate that ensures the financial 
viability of any entity. Thus, the fact that Sirius XM may be able to 
afford the $0.0016 rate now, but might not be able to afford any higher 
rate, is simply not pertinent to the Judges' determination. Moreover, 
the fact that Sirius XM acknowledges that noninteractive streaming is 
only an ``ancillary'' part of its business (in contrast to its 
satellite service) indicates that the impact of the rates on its 
noninteractive service cannot be a driver of the statutory rate 
determination. The Judges note that Sirius XM was willing to accept 
rates in its 2009 WSA settlement at least in part because of the 
ancillary nature of its noninteractive service. Because that 
noninteractive service remains ancillary in nature to Sirius XM, the 
Judges cannot conclude that impact of the rates set in this proceeding 
have any greater particular importance to Sirius XM now.

G. NAB Rate Proposal

1. Proposed Rates
    The NAB proposes a two-tiered rate structure for webcasts by 
simulcasters. Broadcasters that transmit fewer than 876,000 ATH would 
pay only the minimum fee. NAB Proposed Rates and Terms at 3 (October 7, 
2014). All other broadcasters would pay a per-performance royalty rate 
of $0.0005 to simulcast for each year of the rate term. Id. at 3-4.
    NAB's rate proposal is limited to simulcasts (retransmissions by 
broadcasters of programming transmitted over their AM or FM radio 
stations), and does not cover other commercial webcasts. Id. at 2 
(definition of Eligible Transmission). Having rejected the NAB's 
proposal to apply a separate rate to simulcasters,\201\ the Judges 
consider the NAB's proposed rate as a rate that would apply to all 
commercial webcasters. For the reasons detailed below, the Judges 
reject the NAB's rate proposal.
---------------------------------------------------------------------------

    \201\ See discussion supra, section I.A.3
---------------------------------------------------------------------------

2. Analysis of Economic Evidence
    The NAB presented its methodology for arriving at a rate proposal 
through its economic expert witness, Professor Michael Katz. Dr. Katz 
did not perform a benchmark analysis to arrive at a rate. Rather, he 
selected guideposts that define the lower and upper bounds of what he 
described as a range of reasonable rates that a willing buyer and a 
willing seller would agree to in a workably competitive market. See 
Katz WDT ]80. The NAB's proposed rate of $0.0005 per-performance 
presumably falls somewhere within that range.\202\
---------------------------------------------------------------------------

    \202\ As discussed below, the upper bound of the NAB's range of 
reasonable rates is expressed as a percentage of revenue. The NAB's 
proposed rate is expressed as a per-performance royalty, however, 
and there is insufficient data in the record to convert the per-
performance rate to a percentage of revenue (and vice versa). Since 
the Judges deem it highly unlikely that the NAB would propose a rate 
that exceeds the upper bound of its own expert's zone of 
reasonableness, the Judges presume that the proposed rate falls 
below that upper bound.
---------------------------------------------------------------------------

    Dr. Katz determined the low end of his ``zone of reasonableness'' 
by reference to terrestrial radio. See Katz WDT ]] 81-84. Radio 
broadcasters are not required to pay royalties for terrestrial 
broadcasts of sound recordings, and typically do not do so. See 17 
U.S.C. 114(a); Katz WDT ] 82. Nevertheless, Dr. Katz points out, record 
companies seek out radio airplay to promote other income streams, such 
as sales of CDs and permanent downloads. See Katz WDT ] 82. He argues 
that economic theory predicts that this promotional effect would drive 
down royalty rates, possibly even resulting in negative royalty rates 
if the law permitted record companies to pay broadcasters to play their 
music (i.e., payola). Id. ]] 81-82.
    Dr. Katz then argues ``available evidence indicates that 
promotional benefits also arise from web simulcasts of terrestrial 
broadcasts.'' Id. ] 83. In effect, he equates simulcasting with 
terrestrial radio and concludes that the lower bound of the range of 
reasonable rates for simulcasting is ``near zero.'' Id. ] 84.
    To set an upper bound to his zone of reasonableness, Professor Katz 
looked to the Judges' decision in SDARS II. Id. ] 85. According to 
Professor Katz,

    In SDARS II, the judges found that 13 percent [of gross revenue] 
constitutes a sensible upper bound on the zone of reasonableness 
before adjusting to account for Section 801(b) factors. The rate was 
then reduced by an additional two percent for the third 801(b) 
factor, which was specific to Sirius XM and the SDARS II proceeding.

Id. (footnotes omitted). He adopted 13 percent of gross revenue as ``an 
initial guidepost'' for determining his range of reasonable rates for 
simulcasters, subject to two adjustments to account for differences 
between SDARS (satellite

[[Page 26391]]

radio) and simulcasters. Id. ]] 86-87. The first adjustment (the 
``music-listening adjustment'') accounted for the fact that music 
accounts for a lower percentage of listening on AM/FM radio than on 
satellite radio. The second adjustment (the ``music-revenue 
adjustment'') accounted for ``the fact that non-music-formatted 
stations generally will not be paying royalties.'' Id. ] 89.
    The net effect of the two adjustments essentially offset each 
other, resulting in an adjustment factor of one. Id. ] 92. 
Consequently, Dr. Katz determined that the upper bound to his zone of 
reasonableness is 13 percent of gross simulcasting revenues. 
Nevertheless, he argues ``there are strong reasons to conclude that the 
actual upper bound of the zone of reasonableness is significantly lower 
than 13 percent.'' \203\Id. ] 93.
---------------------------------------------------------------------------

    \203\ Professor Katz's primary argument that the 13 percent 
figure is too high is that it was derived in SDARS I from analysis 
of a market that was not effectively competitive. Id.
---------------------------------------------------------------------------

    Dr. Katz's approach is similar in some respects to the approach 
that the Judges took (and the Court of Appeals affirmed) in SDARS II. 
In that case, the zone of reasonableness that the Judges determined 
based on the parties' benchmarks was extremely broad. In order to 
narrow down the possible rates within that zone, the Judges referred to 
several ``guide posts,'' including the 13 percent rate that had been 
the basis for the rate that the Judges set in SDARS I.
    SDARS II, however, is distinguishable from the present case. In 
SDARS II the Judges had little confidence in the benchmark analyses 
offered by the parties which, in any event, yielded a range of possible 
rates that was too broad to provide useful guidance to the Judges. Thus 
the Judges found it necessary to consider other available evidence as 
guideposts. In the instant case, the Judges have sufficient confidence 
in the available benchmark analyses to proceed without reference to 
other guideposts.
    In SDARS II, the Judges were not determining a market rate under 
the willing-buyer, willing-seller standard. The Judges decided SDARS II 
under the section 801(b) reasonable rate standard. As the Court of 
Appeals emphasized, under that standard ``[t]he Copyright Act permits, 
but does not require, the Judges to use market rates to help determine 
reasonable rates.'' Music Choice v. Copyright Royalty Bd., 774 F.3d 
1000, 1010 (D.C. Cir. 2014). That is not the case under Sec.  
114(f)(2)(B). The Judges must determine market rates, yet the rates 
used by Dr. Katz to determine the upper and lower bounds of his zone of 
reasonableness are not market rates.
    There is no market for licensing of sound recordings for 
transmission by terrestrial radio stations, since there is no general 
public performance right for sound recordings. That would be sufficient 
reason to reject Dr. Katz's proposed lower bound of ``near zero'' that 
he derived from terrestrial radio. Moreover, Dr. Katz relies on an 
assumption that the promotional effect of simulcasting is essentially 
the same as the promotional effect of terrestrial broadcasting, because 
they carry the same content. As discussed above, broadcasters' use of 
technologies to substitute songs in their simulcast streams destroys 
the underlying premise that the content of a simulcast stream is the 
same as the terrestrial broadcast. Even if the content is the same, the 
Judges do not find sufficient persuasive evidence supporting the 
conclusion that simulcasts have the same promotional effect as 
terrestrial broadcasts.\204\
---------------------------------------------------------------------------

    \204\ See discussion, supra section III.A.3.c.v.
---------------------------------------------------------------------------

    As for Dr. Katz's use of the SDARS II rate to establish an upper 
bound to his zone of reasonableness, that too is not a market rate. It 
is a rate established by the government by means of a CRB proceeding. 
Moreover, it is not even a rate that is intended to replicate market 
conditions. It is a section 801(b) reasonable rate, albeit one that was 
informed by marketplace evidence (though from a somewhat different 
market). In short, neither end of Dr. Katz's zone of reasonableness is 
anchored in the noninteractive streaming market that the Judges are 
seeking to replicate in this proceeding. The Judges find Dr. Katz's 
zone of reasonableness unhelpful in setting a rate for commercial 
webcasters, and reject the NAB's proposed rate that it derived from Dr. 
Katz's analysis.

V. Judges' Determination of Noncommercial Webcasting Rates

A. Parties' Proposals

1. SoundExchange
    SoundExchange proposes that noncommercial webcasters pay a flat 
annual fee of $500 per station or channel for all performances up to a 
cap of 159,140 ATH per month. SoundExchange Rate Proposal at 4 (October 
7, 2014) SoundExchange proposes that, in any month that a noncommercial 
webcaster exceeds 159,140 ATH, the webcaster pay per-performance 
royalties at the following rates for its transmissions in excess of 
159,140 ATH:

   SoundExchange Proposed Per-Performance Rates for Performances Above
                               159,140 ATH
------------------------------------------------------------------------
                                                               Per-
                          Year                              performance
                                                               rate
------------------------------------------------------------------------
2016....................................................         $0.0025
2017....................................................          0.0026
2018....................................................          0.0027
2019....................................................          0.0028
2020....................................................          0.0029
------------------------------------------------------------------------

    Id. at 4-5. These are the same per-performance rates the 
SoundExchange proposes for commercial webcasters.
2. NRBNMLC
    The NRBNMLC proposes what it describes as a ``tiered and capped 
flat fee structure.'' NRBNMLC PFF ] 80. Under the NRBNMLC proposal, 
each noncommercial webcaster would pay a $500 annual fee for all 
performances of sound recordings up to a threshold of 400 average 
concurrent listeners (3,504,000 ATH) annually, and an additional $200 
for each additional 100 average concurrent listeners (876,000 ATH) 
annually, up to an annual fee cap of $1,500 per station or channel. See 
Introductory Memorandum to Written Direct Statement of NRBNMLC at 3 
(October 7, 2014) (NRBNMLC Introduction); The NRBNMLC's Proposed 
Noncommercial Webcaster Rates and Terms at 3 (October 7, 2014) (NRBNMLC 
Proposed Rates and Terms). The NRBNMLC would define ATH to include only 
transmissions of recorded music. Id. at 1.
3. IBS and Harvard Broadcasting/WHRB
    Section 351.4 of the Judges' procedural rules sets forth the 
required contents of a participant's WDS, including the requirement 
that, in a rate proceeding, ``each party must state its requested 
rate.'' 37 CFR 351.4(b)(3) (required contents of WDS). The rule goes on 
to permit participants to revise their rate proposals at any time up to 
the filing of proposed findings of fact and conclusions of law. Id.
    IBS's WDS does not contain a rate proposal, or anything that the 
Judges could reasonably interpret as a rate proposal. It consists 
solely of the three-page written testimony of Frederick Kass. Captain 
Kass introduces himself and IBS, and briefly discusses the nature of 
IBS members' webcasting activities:

    [IBS member] stations operate as non-profit entities within the 
meaning of the statute, as amended. They use digitally recorded 
music as instructional media for announcers and programmers. The 
instantaneous listenership to such music on member stations is

[[Page 26392]]

typically on the order of five listeners, with the exception of 
course-related music and other on-campus events. In contrast, 
audiences for live sports broadcast live musical performances, and 
lectures and other live on-campus originations are typically much 
larger than the audience for digitally recorded music.
    IBS Members provide significant science, technology, 
engineering, management, media, and communication skill set 
training. The stations typically act as learning laboratories where 
students may learn and perfect their skills.

IBS Ex. 9000 at 3 (Kass WDT).
    Similarly, WHRB's WDS does not contain a rate proposal, or anything 
the Judges could reasonably interpret as a rate proposal. WHRB's WDS is 
comprised of the WDT of Michael Papish, one of the station's board 
members. In three pages of written testimony, Mr. Papish merely 
introduces himself and describes WHRB's operations. See generally WHRB 
Ex. 8000 (Papish WDT).
    Neither Captain Kass nor Mr. Papish presented a rate proposal in 
the course of their respective live testimony at the hearing. The only 
hint of a proposal might be gleaned from a colloquy between the Judges 
and counsel \205\ during closing arguments:
---------------------------------------------------------------------------

    \205\ William Malone, Esq., jointly represented IBS and WHRB in 
this proceeding. In closing arguments Mr. Malone, on behalf of WHRB, 
briefly discussed a matter related to terms. 7/21/15 Tr. at 7946. 
The remainder of his closing argument, including the colloquy quoted 
in the text, was apparently on behalf of IBS alone.

    [THE JUDGES]: So what exactly is IBS proposing here?
    MR. MALONE: All right. In our pleadings as early as the 
agreement between SoundExchange and CPB, NPR became public when you 
published it in the Federal Register, we have computed to the best 
of our ability that there is a rate per ATH of 0.0011940. And we 
think that this is a marketplace agreement entered into voluntarily 
by one of the big companies in the market, and we think that sets 
the appropriate rate.
    Then when you scale that down to show the number of ATH that 
these college stations, high school stations, academy stations, and 
the like are operating, it works out to around $20 a year.

7/21/15 Tr. at 7949 (Kass).
    In its proposed findings, IBS directed its efforts to arguing 
against adoption of the SoundExchange/CBI settlement agreement \206\ 
and, once again, failed to propose a royalty rate.\207\ In short, the 
only arguable reference by IBS to a rate proposal was made by counsel 
in his closing arguments. The Judges do not credit this statement by 
counsel as a rate proposal by IBS for three reasons. First, introducing 
a rate proposal for the first time in closing arguments does not comply 
with the Judges' rules and is grossly unfair to the other parties. 
Section 351.4(b)(3) is extremely liberal regarding revisions to a 
party's rate proposal, but it presupposes that the party has made a 
proposal as part of its WDS, thus giving the other parties an 
opportunity to analyze it prior to presenting their rebuttal evidence.
---------------------------------------------------------------------------

    \206\ Those efforts were both untimely and not in accordance 
with the procedures established in the Act, the Judges' rules for 
submitting comments on a proposed settlement, and the Judges' 
Federal Register notice. See 17 U.S.C. 801(b)(7)(A); 37 CFR 
351.2(b)(2); 79 FR 65609 (November 5, 2014) (SoundExchange/CBI 
agreement); 80 FR 15958 (March 26, 2015) (SoundExchange/NPR 
agreement).
    \207\ IBS goes through a series of computations in its PFF in an 
effort to show that the proposed settlement rates ``in no way meet 
the comparability test for noncommercial royalty rates.'' IBS PFF, 
at 10. In the course of those computations, IBS comes up with a $20/
year figure, but it is unclear what that figure represents. Id.
---------------------------------------------------------------------------

    Second, ``around $20 a year'' is not sufficiently definite or 
specific to constitute a rate proposal. For example, which 
noncommercial webcasters would pay ``around $20 a year''? All of them? 
Only ones that transmit below a certain ATH threshold? What threshold? 
IBS does not say.
    Third, even if the Judges were to consider this to be a proposal, 
IBS has offered only statements of counsel to support it. The record is 
devoid of any evidence to support IBS's ``proposal'' or the analysis 
from which it was purportedly derived. Nothing will come of nothing. 
Neither IBS nor WHRB has offered a rate proposal that the Judges can 
consider in this proceeding.

B. Analysis and Conclusions

1. Upper Threshold for Noncommercial Rate
    The Judges have recognized noncommercial webcasting as a separate 
submarket in prior decisions only ``up to a point.'' Web II Original 
Determination at 24097. The Judges stressed that there must be limits 
to the differential treatment for noncommercials to avoid ``the chance 
that small noncommercial stations will cannibalize the webcasting 
market more generally and thereby adversely affect the value of the 
digital performance right in sound recordings.'' Id. (internal quotes 
and citations omitted). The Judges concluded that any separate rate for 
noncommercial webcasters must ``include safeguards to assure that, as 
the submarket for noncommercial webcasters that can be distinguished 
from commercial webcasters evolves, it does not simply converge or 
overlap with the submarket for commercial webcasters and their 
indistinguishable noncommercial counterparts.'' Id. at 24097-98. To 
avoid this convergence or overlap, the Judges adopted a cap on the size 
(as measured by audience size) of noncommercial webcasting stations or 
channels that are eligible for the noncommercial rate. See 37 CFR 
380.3(a)(2) (applying flat $500 royalty rate up to 159,140 ATH per 
month).\208\
---------------------------------------------------------------------------

    \208\ Although the Judges and the parties discuss the ATH 
threshold as a ``cap'' on eligibility for a reduced noncommercial 
rate, this is not entirely accurate. A noncommercial webcaster that 
exceeds the cap in any given month does not pay commercial rates for 
all of its transmissions in that month, but only those beyond the 
cap. This results in noncommercial webcasters paying a lower average 
per-play rate than a commercial webcaster (that pays at the 
commercial rate for every performance).
---------------------------------------------------------------------------

    SoundExchange's proposal to continue to impose of a limit on the 
size of noncommercial webcasters that are eligible for a separate 
noncommercial rate is supported by the testimony of Professor Thomas 
Lys. Professor Lys noted that, as a matter of economic logic, ``there 
is no real difference between a noncommercial and a commercial 
broadcaster.'' SX Ex. 28 ] 256 (Lys WRT); 5/29/15 Tr. at 6738. The 
Judges credit this testimony, but do not reach precisely the same 
ultimate conclusion as Professor Lys. While Professor Lys apparently 
argues that there should be no distinction between commercial and 
noncommercial rates, he did not consider (and was apparently unaware 
of) the revealed preference in the marketplace for a separate 
noncommercial rate. The Judges resolve the tension between Professor 
Lys's observation concerning economic logic and the revealed preference 
in the marketplace by limiting the differential treatment of 
noncommercial webcasters to smaller players that have a correspondingly 
smaller impact on the commercial market. The Judges thus agree with 
SoundExchange that eligibility for a noncommercial rate should be 
limited to those noncommercial webcasters whose audience size falls 
below a fixed threshold.
    While SoundExchange proposes a threshold above which a 
noncommercial webcaster ceases to be eligible for a noncommercial rate, 
the NRBNMLC does not. The NRBNMLC does, however, propose a threshold 
above which a noncommercial webcaster must pay an additional flat 
royalty fee (this structure is described supra, section V.A.2). Under 
either proposal a flat fee of $500 pays for all performances of sound 
recordings up to the threshold.
    SoundExchange proposes that the threshold remain the same as the

[[Page 26393]]

current threshold for noncommercial webcasters: 159,140 ATH per month 
(218 concurrent listeners, on average, for a webcaster that transmits 
24 hours per day). 307 CFR 380.3(a)(2). That is also the threshold in 
the SoundExchange/CBI settlement agreement above which a noncommercial 
educational webcaster (NEW) ceases to be eligible for the settlement 
rate. See Digital Performance Right in Sound Recordings and Ephemeral 
Recordings: Proposed Rule, 79 FR 65609, 65611 (November 5, 2014) 
(proposed 37 CFR 380.22). By contrast, the NRBNMLC proposes a much 
higher threshold of 400 average concurrent listeners, or 3,504,000 ATH 
annually (292,000 ATH per month on average).\209\
---------------------------------------------------------------------------

    \209\ This threshold effectively would be higher still as a 
result of the NRBNMLC's proposal to exclude certain non-music 
intensive programming from the definition of ATH.
---------------------------------------------------------------------------

    The NRBNMLC argues that the existing threshold should be increased 
because it was originally established in 2006 (based on 2004 survey 
data). NRBNMLC PFF ] 143. In addition, the NRBNMLC argues that an 
increase is necessary to provide noncommercial webcasters with 
``breathing room.'' See Emert WDT ] 40. These arguments are 
unpersuasive.
    While it is correct that the current 159,140 ATH threshold was 
adopted originally in Web II based on survey evidence presented in that 
proceeding, that is not the only source for that number. See Web II, 72 
FR at 24099. SoundExchange and CBI adopted 159,140 ATH as the threshold 
in their settlement agreement, which is contemporaneous with this 
proceeding and covers the same rate period. See NRBNMLC Ex. 7034, 
Attachment at 2-3 (SoundExchange/CBI Joint Motion to Adopt Partial 
Settlement). By contrast, the NRBNMLC cannot point to any marketplace 
agreement (contemporaneous or otherwise) that employs the threshold it 
proposes.
    As to the NRBNMLC's argument that noncommercial webcasters need the 
``breathing room'' that an increased threshold would provide, there is 
no persuasive record evidence to support that proposition. Mr. Emert 
did testify to this effect. Emert WDT ] 39; see also 5/21/15 Tr. at 
5271-71 (Henes). However, that testimony was an expression of opinion, 
unsupported by any factual evidence. Mr. Emert's and Mr. Henes' 
testimony that that the dozen or so radio stations they operate stream 
far below the existing threshold tends to contradict their statements 
concerning the need to increase the threshold to accommodate future 
audience growth. See Emert WDT ] 29; Ex. 7010; 5/21/15 Tr. at 5275-77 
(Henes). Their stations could achieve significant audience growth under 
SoundExchange's proposed rate structure without subjecting themselves 
to additional royalty costs.
    To the contrary, there is ample record evidence to demonstrate that 
the vast majority of noncommercial webcasters do not exceed the 
existing threshold. SoundExchange payment data show that between 2010 
and 2014, noncommercial webcasters \210\ paid usage fees 112 times out 
of 3917 noncommercial webcaster payments (2.86%). NAB Ex. 4141; NAB Ex. 
4149; see also SX Ex. 2 at 14 (Bender WDT) (``approximately 97% of 
noncommercial webcasters paid only [the] minimum fee''). The NRBNMLC 
seeks to counter this evidence with testimony from Mr. Emert and Mr. 
Henes that they were ``aware of'' some noncommercial broadcasters that 
impose listener caps on their simulcast streams to avoid exceeding the 
existing threshold. Emert WDT, ] 38; 5/21/15 Tr. at 5271 (Henes). The 
NRBNMLC's evidence is vague and anecdotal. It was not derived from the 
witnesses' own experiences, but rather from something they heard 
elsewhere. Even if the Judges were to deem this testimony credible, the 
most that it reveals is the existence of some isolated instances of 
noncommercial webcasters that are constrained by the existing 
threshold. The testimony emphatically does not demonstrate that a 
substantial number of noncommercial webcasters are operating near the 
threshold and taking steps to keep below it.\211\
---------------------------------------------------------------------------

    \210\ These are webcasters that are coded ``NCW-CRB'' 
(noncommercial webcaster paying statutory rates), ``NCW-WSA'' 
(noncommercial webcaster paying WSA settlement rates) and ``NCEDW'' 
(noncommercial education webcaster paying under the SoundExchange/
CBI settlement) in the SoundExchange data. For purposes of this 
analysis, the Judges have excluded noncommercial microcasters which, 
by definition, stream far below the threshold and pay no usage fees. 
See Noncommercial Microcasters, available online at http://www.soundexchange.com/service-provider/noncommercial-webcaster/noncommercial-microcaster-wsa/ (visited September 8, 2015). The 
Judges consider a webcaster to be paying usage fees if the fees 
collected by SoundExchange in a particular year (a) exceed the $500 
flat fee, (b) do not equal $600 (which most likely represents the 
$500 flat fee plus a $100 proxy fee in lieu of census reporting) and 
(c) are not an even multiple of $500 (most likely representing 
payment of the minimum fee for multiple channels). This is the 
approach that the NRBNMLC employed in interpreting these data. See, 
e.g., NRBNMLC PFF ] 95.
    \211\ The NRBNMLC candidly admits that it does not know the 
extent to which noncommercial webcasters impose listener caps, 
noting that ``[t]here is no way of knowing exactly how many 
Noncommercial entities have done this . . . .'' NRBNMLC PFF ] 23. 
This statement is only partially correct: The NRBNMLC could have 
surveyed its members or the broader noncommercial webcaster 
community. While such a survey may not have provided a definitive 
answer for the entire population of noncommercial webcasters, it 
would have revealed far more about the current state of affairs 
across the noncommercial webcasting market than the hearsay 
testimony of these two witnesses.
---------------------------------------------------------------------------

    The NRBNMLC's proposal to increase the threshold to 400 concurrent 
listeners is unsupported by the record. By contrast, the evidence 
demonstrates that the current threshold of 159,140 ATH per month that 
SoundExchange proposes to retain has resulted, for the vast majority of 
noncommercial webcasters, in no additional liability for royalties 
beyond the minimum fee. Moreover, the willingness of SoundExchange and 
CBI to adopt that threshold in their current settlement agreement, 
after years of experience with the identical threshold under the 
current rates, demonstrates that it is reasonable and workable. The 
Judges hereby adopt it.
2. Consequences of Exceeding the Threshold
    SoundExchange proposes that a noncommercial webcaster's 
transmissions beyond the 159,140 ATH threshold should no longer enjoy a 
reduced royalty rate. The NRBNMLC proposes that a reduced royalty rate, 
structured in $200 increments for each 876,000 ATH annually, should 
apply to transmissions beyond the threshold.
a. The NRBNMLC's Proposal
    The Judges explained in Web II that the threshold on the 
noncommercial webcasting rate serves as a ``proxy that aims to capture 
the characteristics that delineate the noncommercial submarket.'' Web 
II Remand, 72 FR at 24099. As discussed in section V.B.1, the Judges do 
this to assure that the submarket for noncommercial webcasters does not 
converge or overlap with the submarket for commercial webcasters. 
SoundExchange's proposal is consistent with this rationale; the 
NRBNMLC's is not. Not only would the NRBNMLC's proposal grant 
substantially reduced rates to large noncommercial webcasters whose 
operations compete with commercial webcasters', but the effective rate 
for such large noncommercial webcasters would actually decline as they 
grow larger due to the effect of the proposed $1,500 cap on royalties. 
The NRBNMLC offers no economic rationale for this result. See Lys WRT, 
]] 256-257.
    The NRBNMLC does not address this issue directly. Instead, the 
NRBNMLC argues that its proposed ``tiered and capped flat rate 
structure'' is what a willing buyer and a willing seller would

[[Page 26394]]

agree to in an effectively competitive market (i.e., a market rate). 
See NRBNMLC PFF ]80. The NRBNMLC cited the testimony of its two 
witnesses as establishing the need of noncommercial webcasters for 
rates that are affordable and predictable. NRBNMLC Ex. 7011 ]] 25-27, 
30 (Henes WDT); Emert WDT ]] 31-32, 34-37, 41. The fatal flaw in this 
argument is that it is unsupported by any marketplace evidence and any 
evidence of sellers who would be willing to accept the NRBNMLC's 
proposed structure. Mr. Henes and Mr. Emert may be willing, even eager 
to license music on this basis, but their testimony tells the Judges 
nothing about the sellers' side of the equation. As discussed in 
greater detail in the following paragraphs, none of the marketplace 
evidence that the NRBNMLC cites pertains to a rate structure remotely 
similar to the one proposed by the NRBNMLC.
    As additional evidence to support their argument that a ``tiered 
and capped flat rate structure'' is a market rate, the NRBNMLC cites 
the SoundExchange/CBI settlement agreement, the SoundExchange/NPR 
settlement agreement, the rates established for musical works under 17 
U.S.C. 118, and the position taken by SoundExchange on legislation to 
create a public performance right for sound recordings that covers 
transmissions over terrestrial radio. Id. The Judges reach different 
conclusions based on this evidence.
    The SoundExchange/CBI settlement agreement imposes a flat $500 fee 
on NEWs that transmit up to 159,140 ATH per month. Any NEW that exceeds 
that threshold loses its eligibility to operate under the settlement, 
and thus becomes subject to the CRB rate for noncommercial webcasters 
for the remainder of the year.\212\ The NRBNMLC concludes that ``no 
usage fees apply under the agreement'' for a NEW that exceeds the 
threshold, and cites the agreement as support for a flat-rate structure 
with no usage fees. NRBNMLC PFF ] 93. The NRBNMLC's interpretation of 
the agreement is not credible. The parties' decision not to specify 
usage fees in the agreement does not mean that they contemplated that a 
NEW that exceeded the ATH threshold would not pay any usage fees. The 
existing CRB rates provide for usage fees above 159,140 ATH, and CBI 
could reasonably assume that SoundExchange's rate proposal (filed with 
the Judges on the same day as the proposed settlement) would also 
contain usage fees. At most, the omission of usage fees from the 
agreement reflected the parties' decision not to resolve the issue of 
what rates would apply beyond the threshold, and to leave it for the 
Judges to determine in the proceeding.
---------------------------------------------------------------------------

    \212\ The NEW may operate under the settlement in the following 
year, provided it takes affirmative steps (e.g., imposes listening 
caps) to ensure that it will not exceed the threshold again.
---------------------------------------------------------------------------

    The NRBNMLC is correct in pointing out that the SoundExchange/NPR 
settlement agreement imposes a flat royalty rate with no additional 
usage fee. However, the SoundExchange/NPR settlement differs so 
fundamentally in so many ways from what the NRBNMLC is proposing that 
it cannot serve as a support for that proposal. The SoundExchange/NPR 
settlement entails a single annual payment by a single payer (CPB), in 
advance, to cover over 500 NPR member radio stations. 80 FR at 59590-
91. The stations include a range of formats, some of which entail very 
limited use of recorded music. Unlike the NRBNMLC's rate proposal, the 
settlement does not include tiered payments above the flat royalty 
rate, but does include a cap on the aggregate amount of recorded music 
that may be performed. NPR consolidates the reports of use for all of 
the stations covered by the agreement. The NRBNMLC's proposal does not 
provide for consolidated reports of use. On the whole, the terms of the 
SoundExchange/NPR agreement provide SoundExchange with significant 
benefits--reduced risk of nonpayment; protection against large numbers 
of uncompensated performances; reduced costs of processing usage data--
that the NRBNMLC proposal does not. To pluck out a single element of 
the deal, the flat royalty rate, and cite it as support for the NRBNMLC 
rate proposal simply lacks credibility.
    The musical works rate under the Sec.  118 statutory license 
suffers from a similar lack of comparability to the rates the Judges 
must set in this proceeding. Rates under Sec.  118 are in a different 
market, with different sellers and for different copyrighted works. The 
NRBNMLC has presented no evidence to demonstrate how a rate structure 
in that market, and with those sellers, reflects what a willing buyer 
and a willing seller would agree to in the sound recordings market.
    Finally, SoundExchange's position on legislation has little or no 
bearing on what constitutes a market rate. The compromises and 
tradeoffs that parties are prepared to make in the legislative arena 
have only the remotest resemblance to the give and take of the 
marketplace. The record industry does not currently enjoy any legal 
right with respect to the transmission of its sound recordings over 
terrestrial radio. There is no basis for the Judges to conclude that 
what the industry may be willing to accept in legislation that 
establishes such a right is the same as what it would bargain for in an 
arms-length transaction against the backdrop of an existing statutory 
right of remuneration.
b. SoundExchange's Proposal
    Although SoundExchange's proposal to impose commercial rates above 
the 159,140 ATH threshold is consistent with the Judge's rationale for 
limiting the applicability of noncommercial rates, the NRBNMLC levels 
multiple criticisms against it. These include:
     SoundExchange's entire rate proposal for noncommercial 
webcasters lacks evidentiary support;
     The specific usage rates that SoundExchange proposes are 
``inappropriate for commercial webcasters and even more inappropriate 
for noncommercial webcasters''; and
     The fact that few noncommercial webcasters have paid usage 
fees confirms that the proposed fees are unreasonable.
NRBNMLC PFF ] 113.
i. Evidentiary Support (or Lack Thereof) for SoundExchange's Rate 
Proposal
    As Professor Rubinfeld readily conceded, there are no current 
marketplace benchmarks from which to derive SoundExchange's entire rate 
proposal for noncommercial webcasters. Rubinfeld CWDT ]] 33, 246. The 
only contemporary agreements in evidence that cover noncommercial 
webcasters are the two settlement agreements between SoundExchange, on 
the one hand, and CBI and NPR, respectively, on the other hand. As 
discussed in the preceding section, there are a number of elements of 
the SoundExchange/NPR agreement that render it a poor benchmark for 
setting noncommercial rates generally. The SoundExchange/CBI agreement 
lends support for some elements of SoundExchange's rate proposal (e.g., 
a flat $500 rate for noncommercial webcasters that transmit up to 
159,140 ATH), but not for the proposed rate for usage beyond the ATH 
threshold.
    That does not mean, however, that SoundExchange's rate proposal is 
entirely without evidentiary support. As discussed, supra section 
V.B.1, expert economic testimony supports treating transmissions by 
noncommercial webcasters above a certain ATH threshold the same as 
transmissions by commercial webcasters. This is what the SoundExchange 
proposal seeks to

[[Page 26395]]

achieve. The rates that SoundExchange proposes for transmissions above 
the ATH threshold are the same that SoundExchange proposes for 
commercial webcasters.
ii. Inappropriateness of Specific Usage Rates Proposed by SoundExchange
    The NRBNMLC pursues two lines of attack against the specific usage 
rates that SoundExchange proposes. The first, concerning Professor 
Rubinfeld's interactive benchmark analysis, essentially repeats the 
licensee services' criticisms of SoundExchange's proposal for 
commercial webcasting rates. See NRBNMLC PFF ] 122. The Judges discuss 
those arguments supra. The Judges, in fact, do not adopt the specific 
rates that SoundExchange proposes, precisely because they find 
SoundExchange's benchmark analysis lacking in certain respects. Rather, 
the Judges adopt the same rates for transmissions in excess of the 
159,140 ATH threshold by noncommercial webcasters as they do for 
commercial webcasters.
    The second line of attack is that Professor Rubinfeld's benchmark 
analysis is inapplicable to noncommercial webcasters because none of 
the licensees under any of the benchmark agreements were noncommercial 
webcasters. Id. ] 123. As discussed, supra section V.B.1, the Judges 
apply commercial rates to noncommercial webcasters above the ATH 
threshold because economic logic dictates that outcome, not because it 
was observed in benchmark agreements.
iii. Small Number of Noncommercial Webcasters Paying Usage Fees 
Confirms That the Fees Are Excessive
    The NRBNMLC notes that few noncommercial webcasters pay usage fees 
and, of those that do, most pay a lower settlement rate in lieu of the 
rates set by the Judges for commercial webcasters. NRBNMLC PFF ] 131. 
Based on this evidence, the NRBNMLC concludes that the commercial 
webcaster rates are excessive, and that noncommercial webcasters are 
imposing listener caps or taking other affirmative steps to avoid 
paying them.
    Of the 3,917 documented payments by noncommercial webcasters 
between 2010 and 2014, 112 included payments for usage above the ATH 
threshold. NAB Ex. 4141; NAB Ex. 4149. Of these, 13 were at the 
commercial rate determined by the Judges and 99 were at a lower rate 
established under a WSA settlement.\213\ Id.; see also 5/6/15 Tr. at 
2099-100 (Rubinfeld) (25-30 noncommercial licensees pay lower rates 
under settlement agreements).
---------------------------------------------------------------------------

    \213\ The noncommercial webcasters' WSA settlement agreement is 
``nonprecedential.'' The Judges are not permitted to take into 
account the rate structure, fees, terms and conditions of that 
agreement in setting rates in this proceeding. 17 U.S.C. 
114(f)(5)(C).
---------------------------------------------------------------------------

    These facts do no support the NRBNMLC's conclusions. In itself, the 
fact that more than 97% of noncommercial webcaster payments do not 
include usage fees could just as easily support the conclusion that the 
vast majority of noncommercial webcasters--like the noncommercial 
webcasters that testified in this proceeding--operate well below the 
159,140 ATH threshold. Without evidence that a substantial number of 
noncommercial webcasters are operating near the threshold, or are 
imposing listening caps, the Judges cannot conclude that the threshold 
operates as a significant constraint or that the usage fees are 
excessive.
    The evidence that most noncommercial webcasters that paid usage 
fees did so under an alternative rate structure also does not support 
the NRBNMLC's conclusions. These webcasters made a rational choice to 
pay an available lower rate. That tells the Judges nothing about their 
willingness to pay the higher statutory rate in the absence of 
settlement. Conversely, though, it strongly suggests that nearly all of 
the webcasters that opted for the statutory rate structure or the NEW 
settlement expected that they would not exceed the threshold.
3. Cap on Royalties
    The NRBNMLC proposes that the total obligation of a noncommercial 
webcaster to pay royalties should be capped at $1,500, regardless of 
the number of sound recordings the webcaster performs. As with the 
other elements of its rate proposal, the NRBNMLC contends that the cap 
on fees is supported by marketplace evidence. Neither of the two 
noncommercial agreements in evidence employs the cap that the NRBNMLC 
proposes. The SoundExchange/CBI settlement imposes a flat royalty rate, 
but caps eligibility for that rate at 159,140 ATH. Beyond that 
threshold, the noncommercial webcaster must pay under the noncommercial 
rate structure determined in this proceeding. The SoundExchange/NPR 
settlement agreement employs a flat-fee structure (which serves as a 
cap on royalties), but also imposes a cap on music usage. See 80 FR at 
15961.
    There is no other evidence of any kind that a copyright owner would 
willingly license unlimited use of its sound recordings for a fixed fee 
of $1,500. The Judges reject the NRBNMLC's proposed royalty cap.
4. IBS's Additional Arguments
    IBS did not direct any criticism directly at either the 
SoundExchange or the NRBNMLC rate proposal. IBS's rate-related 
arguments were directed (or misdirected \214\) at the SoundExchange/CBI 
settlement agreement. Nevertheless, had IBS applied those arguments to 
the rate proposals before the Judges, the Judges would have rejected 
them.
---------------------------------------------------------------------------

    \214\ See supra note 204.
---------------------------------------------------------------------------

a. Lobbying Prohibition
    Captain Kass testified that many IBS members are a part of state-
funded educational institutions that are barred by state law from 
providing funds to organizations that lobby. IBS argues that these laws 
prevent certain IBS members from paying royalties to SoundExchange.
    This argument is unavailing for several reasons. First, IBS failed 
to provide any legal authority or expert testimony to support Captain 
Kass's interpretation of these state laws. Even if the Judges accept as 
true the assertion that these state laws prohibit certain IBS members 
from remitting funds to lobbying organizations, it is far from clear 
whether those laws would prevent the same IBS members from paying 
statutory license royalties to an organization designated by regulation 
as a collective under a Federal statute.
    Second, there is no evidence in the record concerning 
SoundExchange's lobbying activities, vel non. The Judges have no basis 
for concluding that the state laws to which IBS refers even apply to 
SoundExchange.
    Third, and most fundamentally, the entire question is not relevant 
to the Judges' task of setting rates for noncommercial webcasters. If 
IBS contends that its members may webcast sound recordings but are 
forbidden under state law to pay royalties to SoundExchange, that is an 
argument that must be resolved by a Federal District Court in an 
infringement action. It has no bearing on the particular rate structure 
that the Judges must determine for noncommercial webcasters.
b. Lack of ``Proportionality''
    IBS argues that royalty payments for noncommercial webcasters must 
be proportional to their use of sound recordings. While IBS's argument 
has a superficial appeal, it suffers from several shortcomings.

[[Page 26396]]

    IBS does not and cannot cite any statutory authority for its 
argument. The statute directs the Judges to set willing buyer/willing 
seller rates.17 U.S.C. 114(f)(2)(B). Willing buyers and willing sellers 
may, and often do, agree to rates that are not strictly proportional to 
usage. The SoundExchange/NPR and SoundExchange/CBI agreements are 
examples of agreements that incorporate a flat-rate structure where 
royalties are not strictly proportional to use.
    The statutory requirement of a minimum fee also runs counter to 
IBS's argument. By definition, a minimum fee (whatever its level) is 
not proportional to usage.
    IBS also fails utterly to provide any evidentiary basis for 
concluding that the rates proposed by SoundExchange or the NRBNMLC are 
so disproportional to noncommercial webcasters' usage as to be 
unreasonable. To be sure, some noncommercial webcasters transmit a very 
small number of performances of recorded music. See Kass WDT at 3 
(``instantaneous listenership to such music on member stations is 
typically on the order of five listeners, with the exception of course-
related music . . .''). Noncommercial webcasters--even those that are 
IBS members--are a heterogeneous group, with some operating above 
SoundExchange's proposed 159,140 ATH threshold. See supra, section 
V.B.1. IBS has not even proposed, much less provided an evidentiary 
basis to adopt, subcategories of noncommercial webcasters.

C. Conclusion

    For the rate period 2016-2020 the Judges adopt an annual rate of 
$500 per station or channel for all transmissions by noncommercial 
webcasters up to a threshold of 159,140 ATH. For transmissions in 
excess of 159,140 ATH, noncommercial webcasters shall pay royalties for 
2016 at the commercial rate (i.e., $0.0017 per-performance), and for 
such transmissions in excess of 159,140 ATH in the remainder of the 
statutory term, at the commercial rate as adjusted annually for changes 
in the Consumer Price Index, as set forth in the regulations.

VI. Minimum Fee

    Sections 112 and 114 of the Act require the Judges to establish 
minimum fees as part of any rate structure under the respective 
statutory licenses. 17 U.S.C. 112(e)(3)-(4) and 114(f)(2)(A)-(B).

A. Commercial Webcasters

1. Parties' Proposals
a. SoundExchange
    SoundExchange proposes a $500 per station or channel annual minimum 
fee. The minimum fee would be nonrefundable, but would be credited 
against royalties incurred during the applicable year. The minimum fee 
would be capped at $50,000 annually for a webcaster with 100 or more 
stations or channels. SoundExchange Rate Proposal at 2 (October 7, 
2014).
b. Pandora
    Pandora does not make an explicit proposal for a minimum fee. 
Pandora does, however, propose that, apart from those terms for which 
it proposes changes, ``the terms currently set forth in 37 CFR 380 be 
continued.'' Proposed Rates and Terms of Pandora at 2 (Oct. 7, 2015). 
Those terms include the current minimum fee of $500 per station or 
channel (capped at $50,000) for commercial webcasters.
c. iHeartMedia
    iHeartMedia does not propose a minimum fee.
d. Sirius XM
    Sirius XM does not make an explicit proposal for a minimum fee. 
Sirius XM does, however, propose that ``other than the royalty rate, 
the terms currently applicable to commercial webcasters be retained in 
their current form.'' Introductory Memorandum to the Written Direct 
Statement of Sirius XM at 1-2 (Oct. 7, 2014). Those terms presumably 
include the current minimum fee of $500 per station or channel (capped 
at $50,000) for commercial webcasters.
e. NAB
    NAB proposes a $500 annual minimum fee for each terrestrial AM or 
FM radio station that a broadcaster webcasts. For purposes of 
calculating the minimum fee, each individual stream (e.g., primary 
radio station, HD multicast radio side channels, different stations 
owned by a single licensee) is to be counted as a separate radio 
station, except that identical streams for simulcast stations will be 
treated as a single stream if the streams are available at a single 
Uniform Resource Locator (URL). NAB Proposed Rates and Terms at 4.
    The minimum fee would be nonrefundable, but would be credited 
against royalties incurred during the applicable year. The minimum fee 
would be capped at $50,000 annually for a webcaster with 100 or more 
stations or channels. Id.
2. Analysis and Conclusion
    All participants that proposed a minimum fee for commercial 
webcasters asked the Judges to retain the current annual minimum fee 
that the Judges adopted in Web III pursuant to a settlement. See Web 
III Remand Decision, 79 FR at 23104. The minimum fee settlement in Web 
III kept in place a settlement of the minimum fee for commercial 
webcasters that the parties reached in Web II. See Digital Performance 
Right in Sound Recordings and Ephemeral Recordings, final rule, 75 FR 
6097 (February 8, 2010) (Web II Minimum Fee Settlement). That 
settlement, in turn, retained a $500 minimum fee that was determined by 
a CARP, and upheld by the Librarian, in Web I, see Determination of 
Reasonable Rates and Terms for the Digital Performance of Sound 
Recordings and Ephemeral Recordings, Final Rule and Order, 67 FR 45240, 
45262-63 (July 8, 2002), but added a $50,000 cap for a webcaster with 
100 or more stations or channels. See Web II Minimum Fee Settlement, 75 
FR at 6098.
    While there is no settlement of the minimum fee issue in the 
current proceeding, the convergence of the parties' proposals on the 
existing $500 minimum fee (capped at $50,000) counsels strongly in 
favor of its retention. In addition, the Judges follow their earlier 
determination that commercial and noncommercial webcasters alike should 
have to pay a minimum fee that at least defrays a portion of 
SoundExchange's costs to administer the statutory licenses. See Digital 
Performance Right in Sound Recordings and Ephemeral Recordings, Final 
Determination after Second Remand, 79 FR 64669, 64672 (Oct. 31, 2014). 
Mr. Jonathan Bender, SoundExchange's Chief Operating Officer, testified 
that ``SoundExchange does not track its administrative costs on a 
licensee-by-licensee, station-by-station, or channel-by-channel basis 
and, as a result, there is no precise way to determine exactly'' how 
much SoundExchange spends on that basis. Bender WDT at 16-17. The costs 
to SoundExchange vary depending on such factors as the quality of the 
data a service submits. Id. at 16. In 2013, the average administrative 
costs per licensee (i.e., the total administrative costs divided by the 
number of licensees) were $11,778. Id. at 17.
    SoundExchange's average administrative cost per licensee is 
substantially higher than the minimum fee it proposes to charge each 
licensee.

[[Page 26397]]

While a higher minimum fee could be justified on this record, no party 
has requested anything higher than the current level of $500.
    The current $500 minimum fee for commercial webcasters has been in 
force for more than a dozen years,\215\ and has been voluntarily re-
adopted by licensors and licensees on two occasions. It has been 
proposed by licensors and licensees in this proceeding. SoundExchange's 
administrative costs (which the minimum fee is intended to defray, in 
part) exceed the proposed minimum fee by a wide margin. The Judges find 
the proposed minimum fee (including the $50,000 cap) to be reasonable 
and supported by record evidence, and will therefore adopt it.
---------------------------------------------------------------------------

    \215\ The $50,000 cap has been in force since 2010 (applicable 
to the rate period beginning January 1, 2006).
---------------------------------------------------------------------------

B. Noncommercial Webcasters

1. Parties' Proposals
a. SoundExchange
    SoundExchange proposes a $500 per station or channel annual minimum 
fee for noncommercial webcasters. The minimum fee would be 
nonrefundable, but would be credited against royalties incurred during 
the applicable year. SoundExchange Rate Proposal at 4.
b. NRBNMLC
    NRBNMLC proposes a $500 per station or channel annual minimum fee. 
The minimum fee would be nonrefundable, but would be credited against 
royalties incurred during the applicable year.
c. IBS and WHRB
    As discussed supra, IBS and WHRB did not submit rate proposals.
2. Analysis and Conclusion
    Both the SoundExchange and NRBNMLC rate proposals include a $500 
annual per station or channel minimum fee for noncommercial 
webcasters--i.e., retention of the current minimum fee. No other 
participant proposed a minimum fee for noncommercial webcasters,\216\ 
although CBI and SoundExchange agreed to retain the existing $500 
minimum fee as part of their settlement covering noncommercial 
educational broadcasters. See Digital Performance Right in Sound 
Recordings and Ephemeral Recordings, Final Rule, 80 FR 58201, 58206 
(Sept. 28, 2015) (37 CFR 380.22(a)).
---------------------------------------------------------------------------

    \216\ As noted supra, neither of the other two noncommercial 
webcasters that participated in this proceeding (WHRB and IBS) 
submitted a rate proposal.
---------------------------------------------------------------------------

    Although WHRB and IBS do not attack the SoundExchange and NRBNMLC 
minimum fee proposals directly, they argued against adoption of the 
SoundExchange/CBI settlement which incorporates the same $500 minimum 
fee, and they repeat those arguments in this proceeding. The Judges 
addressed their objections to the SoundExchange/CBI settlement in the 
Federal Register notice adopting the settlement terms. See id. at 
58203-04. The Judges have also addressed WHRB's and IBS's objections in 
the context of the SoundExchange and NRBNMLC rate proposals. For the 
same reasons articulated in the Federal Register notice and supra, 
section V.B.4, the Judges reject WHRB's and IBS's objections as they 
may apply to the proposed minimum fee for noncommercial webcasters.
    The current $500 annual minimum fee for noncommercial webcasters 
has been in force since Web I. See 37 CFR 261.3(e)(1) (2003). It was 
adopted by SoundExchange and CBI in a settlement agreement covering the 
rate period of this proceeding. It has been proposed by SoundExchange 
and the NRBNMLC, the only noncommercial webcaster to file a rate 
proposal in this proceeding. It constitutes a small (but nontrivial) 
fraction of the costs that SoundExchange incurs in administering the 
statutory license. The Judges find the proposed minimum fee to be 
reasonable and supported by record evidence, and will therefore adopt 
it.

VII. Ephemeral License Rate and Terms

    Section 112(e) grants entities that transmit performances of sound 
recordings a statutory license to make ephemeral recordings. 
SoundExchange proposes that the Judges bundle the royalties for Section 
114 and 112 and allocate five percent (5%) of the Section 114 
performance right royalty deposits to the Section 112(e) ephemeral 
recording right, a rate structure that would continue the extant 
arrangement. SX PFFCL ] 1369. SoundExchange contends that its proposal 
regarding the bundled rate for the Section 112 license is supported by 
the designated testimony of Dr. Ford. SX PFFCL at 1370 & n.64. 
SoundExchange also cites as support for its Section 112 proposal 
certain license agreements that were introduced into evidence. SX PFFCL 
] 1374 (citing agreements between [REDACTED] and [REDACTED], [REDACTED] 
agreements with [REDACTED] and [REDACTED], [REDACTED]'s agreements with 
[REDACTED] and [REDACTED] for the [REDACTED] service).
    SoundExchange contends that no participant offered evidence of a 
benchmark agreement that does not bundle performance rights and the 
right to make ephemeral copies. SX PFFCL ] 1375. SoundExchange further 
contends that ``[a]s of the Web III proceeding, recording artists and 
record companies had reached an agreement that five percent of the 
`payments for activities under Section 112(e) and 114 should be 
allocated to Section 112(e) activities.' '' SX PFFCL ] 1377, quoting 
Dr. Ford. According to SoundExchange, no participant has presented 
evidence in support of a different allocation between artists and 
record companies. SX PFFCL ] 1377. SoundExchange concludes that 
``[b]ecause SoundExchange's Board represents both artists and copyright 
owners, its proposed rate of 5% for ephemeral copies is appropriate 
evidence and `credibly represents the result that would in fact obtain 
in a hypothetical marketplace negotiation between a willing buyer and 
the interested willing sellers under the relevant constraints.' '' SX 
PFFCL ] 1378, quoting Dr. Ford.
    Other participants that address the rate for the Section 112 
license do not contradict SoundExchange's assertions. See iHeart Reply 
PFFCL at 203 (``iHeartMedia supports the current bundling of the Sec.  
112 and Sec.  114 royalties''); Sirius XM PFF ] 2 (``Sirius XM 
maintains that the Section 112 ephemeral license has no value 
independent of the Section 114 performance license, and consequently 
proposed that the royalty for the Section 112 license be deemed 
included within the Section 114 royalty payment. Sirius XM takes no 
position at this time as to what, if any, percentage of the Section 114 
royalty should be deemed attributed to the Section 112 ephemeral 
license.''); NRBNMLC PFFCL ] 151 (``[t]here is no dispute between 
SoundExchange and the NRBNMLC regarding how the royalties for the 
ephemeral recording statutory license specified in 17 U.S.C. 112(e) 
should be set. Both participants propose that those royalties for 
ephemeral reproductions used solely to facilitate transmissions made 
pursuant to the 17 U.S.C. 114(f) statutory license be deemed to be 
`included within, and constitute 5% of' the Sec.  114(f) statutory 
license payments made by a particular service'' quoting the respective 
proposals of SoundExchange and NRBNMLC); NAB PFFCL ] 226 (``no dispute 
between SoundExchange and NAB regarding how the royalties for the 
[Section 112(e) license] should be set.'') and Pandora PFFCL ] 416 
(``[c]onsistent

[[Page 26398]]

with past proceedings and the Merlin Agreement (which has no separate 
ephemeral recording fee), Pandora proposes that the royalty payable for 
ephemeral recordings be included within the Section 114 royalty. There 
is no dispute on this point: SoundExchange has proposed the same.'').
    The Judges accept SoundExchange's proposal to continue the current 
bundling of the Section 112 and 114 rates. The Judges find persuasive 
the designated testimony of Dr. Ford and the license agreements that 
SoundExchange cites in its PFFCL that willing buyers and willing 
sellers would prefer that the rates for the two licenses be bundled and 
that they would be agnostic with respect to the allocation of those 
rates to the Section 112 and 114 license holders.\217\ The Judges also 
find that the minimum fee for the Section 112 license should be 
subsumed under the minimum fee for the Section 114 license, 5% of which 
shall be allocable to the Section 112 license holders, with the 
remaining 95% allocated to the Section 114 license holders.
---------------------------------------------------------------------------

    \217\ SX Ex. 1931 (designated testimony of Dr. George S. Ford). 
Dr. Ford testifies that ``in the marketplace deals between record 
companies and webcasters for non-statutory forms of licenses, it is 
typical for ephemeral copy rights to be expressly included among the 
grant of rights provided to the webcasters . . . [incorporating the 
rate for the ephemeral copy] into the overall rate that the 
webcaster pays for the ephemeral copy rights and performance 
rights.'' Id. at 10-11. He also concluded that ``recording artists 
and record companies have reached an agreement that five percent 
(5%) of the payment for activities under Section 112(e) and 114 
should be allocated to Section 112(e) activities [and] that appears 
to be a reasonable proposal.'' Id. at 15.
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    SoundExchange and the services disagree, however, on the terms with 
respect to the Section 112(e) license. CRB Rule 380.3(c), which 
addresses ephemeral recordings, states: ``The royalty payable under 17 
U.S.C. 112(e) for the making of Ephemeral Recordings used by the 
Licensee solely to facilitate transmissions for which it pays royalties 
shall be included within, and constitute 5% of, the total royalties 
payable under 17 U.S.C. 112(e) and 114.'' 37 CFR 380.3(c), emphasis 
added.
    Pandora proposes that the Judges strike the italicized language and 
replace it with the phrase ``made pursuant to 17 U.S.C. 114.'' Pandora 
believes the current language ``creates the possibility (likely 
unintended) that ephemeral copies of sound recordings that are used by 
a service for non-compensable performances under Section 114 might not 
be authorized under the regulations.'' Pandora PFFCL ] 416. Pandora 
also proposes that the Judges add the following sentence to the current 
amended regulation: ``A Licensee is authorized to make more than one 
Ephemeral Recording of a sound recording as it deems necessary to make 
noninteractive digital audio transmissions pursuant to 17 U.S.C. 114.'' 
Pandora PFFCL ] 417. Pandora contends that such ``as necessary'' 
language is consistent with industry practice. Id. ] 418. SoundExchange 
proposes that the current regulation be carried over into the new rate 
period but appears to acknowledge that authorizing the making of more 
than one ephemeral copy is not inconsistent with current industry 
practice.\218\
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    \218\ Compare SX Reply PFFCL ] 1247 (``SoundExchange believes 
that Pandora's proposed changes [to CRB regulations] should be 
rejected outright'') with SX PFFCL ] 1374 (referencing agreements 
between labels and services wherein services are authorized to 
create and store a reasonable, limited number of ephemeral copies).
---------------------------------------------------------------------------

    The Judges adopt Pandora's proposed language and do not carry 
forward the language ``for which it pays royalties'' in the current 
regulation because they believe that the phrase could be construed in a 
way that would limit the application of the Section 112 license to 
certain transmissions made consistent with Section 114 that are not 
royalty generating, such as skips. The Judges also are sympathetic to 
the Services' contention that, in certain circumstances (e.g., where 
different file format requirements may necessitate the creation of 
multiple copies), it may be necessary to make more than one ephemeral 
copy to facilitate transmissions made pursuant to Section 114. 
Nevertheless, the circumstances must be necessary and commercially 
reasonable. The language the Judges adopt includes this standard.

VIII. Terms

    One of the purposes of this proceeding is to establish terms for 
the administration of the rates the Judges determine for the rate 
period 2016 to 2020. The parties proposed changes to Subchapter E of 
Chapter III, title 37 CFR, relating to royalty rates and terms. The 
Judges adopted some changes and rejected others in the initial 
Determination. In its Petition for Rehearing (Rehearing Motion), 
SoundExchange raised several issues relating to the Judges' 
determinations regarding proper regulatory language to effect their 
conclusions in the Determination. After considering the Rehearing 
Motion \219\ and the responses thereto, the Judges issued a separate 
order detailing SoundExchange's requests and the Judges' 
conclusions.\220\ In the interest of making this final Determination a 
complete and cohesive record of the Judges' findings and conclusions in 
this proceeding, the Judges include additional material in this section 
to reflect their rehearing ruling.
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    \219\ In the Rehearing Motion, SoundExchange analyzed its 
concerns regarding several substantive determinations, including the 
provision for annual royalty rate adjustments. With regard to the 
regulations, SoundExchange challenged the stated method of 
calculation of annual royalty rate increases, if any. SoundExchange 
also listed (without sufficient analysis) several other regulatory 
concerns. The Judges permitted SoundExchange to detail the other 
regulatory concerns in a Supplemental Motion (Supplement). The 
Judges solicited and received responses from the Licensees to all 
issues in the original Rehearing Motion and the Supplement.
    \220\ See Order Denying in Part SoundExchange's Motion for 
Rehearing and Granting in Part Requested Revisions to Certain 
Regulatory Provisions (Feb. 10, 2016), issued in PUBLIC version on 
February 22, 2016.
---------------------------------------------------------------------------

    In addition to the proposed terms concerning licensing ephemeral 
recordings discussed in the preceding section of this Determination, 
the Judges have weighed the proposals and the arguments of the parties 
in support of or opposed to various regulatory provisions and, after 
due consideration of the rehearing papers, adopt the Terms as detailed 
below this Supplementary Information section. The parties' proposals--
and the Judges' rulings--include the following.\221\
---------------------------------------------------------------------------

    \221\ Section references are to the section numbers in the 
regulations adopted by this Determination.
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A. Section 380.1--Scope and Compliance

1. Legal Compliance--Sec.  380.1(c)
a. Sound Recording Performance Complement
    iHeart proposed changes to the statutory definition of ``sound 
recording performance complement'' to reflect the practice of waiving 
the statutory performance complement in private agreements, IHM PFF ] 
425. The provision would ``ensure[ ] that Broadcasters do not need to 
alter the content of their radio broadcasts simply because they have 
elected to simulcast those broadcasts over the Internet''. IHM Rate and 
Terms Proposal at 2-3. According to iHeart, because programs on 
terrestrial radio stations can play entire albums, iHeart should be 
allowed to simulcast the programs without altering them to satisfy the 
performance complement requirement, and the Judges have the authority 
to modify such ``background terms of the statutory license'' where 
willing buyers and sellers would negotiate such terms absent the 
statute. IHM COL ] 34-35. SoundExchange argued that statutory changes 
can only be made by Congress.

[[Page 26399]]

The Judges agreed. The Judges did not adopt this change.
b. Waiver of Requirement to Destroy Ephemeral Recordings After Six 
Months
    iHeart proposed to add a provision that exempts Broadcasters from 
the statutory six-month limitation on the retention of ephemeral 
recordings subject to certain conditions. SoundExchange argued that the 
Judges are not authorized to make changes to the statute by enacting 
regulations, and the Judges agreed. The Judges cannot and did not adopt 
this proposal.

B. Section 380.2--Making Payment of Royalty Fees

1. Monthly Payments--Sec.  380.2(b)
a. Payment Period
    SoundExchange proposed shortening the payment period from 45 days 
to 30 days. Pandora and Sirius did not oppose the change, but the NAB, 
NRBNMLC, and IHM did. SoundExchange argued that the shorter term would 
allow them to distribute payments more quickly and that the majority of 
agreements in the industry have payments terms of 30 days. The NAB and 
IHM argued that because of the unique character of their respective 
business models, shortening the term would cause additional burdens and 
create inaccuracies and overpayments that potentially would not be 
refunded. The Judges also are considering this issue in a rulemaking 
proceeding that is currently pending before them. The Judges do not 
believe the record before them in this rate-setting proceeding supports 
the change that SoundExchange seeks, and therefore decline to adopt it. 
The Judges can perceive the costs to the Services that the shortened 
reporting period would impose, and it is less clear that the benefits 
identified by SoundExchange from such a change would justify those 
costs. Nevertheless, the Judges will consider revisiting this issue in 
the broader context of the pending rulemaking proceeding.
b. Emails Acknowledging Receipt of Payment
    NRBNMLC proposed that SoundExchange send emails (similar to those 
that the musical works collectives send) with reminders that annual 
payments are due, which would serve a function similar to an invoice. 
NRBNMLC also proposed a provision requiring SoundExchange to email 
acknowledgments of receipt of payment, which would function like a 
receipt and which is a common business practice, including in the 
nonprofit arena. SoundExchange argued there is no need for a regulation 
because it already sends reminders. It also argued that an 
acknowledgment email would be challenging because it does not have 
current email addresses for each of its licensees, and the cost would 
outweigh the benefit. SoundExchange countered that it will soon have an 
online payment portal, a fact that NRBNMLC points out shows that 
SoundExchange realizes that the receipts would be useful. The Judges 
found that the online portal should address the receipt concern and 
that the practice of sending reminders does not warrant a regulation. 
Therefore, the Judges did not adopt this proposed change.
2. Late Fees--Sec.  380.2(d)
a. A Single Late Fee
    Pandora proposed a single late fee for both a late payment and a 
late Statement of Account. It argued that a late fee for each of these 
is duplicative and unnecessary. SoundExchange countered that it incurs 
duplicative costs when both items are late and that it is fair to hold 
a late payor accountable for such costs. In addition, SoundExchange's 
ability to enforce compliance and make efficient distribution relies on 
late fees for each of these. The Judges agreed that such fees encourage 
compliance for each required item. As a result, the Judges did not 
adopt this proposed change.
b. Late Fee Rate
    iHeart, the NAB, and NRBNMLC proposed that the late fee rate be 
reduced from 1.5% (the equivalent of 18% per year) to a more 
``reasonable'' fee; that is, one similar to statutory interest rates on 
judgments and tax underpayments. iHeart pointed out that its agreements 
with the Indies contain no late fee provision and that Warner has never 
asked them to pay the late fee when they have submitted a late payment. 
SoundExchange argued that the high fee provides an incentive for timely 
payments and covers costs due to late payments. The evidence shows that 
late fees in market agreements range from no fees up to the proposed 
fee of 1.5%. The 1.5% rate is an accepted rate in the market, and the 
services produced no evidence of actual hardship from the current rate 
of 1.5%. For this reason, the Judges did not adopt this proposed 
change.

C. Section 380.3--Delivering Statements of Account

1. Adjustments to Statements of Account--Sec.  380.3(a)
    Pandora proposed a change to allow Licensees to make adjustments to 
their Statements of Account. iHeart proposed changes that would allow 
Licensees to recoup overpayments. SoundExchange argued that the 
proposals are unreasonable because of, inter alia, the window of time 
within which, and the number of occasions upon which, a Licensee could 
make adjustments. In addition, SoundExchange complained that the 
administrative burden of such a proposal could be excessive. 
SoundExchange also noted that the money may not be recoupable once it 
is paid to artists. Pandora argued that making good faith adjustments 
are part of the normal course of business and that SoundExchange's 
technological advances will make the administration of adjustments 
manageable. Pandora RFF at 192-93. iHeart pointed out that 
SoundExchange has a method for reversing its own inadvertent 
overpayments. IHM PFF ] 433; IHM RFF ] 202; see PAN PFF ] 1300.
    The Judges agreed with SoundExchange. The burden of submitting 
accurate payments is on the Licensee, and the Licensee bears the risk 
of overpayment. In addition, the record contained no evidence to guide 
the Judges in determining a reasonable period for, or a reasonable 
number of, adjustments. Therefore, the Judges did not adopt this 
proposed change.
    The parties also raised the issue of royalty fee payment 
adjustments in the context of audits. See discussion regarding 
overpayments and underpayments discovered at audit under section 380.6 
below.
2. Signature Attestation--Sec.  380.3(a)(8)
    Pandora proposed adding a sentence to the required language in a 
Statement of Account--just below the sentence where the signatory 
attests to the statement's accuracy and completeness--that would allow 
Licensees to amend their Statements of Accounts. This proposal was 
related to iHeart's proposal regarding overpayment and corrections to 
payments. The proposed sentence contained no time limit for making 
amendments to the Statements of Accounts and is therefore an 
unreasonable addition to the Statement of Account. The Judges did not 
adopt this proposed change.

D. Section 380.4--Distributing Royalty Fees

1. Best Efforts to Identify and Locate--Sec.  380.4(a)(2)
    In this proceeding, the Licensees proposed, and the Judges adopted, 
additional regulatory language regarding the Collective's duty to 
locate parties

[[Page 26400]]

entitled to receive royalty distributions.\222\ SoundExchange objected 
to the added language. A SoundExchange executive testified that the 
Collective maintains an extensive database and can locate distributees 
without the due diligence suggested by the new language. See SX Ex. 23 
at 18-19, SX Ex. 2 at 5-11. As SoundExchange conceded, however, the 
regulations contain similar language in section 370.5(d) regarding best 
efforts to find copyright owners in order to make available reports of 
use.
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    \222\ In their post-Determination review, the Judges noted that 
the due diligence language was misplaced in Sec.  380.2(e), which is 
concerned with payment of royalty fees by Licensees. The Judges have 
deleted the language from Sec.  380.2.
---------------------------------------------------------------------------

    If SoundExchange is able to make--and amenable to making--records 
searches to assure proper distribution of reports of use, the Judges 
should assure that SoundExchange makes no less of an effort to locate 
copyright owners when the time comes to distribute royalty funds. It 
would seem even more appropriate for SoundExchange to engage in best 
efforts when distributing royalties to avoid any appearance of 
impropriety or conflict of interest, in light of section 380.4(b), 
which may permit retention of unclaimed funds by SoundExchange. This 
minimal additional due diligence can do little other than assure the 
currency and integrity of SoundExchange's distribution database.
    Further, SoundExchange outlined its search capabilities, but did 
not object expressly to the due diligence language proposed by NAB and 
NRBNMLC. The Judges adopted the proposal of NAB and NRBNMLC.
2. Unclaimed Funds--Sec.  380.4(b)
    Pandora proposed that the provision in the regulations dealing with 
the Collective's use of unclaimed funds may not be consistent with 
state escheatment laws. SoundExchange opposed changes to this 
provision, which allows the Collective, under certain circumstances, to 
use unclaimed funds for administrative purposes. SoundExchange argued 
that the changes Pandora had proposed, which would have required the 
Collective to use unclaimed funds in a manner consistent with 
applicable law, could impose an unnecessary regulatory burden on the 
Collective.
    The Judges adopted the changes substantially as proposed by 
Pandora. Although the Judges do not believe the unclaimed funds 
provision in the current regulations runs afoul of any state law, in 
abundance of caution and to avoid potential confusion in the upcoming 
rate period, the Judges adopted the more neutral drafting that Pandora 
proposed to ensure that the Collective's use of unclaimed funds 
comports with applicable law.
    In the Rehearing Motion, SoundExchange further objected to the 
Judge's insertion of language to define the three-year holding period 
for unclaimed funds. The extant regulations contain an internal 
ambiguity concerning the measurement of the period for holding 
unclaimed funds. When the Judges suggested reorganization of the Part 
380 regulations, they highlighted this issue for the parties. See 
Judges' letter to participants dated April 2, 2015. For example, in 
Sec.  380.4 of the current regulations, the Collective is required to 
hold funds if it is ``unable to locate a Copyright Owner . . . within 3 
years from the date of payment by a Licensee . . . .'' 37 CFR 
380.4(g)(2) (emphasis added). If the Collective is unable to locate the 
rightful payee, then the funds become subject to Sec.  380.8, which 
requires the Collective to retain ``unclaimed'' funds for ``a period of 
3 years from the date of distribution.'' See, e.g., 37 CFR 380.8 
(emphasis added). The Collective may apply those funds to offset its 
costs at the end of the three-year holding period. Id.\223\
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    \223\ Similar language is repeated in subparts B (Sec. Sec.  
380.13(i)(2), 380.17) and C (Sec. Sec.  380.23(h)(2), 380.27) of the 
extant regulations.
---------------------------------------------------------------------------

    On its face, the ``date of payment by a Licensee'' is not the same 
as the ``date of distribution,'' the latter of which is ambiguous, at 
best. Despite the Judges' invitation, no party offered explanation for 
the current regulatory discrepancy or suggested clarifying language to 
eliminate the ambiguity. In section 380.2(e) of the regulations adopted 
by the Judges as part of this proceeding, the Judges sought to resolve 
the ambiguity by specifying that the three-year holding period 
commences on ``the date of final distribution of all royalties.'' 
SoundExchange averred that the Judges' introduced uncertainty into the 
regulation because it is unclear when a ``final distribution of all 
royalties'' takes place when a copyright owner cannot be located and 
the funds that copyright owner may be entitled to cannot be 
distributed.
    SoundExchange requested that the Judges amend the regulation to 
specify that the three-year holding period commences on the date of the 
first distribution of royalties from the relevant payment by the 
service. Rehearing Motion at 10. No other party responded to 
SoundExchange's requested amendment. The Judges recognized that the 
language of section 380.2(e) may be unclear, and that the amendment 
that SoundExchange requested would clarify the regulation in a manner 
consistent with the Judges' intent. Therefore, the Judges accepted the 
SoundExchange proposal and clarified the regulatory language 
accordingly: The three-year escrow period for undistributable royalties 
shall be three years from the date of first distribution of relevant 
royalty deposits from a Licensee.
3. Designation of the Collective--Sec.  380.4 (d)(1)
    The Judges designated SoundExchange as Collective.\224\ 
SoundExchange participated as the existing and presumed Collective. 
SoundExchange indicated its willingness to continue as the Collective. 
See Bender WDT at 14-15. No party objected to SoundExchange continuing 
in the role of Collective. The Judges acknowledged the administrative 
and technological knowledge base developed by SoundExchange over its 
years of service as the Collective. Finding no reason to change the 
designation, the Judges re-named SoundExchange to serve as the 
Collective for purposes of collecting, monitoring, managing, and 
distributing sound recording royalties established by this Part 380.
---------------------------------------------------------------------------

    \224\ In the provision relating to the potential dissolution of 
SoundExchange as the Collective, Pandora and SoundExchange agreed 
that the phrase ``that have themselves authorized the Collective'' 
in current CRB Rule 380.4(b)(2)(i) is unnecessary and should be 
deleted. See SX Reply PFFCL ] 1231 n.74. Accordingly, the applicable 
provision the Judges adopted, Sec.  380.4(d)(2)(i), does not retain 
that unnecessary language.
---------------------------------------------------------------------------

E. Section 380.5--Handling Confidential Information

1. Disclosure of Confidential Information--Sec.  380.5(c)
    Upon review of the supplemental papers, the Judges made an 
additional change to the language regarding handling of confidential 
information, anticipating a claim of ambiguity. In its discussion of 
the new regulatory requirements for, inter alia, written 
confidentiality agreements, SoundExchange referred to confidentiality 
obligations arising by ``operation of law.'' Supplement at 3. The 
Judges acknowledged that a Qualified Accountant and any attorney 
admitted to a state's bar is under a professional ethical obligation 
\225\ to

[[Page 26401]]

maintain confidentiality of his or her client's confidential 
information. The Judges, therefore, eliminated ``attorney'' from the 
list of potential viewers of confidential information required to sign 
a confidentiality agreement. The Judges added ``outside counsel'' to 
``Qualified Auditor'' in subsection (c)(2) of section 380.5, as 
eligible to receive confidential information without executing a 
separate confidentiality agreement. The Judges specified ``outside 
counsel'' as some entities involved in these complex proceedings may 
employ in-house counsel, whose duties would not necessitate their 
seeing information relating to the Judges' rate proceedings. In-house 
counsel are deemed to be included in the term ``employees'' in the list 
of persons required to sign the confidentiality agreement.\226\
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    \225\ These obligations might or might not arise by ``operation 
of law'' depending upon the jurisdiction, but any party aggrieved by 
a breach of these professional obligations is likely nonetheless 
entitled to a legal or equitable remedy from a court of competent 
jurisdiction.
    \226\ The Judges understand that in-house counsel admitted to 
the bar carry the same professional ethical obligations as outside 
counsel. Admission to the bar alone, however, is not sufficient to 
grant in-house counsel unnecessary access to confidential 
information of a business competitor.
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2. Written Agreements--Sec.  380.5(c)(1)
    NAB and NRBNMLC proposed, and the Judges adopted, additional 
verbiage for the regulation (section 380.5(c) (1) in the newly-revised 
regulations) regarding confidential information shared by participants 
in webcasting proceedings that: (1) Required confidentiality agreements 
to be in writing; and (2) limited disclosure of confidential 
information to those performing activities ``related directly'' to 
collection and distribution of royalty payments. SoundExchange did not 
indicate that it ever addressed these proposed changes to the 
regulations. It was not until SoundExchange sought rehearing that it 
raised a specific challenge to this added confidentiality language. 
Supplemental Petition for Rehearing . . . at 4 (Supplement).
    In their joint opposition to the Supplement, NAB and Pandora 
objected to allowing SoundExchange to raise a new issue on rehearing. 
See NAB and Pandora's Opposition to . . . Supplement [ ] . . . at 5 
(NAB/Pandora Supp. Opp.). iHeart further pointed to record evidence to 
support the additional language relating to handling confidential 
information during the process of royalty collection and distribution. 
See iHeart Opposition to . . . Supplement[ ] at 2-3 (iHeart Supp. 
Opp.). iHeart cited direct license agreements that were in evidence in 
this proceeding as support for the reasonable addition of requirements 
for (1) written confidentiality agreements and (2) restriction of use 
of confidential information to purposes ``directly'' related to 
collection and distribution of royalties. Id. (citing, e.g., SX Exs 110 
at 11 (iHeart-Concord agreement) and 33 at 30 (iHeart-Warner 
agreement)). iHeart's citation to the record illustrated the Judges' 
ability to look to ``comparable circumstances under voluntary license 
agreements'' in setting rates under Sec.  114.
    SoundExchange's objection was too little, too late. The Judges 
declined to change the confidentiality language.
3. Safeguarding Confidential Information--Sec.  380.5(d)
    SoundExchange objected to use of the phrase ``distributees of the 
collective'' in section 380.5(d) as creating an uncertain standard, 
contending that the provision could be interpreted to require 
recipients of confidential information to ``adhere to the unknowable 
standards employed by SoundExchange's tens of thousands of 
distributees.'' Supplement at 4. SoundExchange proposed to clarify that 
recipients of confidential information are bound by the standard of 
care that they employ with their own confidential information by 
substituting the phrase ``Person authorized to receive confidential 
information'' for ``distributees of the collective.'' Id. No other 
party raised an issue with the language of the newly-revised 
regulation; nor did any party object to SoundExchange's requested 
change.
    SoundExchange correctly discerned the intended meaning of the 
language that the Judges adopted. The Judges did not view the potential 
misinterpretation that SoundExchange feared to be a reasonable reading 
of the section 380.5(d). The Judges also did not view SoundExchange's 
proposed amendment as likely to clarify the Judges' intent. 
Nevertheless, to remove all doubt the Judges amended section 380.5(d) 
by deleting everything after the second-to-last comma and substituting 
the following: ``but no less than the same degree of security that the 
recipient uses to protect its own Confidential Information or similarly 
sensitive information.''

F. Section 380.6--Auditing Payments and Distributions

1. Frequency of Auditing--Sec.  380.6(b)
    SoundExchange argued that the Judges' newly-revised regulatory 
language regarding audit frequency included an unintended ambiguity 
regarding the frequency with which the Collective may audit Licensees. 
Motion at 10. In its Supplement, SoundExchange contended that section 
380.6(b) could be interpreted as limiting SoundExchange to a single 
audit of a single service each year. Id. SoundExchange asked the Judges 
to clarify that it is not restricted to auditing only one licensee per 
year; rather that the limit is one audit per year for each licensee. No 
party responded in opposition to this clarification request. As 
SoundExchange's proposed clarification was consistent with the intent 
of the language originally adopted by the Judges, but was not subject 
to misinterpretation, the Judges amended the regulatory language 
accordingly.
2. The Audit--Sec.  380.6(d)
a. Binding Nature
    The NAB proposed the Judges modify the audit regulation by removing 
the requirement that the Qualified Auditor's results be binding on the 
parties. SoundExchange objected to the Judges' adoption of the NAB 
proposal. Supplement at 4. As the NAB noted, SoundExchange \227\ 
witness, Dr. Thomas Lys, testified that requiring an audit report be 
dispositive would be ``unreasonable.'' NAB/Pandora Supp. Opp. at 3, 
citing 5/4/15 Tr. at 1507-08 (Lys).
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    \227\ In drafting, the Judges inadvertently included language 
the NAB proposed to make the choice of a Qualified Auditor binding, 
in addition to adopting the NAB proposal to drop the requirement 
that the audit results be binding. The Judges found that language 
making the choice of a Qualified Auditor binding is unnecessary, and 
have removed it.
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    The Judges credited Dr. Lys's testimony and agreed that the subject 
of any audit should be permitted to contest audit results. 
SoundExchange offered no record support for its proposal that the 
regulations return to the current language, albeit made reciprocal in 
nature. The ``binding'' language has been excised from the newly-
revised regulations.\228\
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    \228\ Accordingly, any attempt to seek a remedy based upon an 
auditor's findings, and any attempt to challenge those findings, 
must be made in a court of competent jurisdiction, or through any 
private alternative dispute resolution procedure to which the 
affected parties may have agreed.
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b. Acceptable Verification Process
    SoundExchange proposed removing this provision because it allows 
audits to be routine financial audits instead of specialized ``royalty 
examinations.'' SX PFF ] 1285-86. Although the services did not oppose 
this change, SoundExchange offered no evidence of the ineffectiveness 
of the audits to date due to the existence of the provision, and 
therefore the Judges did not adopt the proposed change. A Service's 
recent financial audit need not preclude a business audit that focuses 
on the

[[Page 26402]]

Service's royalty policies and procedures.
3. Audit Results; Underpayment or Overpayment of Royalties--Sec.  
380.6(g)
a. Terms for Restitution of Underpayment
    Pandora suggested that Licensees and SoundExchange be permitted to 
agree on acceptable terms \229\ regarding the time for restitution of 
underpayments by Licensees.\230\ SoundExchange did not oppose Pandora's 
proposal in its Reply PFF/PCL. In its opposition to the SoundExchange 
Supplement, iHeart suggested that agreed terms for reconciliation are 
consistent with market terms allowing for agreement on the identity of 
an auditor and the scope of an audit. iHeart Supp. Opp. at 2, citing, 
e.g., SX Ex. 38 at 40 (re timing and scope of audit).
---------------------------------------------------------------------------

    \229\ The Judges addressed elsewhere whether those terms shall 
include interest.
    \230\ SoundExchange complained that Pandora ``sneaked'' in these 
changes. The record did not support SoundExchange's allegation. 
Pandora included its request for this regulatory change twice--once 
with its written rebuttal statement and again with its proposed 
findings of fact and conclusions of law. Pandora First Amended Rates 
and Terms (Feb. 22, 2015) (submitted concurrently with Pandora 
Written Rebuttal Statement); Pandora Second Amended Rates and Terms 
at 3, 13 (Jun. 24, 2015) (submitted concurrently with Pandora PFF/
PCL).
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    The legislative emphasis in the Act on voluntary, negotiated 
settlements, should, without clear, contrary evidence or authority, 
extend to permitting agreement regarding the timing for account 
reconciliation. SoundExchange failed to show that permission to resolve 
a conflict by agreement is without evidentiary support or contrary to 
any legal requirements in the Act. The Judges did not err in adding 
this provision to the revised regulations. However, the regulatory 
language the Judges adopted might be construed as requiring, rather 
than permitting SoundExchange and Licensees to agree on acceptable 
terms of payment. Accordingly, the Judges clarified section 380.6(g).
b. Recoupment of Overpayment
    The parties raised the issue of underpayment collection and 
overpayment recoupment (with interest) in the context of monthly 
royalty deposits. A periodic audit may also reveal underpayments and 
overpayments. SoundExchange objected to new language in section 
380.6(g) that gives licensees a credit, with interest, for overpayments 
that are revealed in an audit, arguing that the provision is 
inconsistent with the Judges' rejection of a similar proposal by the 
services in connection with adjustments based on revised Statements of 
Account. Rehearing Motion at 10. In the then-extant regulations, the 
provisions regarding audits and audit findings did not address the 
question of financial adjustment,\231\ either restitution for 
underpayment or recoupment of overpayment. In this proceeding, the 
Services introduced evidence of the practice of ``truing'' accounts. 
See e.g., SX Ex. 33 at 18 (] 4(c) of document) (Licensee to make 
immediate restitution of any underpayment discovered by audit), IHM Ex. 
3351 at 11 (] 7(b), p. 10 of document) (Licensee may withhold royalties 
prospectively in certain circumstances), IHM Ex. 3340 at 3 (] 1(b), p. 
2 of document) (same). Reconciliation of accounts should be no less a 
practice in the context of statutory licensing. See 17 U.S.C. 
114(f)(2)(B)(II) (in establishing terms, Judges may consider 
``comparable circumstances under voluntary license agreements'').
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    \231\ The only reference to a financial issue in the current 
audit regulations relates to restitution of an underpayment and 
allocation of the cost of the audit in the event the auditor finds 
an underpayment discrepancy of 10% or more. See, e.g. 37 CFR 
380.6(g), 380.7(g). No regulation addresses underpayment of less 
than 10% or overpayment at any amount.
---------------------------------------------------------------------------

    The Licensees participating in this proceeding proposed an open-
ended term that would permit them to amend SOAs and make concomitant 
financial adjustments (with interest). The Judges rejected this 
proposal because of the open-ended nature of the proposal, which could 
result in an excessive administrative burden on SoundExchange. The 
Judges concluded, rather, to allocate the burden of accuracy in 
reporting to the Licensees.
    In allocating that administrative burden, however, the Judges were 
not opining on the propriety of or need for a balancing of accounts 
after an audit. SoundExchange may audit Licensees annually, but the 
period audited may be up to three years. No party offered evidence of 
past audit practices or results. The Judges were unaware whether any 
audit findings had ever resulted in cost-shifting, for example, let 
alone what remedies, if any, the parties had employed to reconcile 
under- or over-payments. Further, a sampling of direct license 
agreements did not reveal a standard regarding recoupment of 
overpayments detected by audit.
    Nonetheless, even if directly-contracting parties negotiated 
reciprocal reconciliation of payments in any circumstance, the 
Collective is in a different business posture than its members making 
direct license deals. As SoundExchange pointed out, it is a non-profit 
organization that makes distributions directly to a multiplicity of 
artists and record companies from each royalty deposit. SoundExchange 
is not in the same position that an individual Licensor might be with 
regard to management of its funds.
    The Judges thus adopted for audit findings the same rationale as 
that applicable to Statements of Account: The burden of accurate 
reporting and payment is on the Licensee. Accordingly, the Judges' 
regulations continue to require immediate restitution in the case of 
underpayment, but no right of recoupment for overpayment. As with any 
untimely payment, a Licensee that is obligated to remedy an 
underpayment is liable to pay reasonable interest thereon.
4. Other Audit Related Proposals
a. Notice and Cure
    The NAB proposed adding a notice and cure provision to apply in 
case of breach because it is customary in contracts and is included in 
some of the agreements in evidence. SoundExchange wanted the option to 
use informal methods of dealing with breach, but the NAB argued this 
provision would not preclude such efforts; it would only be required in 
case of a material breach that SoundExchange planned to assert. Such a 
provision is not necessary merely because it is customary, and informal 
or formal methods of notice are always available to the parties. 
Therefore, the Judges did not adopt this proposed change.
b. Completion of Audit Within Six Months
    The NAB and NRBNMLC proposed augmenting the audit notice provision 
with what they termed a reasonable deadline for completion of audits, 
arguing the potential for abuse and the burden that lengthy audits 
place on Broadcasters. They point to comments in a rulemaking 
proceeding regarding the burden. SoundExchange argues that the length 
of an audit is in the control of the services more than of the auditor 
and that the NAB and NRBNMLC point to no such provisions in private 
agreements. The comments in the rulemaking procedure are not evidence 
in this proceeding. What is reasonable is the ultimate finding of fact. 
The parties submitted no evidence on what would be a reasonable time 
within which to complete an audit. The Judges do not adopt this 
proposal.

[[Page 26403]]

G. Section 380.7--Definitions \232\
---------------------------------------------------------------------------

    \232\ The Judges included two sections numbered 380.6 in the 
initial iteration of the regulatory language, one of which was the 
definitions section. The Judges corrected that error and relabeled 
the definitions section Sec.  380.7.
---------------------------------------------------------------------------

1. Definition of Aggregate Tuning Hours (ATH)
    The NAB and NRBNMLC proposed to redefine ATH to allow for a 
reduction in reported ATH for broadcast time devoted to talk radio. 
SoundExchange countered that NRBNMLC provided no evidence to justify a 
reduction different from the one established (and used) by NPR 
stations. SoundExchange pointed out that all the rates would have to be 
recalculated if the basic assumption regarding ATH is changed at this 
point. The Judges agreed. If the definition changed, the threshold 
would need to change as well, and there was no basis in the record for 
making those changes. The Judges did not adopt this change.
2. Definition of Broadcast Retransmission
    The NAB and iHeart proposed a change in the definition of broadcast 
retransmission (simulcast) to cover anything that is at least 51% 
identical to its antecedent terrestrial broadcast. This proposal was a 
companion proposal to the NAB's proposal of separate royalty rates for 
simulcasters. The Judges declined to establish separate rates for 
simulcasters and therefore did not include a definition of ``broadcast 
retransmission'' in the new regulations.
3. Definition of Broadcaster To Include ``Affiliate of''
    The NAB and NRBNMLC proposed to change the definition of 
Broadcaster, but did not provide a reason for the change. The Judges 
determined not to establish separate royalty rates for simulcasts by 
over-the-air broadcasters, obviating the need for a definition of 
``broadcaster'' in the regulations. The Judges did not, therefore, 
adopt this proposed change.
4. Definition of Commercial Webcaster
    In the Rehearing context, SoundExchange asked the Judges to change 
the definition of ``Commercial Webcaster.'' Motion at 10. As written in 
the original ``Exhibit A'' to the Determination, the definition of 
Commercial Webcaster excluded ``an Educational Webcaster,\233\ a 
Noncommercial Webcaster, or Public Broadcasting Entities . . . .'' 
SoundExchange sought to change the phrase ``Public Broadcasting 
Entities'' to ``Covered Entity under Subpart D'' to conform the 
terminology with that adopted in Subpart D of Part 380, pursuant to the 
settlement SoundExchange reached with The Corporation for Public 
Broadcasting (CPB) and National Public Radio (NPR). By its terms, the 
CPB/NPR settlement is by and between SoundExchange on the one hand and, 
on the other hand, NPR and CPB, on behalf of themselves and on behalf 
of American Public Media, Public Radio International, and certain 
public radio stations, together designated the Covered Entities.
---------------------------------------------------------------------------

    \233\ The Judges noted that the reference to Educational 
Webcaster in this definition was misplaced and therefore removed it.
---------------------------------------------------------------------------

    No participant in the hearing self-identified as a public 
broadcasting entity. Presumably, if there were an entity satisfying the 
statutory definition of a public broadcaster that was excluded by 
agreement from the settlement memorialized in Subpart D of the revamped 
regulations, the excluded entity would be treated as a noncommercial 
webcaster or a noncommercial educational webcaster, as the case may 
be.\234\ As the Judges did not define ``public broadcaster'' in this 
iteration of their regulations, however, the request from SoundExchange 
to clarify the reference was well taken.
---------------------------------------------------------------------------

    \234\ Under section 118 of the Act, a ``public broadcasting 
entity'' means a noncommercial educational webcaster as defined in 
47 U.S.C. 397, viz., ``[CPB], any licensee or permittee of a public 
broadcast station, or any nonprofit institution engaged primarily in 
the production, acquisition, distribution, or dissemination of 
educational and cultural television or radio programs.'' Not all 
noncommercial webcasters are public broadcasters. Not all 
educational webcasters are public broadcasters. The appellation 
``public broadcaster'' appears to be reserved to those stations that 
receive funding by or through the CPB.
---------------------------------------------------------------------------

    The Judges have added a definition of ``public broadcaster'' to 
section 380.7, cross-referencing Subpart D.
5. Definition of Performance
    In the current regulations, a ``performance'' is defined as ``each 
instance in which any portion of a sound recording is publicly 
performed to a listener . . . .'' See, e.g., 37 CFR 380.2. The Services 
proposed various changes to the definition of performance. Parties can 
and do alter the definition of ``performance'' and change other DMCA 
provisions in directly negotiated licenses. The Judges cannot, however, 
make regulations that are contrary to the requirements of the Act.
    Pandora sought to add ``in the United States'' to the definition. 
The NAB and NRBNMLC asked for an alternate parenthetical description 
and a reference to the section in the Copyright Act regarding 
performances that do not require a license. More substantively, the NAB 
and NRBNMLC also added two exclusions to the definition, one regarding 
performances of very short duration and one very technical one 
regarding second connections from the same IP address. SoundExchange 
argued that rights owners should be compensated for all uses of their 
works, and thus that services should pay for performances even if they 
are of brief duration or the service deems them to be ``skips.'' 
SoundExchange also pointed out that the proposed rates were calculated 
based on the current statutory definition of ``performance'' and that 
any narrowing of the definition would require adjustments to the 
proposals. The second exclusion is not necessary because 
SoundExchange's witness, Mr. Bender, agreed that reconnections are not 
performances under the current regulations, which specify that a 
``performance'' requires a listener.
    The definition of performance in the regulations has long been 
established. The NAB and NRBNMLC argued that performances of very short 
duration are of no value to the listener or the service, and they 
pointed out that listeners cannot skip songs on their services. The 
Judges agreed that performance as it has been defined should continue 
to apply. The Judges did not adopt these changes.
    In its Supplement, SoundExchange objected to the Judges' 
``linguistic changes'' to the definition of ``performance'' in section 
380.7. Supplement at 5. The Judges accepted SoundExchange's concern 
that the new language may harbor an ambiguity. No party objected to 
SoundExchange's request for modification of the definition. The Judges 
made the requested modification.
6. Definition of Qualified Auditor
    SoundExchange proposed that the regulations allow non-CPAs to 
perform audits if they have the requisite industry-specific expertise, 
arguing that it is difficult to find CPAs with the needed expertise and 
that other actors in the market allow content owners to audit royalty 
payments. The NAB and NRBNMLC countered with the argument that CPAs 
inspire confidence in the audit results because of the standards of 
their profession and that they can rely on experts in the industry to 
assist them if necessary. SoundExchange had argued in past proceedings 
for a change to allow in-house auditors to perform audits. The Judges 
had rejected that change. Final Rule and Order, Docket No. 2005-1 CRB 
DTRA (``Web II''), 72 FR 24084, 24109 (May 1, 2007). For the same 
reasons,

[[Page 26404]]

they did not adopt in this proceeding a change to the requirement that 
the auditor be a CPA. The Judges further inserted the qualifier 
``independent'' into the definition of ``Qualified Auditor'' for the 
sake of regulatory efficiency. The Judges did not adopt SoundExchange's 
proposed change.
    The Judges did, however, adopt language proposed by the NAB and 
NRBNMLC concerting the licensing of an auditor. In its Rehearing 
Motion, SoundExchange objected to the addition of a requirement that a 
Qualified Auditor be licensed in the jurisdiction in which it conducts 
the audit. Motion at 8-9. The NAB had requested this additional 
requirement to qualify an auditor as part of its proposed terms. NAB 
Proposed Rates and Terms at 3 (Tab B to NAB CWDS Vol. 1). SoundExchange 
asserted that the additional jurisdictional licensure requirement was 
not supported by the record. This requirement provides assurance that 
the auditor will be accountable and amenable to local governance in the 
jurisdiction in which it operates. Differences in ethical standards and 
sanctions for CPAs among jurisdictions might be small, but the 
requirement that the auditor submit itself to the jurisdiction of the 
local CPA governing bodies and local courts is significant. The NAB's 
suggestion is supported by the testimony of Professor Roman Weil and, 
therefore, was not without support in the record. See Weil WRT at 11-
13. The Judges rejected SoundExchange's objection.

H. Section 380.10 (Subpart B)--Royalty Fees for the Public Performance 
of Sound Recordings and the Making of Ephemeral Recordings

1. Minimum Fee--Sec.  380.10(b)
    The NAB proposed a revision to the minimum fee provision that 
removed fees for individual channels, leaving only fees for individual 
stations. SoundExchange argued that this is not necessary because of 
the annual cap on total amount of minimum fees that any licensee must 
pay; that fees would no longer be in proportion to SoundExchange's 
costs; and that stations would game the system by streaming on multiple 
channels in order to reduce fees. The NAB explained that its rate 
proposal and terms applied only to stations that simulcast and that 
side channels would have different rates and terms. According to the 
NAB, this proposed change was a ``conforming change'' that presumably 
would bring this term in line with the NAB's proposed rate for 
simulcasters. The Judges did not set a separate rate for simulcasters 
and therefore did not adopt the proposed revision.
2. Annual Royalty Fee Adjustment--Sec.  380.10(c)
    While the Judges rejected SoundExchange's objections to the royalty 
fee adjustment adopted in the Determination, the Judges acknowledged 
that the regulation should be clarified so that, in rounding to the 
nearest fourth decimal place, it is not understood to create a 
meaningful deviation from the unrounded real rate. Accordingly the 
Judges adopted a change to the regulation providing for annual royalty 
fee adjustment in order to clarify the Judges' intent with regard to, 
and provide examples of, calculating the indexed increase, if any.
3. Third Party Programming
    The NAB proposed a waiver of census reporting on any material that 
is transmitted by a simulcaster that is programmed by a third party, 
i.e., not the station owner/operator whose broadcasts are 
retransmitted. The NAB proposed estimating ATH for third party 
programming because the stations are unable to get the necessary data 
from the program originators. SoundExchange argued that some 
broadcasters use a lot of third party material and that they should be 
required to get that data in order to make accurate reporting to 
SoundExchange. If broadcasters use third party programming, 
SoundExchange should not have to bear the risk of inaccurate reporting. 
In addition, the broadcaster is in the best position to incorporate 
costs of census reporting into their negotiated payments with the 
third-party programmers. The Judges did not adopt this change.

I. Miscellaneous--Proposed Relief From Reporting Requirement

    The NAB and NRBNMLC proposed that the regulation regarding 
distribution of royalties provide relief from reporting requirements 
for small broadcasters and those noncommercial webcasters that are 
``exempt from the report of use requirements contained in Sec.  
370.4''. NAB Proposed Terms at 6; NRBNMLC Amended Proposed Rates and 
Terms at 6. This is an argument the NAB and NRBNMLC make in the pending 
rulemaking proceeding and did not make in this proceeding other than to 
add the language to their proposed terms. SoundExchange's response is 
lodged in the rulemaking proceeding. See Docket No. 14-CRB-0005 (RM). 
The forum for that request is the rulemaking, not this proceeding. The 
Judges did not adopt these proposals.

IX. Royalty Rates Determined by the Judges

A. Annual Rates and Price Level Adjustments

    The Judges will set statutory rates for the year 2016. For the 
years 2017 through 2020, the rates shall be adjusted to reflect any 
inflation or deflation, as measured by changes in a particular Consumer 
Price Index (the CPI-U) announced by the Bureau of Labor Statistics 
(BLS), in November of the immediately preceding year, as described in 
the new regulations set forth in this determination. In this regard, 
the Judges concur with Dr. Shapiro, who testified that a regulatory 
provision requiring an annual price level adjustment is preferable to 
an implicit or explicit prediction of future inflation (or deflation). 
5/19/15 Tr. 4608-10 (Shapiro).
    The Judges shall also adjust any effective benchmark rate on which 
they rely in this proceeding to reflect inflation (or deflation) as 
measured by the CPI-U in the calendar years between the last calendar 
year in which the data was collected for the benchmark and 2016, as 
reflected in the applicable November announcement by the BLS.

B. Commercial Rates

1. Commercial Subscription Rates
    Based on the analysis in this determination, the Judges shall set 
two separate rates for commercial noninteractive webcasting. One rate 
shall apply to performances on subscription-based commercial 
noninteractive services. A separate rate shall apply to performances on 
nonsubscription (advertising-supported free-to-the-listener) services.
    The Judges have identified two usable benchmark rates for 
commercial noninteractive subscription services for 2016.
    The first is the steering-adjusted rate derived from the benchmark 
developed by Dr. Rubinfeld on behalf of SoundExchange. Dr. Rubinfeld 
established a subscription-based benchmark rate of $0.002376. SX Ex. 59 
(Rubinfeld CWDT Ex. 16(a); see also SX PFF ]] 344; 393.
    As noted in this determination, the Judges apply a steering 
adjustment to this benchmark rate to reflect the rate-reducing effect 
of steering as indicated in the Pandora/Merlin Agreement.\235\ In the 
present case, the steering adjustment

[[Page 26405]]

derived from the evidence is 12%, calculated as follows:
---------------------------------------------------------------------------

    \235\ Dr. Shapiro's rate data covered a period through the third 
quarter of 2014. Shapiro WDT at 32.
---------------------------------------------------------------------------

    (1) The unsteered subscription service rate for 2015 in the 
Pandora/Merlin Agreement is $0.[REDACTED]. See Pan Ex. 5014, ] 
3(a)(ii).
    (2) Pandora's effective rate at the [REDACTED]% (low end) of 
steering for 2016, as derived by Dr. Shapiro, is $0.002238. See Shapiro 
WDT at 35.
    (3) Dr. Shapiro's $0.002238 steered rate for 2016 includes a 2.2% 
anticipated inflation factor that the Judges do not apply. See id.
    (4) Backing out that 2.2% inflation factor indicates a 2015 steered 
rate of $0.002189 (i.e., $0.002238/1.022).
    (5) Adjusting for the actual inflation in 2015 of 0.5% (announced 
by the BLS on December 15, 2015 \236\) increases the above steered rate 
marginally to $0.002194, which the Judges round to $0.0022.
---------------------------------------------------------------------------

    \236\ See Bureau of Labor Statistics, Economic News Release 
(Dec. 15, 2015) (available at bls.gov).
---------------------------------------------------------------------------

    (6) The unsteered 2015 subscription service rate of $0.[REDACTED] 
(step 1) minus the steered rate of $0.0022 equals $0.0003.
    (7) The percentage change in the subscription service rate for 2015 
is 12% (i.e., $0.0003/$0.[REDACTED]).
    Accordingly, Dr. Rubinfeld's proposed benchmark rate of $0.002376 
must be reduced by 12% to reflect an effectively competitive rate. A 
reduction of 12% brings that subscription service rate to $0.0021 
(rounded).
    However, Dr. Rubinfeld's data covered the period 2011 through 2014. 
As noted supra, the Judges reject Dr. Rubinfeld's linear $0.0008 year-
over-year increase. Instead, the Judges apply the CPI-U inflation 
adjustment of 0.5% to reflect the inflation announced by the BLS on 
December 15, 2015. That adjustment raises the rate derived from Dr. 
Rubinfeld's proposed steering-adjusted benchmark marginally, to 
$0.0021105, which the Judges round to $0.0021.
    The second steering-based subscription rate that the Judges credit 
is the rate in the Pandora/Merlin Agreement, which already incorporates 
a steering adjustment. That proposed benchmark rate (at 12.5% steering) 
is $0.002238, rounded to $0.0022. See Shapiro WDT at 35.
    Thus (and perhaps not surprisingly), the steering and inflation-
adjusted subscription rates under both proposed benchmarks establish an 
extremely tight zone of reasonableness, separated by only $0.0001.\237\
---------------------------------------------------------------------------

    \237\ From an economic perspective, these rates suggest that a 
hypothetical willing seller would have a WTA of $0.0021 in this 
subscription market, and a hypothetical noninteractive service would 
have a WTP of $0.0022. In such a hypothetical market, the parties 
could consummate a contract at any price point between $0.0021 and 
$0.0022 per play.
---------------------------------------------------------------------------

    Based on the foregoing, the Judges determine, in their discretion, 
that the appropriate per-play rate for royalties paid by licensees to 
licensors in the noninteractive subscription market under Sec.  114 for 
the year 2016 is $0.0022. As discussed supra, the rate for the 
remainder of the statutory term--2017-2020--shall reflect the foregoing 
rate of $0.0022 per performance, as adjusted annually upward or 
downward to reflect changes in the CPI-U over the preceding year, 
pursuant to the applicable regulations.
2. Commercial Nonsubscription Rates
    The Judges have identified two usable benchmark rates for 
commercial noninteractive nonsubscription services for 2016. First, the 
Judges have identified the adjusted, effective average per-play rate 
derived from the iHeart/Warner Agreement. That rate, as developed, 
supra, is $0.[REDACTED] per play.
    Second, the Judges have identified the effective per-play rate in 
the Pandora/Merlin Agreement (with steering at [REDACTED]%) as a usable 
benchmark. The effective benchmark rate from that agreement is 
$0.[REDACTED].
    Thus, the Judges identify a zone of reasonableness in this market 
segment as well. That is, the zone embraces a low effective rate of 
$0.[REDACTED] and high effective rate of $0.[REDACTED]. As noted 
earlier in this determination, it would be improper based on the 
present record, to set separate rates for Indies and Majors.
    However, as the Judges have also explained, supra, a fundamental 
difference between these two benchmarks is that the iHeart/Warner 
benchmark reflects an effective rate between a Major and a 
noninteractive service, whereas the Pandora/Merlin Agreement reflects 
an effective rate between Indies and a noninteractive service. The 
evidence at the hearing indicated that the Majors' sound recordings 
comprise 65% of noninteractive streams, and the Indies' sound 
recordings comprise 35% of noninteractive streams. See, e.g., SX Ex. 
269 at 73.
    Based on the foregoing factors, the Judges find that the 
appropriate statutory rate within this zone of rates, for 
nonsubscription, ad-supported (free-to-the-listener) services is 
$0.0017 per performance, as adjusted annually upward or downward to 
reflect changes in the Consumer Price Index over the preceding year, as 
set forth in the regulations.
3. Ephemeral Recording Rate
    In accordance with the Judges' analysis supra, section VII, the 
royalty rate for ephemeral recordings under 17 U.S.C. 112(e) applicable 
to commercial webcasters shall be included within, and constitute 5% of 
the royalties such webcasters pay for performances of sound recordings 
under Sec.  114 of the Act.

C. The Noncommercial Rates

1. NPR-CPB/SoundExchange Settlement
    The Judges have previously adopted the settlement agreement between 
SoundExchange, on one hand, and National Public Radio and the 
Corporation for Public Broadcasting, on the other, for simulcast 
transmissions by public radio stations. See Digital Performance Right 
in Sound Recordings and Ephemeral Recordings, Final Rule, 80 FR 59588 
(Oct. 2, 2015). The rates and terms governing transmissions and 
ephemeral recordings by the entities that are covered by that 
settlement agreement for the period 2016-2020 shall be as set forth in 
the agreement and codified at 37 CFR 380.30-380.37 (subpart D).
2. CBI/SoundExchange Settlement
    The Judges have previously adopted the settlement agreement between 
SoundExchange, and College Broadcasters, Inc., for transmissions by 
Noncommercial Educational Webcasters (NEWs). See Digital Performance 
Right in Sound Recordings and Ephemeral Recordings, Final Rule, 80 FR 
558201 (Sep. 28, 2015). The rates and terms governing transmissions and 
ephemeral recordings by NEWs for the period 2016-2020 shall be as set 
forth in the agreement and codified at 37 CFR 380.20-380.27 (subpart 
C).
3. All Other Noncommercial Webcasters
    In accordance with the Judges' analysis supra, section V, the 
royalty rate for webcast transmissions by all other noncommercial 
webcasters during the 2016-2020 rate period shall be $500 annually for 
each station or channel for all webcast transmissions totaling not more 
than 159,140 Aggregate Tuning Hours (ATH) in a month, for each year in 
the rate term. In addition, if, in any month, a noncommercial webcaster 
makes total transmissions in excess of 159,140 ATH on any individual 
channel or station, the noncommercial webcaster shall pay per-
performance royalty fees for the transmissions it makes on that channel 
or station in excess of 159,140 ATH at the rate of $0.0017 per 
performance, as adjusted annually

[[Page 26406]]

upward or downward to reflect changes in the Consumer Price Index over 
the preceding year.
4. Ephemeral Recording Rate
    The royalty rate for ephemeral recordings under 17 U.S.C. 112(e) 
applicable to noncommercial webcasters shall be the same as the rate 
applicable to commercial webcasters; that is, royalties for ephemeral 
recordings shall be included within, and constitute 5% of the royalties 
such webcasters pay for performances of sound recordings under Sec.  
114 of the Act.

X. Conclusion

    On the basis of the foregoing analysis and full consideration of 
the record, the Judges propound the rates and terms described in this 
Determination. The Register of Copyrights may review the Judges' 
Determination for legal error in resolving a material issue of 
substantive copyright law. The Librarian shall cause the Judges' 
Determination, and any correction thereto by the Register, to be 
published in the Federal Register no later than the conclusion of the 
60-day review period.
    So ordered.

    Issue Date: March 4, 2016.

Suzanne M. Barnett,
Chief Copyright Royalty Judge

Jesse M. Feder,
Copyright Royalty Judge

David R. Strickler,
Copyright Royalty Judge

List of Subjects in 37 CFR Part 380

    Copyright; sound recordings.

    For the reasons set forth in the preamble, amend part 380 of title 
37 of the Code of Federal Regulations as follows:

PART 380--RATES AND TERMS FOR TRANSMISSIONS BY ELIGIBLE 
NONSUBSCRIPTION SERVICES AND NEW SUBSCRIPTION SERVICES AND FOR THE 
MAKING OF EPHEMERAL REPRODUCTIONS TO FACILITATE THOSE TRANSMISSIONS

0
1. The authority citation for part 380 continues to read as follows:

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

0
2. Revise the title of Part 380 to read as set forth above.

0
3. Revise Subpart A to read as follows:

Subpart A--Regulations Of General Application

Sec.
380.1 Scope and compliance.
380.2 Making payment of royalty fees.
380.3 Delivering statements of account.
380.4 Distributing royalty fees.
380.5 Handling Confidential Information.
380.6 Auditing payments and distributions.
380.7 Definitions.


Sec.  380.1  Scope and compliance.

     (a) Scope. Subparts A and B of this part codify rates and terms of 
royalty payments for the public performance of sound recordings in 
certain digital transmissions by certain Licensees in accordance with 
the applicable provisions of 17 U.S.C. 114 and for the making of 
Ephemeral Recordings by those Licensees in accordance with the 
provisions of 17 U.S.C. 112(e), during the period January 1, 2016, 
through December 31, 2020.
    (b) Limited application of terms and definitions. The terms and 
definitions in Subpart A apply only to Subpart B, except as expressly 
adopted and applied in subpart C or subpart D of this part.
    (c) Legal compliance. Licensees relying upon the statutory licenses 
set forth in 17 U.S.C. 112(e) and 114 must comply with the requirements 
of this part 380 and any other applicable regulations.
    (d) Voluntary agreements. Notwithstanding the royalty rates and 
terms established in any subparts of this part 380, the rates and terms 
of any license agreements entered into by Copyright Owners and 
Licensees may apply in lieu of these rates and terms.


Sec.  380.2  Making payment of royalty fees.

    (a) Payment to the Collective. A Licensee must make the royalty 
payments due under subpart B to SoundExchange, Inc., which is the 
Collective designated by the Copyright Royalty Board to collect and 
distribute royalties under this part 380.
    (b) Monthly payments. A Licensee must make royalty payments on a 
monthly basis. Payments are due on or before the 45th day after the end 
of the month in which the Licensee made Eligible Transmissions.
    (c) Minimum payments. A Licensee must make any minimum annual 
payments due under Subpart B by January 31 of the applicable license 
year. A Licensee that as of January 31 of any year has not made any 
eligible nonsubscription transmissions, noninteractive digital audio 
transmissions as part of a new subscription service, or Ephemeral 
Recordings pursuant to the licenses in 17 U.S.C. 114 and/or 17 U.S.C. 
112(e), but that begins making such transmissions after that date must 
make any payment due by the 45th day after the end of the month in 
which the Licensee commences making such transmissions.
    (d) Late fees. A Licensee must pay a late fee for each payment and 
each Statement of Account that the Collective receives after the due 
date. The late fee is 1.5% (or the highest lawful rate, whichever is 
lower) of the late payment amount per month. The late fee for a late 
Statement of Account is 1.5% of the payment amount associated with the 
Statement of Account. Late fees accrue from the due date until the date 
that the Collective receives the late payment or late Statement of 
Account.
    (1) Waiver of late fees. The Collective may waive or lower late 
fees for immaterial or inadvertent failures of a Licensee to make a 
timely payment or submit a timely Statement of Account.
    (2) Notice regarding noncompliant Statements of Account. If it is 
reasonably evident to the Collective that a timely-provided Statement 
of Account is materially noncompliant, the Collective must notify the 
Licensee within 90 days of discovery of the noncompliance.


Sec.  380.3  Delivering statements of account.

    (a) Statements of Account. Any payment due under this Part 380 must 
be accompanied by a corresponding Statement of Account that must 
contain the following information:
    (1) Such information as is necessary to calculate the accompanying 
royalty payment;
    (2) The name, address, business title, telephone number, facsimile 
number (if any), electronic mail address (if any) and other contact 
information of the person to be contacted for information or questions 
concerning the content of the Statement of Account;
    (3) The signature of:
    (i) The Licensee or a duly authorized agent of Licensee;
    (ii) A partner or delegate if the Licensee is a partnership; or
    (iii) An officer of the corporation if the Licensee is a 
corporation.
    (4) The printed or typewritten name of the person signing the 
Statement of Account;
    (5) If the Licensee is a partnership or corporation, the title or 
official position held in the partnership or corporation by the person 
signing the Statement of Account;
    (6) A certification of the capacity of the person signing;
    (7) The date of signature; and
    (8) An attestation to the following effect:

    I, the undersigned owner/officer/partner/agent of the Licensee 
have examined this Statement of Account and hereby state that it is 
true, accurate, and complete to my knowledge after reasonable due 
diligence and that it fairly presents, in all material respects,

[[Page 26407]]

the liabilities of the Licensee pursuant to 17 U.S.C. 112(e) and 114 
and applicable regulations adopted under those sections.

    (b) Certification. Licensee's Chief Financial Officer or, if 
Licensee does not have a Chief Financial Officer, a person authorized 
to sign Statements of Account for the Licensee must submit a signed 
certification on an annual basis attesting that Licensee's royalty 
statements for the prior year represent a true and accurate 
determination of the royalties due and that any method of allocation 
employed by Licensee was applied in good faith and in accordance with 
U.S. GAAP.


Sec.  380.4  Distributing royalty fees.

    (a) Distribution of royalties. (1) The Collective must promptly 
distribute royalties received from Licensees to Copyright Owners and 
Performers that are entitled thereto, or to their designated agents. 
The Collective shall only be responsible for making distributions to 
those who provide the Collective with information as is necessary to 
identify and pay the correct recipient. The Collective must distribute 
royalties on a basis that values all performances by a Licensee equally 
based upon the information provided under the Reports of Use 
requirements for Licensees pursuant to Sec.  370.4 of this chapter and 
this subpart.
    (2) The Collective must use its best efforts to identify and locate 
copyright owners and featured artists in order to distribute royalties 
payable to them under Sec.  112(e) or 114(d)(2) of title 17, United 
States Code, or both. Such efforts must include, but not be limited to, 
searches in Copyright Office public records and published directories 
of sound recording copyright owners.
    (b) Unclaimed funds. If the Collective is unable to identify or 
locate a Copyright Owner or Performer who is entitled to receive a 
royalty distribution under this part 380, the Collective must retain 
the required payment in a segregated trust account for a period of 
three years from the date of the first distribution of royalties from 
the relevant payment by a Licensee. No claim to distribution shall be 
valid after the expiration of the three-year period. After expiration 
of this period, the Collective must handle unclaimed funds in 
accordance with applicable federal, state, or common law.
    (c) Retention of records. Licensees and the Collective shall keep 
books and records relating to payments and distributions of royalties 
for a period of not less than the prior three calendar years.
    (d) Designation of the Collective. (1) The Judges designate 
SoundExchange, Inc., as the Collective to receive Statements of Account 
and royalty payments from Licensees and to distribute royalty payments 
to each Copyright Owner and Performer (or their respective designated 
agents) entitled to receive royalties under 17 U.S.C. 112(e) or 114(g).
    (2) If SoundExchange, Inc. should dissolve or cease to be governed 
by a board consisting of equal numbers of representatives of Copyright 
Owners and Performers, then it shall be replaced for the applicable 
royalty term by a successor Collective according to the following 
procedure:
    (i) The nine Copyright Owner representatives and the nine Performer 
representatives on the SoundExchange board as of the last day preceding 
SoundExchange's cessation or dissolution shall vote by a majority to 
recommend that the Copyright Royalty Judges designate a successor and 
must file a petition with the Copyright Royalty Judges requesting that 
the Judges designate the named successor and setting forth the reasons 
therefor.
    (ii) Within 30 days of receiving the petition, the Copyright 
Royalty Judges must issue an order designating the recommended 
Collective, unless the Judges find good cause not to make and publish 
the designation in the Federal Register.


Sec.  380.5  Handling Confidential Information.

    (a) Definition. For purposes of this part 380, ``Confidential 
Information'' means the Statements of Account and any information 
contained therein, including the amount of royalty payments and the 
number of Performances, and any information pertaining to the 
Statements of Account reasonably designated as confidential by the 
party submitting the statement. Confidential Information does not 
include documents or information that at the time of delivery to the 
Collective is public knowledge. The party seeking information from the 
Collective based on a claim that the information sought is a matter of 
public knowledge shall have the burden of proving to the Collective 
that the requested information is in the public domain.
    (b) Use of Confidential Information. The Collective may not use any 
Confidential Information for any purpose other than royalty collection 
and distribution and activities related directly thereto.
    (c) Disclosure of Confidential Information. The Collective shall 
limit access to Confidential Information to:
    (1) Those employees, agents, consultants, and independent 
contractors of the Collective, subject to an appropriate written 
confidentiality agreement, who are engaged in the collection and 
distribution of royalty payments hereunder and activities related 
directly thereto who require access to the Confidential Information for 
the purpose of performing their duties during the ordinary course of 
their work;
    (2) A Qualified Auditor or outside counsel who is authorized to act 
on behalf of:
    (i) The Collective with respect to verification of a Licensee's 
statement of account pursuant to this part 380; or
    (ii) A Copyright Owner or Performer with respect to the 
verification of royalty distributions pursuant to this part 380;
    (3) Copyright Owners and Performers, including their designated 
agents, whose works a Licensee used under the statutory licenses set 
forth in 17 U.S.C. 112(e) and 114 by the Licensee whose Confidential 
Information is being supplied, subject to an appropriate written 
confidentiality agreement, and including those employees, agents, 
consultants, and independent contractors of such Copyright Owners and 
Performers and their designated agents, subject to an appropriate 
written confidentiality agreement, who require access to the 
Confidential Information to perform their duties during the ordinary 
course of their work;
    (4) Attorneys and other authorized agents of parties to proceedings 
under 17 U.S.C. 8, 112, 114, acting under an appropriate protective 
order.
    (d) Safeguarding Confidential Information. The Collective and any 
person authorized to receive Confidential Information from the 
Collective must implement procedures to safeguard against unauthorized 
access to or dissemination of Confidential Information using a 
reasonable standard of care, but no less than the same degree of 
security that the recipient uses to protect its own Confidential 
Information or similarly sensitive information.


Sec.  380.6  Auditing payments and distributions.

     (a) General. This section prescribes procedures by which any 
entity entitled to receive payment or distribution of royalties may 
verify payments or distributions by auditing the payor or distributor. 
The Collective may audit a Licensee's payments of royalties to the 
Collective, and a Copyright Owner or Performer may audit the 
Collective's distributions of royalties to the owner or performer. 
Nothing in this section shall preclude a verifying entity and the payor 
or distributor from agreeing to verification methods in addition to or

[[Page 26408]]

different from those set forth in this section.
    (b) Frequency of auditing. The verifying entity may conduct an 
audit of each licensee only once a year for any or all of the prior 
three calendar years. A verifying entity may not audit records for any 
calendar year more than once.
    (c) Notice of intent to audit. The verifying entity must file with 
the Copyright Royalty Judges a notice of intent to audit the payor or 
distributor, which notice the Judges must publish in the Federal 
Register within 30 days of the filing of the notice. Simultaneously 
with the filing of the notice, the verifying entity must deliver a copy 
to the payor or distributor.
    (d) The audit. The audit must be conducted during regular business 
hours by a Qualified Auditor who is not retained on a contingency fee 
basis and is identified in the notice. The auditor shall determine the 
accuracy of royalty payments or distributions, including whether an 
underpayment or overpayment of royalties was made. An audit of books 
and records, including underlying paperwork, performed in the ordinary 
course of business according to generally accepted auditing standards 
by a Qualified Auditor, shall serve as an acceptable verification 
procedure for all parties with respect to the information that is 
within the scope of the audit.
    (e) Access to third-party records for audit purposes. The payor or 
distributor must use commercially reasonable efforts to obtain or to 
provide access to any relevant books and records maintained by third 
parties for the purpose of the audit.
    (f) Duty of auditor to consult. The auditor must produce a written 
report to the verifying entity. Before rendering the report, unless the 
auditor has a reasonable basis to suspect fraud on the part of the 
payor or distributor, the disclosure of which would, in the reasonable 
opinion of the auditor, prejudice any investigation of the suspected 
fraud, the auditor must review tentative written findings of the audit 
with the appropriate agent or employee of the payor or distributor in 
order to remedy any factual errors and clarify any issues relating to 
the audit; Provided that an appropriate agent or employee of the payor 
or distributor reasonably cooperates with the auditor to remedy 
promptly any factual error[s] or clarify any issues raised by the 
audit. The auditor must include in the written report information 
concerning the cooperation or the lack thereof of the employee or 
agent.
    (g) Audit results; underpayment or overpayment of royalties. If the 
auditor determines the payor or distributor underpaid royalties, the 
payor or distributor shall remit the amount of any underpayment 
determined by the auditor to the verifying entity, together with 
interest at the rate specified in Sec.  380.2(d). In the absence of 
mutually-agreed payment terms, which may, but need not, include 
installment payments, the payor or distributor shall remit promptly to 
the verifying entity the entire amount of the underpayment determined 
by the auditor. If the auditor determines the payor or distributor 
overpaid royalties, however, the verifying entity shall not be required 
to remit the amount of any overpayment to the payor or distributor, and 
the payor or distributor shall not seek by any means to recoup, offset, 
or take a credit for the overpayment, unless the payor or distributor 
and the verifying entity have agreed otherwise.
    (h) Paying the costs of the audit. The verifying entity must pay 
the cost of the verification procedure, unless the auditor determines 
that there was an underpayment of 10% or more, in which case the payor 
or distributor must bear the reasonable costs of the verification 
procedure, in addition to paying or distributing the amount of any 
underpayment.
    (i) Retention of audit report. The verifying party must retain the 
report of the audit for a period of not less than three years from the 
date of issuance.


Sec.  380.7  Definitions.

    Aggregate Tuning Hours (ATH) means the total hours of programming 
that the Licensee has transmitted during the relevant period to all 
listeners within the United States from all channels and stations that 
provide audio programming consisting, in whole or in part, of eligible 
nonsubscription transmissions or noninteractive digital audio 
transmissions as part of a new subscription service, less the actual 
running time of any sound recordings for which the Licensee has 
obtained direct licenses apart from 17 U.S.C. 114(d)(2) or which do not 
require a license under United States copyright law. By way of example, 
if a service transmitted one hour of programming containing 
Performances to 10 listeners, the service's ATH would equal 10 hours. 
If three minutes of that hour consisted of transmission of a directly-
licensed recording, the service's ATH would equal nine hours and 30 
minutes (three minutes times 10 listeners creates a deduction of 30 
minutes). As an additional example, if one listener listened to a 
service for 10 hours (and none of the recordings transmitted during 
that time was directly licensed), the service's ATH would equal 10 
hours.
    Collective means the collection and distribution organization that 
is designated by the Copyright Royalty Judges, and which, for the 
current rate period, is SoundExchange, Inc.
    Commercial Webcaster means a Licensee, other than a Noncommercial 
Webcaster or Public Broadcaster, that makes Ephemeral Recordings and 
eligible digital audio transmissions of sound recordings pursuant to 
the statutory licenses under 17 U.S.C. 112(e) and 114(d)(2).
    Copyright owners means sound recording copyright owners who are 
entitled to royalty payments made under Part 380 pursuant to the 
statutory licenses under 17 U.S.C. 112(e) and 114.
    Digital audio transmission has the same meaning as in 17 U.S.C. 
114(j).
    Eligible nonsubscription transmission has the same meaning as in 17 
U.S.C. 114(j).
    Eligible Transmission means a subscription or nonsubscription 
transmission made by a Licensee that is subject to licensing under 17 
U.S.C. 114(d)(2) and the payment of royalties under this part.
    Ephemeral recording has the same meaning as in 17 U.S.C. 112.
    Licensee means a Commercial Webcaster, a Noncommercial Webcaster, 
or any entity operating a noninteractive Internet streaming service 
that has obtained a license under Section 112 or 114 to transmit 
eligible sound recordings.
    New subscription service has the same meaning as in 17 U.S.C. 
114(j).
    Noncommercial webcaster has the same meaning as in 17 U.S.C. 
114(f)(5)(E).
    Nonsubscription has the same meaning as in 17 U.S.C. 114(j).
    Performance means each instance in which any portion of a sound 
recording is publicly performed to a listener by means of a digital 
audio transmission (e.g., the delivery of any portion of a single track 
from a compact disc to one listener), but excludes the following:
    (1) A performance of a sound recording that does not require a 
license (e.g., a sound recording that is not copyrighted);
    (2) A performance of a sound recording for which the service has 
previously obtained a license from the Copyright Owner of such sound 
recording; and
    (3) An incidental performance that both:
    (i) Makes no more than incidental use of sound recordings 
including, but not limited to, brief musical transitions in and out of 
commercials or program

[[Page 26409]]

segments, brief performances during news, talk and sports programming, 
brief background performances during disk jockey announcements, brief 
performances during commercials of sixty seconds or less in duration, 
or brief performances during sporting or other public events; and
    (ii) Does not contain an entire sound recording, other than ambient 
music that is background at a public event, and does not feature a 
particular sound recording of more than thirty seconds (as in the case 
of a sound recording used as a theme song).
    Performers means the independent administrators identified in 17 
U.S.C. 114(g)(2)(B) and (C) and the parties identified in 17 U.S.C. 
114(g)(2)(D).
    Public broadcaster means a Covered Entity under subpart D of this 
part.
    Qualified auditor means an independent Certified Public Accountant 
licensed in the jurisdiction where it seeks to conduct a verification.
    Transmission has the same meaning as in 17 U.S.C. 114(j).

0
4. Revise subpart B, consisting of Sec.  380.10, to read as follows:

Subpart B--Commercial Webcasters and Noncommercial Webcasters


Sec.  380.10  Royalty fees for the public performance of sound 
recordings and the making of ephemeral recordings.

    (a) Royalty fees. For the year 2016, Licensees must pay royalty 
fees for all Eligible Transmissions of sound recordings at the 
following rates:
    (1) Commercial Webcasters: $0.0022 per performance for subscription 
services and $0.0017 per performance for nonsubscription services.
    (2) Noncommercial webcasters. $500 per year for each channel or 
station and $0.0017 per performance for all digital audio transmissions 
in excess of 159,140 ATH in a month on a channel or station.
    (b) Minimum fee. Licensees must pay the Collective a minimum fee of 
$500 each year for each channel or station. The Collective must apply 
the fee to the Licensee's account as credit towards any additional 
royalty fees that Licensees may incur in the same year. The fee is 
payable for each individual channel and each individual station 
maintained or operated by the Licensee and making Eligible 
Transmissions during each calendar year or part of a calendar year 
during which it is a Licensee. The maximum aggregate minimum fee in any 
calendar year that a Commercial Webcaster must pay is $50,000. The 
minimum fee is nonrefundable.
    (c) Annual royalty fee adjustment. The Copyright Royalty Judges 
shall adjust the royalty fees each year to reflect any changes 
occurring in the cost of living as determined by the most recent 
Consumer Price Index (for all consumers and for all items) (CPI-U) 
published by the Secretary of Labor before December 1 of the preceding 
year. The adjusted rate shall be rounded to the nearest fourth decimal 
place. To account more accurately for cumulative changes in the CPI-U 
over the rate period, the calculation of the rate for each year shall 
be cumulative based on a calculation of the percentage increase in the 
CPI-U from the CPI-U published in November, 2015 (237.336), according 
to the formula (1 + (Cy - 237.336)/237.336) x R2016, where 
Cy is the CPI-U published by the Secretary of Labor before 
December 1 of the preceding year, and R2016 is the royalty 
rate for 2016 (i.e., $0.0022 per subscription performance or $0.0017 
per nonsubscription performance). By way of example, if the CPI-U 
published in November 2016 is 242.083, the adjusted rate for 
nonsubscription services in 2017 will be computed as (1 + (242.083 - 
237.336)/237.336) x $0.0017 and will equal $0.00173 ($0.0017 when 
rounded to the nearest fourth decimal place). If the CPI-U published in 
November 2017 is 249.345, the rate for nonsubscription services for 
2018 will be computed as (1 + (249.345 - 237.336)/237.336) x $0.0017 
and will equal $0.00179 ($0.0018 when rounded to the nearest fourth 
decimal place). The Judges shall publish notice of the adjusted fees in 
the Federal Register at least 25 days before January 1. The adjusted 
fees shall be effective on January 1.
    (d) Ephemeral recordings royalty fees. The fee for all Ephemeral 
Recordings is part of the total fee payable under this section and 
constitutes 5% of it. All ephemeral recordings that a Licensee makes 
which are necessary and commercially reasonable for making 
noninteractive digital transmissions are included in the 5%.
0
5. In Sec.  380.22, revise paragraphs (b)(1) through (3) and (c) to 
read as follows:


Sec.  380.22  Royalty fees for the public performance of sound 
recordings and for ephemeral recordings.

* * * * *
    (b) * * *
    (1) The Noncommercial Educational Webcaster shall, for such month 
and the remainder of the calendar year in which such month occurs, pay 
royalties in accordance, and otherwise comply, with the provisions of 
Part 380 Subparts A and B applicable to Noncommercial Webcasters;
    (2) The Minimum Fee paid by the Noncommercial Educational Webcaster 
for such calendar year will be credited to the amounts payable under 
the provisions of Part 380 Subparts A and B applicable to Noncommercial 
Webcasters; and
    (3) The Noncommercial Educational Webcaster shall, within 45 days 
after the end of each month, notify the Collective if it has made total 
transmissions in excess of 159,140 Aggregate Tuning Hours on a channel 
or station during that month; pay the Collective any amounts due under 
the provisions of Part 380 Subparts A and B applicable to Noncommercial 
Webcasters; and provide the Collective a statement of account pursuant 
to part 380, subpart A.
    (c) Royalties for other Noncommercial Educational Webcasters. A 
Noncommercial Educational Webcaster that is not eligible to pay 
royalties under paragraph (a) of this section shall pay royalties in 
accordance, and that otherwise comply, with the provisions of subparts 
A and B of this part applicable to Noncommercial Webcasters.
* * * * *

0
6. In Sec.  380.23, revise paragraph (b)(1) to read as follows:


Sec.  380.23  Terms for making payment of royalty fees and statements 
of account.

* * * * *
    (b) Designation of the Collective. (1) The Copyright Royalty Judges 
designate SoundExchange, Inc., as the Collective to receive statements 
of account and royalty payments from Noncommercial Educational 
Webcasters due under Sec.  380.22 and to distribute 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(g).
* * * * *

Subpart D--Public Broadcasters

0
7. Revise the heading of Subpart D to read as set forth above.

0
8. In Sec.  380.33, revise paragraph (b)(1) to read as follows:


Sec.  380.33  Terms for making payment of royalty fees and statements 
of account.

* * * * *

[[Page 26410]]

    (b) Designation of the Collective. (1) The Copyright Royalty Judges 
designate SoundExchange, Inc., as the Collective to receive statements 
of account and royalty payments for Covered Entities under this subpart 
and to distribute 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(g).
* * * * *

    Dated: April 19, 2016.
Suzanne M. Barnett,
Chief Copyright Royalty Judge.
Jesse M. Feder,
Copyright Royalty Judge.
David R. Strickler,
Copyright Royalty Judge.
    Approved By:
David S. Mao,
Librarian of Congress.
[FR Doc. 2016-09707 Filed 4-29-16; 8:45 am]
 BILLING CODE 1410-72-P