[Federal Register Volume 83, Number 243 (Wednesday, December 19, 2018)]
[Rules and Regulations]
[Pages 65210-65270]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-26922]



[[Page 65209]]

Vol. 83

Wednesday,

No. 243

December 19, 2018

Part II





Library of Congress





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Copyright Royalty Board





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37 CFR Part 382





Determination of Royalty Rates and Terms for Transmission of Sound 
Recordings by Satellite Radio and ``Preexisting'' Subscription Services 
(SDARS III); Final Rule

  Federal Register / Vol. 83 , No. 243 / Wednesday, December 19, 2018 / 
Rules and Regulations  

[[Page 65210]]


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LIBRARY OF CONGRESS

Copyright Royalty Board

37 CFR Part 382

[Docket No. 16-CRB-0001 SR/PSSR (2018-2022)]


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

AGENCY: Copyright Royalty Board, Library of Congress.

ACTION: Final rule and order.

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SUMMARY: The Copyright Royalty Judges announce their final 
determination of the rates and terms for the digital transmission of 
sound recordings and the reproduction of ephemeral recordings by 
preexisting subscription services and preexisting satellite digital 
audio radio services for the period beginning January 1, 2018, and 
ending on December 31, 2027.

DATES: 
    Effective Date: December 19, 2018.
    Applicability Date: The regulations apply to the license period 
beginning January 1, 2018, and ending December 31, 2027.

ADDRESSES: The final determination is posted in eCRB at https://app.crb.gov/. For access to the docket to read the final determination 
and submitted background documents, go to eCRB and search for docket 
number 16-CRB-0001 SR/PSSR (2018-2022).

FOR FURTHER INFORMATION CONTACT: Anita Blaine, CRB Program Assistant, 
by telephone at (202) 707-7658 or by email at [email protected].

SUPPLEMENTARY INFORMATION:

I. Introduction

    The purpose of the Copyright Royalty Judges (Judges) in the present 
proceeding is to determine the royalty rates and terms applicable to 
Preexisting Subscription Services (PSS) and Satellite Digital Audio 
Radio Services (SDARS) for licenses established by the Copyright Act 
(Act) to utilize copyrighted sound recordings. See 17 U.S.C. 112, 114. 
The Act requires the Judges to determine applicable rates and terms 
every five years. See 17 U.S.C. 801(b)(1), 804(b)(3)(B).
    In determining the PSS rates, the Judges considered proposals from 
both Music Choice and SoundExchange as guideposts rather than as 
benchmarks and determined a rate based upon the current statutory rate 
as adjusted to meet statutory requirements. In determining the SDARS 
rates, the Judges relied most heavily on the opportunity cost approach 
proffered by SoundExchange, but the Judges utilized opportunity cost 
survey data that they found more appropriate than the data relied on by 
SoundExchange.
    After the Judges issued the Initial Determination in this 
proceeding on December 14, 2017, both Sirius XM Radio, Inc., (Sirius 
XM), the lone SDARS, and Music Choice filed timely motions for 
rehearing. SoundExchange filed responses opposing each rehearing 
motion, and Sirius XM and Music Choice filed replies. On April 17, 
2018, the Judges ruled on the rehearing motions. See Order Granting In 
Part and Denying In Part . . . Motion[s] for Rehearing (Apr. 17, 2018). 
By this order, the Judges denied the Music Choice motion and asked for 
additional briefing on the primary issue Sirius XM raised, viz., 
whether the Judges should reduce the royalty rate for SDARS set in the 
Initial Determination to a rate not lower than 14.7% of Gross Revenues. 
Id. at 9. The parties filed briefs and responses and the Judges took 
the issue under advisement.
    On October 11, 2018, the President signed into law the Orrin G. 
Hatch-Bob Goodlatte Music Modernization Act, Public Law 115-264, 132 
Stat. 3676 (Oct. 11, 2018) (MMA). That law includes a provision 
amending section 804(b)(3)(B) of the Copyright Act (Act) to state that 
``with respect to pre-existing satellite digital audio radio services, 
the terms and rates set forth by the Copyright Royalty Judges on 
December 14, 2017, in their initial determination for the rate period 
ending on December 31, 2022, shall be in effect through December 31, 
2027, without any change based on a rehearing under section 803(c)(2) . 
. . .'' Id. sec. 103. As a consequence of this statutory provision, the 
Judges dismissed the pending rehearing as moot. See Order Dismissing 
Rehearing Proceeding (Oct. 11, 2018).
    Based upon the totality of the record, and in accordance with the 
following reasoning and analysis, the Judges determine that the 
applicable rates and terms for the period beginning January 1, 2018,\1\ 
shall be:
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    \1\ In the Judges' Initial Determination in this proceeding, 
they established rates for the period January 1, 2018 through 
December 31, 2022. Under the MMA, these rates shall remain in effect 
until December 31, 2027. See 17 U.S.C. 804(b)(3)(B) (as amended by 
the MMA). Note that all redactions in this publication were made by 
the Copyright Royalty Judges and not by the Federal Register.
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    For PSS: 7.5% of Gross Revenues, as that term is defined for PSS.
    For SDARS: 15.5% of Gross Revenues, as that term is defined for 
SDARS.

II. Background

A. Statutory Licenses

    In 1995, Congress granted to sound recording copyright owners the 
exclusive right ``to perform the copyrighted [sound recording] publicly 
by means of a digital audio transmission.'' \2\ 17 U.S.C. 106(6). 
Concurrently, Congress limited that exclusive right by creating two 
statutory licenses that would enable certain users, including SDARS and 
PSS, to transmit digitally sound recordings without obtaining a 
voluntary license from each copyright owner. See 17 U.S.C. 112(e), 
114(d). The section 112 license (ephemeral license) allows an entity 
that transmits a sound recording digitally to make ephemeral 
phonorecords of the sound recording to facilitate the transmission. 
Section 112(e) describes conditions under which an entity may license 
the ephemeral sound recording.\3\ Section 114 describes limits that 
apply to the digital transmission license.\4\
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    \2\ See Digital Performance Right in Sound Recording Act of 
1995, Public Law 104-39, 109 Stat. 336 (1995).
    \3\ Section 112 provides that a sound recording transmitter may 
make no more than one ephemeral phonorecord, ``unless the terms and 
conditions of the statutory license allow for more.'' 17 U.S.C. 
112(e)(1).
    \4\ Specifically, section 114 excludes from the statutory 
license transmissions by interactive services. See 17 U.S.C. 
114(d)(2)(A)(i).
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B. The Standards for Determining Royalty Rates

    Section 801(b)(1) of the Act provides that the Judges shall ``make 
determinations and adjustments of reasonable terms and rates of royalty 
payments'' for the statutory licenses set forth in, inter alia, section 
114(f)(1) (``digital performance license'').\5\ The digital performance 
license requires that the Judges set rates and terms that are 
``reasonable.'' Id. In addition, section 801(b)(1) provides that these 
``reasonable'' rates shall be calculated to achieve four specific 
objectives:

    \5\ Sirius XM and SoundExchange agree in substance that the 
Judges should conform the SDARS regulations regarding ephemeral 
licenses to the language adopted by the Judges in Web IV. See SEPFF 
] 2371; SXMPFF ] 492. The Judges approve this agreement and adopt it 
in the regulations for the forthcoming rate period. See infra, 
section III.
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    (A) To maximize the availability of creative works to the 
public.
    (B) To afford the copyright owner a fair return for his or her 
creative work and the copyright user a fair income under existing 
economic conditions.
    (C) To reflect the relative roles of the copyright owner and the 
copyright user in the product made available to the public with

[[Page 65211]]

respect to relative creative contribution, technological 
contribution, capital investment, cost, risk, and contribution to 
the opening of new markets for creative expression and media for 
their communication.
    (D) To minimize any disruptive impact on the structure of the 
industries involved and on generally prevailing industry practices.

17 U.S.C. 801(b)(1).

    In SDARS 1, the Judges detailed the historical treatment of these 
section 801(b)(1) standards. See Determination of Rates and Terms . . . 
73 FR 4080, 4082-84 (Jan. 24, 2008) (SDARS I). There, the Judges noted 
that the section 801(b)(1) factors originated in the protracted 
legislative process that ultimately produced the Copyright Act of 1976. 
The SDARS I Judges examined the legislative history of the 1976 Act and 
noted that the motivation for adopting the four itemized 801(b)(1) 
factors arose from an exchange between two law professors, Professor 
Ernest Gellhorn, on behalf of certain copyright users, and Professor 
Louis H. Pollack, on behalf of certain copyright owners. The issue 
between the professors was the constitutionality of the Copyright 
Royalty Tribunal (CRT), a predecessor of the Copyright Royalty Board. 
As recounted in SDARS I: ``Professor Gellhorn had recommended that, in 
order to bolster the constitutionality of the Tribunal, the Congress 
should, inter alia, adopt statutory standards beyond the vague 
criterion of `reasonableness.' '' SDARS I, 73 FR at 4082 (citing 
Hearings on H.R. 2223 before the Subcomm. on Courts, Civil Liberties, 
and the Administration of Justice of the House Comm. on the Judiciary, 
94th Cong., 1922 (1975).\6\ After consideration of alternative 
potential statutory language, Congress adopted the four-part itemized 
factors included in section 801(b)(1) to supplement the ``reasonable'' 
rate requirement. Id.
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    \6\ The SDARS I Judges also noted that, in like fashion, the 
Register of Copyrights concluded that it would be ``wise to 
establish, in the statute, certain criteria beyond `reasonableness' 
that each Panel is to apply to its decision-making.'' Id. (citing 
Second Supplementary Report of the Register of Copyrights on the 
General Revision of the U.S. Copyright Law, Chapter XV, at 31 
(1975)).
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    There is additional legislative history regarding the itemized four 
factors in section 801(b)(1) that aids in understanding how those 
factors should be applied and informs economic analysis under these 
statutory provisions. This legislative history is highlighted by 
dueling positions taken in Congressional testimony in 1967 by the 
licensors, through the National Music Publishers Association (NMPA) and 
its economic witness, Robert R. Nathan, and by the licensees, the 
Recording Industry Association of America (RIAA), through their 
counsel, Thurman Arnold, Esq., a well-known advocate of strong 
antitrust enforcement. See Hearing on S. 597, Subcomm. on Patents, 
Trademarks and Copyrights of the S. Committee on the Judiciary, (Mar. 
20-21, 1967) (Senate Hearing).
    Mr. Nathan criticized any proposed legislation that would subject 
the songwriting industry to a statutory mechanical licensing scheme. 
Id. at 382. He did not agree that licenses in the music industry should 
be treated differently than how ``we generally function under 
competitive marketplace bargaining arrangements whereby most entities 
in our economy bargain for that which goes into the creation of goods 
and services and also bargain the price for which those goods and 
services are sold.'' Id. He further noted that the statutory mechanical 
royalty rate was in part a reaction to an early 20th century concern 
regarding a Supreme Court decision allowing a player-piano manufacturer 
to play songs through the use of perforated paper rolls fed into the 
new devices (player pianos), without a license and without a duty to 
pay royalties to the songwriters and publishers. White-Smith Music 
Publishing Company v. Apollo Company, 209 U.S. 1 (1908). As Mr. Nathan 
explained: ``[T]he Aeolian Co.[,] had gained control of some 80 percent 
of the musical compositions and Congress . . . fear[ed] the threat of 
monopoly in the mechanical reproduction of music.'' Senate Hearing at 
382-83. The Copyright Act of 1909 superseded the effect of White-Smith 
by creating a statutory license and imposing a fixed statutory rate for 
mechanical reproduction of musical compositions.
    In his 1967 testimony, Mr. Nathan advocated that Congress eliminate 
the compulsory license and the statutory rate, and he specifically 
urged Congress to resist replacing the fixed statutory fee with a 
regulatory standard to be implemented by a quasi-adjudicatory body. As 
to the latter point he explained to Congress: ``[O]ne might ask . . . 
whether the music publishing industry has any characteristics of a 
public utility? I submit . . . that there is nothing in the music 
publishing industry which gives [it] the characteristics or the 
elements of a public utility . . . .'' Id. at 383. Mr. Nathan noted 
what he felt was a key distinction: Unlike traditional public utilities 
such as ``railroad systems'' or ``streetcar lines,'' the songwriting 
and publishing industry is ``a creative and nonstandardized area,'' and 
``[m]onopoly and public utility aspects are just not prevalent in this 
industry.'' Id.
    The licensees' opposing position, expressed by Mr. Arnold on behalf 
of the RIAA, contained the seeds of the standard ultimately adopted in 
section 801(b)(1). As Mr. Arnold testified, the statute should include, 
inter alia, ``accepted standards of statutory ratemaking,'' including a 
rate ``that insures the party against whom it is imposed a reasonable 
return on . . . investment'' and ``that divides the rewards for the 
respective creative contributions of the record producers [the 
licensees] and the copyright owners . . . equitably between them.'' Id. 
at 469.
    Mr. Nathan criticized this approach on two fronts. First, he argued 
that the ``personal service'' nature of the songwriting and publishing 
industry precluded application of a ``reasonable rate of return'' 
requirement for establishing the compulsory royalty rate. Second, with 
regard to the division of the ``rewards'' proposal, Mr. Nathan stated 
that ``I have never in all my experience encountered this novel concept 
of dividing rewards for creative contributions as a meaningful and 
relevant standard of ratemaking.'' Id. at 1093-94.\7\
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    \7\ As the present record (and the record in Phonorecords III) 
demonstrates, subsequent to Mr. Nathan's 1967 testimony, the 
economic concept of ``dividing rewards for creative contributions as 
a meaningful and relevant standard of ratemaking'' has blossomed, 
with the application of Opportunity Cost/Efficient Component Pricing 
approaches, Nash Bargaining Solutions, and Shapley Value analyses.
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    Resolution of this 1967 dispute languished until 1976, when 
Professor Gellhorn successfully convinced Congress to adopt an itemized 
standard in the final statute. See F. Greenman & A. Deutsch, The 
Copyright Royalty Tribunal and the Statutory Mechanical Royalty: 
History and Prospect, 1 Cardozo Arts & Ent. L.J. 1, 53, 59 (1982). In 
so doing, Congress did not explicitly address the economic dispute 
between Mr. Arnold and Mr. Nathan regarding the relative merits of a 
market-based rate versus a rate established in some other manner.
    Under the itemized section 801(b)(1) standard, the Judges have the 
discretion to choose a market rate, a market-based rate, or a rate 
unrelated to market evidence. Music Choice v. Copyright Royalty Bd., 
774 F.3d 1000, 1010 (D.C. Cir. 2014) (and citations therein). Any such 
rate would be legally appropriate provided it was not ``arbitrary, 
capricious, an abuse of discretion, or otherwise not in accordance with 
law, or if the facts relied upon by the [Judges]

[[Page 65212]]

have no basis in the record.'' Id. at 1007. Indeed, in Music Choice, 
the D.C. Circuit reaffirmed that ``the Copyright Act gives the Judges 
of the Copyright Royalty Board broad discretion to set rates and terms 
for compulsory licenses of the digital performance of sound 
recordings.'' Id. at 1016 (emphasis added).

C. Prior Proceedings

    This proceeding is not the first in which the Judges or their 
predecessors have applied the section 801(b) factors to determine 
royalty rates.\8\ In SDARS I, the Judges detailed the historical 
treatment of these factors by their predecessors, the Copyright Royalty 
Tribunal and the Librarian in his administration of the Copyright 
Arbitration Royalty Panel (CARP) system. See Determination of Rates and 
Terms . . . , 73 FR 4080, 4082-84 (Jan. 24, 2008) (SDARS I). In SDARS 
I, the Judges chose to ``begin with a consideration and analysis of the 
[market] benchmarks and testimony submitted by the parties, and then 
measure the rate or rates yielded by that process against the [section 
801(b)] statutory objectives'' to reach a decision. Id. at 4084.
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    \8\ The Copyright Royalty Tribunal (CRT) applied the 801(b) 
factors in a section 116 (Jukebox) rate adjustment and a section 115 
(Phonorecords) rate adjustment. The Librarian of Congress, as 
administrator of a Copyright Arbitration Royalty Panel (CARP) issued 
a determination for the section 114 satellite radio license (SDARS 
I). In 2017, the Judges presided over a contested Phonorecords rate 
hearing, the determination of which will issue after the present 
determination and will involve application of the 801(b) policy 
factors to the Phonorecords license.
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    The precedent guiding the present panel of Judges signals an 
analysis in which the Judges may weigh the evidence presented to 
support the rate proposals, including marketplace benchmarks, apply the 
section 801(b) policy factors to assure the final rates are consonant 
with those factors and, if the evidence permits, also establish a zone 
of reasonableness within which the rate shall be set.\9\
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    \9\ The U.S. Court of Appeals for the D.C. Circuit has also 
concluded that the Judges may apply the ``[section 801(b)] . . . 
objectives [to] determine a range of reasonable royalty rates that 
would serve all these objectives adequately but to differing 
degrees, [and] the [Judges are] free to choose among those rates, 
and courts are without authority to set aside the particular rate 
chosen . . . if it lies within a ``zone of reasonableness.'' See 
Recording Indus. Ass'n of America v. Copyright Royalty Tribunal, 662 
F.2d 1, 9 (D.C. Cir. 1981) (footnotes omitted). Thus, the Judges may 
establish such a zone of reasonableness, but are not required to do 
so.
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D. The Present Proceeding

    The Judges commenced the present proceeding with publication of 
notice seeking petitions to participate. See 81 FR 255 (Jan. 5, 2016). 
Seven entities filed petitions to participate.\10\ The Judges dismissed 
the petitions of Music Reports, Inc. and David Powell. Muzak LLC 
withdrew its petition to participate. The parties participating in the 
hearing were George Johnson d/b/a GEO Music Group (GEO), Music Choice, 
Sirius XM Radio, Inc. (Sirius XM), and SoundExchange, Inc. 
(SoundExchange).
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    \10\ Original petitioners included George Johnson d/b/a GEO 
Music Group; Music Choice; Music Reports, Inc.; Muzak LLC; Sirius XM 
Radio, Inc.; SoundExchange, Inc. (SoundExchange); and David Powell. 
SoundExchange appeared on behalf of itself and its members, the 
American Association of Independent Music; the American Federation 
of Musicians of the United States and Canada; the Recording Industry 
Association of America; the Screen Actors Guild and the American 
Federation of Television and Radio Artists; Sony Music 
Entertainment; Universal Music Group; and Warner Music Group.
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    The Judges presided over an evidentiary hearing that commenced on 
April 12, 2017, and ended on May 18, 2017. Parties to the hearing 
presented oral closing argument on July 18. The parties called 35 
witnesses,\11\ including 15 experts.\12\ Of the 856 exhibits marked for 
identification for the hearing (not including illustrative 
presentations by various witnesses) the Judges admitted 511 (including 
those admitted for limited purpose) into evidence during the 
hearing.\13\ On June 14, the parties filed their respective Proposed 
Findings of Fact (PFF) and Proposed Conclusions of Law (PCL). Parties 
filed Reply PFF and PCL on June 29.
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    \11\ In addition to live witnesses, participants also designated 
prior testimony of witnesses in prior proceedings. See 37 CFR 
351.4(b)(2).
    \12\ GEO Music Group (GEO) presented the testimony of George 
Johnson. Mr. Johnson asked to be qualified as an expert in the music 
sound recording business. There being no objection, the Judges 
acknowledged his experience as a songwriter, singer, and independent 
record producer for approximately 30 years and qualified him for 
purposes of the present proceeding as an expert in the music 
business.
    \13\ Immediately prior to and during the hearing in this 
proceeding, participants filed motions seeking to limit or exclude 
opposing parties' evidence. The Judges' conclusions on those motions 
are issued by separate order or orders. References to evidence in 
this Determination are to evidence admitted to the record.
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III. The Section 112 Ephemeral License

    The ephemeral license rates that the Judges are to determine in 
this proceeding shall ``most clearly represent the fees that would have 
been negotiated in the marketplace between a willing buyer and a 
willing seller.'' 17 U.S.C. 112(e)(4). All parties to the present 
proceeding agree that the value of the section 112 ephemeral license is 
linked to the value of the section 114 performance license.\14\ Music 
Choice asked that the Judges include the section 112 rate in the 
overall rate. Sirius and SoundExchange asked the Judges to determine 
that the value of the licenses be allocated 5% to the ephemeral license 
and 95% to the performance license, consistent with the current 
regulations applicable to SDARS, webcasters, and new subscription 
(CABSAT) services. See, e.g., Sirius XM . . . Proposed Findings . . . 
and Conclusions at 234 (SXM PFFCL); Proposed Findings . . . and 
Conclusions of SoundExchange . . . at 938 (SX PFFCL); see 37 CFR 
382.3(c), 382.12(b) (2016).
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    \14\ See Music Choice Written Direct Statement at 6; 
Introductory Memorandum to the Written Statement of Sirius Radio 
Inc. at 1; Proposed Rates and Terms of SoundExchange, Inc. and 
Copyright Owner and Artist Participants at 5.
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    The parties' positions and the Judges' decisions concerning the 
ephemeral license regulations are detailed in section XI.C of this 
Determination; the regulatory language adopted by the Judges is 
attached as Appendix A.

IV. PSS Performance License

A. Background

    The Act defines a PSS as ``a service that performs sound recordings 
by means of noninteractive audio-only subscription digital audio 
transmissions, which was in existence and was making such transmissions 
to the public for a fee on or before July 31, 1998 . . . .'' 17 U.S.C. 
114(j)(11). When Congress enacted that definition, there were three PSS 
entities in existence. See H.R. Rep. No. 105-796, at 81, 85, 89 (Oct. 
8, 1998). Only two remain, and Music Choice was the only PSS that 
participated in this proceeding.\15\ SoundExchange represented 
Copyright Owners in the PSS portion of the proceeding. George Johnson, 
an individual licensor, also proposed a PSS rate.
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    \15\ The other remaining PSS entity, Muzak LLC, filed a Petition 
to Participate, but withdrew it before the deadline for filing 
Written Direct Statements.
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    Music Choice operates a residential audio service that consists of 
50 channels of audio programming delivered to subscribers' televisions. 
Written Direct Testimony of David J. Del Beccaro, Trial Ex. 55, at 4 
(Del Beccaro WDT). Music Choice's services are delivered to customers 
by cable operators and other multichannel video programming 
distributors (MVPDs) as part of customers' digital basic cable service. 
Id.
    In addition to its cable TV-based service, Music Choice makes its 
50 cable channels, plus an additional 25 channels of audio programming, 
available to authenticated television subscribers through its website 
and a

[[Page 65213]]

mobile app. Id. Music Choice describes these internet transmissions as 
``an ancillary part of its residential music business . . . .'' Written 
Rebuttal Testimony of David J. Del Beccaro, Trial Ex. 57, at 25 (Del 
Beccaro WRT).
1. PSS Rates From SDARS II
    The parties in the prior proceeding (SDARS II) reached agreement on 
the rates and terms of the section 112 license prior to the hearing. 
See 78 FR at 23054-56.\16\ Therefore, the Judges' focus in that 
proceeding was limited to determining the appropriate rates and terms 
for the section 114 license. The Judges began with a consideration and 
analysis of the market benchmarks and testimony submitted by the 
parties and then measured the rate or rates yielded by that process 
against the Section 801(b) statutory objectives to reach a decision. 78 
FR at 23055. The Judges repeat that approach in the current proceeding.
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    \16\ In the SDARS II proceeding, SoundExchange and Music Choice 
submitted a joint stipulation with respect to the Section 112(e) 
ephemeral license, and the Judges adopted the proposal based on the 
stipulation. 78 FR at 23055-56. The provision addressing the Section 
112(e) license appears in current CRB Rule 382.3(c). It states that 
``[t]he royalty payable under 17 U.S.C. 112(e) for the making of 
phonorecords used by the Licensee solely to facilitate transmissions 
for which it pays royalties as and when provided in this subpart 
shall be included within, and constitute 5% of, the total royalties 
payable under 17 U.S.C. 112(e) and 114.''
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    In SDARS II, Music Choice advocated adoption of the annual 
royalties it pays to performing rights societies (PROs) (i.e., ASCAP, 
BMI, and SESAC) for the right to perform musical works to subscribers 
of its residential audio service as a precedential benchmark. Indeed, 
Music Choice asserted that the Judges were required to rely on that 
musical works rate. The Judges rejected that contention but analyzed 
whether the rates that Music Choice paid the PROs were a useful 
benchmark. 78 FR at 23056. Music Choice contended that two pieces of 
evidence corroborated use of the musical works rates as a benchmark: 
(1) Decisions from Canada and the United Kingdom concluding that 
royalty rates for sound recordings and musical compositions have 
equivalent value \17\ and (2) results of an economic model called the 
Asymmetric Nash Bargaining Framework (Nash Framework) \18\ offered by 
Music Choice's expert, Professor Gregory Crawford.\19\ Based on his 
analysis, Professor Crawford concluded the PRO rates were an 
appropriate benchmark for the sound recording license at issue.
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    \17\ The Judges dismissed Music Choice's reliance on foreign 
jurisdictions because of a lack of proof of comparability between 
foreign markets and U.S. markets. Further, Music Choice failed to 
convince the Judges that the governing laws were sufficiently 
similar to U.S. law to offer even analogous reasoning. See 78 FR at 
23058.
    \18\ The Nash Framework, as presented in the instant proceeding, 
is discussed in greater detail infra, section IV.C.1.a.
    \19\ Professor Crawford's Nash Framework from SDARS II (as well 
as the Judges' reasons for rejecting it) is described at length in 
the determination and need not be repeated here. See SDARS II, 78 FR 
at 23056-57, 23058. As discussed below, in the current proceeding 
Music Choice does not premise its Nash-based model (or any other 
model) on an asserted equivalency between the value of sound 
recordings and musical works, in light of the Judges' rejection of 
that argument on the record presented in SDARS II. Nonetheless, 
Professor Crawford's Nash Framework in the instant proceeding is 
strikingly similar to his Nash Framework in SDARS II.
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    The Judges disagreed and found that the musical works benchmark 
lacked comparability to the hypothetical PSS market. Id. at 23058. The 
Judges found that the musical works market involved different sellers 
(PROs versus record companies) selling different rights (musical works 
performance rights versus sound recording performance rights) than 
those at issue in this proceeding.\20\
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    \20\ The Judges acknowledged that musical works performance 
rights and sound recording performance rights are likely perfect 
complements, but concluded that, based on the record, such 
complementarity had not been shown to inform the decision regarding 
relative value of the rights.
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    With regard to the Nash Framework, the Judges noted:

    The Nash Framework is a theoretical concept whose goal is to 
evaluate how the surplus from a hypothetical transaction might be 
divided between negotiating parties. Even assuming that the Nash 
Framework has predictive value in some real-world contexts, Music 
Choice provided no data to support the theoretical approximations in 
the market for any intellectual property rights, much less those 
that the Judges are charged with evaluating. Therefore, the Judges 
find that the Nash Framework is not useful corroborating evidence.

78 FR at 23058.\21\
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    \21\ The Judge who dissented from the majority decision offered 
what the majority characterized as a ``more spirited rejection of 
the probative value of the Nash Framework as proffered in this 
context.'' The majority concurred with this assessment but concluded 
that ``as a threshold matter, [the] Nash Framework, without real-
world data to support its predictive capacity, is unworthy of 
further consideration. 78 FR at 23058, n.17.

    For its part, SoundExchange offered certain marketplace agreements 
executed by interactive music streaming services as a benchmark. The 
Judges also rejected this proposed benchmark on comparability grounds. 
78 FR at 23058.\22\
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    \22\ The markets that the proffered agreements covered were 
subscription interactive webcasting, ringtones/ringbacks, and 
digital downloads. The Judges concluded that these markets involve 
the licensing of products and rights separate and apart from the 
right to publicly perform sound recordings in the context of the PSS 
proceeding. The Judges noted that the buyers are different from the 
target PSS market. Thus, the key characteristic of a good 
benchmark--comparability--was not present. 78 FR at 23058. The 
Judges noted that the bundling of Music Choice's services with 
multiple channels of video and other non-music programming 
significantly dim the possibility of market comparators. The Judges 
concluded that ``in the absence of some rational, reasoned 
adjustment to make the music agreements data more comparable to the 
PSS market, the Judges find its probative value in this proceeding 
of only marginal value.'' Id.
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    The Judges concluded that the evidence presented by Music Choice 
framed the lower end of a range of reasonable rates and that presented 
by SoundExchange framed the upper end. 78 FR at 23059. Having rejected 
the parties' respective proffered benchmarks (and proposed 
corroborating evidence) for any purpose other than to frame a range of 
potential rates, the Judges were left with a consideration of the then-
prevailing royalty rate of 7.5% of gross revenues, which fell within 
that range. The Judges started with the then-prevailing rate and 
applied the Section 801(b) factors. Consideration of the section 801(b) 
factors persuaded the Judges that they should adopt that rate, but 
adjust it up to 8.5% based on Music Choice's planned expansion of its 
service from 46 channels to up to 300. The Judges concluded that the 
planned expansion would result in a substantial increase in the number 
of plays of recorded music without any corresponding increase in 
compensation. 78 FR at 23059-60. Nevertheless, the Judges acknowledged 
that the upward adjustment of the benchmark rate was based on projected 
usage that was likely to occur during the rate period. The Judges noted 
that ``[s]hould Music Choice alter its anticipated usage under the 
statutory license in the future, such evidence can be taken into 
account in a future rate proceeding. . . .'' Id. at 23061.
2. Standard for PSS Royalty Rates
    When the Judges determine a section 114 rate for PSS, they 
generally begin with an appropriate rate (or range of rates) and adjust 
it, as appropriate, in accordance with the section 801(b)(1) statutory 
factors. By contrast, the section 112 ephemeral license requires the 
Judges, among other things, to ``establish rates that most clearly 
represent the fees that would have been negotiated between a willing 
buyer and a willing seller.'' 17 U.S.C. 112(e)(4).\23\

[[Page 65214]]

The ephemeral license also requires a minimum fee for each type of 
service offered by a transmitting organization.\24\
---------------------------------------------------------------------------

    \23\ Section 112(e)(4) also directs the Judges to base their 
decision on such factors as (1) whether use of the service may 
substitute for or promote the sale of phonorecords or otherwise 
interferes with or enhances the copyright owner's traditional 
streams of revenue and (2) the relative roles of the copyright owner 
and the transmitting organization in the copyrighted work and the 
service made available to the public with respect to relative 
creative contribution, technological contribution, capital 
investment, cost, and risk. 17 U.S.C. 112(e)(4).
    \24\ The ephemeral license for both PSS and SDARS is addressed 
in section XI.C.
---------------------------------------------------------------------------

    Consistent with this process, in determining the appropriate rate 
for the PSS market for the upcoming rate period, the Judges must first 
identify a starting point for applying the Section 801(b) policy 
factors. A marketplace benchmark, if available, can be a useful 
starting point for applying the Section 801(b) factors. See SDARS II, 
78 FR at 23056. A key component of a marketplace benchmark is that the 
market it purports to represent is comparable to the hypothetical 
target market in the proceeding. See SDARS I, 73 FR at 4088 (`` 
`comparability' is a key issue in gauging the relevance of any 
proffered benchmarks.''). In determining whether a benchmark market is 
comparable, the Judges consider such factors as whether it has the same 
buyers and sellers as the target market and whether they are 
negotiating for the same rights. 78 FR at 23058. ``Although the 
applicable Section 114 statutory standard provides a broader scope for 
analyzing relevant `benchmark' rates than the `willing buyer/willing 
seller standard' . . . , nevertheless potential benchmarks are confined 
to a zone of reasonableness that excludes clearly noncomparable 
marketplace situations.'' 73 FR at 4088.
    In the hypothetical PSS market the buyers are the PSS services, and 
the sellers are the copyright owners of the sound recordings that are 
being transmitted (which most often means record companies). The buyers 
and sellers are negotiating for the same bundle of rights as those 
granted to a PSS under section 114(f)(1)(A) of the Copyright Act to 
make digital subscription transmissions of the copyrighted works.
    When the parties (or the Judges) identify variances in the 
comparability of the hypothetical target market and the proffered 
benchmark market, the Judges will consider reasoned adjustments that 
might more closely align the two markets.\25\ Even when a proffered 
benchmark is not comparable to the target market, however, the Judges 
may use the rates derived from the proffered benchmark as a reference 
point (or guidepost) to help frame a zone of reasonableness within 
which to set an appropriate rate for the upcoming rate period (as they 
did in SDARS II).\26\
---------------------------------------------------------------------------

    \25\ When the Judges are faced with proposed benchmarks that are 
not comparable and cannot be made so with reasoned adjustments, the 
Judges reject the proffered benchmarks. See, e.g., SDARS II, 78 FR 
at 23058; SDARS I, 73 FR at 4089-90.
    \26\ See supra, section IV.A.1.
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B. The Parties' Rate Proposals

1. Music Choice's Proposal
    Since 1998, the PSS have paid a fee based on a percentage of gross 
revenues, as that term is defined by regulation.\27\ See SDARS II, 78 
FR 23054, 23056; 63 FR 25394, 25413 (May 8, 1998). Music Choice has 
proposed continuing that rate structure but seeks at least a 34% 
reduction in the current rate of 8.5% of gross revenues, to a rate no 
higher than 5.6% of gross revenues. MC PFF ] 30.
---------------------------------------------------------------------------

    \27\ Music Choice also does not propose an alternative per-
subscriber rate should the Judges adopt such a rate structure rather 
than a percent-of-revenue structure. Neither party has proposed to 
combine both rate structures (e.g., in a greater-of structure). 
Given that neither party has advocated a hybrid rate structure nor 
provided sufficient evidence to support such a rate structure in the 
current proceeding, the Judges weigh the arguments and evidence in 
the record to determine the applicable rate structure from the two 
structures that the parties proposed.
---------------------------------------------------------------------------

2. SoundExchange's Proposal
    SoundExchange requests that the Judges change the PSS rate 
structure. Rather than the percentage-of-revenue formula, SoundExchange 
proposes that PSS pay a per-subscriber fee that would begin at $0.0190 
in 2018, the first year of the new rate period, and rise to $0.0214 in 
2022, the last year of the rate period. Amended Proposed Rates and 
Terms of SoundExchange, Inc. and Copyright Owner and Artist 
Participants at 7. Although SoundExchange does not offer a percent-of-
revenue alternative to its proposed per-subscriber rates, it 
acknowledges that converting its proposed rates to a percentage-of-
revenue rate would plausibly yield a rate of [REDACTED] % for 2018, the 
first year of the upcoming rate period. SX PFFCL ] 1949; see Written 
Rebuttal Testimony of Gregory Crawford, Trial Ex. 59, ] 113 (Crawford 
WRT).\28\ The evidence in the record supports that this conversion 
estimate is correct; thus the lowest rate that SoundExchange proposes 
([REDACTED] %) exceeds the highest rate that Music Choice proposes 
(5.6%) by [REDACTED] %; it exceeds the current rate by [REDACTED] %, 
assuming no increase in subscribers.\29\
---------------------------------------------------------------------------

    \28\ Music Choice's expert, Professor Gregory Crawford, 
estimates that Music Choice would pay [REDACTED] % of its unadjusted 
residential service revenue in sound recording performance royalties 
in 2018 under the CABSAT rates, the basis for SoundExchange's rate 
proposal, compared to the 8.5% it currently pays. Crawford WRT at ] 
113, Table 6. This estimate appears consistent with the effective 
rate that Stingray, a Music Choice competitor, paid in 2015 under 
the CABSAT rates. SX PFFCL ] 1949; Trial Ex. 1017 at SoundX 
000145808.
    \29\ Assuming that the number of subscribers that carried Music 
Choice's service remained flat over the upcoming rate period, the 
annual 3% increases SoundExchange proposes would bring the rates to 
[REDACTED] % for 2019, [REDACTED] % for 2020, [REDACTED] % for 2021, 
and [REDACTED] % for 2022, or [REDACTED] % over the current rate. 
This estimate is consistent with SoundExchange's estimate that a 
CABSAT service pays almost [REDACTED] times as much on a per-
subscriber basis as a PSS. SX PFFCL ] 1940 and evidence cited 
therein. See id. ]] 1934-35 (estimating that Music Choice's PSS 
statutory royalty payment amounts to [REDACTED] cents per listener 
per year whereas for a CABSAT service, the annual per-subscriber 
royalty for 2017 is 22.2 cents).
---------------------------------------------------------------------------

    SoundExchange also proposed a separate rate for internet 
transmissions by a PSS, leading to a dispute between the parties over 
whether a PSS's internet transmissions are included in the PSS license 
and subject to the PSS rate standard. The Judges referred the question 
of categorization of Music Choice's streaming service to the Register 
of Copyrights (Register) for a legal opinion. Analysis of the 
Register's opinion follows in Section IV.D.2.
3. GEO's Rate Proposal
    George Johnson, d/b/a GEO Music Group (GEO) proposed that PSS pay a 
per-subscriber rate of $0.10 in 2018 rising to $0.20 in 2022. Johnson 
WDT at 14. He also proposed a percentage-of-revenue rate of 45% of 
gross revenues. It is unclear whether he proposed that PSS pay both 
components or that they pay them as a greater-of or lesser-of 
structure. Mr. Johnson did not proffer a benchmark or any other 
evidence to support his rate proposals for PSS. He merely stated that 
``[t]hese are estimates from public data and actual royalty statements. 
If the Sirius XM and Music Choice would provide number of listeners per 
station and on a per-play basis, that would help GEO to better 
establish a more reasonable rate.'' Id. The Judges find that there is 
no evidence in the record to support the PSS rates that Mr. Johnson 
proposed and therefore decline to adopt them.\30\
---------------------------------------------------------------------------

    \30\ Mr. Johnson also proposed requiring the PSS to install a 
``buy button'' on their services to promote sales of music 
downloads. 5/3/17 Tr. 2232, 2238 (Johnson). Such proposal is beyond 
the scope of the Section 114 and 112 licenses and therefore beyond 
the Judges' authority in the current proceeding.
---------------------------------------------------------------------------

C. Rates for Music Choice's Cable Radio Service

1. Analysis of the Parties' Proffered Benchmarks
a. Music Choice's Proffered Nash Model
    Music Choice, through its expert, Professor Crawford, contended 
that in the absence of an appropriate marketplace benchmark, the best 
way to

[[Page 65215]]

estimate the royalties that would arise in a hypothetical effectively 
competitive market for the PSS sound recording rights is to use an 
economic model. Professor Crawford chose as that model one based upon 
the Nash Bargaining Solution, developed by Nobel-prize-winning 
economist John Nash. Crawford WDT ]] 62, 64. Professor Crawford offered 
a variation of the Nash Framework that the Judges rejected in SDARS II 
as a means of corroborating the proffered musical works benchmark. 
Crawford WDT ] 65.\31\
---------------------------------------------------------------------------

    \31\ Music Choice acknowledged that the Judges rejected its 
proposed musical works benchmark as a marketplace benchmark in SDARS 
II. Rather than proffer a marketplace benchmark from another market, 
however, Music Choice proffered Professor Crawford's Nash Framework, 
not to corroborate the musical works benchmark rejected in SDARS II, 
but as a stand-alone benchmark.
---------------------------------------------------------------------------

    In his Nash Framework proposal, Professor Crawford modeled a single 
record label as the ``upstream'' firm in the negotiation of sound 
recording performance rights to be licensed to a single PSS, the 
``downstream'' firm in the negotiation. Id. ] 67. The Nash Framework is 
based on the assumption that the record label and PSS provider each 
have a certain degree of market power. Id. ] 71. Professor Crawford 
asserted that this assumption is applicable with respect to Music 
Choice given its current product offerings and established 
relationships with MVPDs. Id. ] 73. According to Professor Crawford, 
Music Choice has negotiated long-term contracts with the MVPDs and 
possesses a unique bundle of technology that would be costly and time 
consuming for other firms to duplicate. Id. ] 73. Professor Crawford 
concluded that because both PSS providers and record labels have some 
market power, a non-cooperative bargaining model such as the Nash 
Framework is an appropriate framework for analyzing market outcomes for 
the PSS sound recording performance rights in the absence of a 
compulsory license. Id. ] 75.
    In the Nash Framework three fundamental factors determine how two 
firms would ``split a pie'' in a hypothetical negotiation. These ``Nash 
Factors'' are: (1) The Joint Agreement Profits; (2) each firm's Threat 
Point; and (3) each firm's bargaining power. Id. ] 81.\32\ To determine 
the royalty that would arise in the hypothetical market for sound 
recording performance rights for the PSS over the 2018-2022 rate 
period, Professor Crawford quantified the Nash Factors based on Music 
Choice's costs and revenues of its residential audio service as a 
standalone business. Id. ] 110.
---------------------------------------------------------------------------

    \32\ Joint Agreement Profits are the combined profits to both 
the upstream and downstream firms in the market under study from 
reaching an agreement. For the PSS this means the revenue the PSS 
earns for the PSS less all non-PSS royalty costs that they incur. 
Crawford WDT ] 81. The Threat Point for each firm is the profit it 
would receive when no agreement is reached. Id. The difference 
between the Joint Agreement Profits and the sum of the firms' Threat 
Points is called the ``Incremental Profits'' which are the profits 
the firms could earn by reaching an agreement above and beyond the 
profits they could earn in the absence of an agreement. Id. The 
profits each firm receives in a bargain equals its Threat Point plus 
its Bargaining Power times the Incremental Profits. Id. ] 82. Dr. 
Crawford communicated this formula in mathematical terms as Royalty 
= Threat Point + Bargaining Power * Incremental Surplus. Id. at 
n.69.
---------------------------------------------------------------------------

i. Joint Agreement Profits
    Because Music Choice keeps its books on a consolidated basis, 
Professor Crawford analyzed Music Choice's costs and revenues to 
determine how they would have been allocated if Music Choice operated 
its residential audio service as a standalone business. Id. ]] 122-149; 
4/24/17 Tr. 733-38 (Crawford); 5/18/17 Tr. 4549-52 (Del Beccaro).\33\ 
This process was conducted not in the ordinary course of business but 
to isolate Music Choice's residential audio business for use in the 
Nash Framework and in response to the Judges' observation in SDARS II 
that the residential audio service is the applicable Music Choice 
business line in analyzing the section 114 license. Crawford WDT ] 110. 
Professor Crawford also asserted that isolating the residential audio 
service is necessary to ensure that Music Choice does not subsidize 
this business line with profits from other business lines, which 
Professor Crawford believes would be inconsistent with economic policy 
and the statutory objectives of the PSS license as he understands them 
to be. Id. ] 176; 4/24/17 Tr. 787 (Crawford).
---------------------------------------------------------------------------

    \33\ Music Choice has three business lines: A residential audio 
service, a residential video service, and a commercial audio 
service. Some of Music Choice's subscription fee revenue bundles 
residential audio and video services. Many of Music Choice's costs 
are used in the production of both the residential audio and video 
business lines. Crawford WDT ] 110. According to Professor Crawford, 
the residential audio service remains the most important in terms of 
revenues and company strategy. Professor Crawford asserted that if 
the residential audio service were to cease, Music Choice would 
cease providing any services and would close altogether. Crawford 
WDT ] 129.
---------------------------------------------------------------------------

    It would not be fruitful to detail the multistep process Professor 
Crawford conducted to disaggregate costs and revenues to derive inputs 
for the Nash Framework analysis. Nonetheless, it is worth noting that 
many of the steps required judgment calls on Professor Crawford's part 
that undoubtedly affected the inputs he later plugged into the Nash 
Framework.\34\ The Judges do not suggest that Professor Crawford's 
adjustments were erroneous or inappropriate under the circumstances but 
only mention them to highlight the level of discretion and subjectivity 
that Professor Crawford employed in developing the inputs that he fed 
into the Nash Framework. Given the extreme complexity of the process 
that Professor Crawford developed, it would be impracticable if not 
impossible for the Judges to ``back out'' one or more of the 
adjustments Professor Crawford made in developing the model if the 
Judges found they were unwarranted. The discretion that Professor 
Crawford exhibited in disaggregating Music Choice's costs and revenues 
pales, however, in comparison to that he exercised in choosing other 
Nash Factors, such as bargaining power and Threat Point. The great 
degree of discretion in quantifying the inputs in the Nash Framework as 
proposed by Professor Crawford underscores the inherent weakness in the 
Crawford model. The Judges concerns about the model are more applicable 
in the current proceeding than they were in SDARS II because Music 
Choice seeks to elevate the model to benchmark status rather than as 
information to corroborate a proffered rate as was the case in SDARS 
II.
---------------------------------------------------------------------------

    \34\ For example, Dr. Crawford chose to exclude certain legal 
costs that Music Choice incurred or expected to incur related to the 
PSS III proceeding in 2016 and 2017 because those costs relate to 
litigating the 2018-2022 rate proceeding. Instead he substituted 
costs that Music Choice purportedly incurred during the PSS II rate 
period (2013-2017). He also chose to average certain patent 
litigation costs over an eight-year period that Music Choice 
incurred during 2016-2017 because, based on his discussions with 
Music Choice executives, Music Choice historically has incurred such 
patent costs every eight years. Crawford WDT ] 148. Of course, as a 
practical matter, no individual company can know with any reasonable 
degree of certainty when, in the future, it may be sued for patent 
infringement or sue another that allegedly violates one of its 
patents.
---------------------------------------------------------------------------

    Professor Crawford used the disaggregated costs and revenues to 
begin the Nash Framework calculations. The first step in that process 
is to create the first Nash Factor--Joint Agreement Profits--the joint 
economic profits to be shared between a record label and PSS provider 
in the PSS market if an agreement is reached. It is the total economic 
profits that the PSS provider earns before payment of a sound recording 
performance royalty. Crawford WDT ] 92.
    Based on his analysis of Music Choice's financial information as 
discussed above, Professor Crawford estimated the Joint Agreement 
Profits in the hypothetical market for PSS sound

[[Page 65216]]

recording performance rights would range from [REDACTED] in 2018 to 
[REDACTED] in 2022. Crawford WDT ]] 113, 171.
ii. Threat Points
    Professor Crawford then calculated each party's Threat Point, the 
second factor in the Nash Framework. A Threat Point is a theoretical 
construct representing the profit that would accrue to a record label 
and a PSS provider if they are unable to reach an agreement. Each firm 
in a hypothetical negotiation will have a Threat Point. Crawford WDT ] 
67. Under the model, threat points can be positive, negative, or zero. 
Id. at 26 n.71. For a record label, a negative threat point could occur 
where the record label could earn additional profit in a non-PSS market 
(e.g., music downloads) if it reaches an agreement with a PSS in the 
PSS market. If the record label fails to reach the agreement with the 
PSS provider, it loses all prospective profits it would have earned in 
the PSS market and the profits it could have earned in the non-PSS 
market. Id. ] 85.
    The profit each firm earns in a bargain equals its threat point 
plus its bargaining power (discussed below) times incremental profits. 
Id. ] 82. Incremental profits are the difference between the joint 
agreement profits and the sum of the firms' threat points. Id. ] 81. 
Professor Crawford determined that Music Choice's threat point would be 
zero because, in the absence of an agreement between Music Choice and a 
theoretical record label, Music Choice would not be able to offer a 
viable residential audio service and therefore would have economic 
profits of zero. Id. ] 173. Professor Crawford asserted that assigning 
a zero threat point to Music Choice is conservative because it is based 
on an assumption that Music Choice could not offer a viable service in 
the absence of an agreement with a single label.\35\ If Music Choice 
could offer such a service in the absence of the catalog of any record 
label, then Music Choice's threat point would be higher than zero, 
which would suggest that Music Choice should pay a lower royalty rate 
under the model. Id. at 49 n.149.
---------------------------------------------------------------------------

    \35\ Rather than postulate the hypothetical PSS market as a 
negotiation between a single PSS and a single record label Professor 
Crawford could have constructed the model as a negotiation between a 
single PSS and a group of record labels. Under this scenario, the 
PSS might reach agreements with some labels but not others. The 
failure of an agreement with certain labels (i.e., smaller labels) 
might not preclude the PSS from offering a service whereas the 
failure of the PSS to reach an agreement with any of the larger 
labels might preclude the PSS from offering any type of service 
(i.e., PSS service or non-PSS service). Under this scenario, the 
assignment to the PSS of a negative threat point might be more 
appropriate than assigning a zero threat point because if Music 
Choice failed to reach an agreement with one major label then it 
might be precluded from offering any service.
---------------------------------------------------------------------------

    Outside of the threat point discussion, however, Professor Crawford 
asserted that Music Choice's residential audio service remains the most 
important in terms of revenues and company strategy. Indeed, Professor 
Crawford asserted that if the residential audio service were to cease, 
Music Choice would cease providing any services and would close 
altogether. Id. ] 129. Placed in the context of the threat point 
discussion, this concession strongly suggests that Music Choice 
deserves a negative threat point under Professor Crawford's model, the 
extent of which would be measured by the amount of profits Music Choice 
would lose if it closed its non-PSS business lines. SoundExchange's 
expert pointed out this inconsistency in Professor Crawford's 
presentation. 5/3/17 Tr. 2461, 2343 (Wazzan) (``Dr. Crawford concedes 
that Music Choice would go out of business altogether without the 
residential music business. So they would lose their commercial and 
video revenue streams. And if you look at the financials, we know that 
Music Choice is forecasting significant profits in its non-PSS lines of 
business.'').
    Music Choice's responses to this disconnect between Professor 
Crawford's threat point assessment and his statements about the primacy 
of Music Choice's residential audio business are unavailing. For 
example, Music Choice contended that the SDARS II decision is precedent 
for treatment of the threat point analysis that Professor Crawford 
employed. Music Choice Reply to SE PFF 2044 at 817-18. The passage from 
SDARS II that Music Choice referred to pertained to an analysis of 
Factor B in Section 801(b)(1), regarding the setting of a rate that 
provides a fair return (for the service) and a fair income (for the 
copyright owners) under existing market conditions. The Judges were 
concerned in that context that Music Choice was making claims of 
unprofitability of its business as a whole to support a downward 
adjustment in the rates under the Section 801(b) factors. The Judges 
pointed out that the subject of the section 114 license was Music 
Choice's residential audio business rather than its entire business, 
which included non-PSS lines. 78 FR at 23059. By that point in the 
determination, the Judges had already discounted the use of the 
Crawford model and the proffered musical works benchmark the results of 
which the model purportedly corroborated. The Judges did not opine on 
how Professor Crawford should have calculated the threat point for his 
own model because the Judges dismissed the usefulness of the model. 78 
FR at 23058 (``without real world data to support its predictive 
capacity [Professor Crawford's application of the Nash Framework] is 
unworthy of further consideration.'').
    Therefore, the Judges agree with SoundExchange's criticism that 
Professor Crawford incorrectly assigned a threat point of zero to Music 
Choice when, under Professor Crawford's own testimony, Music Choice 
would lose profits from non-PSS business lines if Music Choice could 
not reach an agreement with one or more record labels. Based on that 
fact alone, the results of Professor Crawford's model in the current 
proceeding are suspect, but the flaws in Professor Crawford's 
presentation do not end there.
    With respect to the threat point for a hypothetical record label, 
Professor Crawford asserted that it would be zero in the PSS market. As 
for the label's threat point in the non-PSS market (e.g., sales of CDs 
and downloads), Professor Crawford asserted that the analysis was more 
``nuanced.'' Crawford WDT ]] 94-95, 174-175. Due to an alleged 
promotional effect that the PSS has on the label in the non-PSS market, 
Professor Crawford concluded that the record label's threat point could 
be negative. Professor Crawford has no way of estimating the purported 
promotional effect of Music Choice's services in the non-PSS market so 
he assigned a zero threat point to the hypothetical record label. Id. 
]] 175-176. We concur with Professor Crawford's decision not to attempt 
to assign any promotional value to Music Choice's service in the non-
PSS market. The evidence he cited to support such an effect is either 
dated (i.e., from a 1998 CARP decision) or anecdotal (i.e., record 
labels provide Music Choice with ``promotional copies'' of new singles 
or albums). Id. ]] 97-104. The Judges do not doubt that record labels 
seek exposure for the artists they promote, and digital platforms like 
Music Choice may provide meaningful exposure to the artists that appear 
on its PSS service. The Judges find no evidence in the record in this 
proceeding that they can use to quantify what impact, if any, 
promotional activities on Music Choice's platform would have on artists 
(and the labels that sign them) in non-PSS markets.
    The Judges are less sanguine, however, about Professor Crawford's 
assignment of a zero threat point to the

[[Page 65217]]

first portion of a record label's threat point (i.e., that dealing with 
the PSS market). It is not at all clear that a record label's failure 
to reach an agreement with Music Choice would mean a loss of all record 
company profits in the PSS market if that market includes all providers 
of residential audio services. There is evidence in the record that at 
least one Music Choice competitor, Stingray Music, provides a service 
that is comparable to the residential audio service that Music Choice 
provides, but pays a much higher royalty rate than Music Choice 
pays.\36\ Although that competitor, which is a recent entrant to the 
U.S. market, has not sought a royalty rate closer to that which Music 
Choice pays, it certainly could in the future, perhaps using the lower 
rate paid by Music Choice as a comparable to support its own rate 
reduction. In other words, the lower rate that Music Choice pays as a 
PSS could put downward pressure on the rates that competing services 
pay to record labels.
---------------------------------------------------------------------------

    \36\ Stingray Music is a Canadian digital pay television audio 
service owned and operated by Stingray Digital. It has about 50 
music channels that are available to television service subscribers 
of several cable and IPTV providers in the U.S. Like Music Choice, 
Stingray also has a business service and streams to individuals who 
subscribe to television services that provide Stingray Music. Wazzan 
WDT ] 62. The PSS and services such as Stingray, which SoundExchange 
refers to as CABSAT (cable/satellite) services compete for the same 
MVPD wholesale buyers. Stingray bought Music Choice's European 
affiliate, which it operates as Music Choice International. In the 
U.S., Music Choice and Stingray are direct competitors. Id. ] 62(g), 
(h).
---------------------------------------------------------------------------

    By contrast, if Music Choice and the theoretical record label were 
unable to reach an agreement, the rate that Music Choice pays could no 
longer be used by providers of comparable services to justify lower 
royalty rates. Under that scenario, a record label could actually 
benefit from the loss of Music Choice to the extent that the rate it 
pays could be shown to be below a market rate, which would result in a 
positive threat point for the record label.\37\ As with the asserted 
promotional effect, however, such an effect is impossible to estimate 
with any accuracy. The Judges do not conclude from this discussion that 
zero is the correct threat point for the hypothetical record label but 
rather confirm the lack of usefulness of the Crawford model because 
critical components of the model, at least as presented by Dr. Crawford 
in the current proceeding, allow a broad level of discretion and 
subjectivity, which undermines the credibility of the results.
---------------------------------------------------------------------------

    \37\ See Wazzan WRT ] 57 (``there is considerable reason to 
believe that the existence of Music Choice imposes significant 
opportunity costs on record companies in today's market [in that] 
record labels receive substantially higher revenues from interactive 
and non-interactive music services than from the PSS''). 
SoundExchange's expert, Dr. Wazzan, attempted to correct this error 
and others in Professor Crawford's model and derived a range of 
rates that are several times greater than those Professor Crawford's 
estimated. Wazzan WRT ] 48. SX PFFCL ] 2046 (comparing Crawford's 
range of 1.4% to 5.6% to Wazzan's ``Corrected'' range of 9.0% to 
36%). If the Judges were to rely to some extent on the Crawford 
model, the evidence in the record does not support a rate outside of 
this wide range of 1.4% to 36% of gross revenues. After reviewing 
each party's evidence regarding the Crawford model, however, the 
Judges do not have a high level of confidence regarding where within 
that broad range a reasonable rate might lie. Nevertheless, the many 
flaws in Professor Crawford's model suggest that the lower end of 
the range of rates that the Crawford model yields is likely outside 
the zone of reasonableness.
---------------------------------------------------------------------------

iii. Relative Bargaining Power
    Professor Crawford's assignment of the parties' respective 
bargaining powers (the last element of the Nash Framework) was also 
based on faulty reasoning. Under the Nash Framework, each firm's 
bargaining power is a number between 0 and 1, which measures the 
strength of that firm in the negotiation. Crawford WDT ] 81. The sum of 
the two parties' bargaining powers equals 1. Id. Professor Crawford 
related each firm's bargaining power to each party's patience in a 
negotiation. The party with greater patience also has greater 
bargaining power. Professor Crawford contended that that comparison is 
consistent with the nature of bargaining between Music Choice and the 
copyright owners. According to Professor Crawford,

[b]oth record labels and Music Choice have a history of successful 
negotiations, so there is nothing a priori to suggest that in the 
hypothetical marketplace, one would be more or less patient than the 
other. Furthermore, estimating Bargaining Parameters of firms in 
marketplace settings is a challenging undertaking at the frontier of 
economic research. . . . I will therefore assume that a range of 
Bargaining Powers is possible. As I think it unreasonable to believe 
that either a record label or a PSS provider could extract all the 
profits from a bargain, I choose a range of bargaining powers for 
each party between 0.2 and 0.8.

Crawford WDT ] 105. The Judges interpret Professor Crawford's statement 
regarding relative bargaining power as saying he has no way to quantify 
what the relative bargaining powers are between Music Choice and the 
record labels. Ultimately, the Judges believe that this is an accurate 
statement that further undermines the usefulness of the Nash Framework 
in the proceeding. That being said, what evidence there is in the 
record regarding the relative bargaining power of Music Choice and the 
record labels suggests that the record labels have much greater 
bargaining power than Music Choice (or a similarly situated PSS in the 
hypothetical market).
    Mr. Del Beccaro, Music Choice's President and CEO testified about a 
history of ``inequality in bargaining power'' between Music Choice and 
the record labels that forced Music Choice to accept rates that were 
higher than it would have otherwise. See, e.g., Del Beccaro WDT at 10 
(``Music Choice had no choice but to accept a rate increase to 7 
percent for 2002 to 2003 and 7.5 percent for 2004 through 2007''); id. 
at 11 (``[d]espite repeated efforts by Music Choice to engage in 
settlement negotiations, when the royalty rate came up for adjustment 
for the next rate period, SoundExchange did not negotiate a settlement 
until directed to by the Judges during the direct trial opening 
statements of the SDARS I proceeding in June 2007''); id. at 12 (``[In 
SDARS III] Music Choice reached out to SoundExchange yet again, in 
January 2016, to attempt settlement solely to avoid the costs of 
litigation. SoundExchange once again failed to negotiate, and did not 
even respond to Music Choice's offer until July.'').
    Professor Crawford contended that ``there is no direct evidence on 
the relative bargaining power of either a record label or Music Choice 
in a hypothetical market for sound recording performance rights for 
PSSs.'' Crawford WDT ] 177. But he needed look no further than Mr. Del 
Beccaro's statements about Music Choice's efforts to negotiate 
settlements with SoundExchange. These statements strongly suggest that 
Music Choice has very little if any bargaining power in its 
negotiations with the labels. The greater the bargaining power by the 
record labels, the higher the rates that Music Choice would be required 
to pay. Crawford WDT at 73, Ex. B.3. Therefore, the Judges find no 
support in the record to suggest that Music Choice or a similarly 
situated PSS would enjoy anything but minimal bargaining power in 
negotiations with the labels, particularly any of the major labels. As 
a result, even under the fundamentally flawed Crawford model, nothing 
but the highest projected rate of 5.6% would even be considered to fall 
within a zone of reasonableness. Given the inherent subjectivity of the 
model, however, the Judges continue to conclude that it provides no 
useful information regarding the royalty rates that a PSS should pay, 
other than perhaps to eliminate from a potential zone of reasonableness 
all rates at or below 5.6%. Therefore, the Judges reject, for the 
second time in two consecutive PSS

[[Page 65218]]

proceedings, the usefulness of Professor Crawford's presentation of the 
Nash Framework as a model for determining reasonable royalty rates for 
the PSS.
b. SoundExchange's Proffered CABSAT Rate
i. The CABSAT Benchmark
    SoundExchange asserted that there is no applicable marketplace 
benchmark suitable for the PSS market, even with a comparability 
adjustment. See Wazzan CWDT ] 12. According to SoundExchange ``nobody 
has identified any agreements relating exclusively to a PSS, or even 
relating in material part to a PSS.'' Id. ]] 45, 47.\38\ SoundExchange 
observed that even if such agreements existed, one would expect the 
rates under those agreements to be influenced by the statutory license. 
Id. ] 44.
---------------------------------------------------------------------------

    \38\ SoundExchange acknowledged that the record includes 
evidence of two Muzak agreements that address Muzak's PSS service, 
but SoundExchange asserted that these agreements are concerned 
primarily with Muzak's business establishment service. Trial Exs. 
401, 402. In any case, SoundExchange asserted that there are a 
number of reasons why these agreements would not make suitable 
benchmarks. See Wazzan CWDT ] 45.
---------------------------------------------------------------------------

    Rather, SoundExchange proffered as its benchmark a royalty rate 
developed in a settlement under section 114 of the Act and applicable 
to certain ``new subscription services'' that offer digital music 
transmissions to cable or satellite television subscribers.\39\ 
SoundExchange referred to these new subscription services' rates as 
``CABSAT'' rates. The Judges adopted the ``CABSAT'' rates in a separate 
proceeding under a statutory provision that prescribes a rate-setting 
standard different from the one at issue in the present proceeding. See 
Written Direct Testimony of Paul Wazzan, Trial Ex. 27, ] 11 (Wazzan 
WDT).
---------------------------------------------------------------------------

    \39\ See 37 CFR part 383. Three services currently offer 
residential audio services through cable and satellite television 
providers and pay royalties under part 383 regulations as New 
Subscription Services: Stingray, Sirius XM, and Muzak's legacy DMX.
---------------------------------------------------------------------------

    SoundExchange asserted that the CABSAT rates are set in a 
``hybrid'' market in which negotiations occur in a marketplace setting 
but, in the case of an impasse, either party can appeal to a judicial 
or regulatory body for a rate determination. SoundExchange contended 
this ``hybrid'' environment makes CABSAT rates an appropriate benchmark 
if the parties have similar stakes in the benchmark and target markets. 
See Crawford WDT ] 50; Wazzan CWRT ] 20. SoundExchange concluded that 
while no party has identified a suitable marketplace benchmark for the 
PSS that is not constrained by regulation, the statutory CABSAT rates 
are ``a market-like rate.'' See Crawford WDT ] 58.
    SoundExchange argued that the two services that use the statutory 
PSS license (i.e., Music Choice and Muzak's Dish CD service) ``are in 
all important respects functionally equivalent to the three services 
``that use the statutory CABSAT license.'' See SX PFFCL at xxiv. 
SoundExchange asserted that both services are cable radio services that 
are delivered to consumers through MVPDs; both provide a similar number 
of channels and similar genres of music; both would negotiate in the 
hypothetical market for the same rights from the same entities; and 
PSSs would meet every element of the regulatory definition of a CABSAT 
service. SoundExchange argued that PSSs and CABSAT services compete 
head-to-head for carriage on MVPDs. In short, according to 
SoundExchange, the only material difference between the two types of 
services is the date on which they commenced operation. See, e.g., 
Wazzan CWDT ]] 59, 60, 66; Crawford WDT ] 50; 5/3/17 Tr. at 2305-06 
(Wazzan); 4/24/17 Tr. at 714 (Crawford); Written Direct Testimony of 
Jonathan Bender, Trial Ex. 29, at 29 (Bender WDT). For that reason and 
``because setting relatively lower rates for the PSS would distort the 
market in their favor'' SoundExchange asserted: ``the CABSAT rates 
present an appropriate benchmark in the absence of any clearly-
appropriate unregulated marketplace benchmark.'' Id.
    According to SoundExchange, Music Choice considers Stingray, one of 
the CABSAT services, to be its primary competitor. 5/18/17 Tr. 4641-42 
(Del Beccaro). SoundExchange acknowledged that the CABSAT rates, which 
are statutory rates set in the context of a CRB rate proceeding, are 
not unregulated marketplace rates. Nevertheless, SoundExchange asserted 
that the CABSAT rates represent the ``best available benchmark for the 
PSS rates.'' SX PFFCL at xlv. SoundExchange acknowledged that the 
statutory rate standard for CABSATs is a willing buyer/willing seller 
standard. Nonetheless, SoundExchange contended that no adjustment would 
be required to the CABSAT rates under the Section 801(b) factors before 
applying them to the PSS services. See Wazzan CWDT ] 18. The extant 
CABSAT rates only apply for three of the five years of the current PSS 
rate period (2018-2020), therefore SoundExchange proposed that the 
Judges apply a 3% per year rate increase (the size of the CABSAT rate 
increases in 2018-2020) to the 2020 CABSAT rate to derive the rates for 
2021 and 2022, the last two years of the upcoming PSS rate period. See 
Bender WDT at 29-31.
    Under SoundExchange's proposal, the rate for PSSs' residential 
audio services would be a monthly per-subscriber rate of $0.0190 for 
2018, $0.0196 for 2019, $0.0202 for 2020, $0.0208 for 2021, and $0.0214 
for 2020. SX Amended Rate Proposal at 7, 10. These rates would cover 
the PSSs' royalty obligations under the section 114 and 112(e) 
licenses. Id.
    For PSSs' webcasting activities,\40\ SoundExchange proposed that 
the PSS pay the same rates that apply to commercial webcasters 
providing a subscription service under 37 CFR 380.10. Through 2020, 
that rate would be a per-performance rate of $0.0022, adjusted for 
inflation. For PSSs that are unable to measure performances, the rate 
would be based on the average number of recordings on the service 
played per hour multiplied by the Aggregate Tuning Hours. SX Amended 
Rate Proposal at 8.
---------------------------------------------------------------------------

    \40\ This proposed rate would apply to ``all licensed 
transmissions and related ephemeral recordings through an internet 
streaming service qualifying as a PSS (or any similar service 
capable of tracking the individual sound recordings received by any 
particular consumer).'' SX Amended Rate Proposal at 8.
---------------------------------------------------------------------------

    In advocating for the CABSAT benchmark, SoundExchange also stressed 
the importance of changing the current rate structure from a percent-
of-revenue to a per-subscriber structure, because CABSAT rates are 
calculated per-subscriber. SX PFFCL ] 1949. SoundExchange acknowledged 
that one could convert the proffered CABSAT-based rates to a percentage 
rate. SoundExchange estimated that in 2015, Stingray paid an effective 
percentage royalty rate of ``just under [REDACTED] %'' of its revenues. 
SX PFFCL ] 1949. This converted CABSAT rate compares to Professor 
Crawford's estimate that Music Choice would pay between [REDACTED] % 
and [REDACTED] % of its unadjusted residential audio service revenue 
under SoundExchange's rate proposal. See Crawford WRT ] 113. Given this 
perceived equivalence, SoundExchange perceived no reason to adopt a 
percent-of-revenue rate structure for PSS in the current proceeding. 
Id.
    SoundExchange contended that a per-subscriber rate structure is 
preferable because Music Choice is paid under such a structure by its 
MVPD customers. Id. ] 1950. SoundExchange also argued that a per-
subscriber rate is easier to apply and more transparent than a 
percentage-of-revenue rate. See Orszag AWDT ] 27; Crawford WDT ]] 147-

[[Page 65219]]

148; Bender WRT at 13.\41\ Of particular concern to SoundExchange was 
the perception that a revenue-based structure gives Music Choice the 
flexibility to reduce the amount of royalties it pays by charging its 
affiliated owners discounted prices. According to SoundExchange, Music 
Choice is partially owned by cable companies, including Comcast, Time 
Warner Cable, and Cox, and charges lower prices to its MVPD owners than 
it charges to other MVPDs. See Wazzan CWDT ] 90. SoundExchange argued 
that ``the Judges should be suspicious of commercial arrangements 
between Music Choice and its MVPD partners.'' Id. ] 1979.
---------------------------------------------------------------------------

    \41\ SoundExchange acknowledged that although allocation 
disputes can arise under a percent-of-revenue structure, ``such 
disputes have not materialized between SoundExchange and Music 
Choice in recent memory.'' SXPFFCL at ] 1952.
---------------------------------------------------------------------------

    SoundExchange disputed Music Choice's attestations that its MVPD 
partner affiliate fees are a function of the relative size of 
affiliated MVPDs vis-[agrave]-vis non-affiliates. See Del Beccaro WDT 
at 22-23; but see Wazzan WDT ] 91. SoundExchange contended that 
evidence in the record shows that all affiliates received discounted 
rates from Music Choice, regardless of the number of subscribers they 
had at the time. SX PFFCL ] 1990; Trial Ex. 410, Music Choice Partner 
Affiliation Agreement, Sch. B at MC0012247-48; 5/3/17 Tr. 2333 
(Wazzan). SoundExchange contended that this purported affiliate 
discount, which remains in effect, represents a [REDACTED] % discount 
to fees that non-affiliated MVPDs are required to pay. 5/3/17 Tr. 2333-
37 (Wazzan). SoundExchange represented that Music Choice's non-partners 
with the largest number of subscribers are expected to pay $[REDACTED] 
or $[REDACTED] per subscriber per month in 2018, while the partners are 
expected to pay $[REDACTED] per subscriber per month, about one third 
as much. See Wazzan CWRT, App. C. at 43-44.
ii. Music Choice's Opposition to the CABSAT Benchmark and Per-
Subscriber Rate Structure
    Music Choice opposed SoundExchange's proffered CABSAT benchmark and 
proposed per-subscriber rate structure. As a preliminary matter, Music 
Choice contended that SoundExchange's identification of the necessary 
components of a comparable market for benchmarking purposes omits two 
key requirements, namely that the benchmark represent a workably 
competitive market and that the buyers and sellers in both the target 
market and the benchmark market have similar stakes. See Crawford WDT ] 
50; 5/24/17 Tr. at 695-96 (Crawford). Music Choice contended that the 
proffered CABSAT benchmark fails on both accounts because the CABSAT 
rates and terms were set by a settlement between SoundExchange and 
Sirius XM. Crawford WDT ]] 55-56. According to Music Choice, the 
settlement did not reflect any sort of competitive marketplace. Id.
    Music Choice asserted that Sirius XM is not an active participant 
in the CABSAT market, providing its CABSAT service to only one 
affiliate (DISH Network). Music Choice contended that Sirius XM's 
CABSAT service is merely a promotional vehicle to drive subscriptions 
to its primary business, the satellite radio service. See Crawford WRT 
] 43. In support of this argument, Music Choice noted that Sirius XM's 
CABSAT service generates only [REDACTED] % of Sirius XM's revenues. 
Given that the CABSAT service generates such a miniscule percentage of 
Sirius XM's revenues, Music Choice argued that Sirius XM had no real 
incentive to vigorously negotiate the CABSAT settlement let alone incur 
the costs of a rate proceeding.\42\ Id. ]] 55-56. By contrast, Music 
Choice has a far different stake because the PSS service is its primary 
business. Crawford WDT ] 129 (Music Choice's residential audio service 
remains its most important business in terms of revenues and company 
strategy).
---------------------------------------------------------------------------

    \42\ Music Choice argued that the ``bargaining and market 
dynamics that led to the settlement from which the current CABSAT 
rates and terms are derived also make clear that those rates are not 
market rates, or even market-like . . .'' MC Reply to 
SoundExchange's PFFCL at 68. According to Music Choice, Sirius XM 
had no rational business incentive to litigate the last CABSAT 
proceeding, so it had little choice but to settle. Id. at 69-70 (and 
evidence cited therein).
---------------------------------------------------------------------------

    In Music Choice's estimation, the proffered CABSAT benchmark lacks 
a key indicator of comparability--similar stakes--which Music Choice 
asserted must be present when using a benchmark from a hybrid market 
(i.e., a market in which negotiations occur in a marketplace setting 
but, in the case of an impasse, either party can appeal to a judicial 
or regulatory body for a rate determination). See Crawford WRT ]] 55-
56. Music Choice also argued that the ``sellers'' in the proffered 
CABSAT market and the hypothetical PSS market are not comparable 
because in the CABSAT market SoundExchange represents the entire record 
industry as opposed to individual record companies which purportedly 
would reflect the sellers in the hypothetical PSS market. Id.
    Music Choice also argued that the proffered CABSAT benchmark is 
flawed because the underlying CABSAT market is neither competitive nor 
stable. See Del Beccaro WRT at 5-6. According to Music Choice, 
``[t]here has never been a CABSAT licensee that has proven able to 
operate a long-term profitable business from its CABSAT operations, nor 
have the majority of participants in the CABSAT market actively or 
successfully sought new affiliates or competed in the marketplace.'' 
Id. Music Choice asserted that Stingray is the ``only active CABSAT.'' 
Id.\43\ According to Music Choice, after six years in the CABSAT market 
Stingray has captured only 6% of the MVPD market and, until recently, 
all of its affiliates were small cable operators that pay high rates, 
which have sustained Stingray. See Del Beccaro WRT at 10. Music Choice 
projected that if it left the market, Stingray could not replace it 
because Stingray would have to reach agreements with larger MVPDs at 
lower rates while still paying the high per-subscriber CABSAT rates. 
Id. Over time under this market dynamic Music Choice contended Stingray 
would be forced to exit the CABSAT market. Id.
---------------------------------------------------------------------------

    \43\ According to Music Choice, the only companies ever to enter 
the CABSAT market are MTV, DMX, Sirius XM, and Stingray. Music 
Choice represented that MTV and DMX have since exited the CABSAT 
market. According to Music Choice, Sirius XM has only one affiliate, 
which it purportedly uses as a promotion tool, and is not competing 
for new business. MC Reply to SX PFFCL at 71-72 (and evidence cited 
therein).
---------------------------------------------------------------------------

    Music Choice also faulted SoundExchange for glossing over the 
legislative history of the PSS license and the Section 801(b) policy 
standard, which, Music Choice contended, reflects Congressional intent 
to ``protect the unique business expectancies of the PSS, even against 
later market entrants, which is inapplicable to other statutory 
licensees and must inform any interpretation or application of the 
801(b)(1) policy standard to the PSS.'' MC Reply to SX PFFCL at 66. 
Music Choice noted that ``Congress `grandfathered' the three PSS, Music 
Choice, DMX and Muzak, which were already in operation at the time 
Congress passed the Digital Millennium Copyright Act (DMCA) \44\ 
allowing the PSS to continue operating under the 801(b)(1) policy-based 
rate standard rather than be subjected to the new [willing buyer/
willing seller] marketplace standard.'' Id. at 65. Thus, Music Choice 
concluded, ``the mere fact that non-comparable services pay different 
rates provides no useful data for setting the PSS rates.'' Id. at 66.
---------------------------------------------------------------------------

    \44\ Public Law 105-304, 112 Stat. 2860 (Oct. 28, 1998).
---------------------------------------------------------------------------

    Music Choice agreed with SoundExchange (and Dr. Wazzan) that

[[Page 65220]]

there are no types of licensed music services comparable to the PSS. 
Id. at 67. Music Choice disagreed, however, that the current PSS rate 
is below market. In fact, it contended that the current PSS rate is an 
above-market rate, given that it is the result of settlements that 
Music Choice had little choice but to accept to avoid litigation costs. 
Id. (MC Reply to SX PFFCL ] 1789).
    Music Choice contended that, despite SoundExchange's claims to the 
contrary, the reason Music Choice has not sought direct licenses is not 
because it would not get a better rate than the statutory rate but 
because the cost of direct license negotiations would be too high. Id. 
Music Choice also noted that since the current statutory rate does not 
exclude revenues from direct licenses for PSS, Music Choice would still 
have to pay a share of revenues attributed to the sound recordings from 
the direct licenses in addition to the royalties required by those 
direct licenses. Id. at 67-68. According to Music Choice, direct 
licensing would only make sense if it could directly license 100% of 
its music. Id. at 68 (Reply to SX PFFCL ] 1789).
    Music Choice acknowledged that PSS providers and CABSAT services 
both sell cable radio to MVPDs but contended that material differences 
in quality, programming, on-screen displays and other features set the 
PSS (or at least Music Choice's) service apart from that of the 
CABSATs. Id. at 77. Music Choice contended that its screen displays 
provide significantly more promotional impact than those of any CABSAT 
service. Id. at 78-79.\45\
---------------------------------------------------------------------------

    \45\ Music Choice cited the fact that it bundles its residential 
PSS with its video offerings as ``critical and relevant, because 
those bundled offerings provide a value proposition that is 
appealing to MVPD providers and allows [Music Choice] to compete 
effectively against the Stingray and Sirius XM's CABSAT services.'' 
MC Reply to SXPFFCL at 85.
---------------------------------------------------------------------------

    Music Choice also opposed the per-subscriber rate structure that 
SoundExchange proposed. Music Choice contended that the proposal is 
based on the false premise that Music Choice provides unfairly 
advantageous discounts to cable providers with which Music Choice is 
affiliated. MC PFF ] 279; Wazzan WDT at 37-38; 5/3/17 Tr. 2330 
(Wazzan). Music Choice represented that a supermajority interest in 
Music Choice is owned by non-cable companies, including some affiliated 
with record companies, which would be harmed if Music Choice gave 
below-market rates to its cable affiliates. Therefore, according to 
Music Choice, doing so would make no economic sense. MC PFF ]] 283, 
285-288; Del Beccaro WRT at 16, 19-20.
    Music Choice asserted that any preferential pricing it offers is 
the result of the size of the cable company, although factors such as 
long-term commitment to the Music Choice service may also play a role. 
Del Beccaro WRT at 16-17. Indeed, Music Choice represented that at 
times its cable affiliates have made concessions on price just to help 
Music Choice survive. MC PFF ] 299; 5/18/17 Tr. 4593-94 (Del Beccaro); 
4/24/17 Tr. 804-05 (Crawford).
iii. Judges' Analysis of SoundExchange's Proffered CABSAT Benchmark and 
Proposed Per-Subscriber Rate Structure
    In determining whether a proffered marketplace benchmark is 
comparable to the hypothetical target market the Judges have looked at 
the comparability of the buyers, sellers, and rights over which the 
parties negotiated.\46\ When the two markets were comparable (i.e., the 
buyers, sellers, and rights are the same), the Judges have found that 
the rate that the buyers and sellers have negotiated in the market can 
provide useful guidance in determining the rate for the target 
market.\47\ In the present proceeding, SoundExchange conceded that 
``[t]he CABSAT benchmark is not a marketplace benchmark. It is instead 
a regulated rate.'' SX PFFCL ] 1847 (and evidence cited therein). The 
prevailing CABSAT rates were agreed to by SoundExchange and Sirius XM, 
the only remaining participants, in a CRB rate-setting proceeding. See, 
e.g., Crawford WRT ] 33.\48\
---------------------------------------------------------------------------

    \46\ See, e.g., SDARS I, 73 FR 4080, 4088 (Jan. 24, 2008).
    \47\ See id. (`` `comparability' is a key issue in gauging the 
relevance of any proffered benchmarks . . . potential benchmarks are 
confined to a zone of reasonableness that excludes clearly 
noncomparable marketplace situations'').
    \48\ The rates that the participants agreed to and the Judges 
adopted based on that agreement were monthly per subscriber payments 
of: 2016: $0.0179; 2017: $0.0185; 2018: $0.0190; 2019: $0.0196; and 
2020: $0.0202. 80 FR at 36928 (37 CFR 383.3(a)(1)).
---------------------------------------------------------------------------

    As a threshold matter, the Judges note that in setting a statutory 
rate for PSS they are not required to approximate a market rate.\49\ 
Rather, the Judges' mandate is to set a reasonable rate consistent with 
the Section 801(b) factors.\50\ In enacting the DMCA, Congress carved-
out the PSS from application of the willing buyer/willing seller 
standard intended to approximate a market rate.\51\ The intent of the 
carve-out was to acknowledge the pioneering status of the PSS, which 
invested in a new type of digital audio service (i.e., transmission of 
noninteractive audio to the television) in reliance on the existing 
801(b) rate standard and to protect their prior investments.\52\ The 
PSS took the risks and received the benefits, one of which was a 
statutory exception from the rate-setting provisions in the DMCA that 
were designed to ``move the industry to market rates.'' \53\ 
SoundExchange now argues, however, that the Judges should adopt the 
proffered CABSAT rate benchmark as a market-like rate. The Judges 
decline.
---------------------------------------------------------------------------

    \49\ Music Choice v. CRB, 774 F.3d. 1000, 1012 (``nothing in the 
statute requires the Judges to rely on market rates or agreements 
when setting Section 114 rates'').
    \50\ 78 FR at 23055; Music Choice v. CRB, 774 F.3d at 1013 
(``The Copyright Act does not `clearly require[ ] the use of `market 
rates'. [I]nstead, `reasonable rates' are those that are calculated 
with reference to the four statutory criteria.'').
    \51\ SoundExchange v. Muzak, 854 F.3d 713, 714-15 (D.C. Cir. 
2017).
    \52\ See Id. at 719.
    \53\ Id.
---------------------------------------------------------------------------

    Notwithstanding the similarities in PSS and CABSAT service 
offerings that SoundExchange noted, the Judges do not find the 
proffered CABSAT rate benchmark is a useful starting point from which 
to apply the Section 801(b) factors.
    First, it is not at all clear to the Judges that the proffered 
CABSAT benchmark market and the hypothetical PSS market offer the same 
rights. As discussed below in reference to the Register's Memorandum 
Opinion regarding the scope of the PSS market, the rights that the PSS 
can exercise while maintaining the grandfathered rate-setting 
methodology are limited to PSS entities' existing service offerings and 
expanded service offerings, as the Register defines those terms. 
Services that a PSS entity provides outside the scope of the 
grandfathered categories constitute different service offerings, i.e., 
rights outside those offered in the hypothetical PSS market. Although 
the types of activities that PSS and CABSAT entities perform may 
overlap in certain respects, for purposes of determining comparability 
of the hypothetical market to the target market, the relevant service 
bundle is limited to those activities that the hypothetical PSS entity 
may provide consistent with the grandfathered rate methodology.
    PSS entities, such as Music Choice, and CABSAT entities may (and 
do, subject to an appropriate royalty rate) provide services outside 
the scope of the PSS license (e.g., internet-based and mobile 
application-based services that are consumed outside the home).\54\

[[Page 65221]]

These different services, however, are not included within the bundle 
of rights that PSS entities would negotiate for in the hypothetical 
market. Although it is theoretically possible to adjust the proffered 
CABSAT benchmark to accommodate for the difference in the bundle of 
rights that the CABSAT and PSS services negotiate for, SoundExchange 
acknowledged no such difference and, consequently, offered no 
adjustment in the current proceeding to account for the difference. The 
Judges can find no persuasive evidence in the record that would allow 
the Judges to develop such an adjustment sua sponte.\55\
---------------------------------------------------------------------------

    \54\ Dr. Wazzan referenced some of the differences he perceived 
between the services that PSS and CABSAT entities provide. Wazzan 
WDT ]] 67-72. For example, he noted that Music Choice provides 
``internet simulcasts of its channels to subscribers of the MVPDs 
that distribute Music Choice'' but took no position on whether such 
streaming is part of its PSS. Id. ]] 67-68. He continued that ``the 
CABSAT rates in Part 383 are quite clearly limited to a service 
`transmitted to residential subscribers of a television service' 
through an MVPD using `a technology that is incapable of tracking 
the individual sound recordings received by any particular 
consumer.'' Id. ] 70. According to Dr. Wazzan, ``internet streaming 
is something else, because streams are typically transmitted to 
devices other than televisions, over the public internet.'' Id. Dr. 
Wazzan noted that Sirius XM and Stingray both provide internet 
streaming services but do so under a different rate structure than 
that applicable to the CABSAT service. Id. ] 72. In finding that the 
rights conveyed to the CABSAT services are not comparable, for 
benchmarking purposes, to those for which a theoretical PSS would 
negotiate, the Judges do not take a position on whether the rights 
conveyed to the theoretical PSS entities are broader or narrower 
than those conveyed to the CABSAT services. They could be broader in 
some senses and narrower in others, but the evidence in the record 
shows that there are meaningful differences. All differences could 
affect the value of the underlying license and therefore are 
relevant in assessing the comparability of the proffered benchmark 
market and the target market. Ultimately, a detailed analysis might 
support a finding that, on balance, the differences are a wash, 
which would support a finding that, notwithstanding the differences 
in the rights granted, no comparability adjustment was necessary. 
Based on the record in the current proceeding, however, the Judges 
are not in a position to make such an assessment and therefore are 
left with a record that shows a lack of comparability of rights with 
no adjustment to sufficiently align the markets.
    \55\ Although the Register's Memorandum Opinion was issued after 
the record was closed in the current proceeding, the D.C. Circuit's 
Muzak decision, which highlighted the limitations in the rights that 
a PSS could exercise consistent with the grandfathered rate 
methodology, was issued during the proceeding. As a party to the 
case, SoundExchange advocated for the restrictions on the PSS 
license that the D.C. Circuit found. SoundExchange certainly could 
reasonably anticipate the impact that the Muzak decision would have 
on the rights that other PSS entities could exercise consistent with 
the grandfathered rate-setting methodology. Indeed, one of 
SoundExchange's witnesses referenced the decision and the 
limitations it placed on the rights that a PSS entity could exercise 
consistent with the grandfathering provision. SX PFFCL ] 1807; 5/10/
17 Tr. 3205 (Bender); see SX PFFCL ] 1807 (``[d]uring the hearing in 
this case, the Court of Appeals for the D.C. Circuit held that 
Muzak's PSS status is limited to its historic DishCD service.'') 
Therefore, SoundExchange had notice that the rights that a 
hypothetical PSS entity could exercise consistent with the 
grandfathering provision were limited to providing the types of 
services (i.e., existing and expanded service offerings) that the 
Register set forth in her Memorandum Opinion addressing the scope of 
the PSS license.
---------------------------------------------------------------------------

    SoundExchange attempted to conflate what the PSS services and 
CABSAT services do (as represented by SoundExchange) with what they 
have the right to do either in the hypothetical PSS market or in the 
CABSAT market. SX PFFCL ] 1794 (``the same rights are conveyed, because 
both create audio music channels incorporating the licensed sound 
recordings and sell them to MVPDs, who in turn resell those channels to 
consumers as part of subscription bundles.''); see 5/3/17 Tr. at 2305-
06 (Wazzan); see also SX PFFCL ]] 1797-1799 (``CABSAT Services And PSS 
Are Functionally Equivalent Cable Radio Services And So Implicate the 
Same Rights''). Similarities in service offerings do not necessarily 
equate to comparability of rights that each of the service types is 
authorized to exercise.
    SoundExchange's attempted direct compare-and-contrast of the 
various activities in which the two types of entities engage also 
ignores the fundamental, statutory difference between PSS and CABSAT: 
Legislative intent that PSS and non-PSS be treated differently with 
respect to the way in which their respective royalty rates are 
determined. By SoundExchange's own admission, the CABSAT rates were 
based on a settlement agreement negotiated in the context of a 
proceeding in which the applicable rate standard was a willing buyer/
willing seller standard. In adopting the DMCA, Congress expressly 
carved-out the PSS from that standard. The Judges conclude that 
applying the CABSAT rate benchmark as proffered by SoundExchange in the 
current proceeding would effectively subject the PSS to the willing 
buyer/willing seller standard, which, in the Judges' view, would be 
inconsistent with Congress's intent in adopting the PSS rate-setting 
methodology in the DMCA.
    The proffered CABSAT benchmark also raises concerns because of the 
enormous difference between the current PSS statutory rate of 8.5% of 
gross revenues and the rates proposed under the CABSAT benchmark 
(converting to approximately [REDACTED] % of revenue in the first 
year). In SDARS II, the Judges characterized a difference between the 
prevailing statutory rate of 8% and a proposed rate as high as 32.5% 
(for SDARS services) as a ``yawning gap'' that raised concerns about 
the reasonableness of the proffered benchmark that yielded such rates. 
See 78 FR at 23066. The Judges have the same concerns about the rates 
derived from the proffered CABSAT benchmark and find that the wide gap 
strongly suggests that the buyers in the CABSAT market lack 
comparability with those in the theoretical PSS market. This difference 
in comparability of buyers is supported by SoundExchange's own 
admission that Sirius XM, which negotiated the CABSAT rates with 
SoundExchange, ``is first and foremost the provider of an SDARS'' that 
``also provides a CABSAT service.'' SX PFFCL ] 1838. The PSS in the 
theoretical market are buyers negotiating for rights to operate their 
core business and therefore will have a greater stake in negotiating 
the most favorable rate. On the other hand, a buyer negotiating for 
rights for a non-core service might be more willing to settle for an 
acceptable rate rather than the best possible rate. Significant 
differences in the stakes of the respective buyers between the PSS and 
the CABSAT services suggest a lack of comparability between the two for 
benchmarking purposes.
    The Judges conclude that the CABSAT benchmark as proposed in the 
current proceeding is not sufficiently comparable to the hypothetical 
PSS target market and that the CABSAT rates are outside of the zone of 
reasonableness for determining PSS rates for the upcoming rate period. 
The only useful information that the proffered CABSAT benchmark 
provides is to identify a rate ceiling that any reasonable PSS rates 
must remain below. In other words, a reasonable PSS rate for the 
upcoming rate period must be lower than the lowest rate proposed by 
SoundExchange based on the CABSAT benchmark (i.e., $0.0190 per 
subscriber or [REDACTED] % of gross revenues).
    By rejecting the proffered CABSAT benchmark, the Judges also reject 
one of SoundExchange's arguments in support of abandoning the current 
percent-of-revenue rate structure in favor of a per-subscriber rate 
structure. See SX PFFCL ] 1949. The Judges find SoundExchange's other 
reasons in support of a per-subscriber rate structure equally 
unpersuasive. Even reviewing the evidence SoundExchange presents in a 
light most favorable to SoundExchange, the Judges do not find that 
Music Choice's arrangements with its affiliated MVPD customers support 
a change in the rate structure to a per-subscriber structure. In this 
regard, the Judges accept as credible the evidence that Music Choice 
presented that historically it has charged and currently charges 
similarly situated non-partner

[[Page 65222]]

affiliates rates that are the same as or lower than those charged to 
its partners. MC Reply to SX PFFCL at 188 (Reply to SX PFFCL ] 1960) 
(and evidence cited therein); see, e.g., 5/18/17 Tr. 4582, 4593-94 (Del 
Beccaro); Del Beccaro WRT at 18.
    If SoundExchange and Music Choice were to agree to a per-subscriber 
rate structure, that structure would not, on its face, be inconsistent 
with the Copyright Act. Without a persuasive argument, supported by the 
evidentiary record, however, the Judges are reluctant to change the 
existing rate structure, which has thus far seemingly operated 
effectively. The arguments and record in the current proceeding do not 
support such a change. Therefore, the Judges reject SoundExchange's 
request to change the rate structure to a per-subscriber structure.
    After reviewing and dismissing both proffered benchmarks, the 
Judges are left with the broad parameters of a zone of reasonableness 
that must be higher than 5.6% of gross revenues \56\ and lower than 
[REDACTED] % of gross revenues (or $0.0190 per subscriber). The current 
rate of 8.5% of gross revenues falls within that range, albeit toward 
the lower end. In SDARS II, the Judges could endorse no proffered 
benchmark as an appropriate starting point for application of the 
Section 801(b)(1) factors. See 78 FR at 23059. Therefore, the Judges 
looked to the prevailing statutory rate to begin the analysis of the 
Section 801(b)(1) factors. Id.
---------------------------------------------------------------------------

    \56\ See supra, section IV.C.1.a.
---------------------------------------------------------------------------

    Notwithstanding that no party advocated using the statutory rate as 
the starting point of the Section 801(b)(1) analysis and that the rate 
was negotiated in the shadow of the statutory license, the Judges found 
in SDARS II that the current rate was neither too high, too low, nor 
otherwise inappropriate. Id. The Judges reach the same conclusion in 
the current proceeding. As was the case in SDARS II, neither party has 
proposed using the current statutory rate as the starting point for 
applying the Section 801(b)(1) factors. SX PFFCL ] 1889; 4/25/17 Tr. 
848 (Crawford). Music Choice contended that the current rate is too 
high and SoundExchange contended that it is too low. The parties do not 
contend that the previous PSS proceeding was ``necessarily'' wrongly 
decided, only that the Judges now must look elsewhere to find a 
reasonable rate. See 5/3/17 Tr. 2305 (Wazzan).\57\
---------------------------------------------------------------------------

    \57\ As discussed below, Music Choice did fault the Judges' 
decision to make an upward adjustment to the prevailing statutory 
rate to account for Music Choice's anticipated increase in the 
number of channels it offered.
---------------------------------------------------------------------------

    Both parties' disdain for the current statutory rate appears to 
stem primarily from the fact that in the first proceeding to set a rate 
for the PSS, which occurred about twenty years ago, the CARP looked to 
the musical works royalty rate to help determine what the rate should 
be for the PSS. See, e.g., SX PFFCL ]] 1894-1900. Since then, the 
parties have either agreed to a royalty rate or, as occurred in SDARS 
II, the Judges selected a rate after fully reviewing the evidence in 
the record. The Judges and their predecessors each chose a rate that 
they viewed as reasonable and supported by the evidence before them at 
the time. The fact that once upon a time one decision-maker relied on a 
type of evidence that the Judges do not find persuasive in the current 
proceeding on the current record is irrelevant in the current 
proceeding. Unlike Music Choice and SoundExchange, the Judges are not 
convinced that the specter of the musical works rate on the prevailing 
PSS rate is so great as to preclude the Judges from using the current 
PSS rate as the starting point for applying the Section 801(b)(1) 
factors.
    The Judges must continue to have the flexibility to rely on the 
best evidence they have available on the record before them in 
selecting reasonable rates and terms for the upcoming rate period. At 
this time, in this proceeding, on this record, the best available 
evidence is the prevailing statutory rate, which falls within the broad 
parameters of the zone of reasonableness indicated by the evidence that 
the parties presented. Therefore, the Judges look to the prevailing 
statutory rate of 8.5% as the starting point for the Section 801(b) 
analysis.
2. Application of the 801(b)(1) Factors
    The digital performance license requires that the rates (but not 
the terms) be determined to achieve the statutory objectives detailed 
above. See 17 U.S.C. 801(b)(1). SoundExchange asserted that if the 
Judges use the prevailing statutory rate as the starting point of the 
section 801(b) factor analysis then they should adjust the rates upward 
to provide copyright owners a fair return (Factor 2), to reflect their 
greater contributions to the product made available to the public 
(Factor 3), and to avoid further disruption of the industries involved 
(Factor 4). SX PFFCL ] 2112.
    Music Choice contended that the Judges should not have adjusted the 
prevailing statutory rate upward in SDARS II to account for Music 
Choice's projected increase in usage of sound recordings. Music Choice 
argued that the PSS license is not a general ``usage'' license (in that 
making more channels available does not necessarily lead to a greater 
number of performances), and that listeners can only listen to one 
channel at a time, regardless of how many channels are available for 
them to choose from. Del Beccaro WDT at 16.\58\ The Judges find this 
claim somewhat peculiar. Music Choice appears to assume that all 
members of a household are transfixed to the same television set as 
they might have been at the dawn of the television age. Modern viewing 
habits, however, are far different. Televisions and other comparable 
electronic devices abound in modern households. It is not unreasonable 
to assume that each individual in a modern household could have access 
to his or her own viewing or listening device, any one of which might 
be capable of viewing or listening to the Music Choice service.
---------------------------------------------------------------------------

    \58\ Music Choice contended that had there been any increase in 
revenues due to the increase in the number of channels that Music 
Choice offered, that SoundExchange would have reaped the benefits 
through increased royalties under as a percentage of revenues. In 
SDARS II, the Judges found no evidence to support a projected 
increase in revenues. 78 FR at 23060 (``Music Choice provided no 
evidence, however, to suggest that the planned expansion in usage 
would result in increased revenues to which the statutory royalty 
rate is to be applied''.) Indeed, Music Choice represented that even 
though it added 25 channels to its app and internet platforms during 
the current rate period, its listenership remained flat while its 
revenues actually decreased. Del Beccaro WDT at 16, 18.
---------------------------------------------------------------------------

    In SDARS II, the Judges found evidence of Music Choice's then 
current intention to increase the number of Music Channels offered from 
46 to 300. 78 FR at 23059. Music Choice does not dispute that 
intention. Del Beccaro WDT at 15. A greater variety of channels could 
reasonably be expected to attract its own audience.\59\ The Judges may 
rely on a party's present intentions as to future actions. Of course, 
present intentions of future actions do not ensure that the latter will 
come to fruition. In this instance, the Judges' finding was based on 
the evidence in the record before them. Music Choice represented in the 
current proceeding that in actuality, the expansion of its service was 
far more limited than it had anticipated in the last rate period. Del

[[Page 65223]]

Beccaro WDT at 18. Consequently, Music Choice contended that it has 
been overpaying for the past rate period because the rate should have 
been kept at 7.5% of gross revenues. Del Beccaro WDT at 18. Indeed, 
Music Choice argued that this alleged ``overpayment justifies a rate 
reduction in the next rate period'' below the previous period's 7.5% 
rate. Crawford WDT ] 214.
---------------------------------------------------------------------------

    \59\ Mr. Del Beccaro suggested that the Judges should follow the 
principle that PSS royalties should only be payable based on actual 
performances, which occur when a song is actually received by a 
listener as is the case with respect to webcasters. He quickly 
cautioned, however, that Music Choice is not able to track the 
actual number of performances to enable such a per-performance rate. 
Del Beccaro WDT at 16-17 and n.2.
---------------------------------------------------------------------------

    While Music Choice chose not to expand its channel offerings as it 
had anticipated, it had the right to do so consistent with the 
statutory license, and the rate that the Judges adopted reflected Music 
Choice's stated intention regarding that projected expansion. A 
licensee has no general statutory or regulatory right to a rebate in a 
subsequent proceeding. Nevertheless, the Judges specifically noted in 
SDARS II that if Music Choice's projected increase in channels did not 
materialize the Judges could take that fact into account in a future 
proceeding. 78 FR at 23061. In SDARS II, the Judges found the increase 
from 7.5% to 8.5% was consistent with the second section 801(b) factor 
(fair return to copyright owners).\60\ In this proceeding, the Judges 
examine again whether the basis for that increase continues to exist in 
the present market.
---------------------------------------------------------------------------

    \60\ 78 FR at 23059.
---------------------------------------------------------------------------

a. Factor A: Maximize Creative Works to the Public
    Music Choice contends that the PSS services are favored under this 
factor because the PSS (and Music Choice in particular) generate 
original content (such as on-screen displays and curated channels) in 
providing the PSS service. MC PFF ] 334-335. Music Choice contends that 
this original creative content has great promotional impact on the 
sound recordings they play on the service, which is illustrated by the 
fact that record labels lobby to get their sound recordings played on 
the service. Id. ]] 352-362. The Judges do not doubt that Music Choice 
expends resources promoting the artists that appear on the service and 
that such exposure can be promotional to the artists and their record 
labels. These efforts are already incorporated into the current 
statutory rate and therefore no downward adjustment is justified to the 
extent Music Choice promotes artists.
    Music Choice contended that the current rate is actually hindering 
it in providing the types of promotional services that help artists and 
labels. Del Beccaro WDT at 17-18. By Music Choice's own admission, 
however, much of the decline is due as much to Music Choice's declining 
revenues as to the royalty rate it pays. Written Direct Testimony of 
Damon Williams, Trial Ex. 56, at 32-33 (Williams WDT). Indeed, since 
the royalty is currently based on a percent of revenue, a decrease in 
revenues would actually result in a decrease in the royalties Music 
Choice pays. Nevertheless, Music Choice provided no quantification of 
the promotional effects, if any, its service has on the artists it 
promotes. Moreover, it provided no persuasive evidence to connect the 
current statutory rate with any decrease in such artist services. Given 
the record before them, the Judges do not find that the evidence 
supports a decrease from the current rate based on this section 801(b) 
factor.
    SoundExchange limited its discussion regarding this factor to 
arguments in support of adoption of the CABSAT rate and arguments 
against lowering the current PSS rate. The Judges do not adopt the 
CABSAT rates and find no persuasive evidence in the record to support a 
lower rate based on the first section 801(b) factor.
b. Factor B: Afford Fair Return and Fair Income
    The second section 801(b) factor requires the Judges to assess 
whether the rate (or rates) they have chosen to begin the section 
801(b) analysis affords the copyright owner a fair return for his or 
her creative work and the copyright user a fair income under existing 
economic conditions. 17 U.S.C. 801(b)(1)(B).
    As discussed above, in SDARS II the Judges found that an increase 
from the then-prevailing statutory rate was warranted because Music 
Choice anticipated greatly expanding the number of channels of music it 
would offer without any anticipated increase in revenues that would 
adequately compensate copyright owners for this increase. 78 FR at 
23060. In actuality, Music Choice's expansion was far more modest than 
it had anticipated. Del Beccaro WDT at 18; 5/18/17 Tr. 4521 (Del 
Beccaro); Del Beccaro WDT at 4 (Music Choice currently provides 50 
television-accessible music channels). Given that the basis for the 
Judges' increase in the royalty rate after the SDARS II hearing was a 
projected expansion of music channels that did not materialize, the 
Judges find that, all things being equal, a downward adjustment to the 
PSS rate from 8.5% back to 7.5% is most supported by the evidence and 
by SDARS II. See 17 U.S.C. 803(a)(1) (``The . . . Judges shall act in 
accordance with . . . prior determinations . . . of . . . the Judges . 
. . .'').
    According to Music Choice, the current rate has not provided the 
service a fair income under existing economic conditions. MC PFF ] 395. 
Music Choice asserted that, due to changes in Music Choice's downstream 
MVPD market, it anticipates losing money on its residential audio 
business over the next two years under the current rate. Id. ]] 395-
396. Music Choice's main contention was that a hyper-competitive market 
for its services is making it more difficult for it to remain 
profitable and provide the same level of services to copyright owners 
under current market conditions. Nevertheless, all of the conditions 
that Music Choice cited to support a downward adjustment are already 
incorporated into the current statutory rate. Music Choice provided no 
evidence that any new threat is on the horizon that might warrant a 
downward adjustment from the current statutory rate going forward. 
Moreover, as SoundExchange correctly noted, no copyright user, not even 
a PSS, is guaranteed any level of profitability.
    Music Choice argued that a decrease from the current rate would not 
have a material effect on the copyright owners and artists. MC PFF ] 
409. SoundExchange contended that the PSS pay lower royalty rates than 
any other music service and that these rates have a negative effect on 
copyright owners and artists who receive these low rates. See 5/18/17 
Tr. at 4621-23 (Del Beccaro) (PSS pay lower rates than other music 
services); Harrison WDT ] 29 (record companies would not agree to 
current PSS rates). SoundExchange contended that the PSS rate is so far 
below a market rate that it would be ``foolish'' for any record company 
to attempt to directly license their sound recordings at rates near the 
current rate. SX PFFCL ] 2131 (and evidence cited therein). 
SoundExchange also asserted that a higher rate for PSS would not be 
unfair because Music Choice could continue to operate; it would only 
make less money doing so, and the Copyright Act does not guarantee a 
copyright user a certain minimum level of profits. Id. ] 2134.
    The Judges do not mean to discount the fact that the market for 
providing content to cable and satellite providers is competitive and 
perhaps likely to grow more competitive in the future. Nevertheless, 
nothing in section 114 of the Copyright Act would authorize the Judges 
to shield PSS services from market forces and the Judges see no reason 
to do so in the absence of such a mandate. Music Choice's argument that 
a rate reduction would not materially affect the return that record 
labels receive for the sound recordings

[[Page 65224]]

they put into the marketplace is also misplaced. The relevant market 
for determining whether an adjustment is warranted is the market for 
PSS services, not the sound recordings market as a whole. As a 
percentage of total royalties, the amount copyright owners receive from 
the PSS services may be low. Nevertheless, all revenue sources are 
important for those that have earned them, and the rate charged for the 
use of sound recordings by the PSS must ensure that the copyright 
owners receive a fair return. Therefore, no additional downward 
adjustment is warranted.
    SoundExchange claimed that the PSS pay the lowest royalty rates of 
any type of music service. Even if true, those comparative rates are 
already reflected in the current statutory rate. Section 114 is clear 
that the PSS that qualify for the grandfathered rate methodology are 
sui generis. At the time the grandfathered provision was adopted the 
number of qualifying services was very limited and has become more 
limited over time. Only two companies qualify for the grandfathered 
rate methodology and only for portions of their respective businesses. 
Therefore, consistent with the section 114 grandfathering provision, 
the correct question to ask is not whether the current statutory rate 
(or whatever rate the Judges choose to begin analysis of the section 
801(b) factors) offers copyright owners a fair income vis-[agrave]-vis 
the rate they would earn from non-PSS music services but whether the 
current statutory rate offers copyright owners an unfairly low return 
that warrants an upward adjustment to ensure that copyright owners 
receive a fair return in the upcoming rate period. Admittedly, it is a 
difficult standard to meet, but SoundExchange has not provided 
sufficient persuasive evidence to support such an upward 
adjustment.\61\
---------------------------------------------------------------------------

    \61\ Having determined that a downward adjustment is justified 
by the second section 801(b) factor, the Judges have reassessed the 
first section 801(b) factor and determined that no further 
adjustment is warranted notwithstanding the rate decrease supported 
by the second factor. The Judges review the evidence with respect to 
the third and fourth factors with the assumption that a rate 
reduction is already supported based on the second factor. 78 FR 
31842, 31843 (May 28, 2013).
---------------------------------------------------------------------------

    After reviewing the evidence provided by both parties, the Judges 
conclude that (outside of a 1 percentage point reduction due to the 
anticipated expansion of the number of music channels that did not 
materialize) neither party has provided sufficient evidence to support 
a change from the current rate based on the second Section 801(b) 
factor.
c. Factor C: Reflect Relative Roles
    The third section 801(b) factor requires the Judges to assess 
whether the rate they have chosen to begin the section 801(b) analysis 
reflects the relative roles of the copyright owner and the copyright 
user in the product made available to the public with respect to 
relative creative contribution, technological contribution, capital 
investment, cost, risk, and contribution to the opening of new markets 
for creative expression and media for their communication. 17 U.S.C. 
801(b)(1)(C).
    Music Choice contended that with respect to this factor it has made 
a much stronger evidentiary showing than SoundExchange and therefore a 
lower rate should be warranted. MC PFF ] 426. For example, Music Choice 
noted that it makes significant creative contributions in terms of 
original programming, curation, and promotional content that increases 
subscribers' engagement with the music and increases the promotional 
impact of the Music Choice service. Williams WDT at 56; 5/18/17 Tr. at 
4693 (Williams). Music Choice noted that it expends substantial 
resources on improving its service offerings but that declining 
revenues over the past rate period have forced Music Choice to cut 
staff that are used to provide these services. Williams WDT at 7. Music 
Choice discounted the record labels' contributions in this regard, 
arguing that they apply only to the sound recordings and not 
specifically to the PSS service. See MC PFF ] 447. Music Choice also 
noted that historically it has had to invent the technology necessary 
to get high-quality digital music programming to subscribers, but that 
the current rate has limited its ability to continue investing in 
improving its technology. Id. ]] 450-52.
    Music Choice asserted that the risks it faces are increasing 
relative to those faced by the record companies. Music Choice also 
contended that it (and other PSSs) has fewer opportunities for 
profitability. Del Beccaro WDT at 20. Music Choice noted that its 
residential business has still not become profitable on a standalone 
basis. Id. at 19-20. Music Choice pointed to consolidation among MVPDs 
and shrinking margins in the cable industry combined with competitive 
pressures that have led to a rapid deterioration of Music Choice's 
subscriber fees. Id. at 21. Music Choice represented that this changing 
MVPD market has fundamentally changed the financial outlook for Music 
Choice's residential audio service. Id. at 24-25.
    Music Choice disputed SoundExchange's assertions that the Music 
Choice service is substitutional. See 5/16/17 Tr. 4076-77 (Harrison); 
5/15/17 Tr. 3882 (Walker). Finally, Music Choice argued that it 
contributed more to the opening of new markets for creative expression 
and new media for its communication than the record companies. For all 
of these reasons Music Choice believes that this factor warrants a 
downward adjustment. MC PFF ]] 500-501.
    Not surprisingly, SoundExchange argued that no downward adjustment 
is warranted under this factor. SoundExchange believes that ``Music 
Choice's wholesale distribution model seems to be relatively 
inexpensive to operate.'' See Wazzan CWDT ] 80. By comparison, record 
companies spend far more on artists, repertoire, and marketing. Id. 
SoundExchange countered Music Choice's argument that the record 
companies' expenditures are not PSS-centered, arguing that without the 
record companies' expenditures the PSS would have no sound recordings 
to use for their services. Id. ] 80. SoundExchange further disputed 
Music Choice's contentions that past expenditures by investors in Music 
Choice warrant a rate reduction. According to SoundExchange, these 
capital costs were invested long ago and the investors have made no 
investments in the last eighteen years. See SX PFFCL ] 2141; but see 
Del Beccaro WDT at 20. SoundExchange contended that these investors 
have realized returns on their investments and that those investments 
have helped fuel Music Choice's non-statutory video service line of 
business. See SX PFFCL ] 2141; but see 5/18/17 Tr. at 4630-31 (Del 
Beccaro).
    With the exception of Music Choice's assertion that market 
conditions have deteriorated recently, neither party made a persuasive 
argument that a further change in the current statutory rate is 
warranted, in either direction. Virtually all of the evidence that the 
parties present reflects conditions that have occurred under the 
current statutory rate. Therefore, all of the relative contributions of 
SoundExchange and Music Choice are already incorporated into that rate 
and no adjustment is warranted. The small rate reduction from the 
current statutory rate that the Judges found warranted under the second 
section 801(b) factor does not change the Judges' assessment.
    As for the negative change in market conditions, Music Choice only 
noted a decline in the resources it spends and the staff it intends to 
employ to improve the service. If anything, a decrease in the resources 
it spends on the service, if quantifiable, would militate against a 
rate reduction. At this time, it is unclear

[[Page 65225]]

how market conditions will affect Music Choice's business in the 
upcoming rate period. Conceivably, persuasive evidence of dramatically 
deteriorating conditions in the market for PSS service might militate 
against an upward rate adjustment if such adjustment could be deemed 
disruptive but any such adjustment would be warranted under the fourth 
section 801(b) factor rather than the third. At this point, on the 
current record, the Judges find no persuasive evidence to support an 
adjustment from the current statutory rate in either direction under 
the third factor.
d. Factor D: Minimize Disruptive Impact
    The fourth and final section 801(b) factor requires the Judges to 
assess whether the rate (or rates) they have chosen to begin the 
Section 801(b) analysis minimizes any disruptive impact on the 
structure of the industries involved and on generally prevailing 
industry practices. 17 U.S.C. 801(b)(1)(D). A royalty rate may be 
considered disruptive ``if it directly produces an adverse impact that 
is substantial, immediate and irreversible in the short-run because 
there is insufficient time for [the parties affected by the rate] 
adequately to adapt to the changed circumstances produced by the rate 
change and, as a consequence, such adverse impacts threaten the 
viability of the music delivery service currently offered to consumers 
under this license.'' SDARS I, 73 FR 4080, 4097 (Jan. 24, 2008).
    Music Choice argued that the current statutory rate has had a 
disruptive effect on the PSS market. As support for this premise, Music 
Choice noted the previously discussed deterioration of Music Choice's 
financial condition, which it contended is due, in part, to the fact 
that the rate was increased in SDARS II. MC PFF ] 503. Music Choice did 
not argue that profits from Music Choice's other business lines should 
be considered in determining the possible disruptive effect of the PSS 
rate. Id. ] 506.
    SoundExchange contended that if Music Choice and other PSSs cannot 
continue to operate then the market will adjust by allowing other 
competitors to take their place. See Wazzan CWRT ]] 83, 86. From 
SoundExchange's perspective, Music Choice's quest for a lower rate is 
motivated by increased competition from Stingray. According to 
SoundExchange, Music Choice seeks a lower rate that would serve as a 
subsidy that would allow Music Choice to maintain its unfair advantage 
and its market share over non-PSS competitors. See 5/18/17 Tr. at 4532-
37 (Del Beccaro). SoundExchange asserted that such a subsidy ``fosters 
Music Choice's inefficient operation and risks disrupting the market 
for residential audio services.'' Wazzan CWDT ] 84. From 
SoundExchange's perspective, the PSS rates are already artificially low 
and merely serve to insulate Music Choice from market forces at the 
record companies' expense. See Wazzan CWRT ]81, n. 112; 4/25/17 Tr. at 
933-34 (Crawford). SoundExchange argued that the current statutory rate 
is disruptive because it provides Music Choice a significant barrier to 
entry in the market for non-PSS (CABSAT) services. 5/3/17 Tr. at 2318 
(Wazzan); SX PFFCL ] 2147. SoundExchange did not accept that a higher 
rate (even one as high as SoundExchange proposes) would be disruptive 
to the PSS market. Rather it contended that an upward adjustment would 
introduce a needed element of competition. See 4/25/17 Tr. at 902-03 
(Crawford); Wazzan CWRT at 76, 83.
    The Judges find that neither party provided persuasive evidence to 
warrant any further adjustment of the current statutory rate (other 
than that warranted by the second 801(b) factor) in either direction. 
Music Choice argued that the ``significant deterioration of its 
financial condition'' is due in part to the current statutory rate but 
the only evidence it cited deals with the effects of market 
competition. See Del Beccaro WDT at 21. The competitive pressures that 
Music Choice faces were not caused by the current statutory rate. While 
the rate increase that the Judges approved in SDARS II may have 
negatively affected Music Choice's margins, the Judges addressed any 
potential disruptive effect of that increase by phasing it in over the 
first two years of the rate period. The grandfathered rate calculation 
methodology was not intended to shield Music Choice from all negative 
impacts arising from competitive pressures. The reversal of that 
increase that the Judges find warranted under the second section 801(b) 
factor only makes Music Choice's arguments on this point less 
compelling.
    The reality of the marketplace contradicts SoundExchange's 
contention that the current rate is disruptive. As SoundExchange 
pointed out, Music Choice faces stiff competition in the market. SX 
PFFCL ] 1879. The modest decrease in the statutory rate that the Judges 
find warranted under the section 801(b)(1)(B) factor does not change 
the Judges' assessment on this point.
    On balance, the Judges find that neither party has provided 
persuasive evidence to support a finding that, under current market 
conditions, an adjustment to the current statutory rate (other than 
that discussed with respect to the second section 801(b) factor), is 
warranted under the fourth Section 801(b) factor. Therefore, the Judges 
determine that the appropriate rate for PSS services in the upcoming 
rate period shall be 7.5%. This rate shall apply to the gross revenues 
that the PSS services earn for all ``existing service offerings'' in 
addition to all ``expanded service offerings'' as those terms are 
defined and used at pages 15-16 of the Register of Copyright's 
(Register's) Memorandum Opinion On Novel Material Questions of Law 
(Memorandum Opinion) (Nov. 20, 2017). Based on the limited evidence in 
the record, the Judges find no justification for applying a different 
rate methodology to these two types of services at this time.
    The Judges accept as credible Music Choice's evidence that 
additional channels that might conceivably fall within the expanded 
service category currently constitute a marginal portion of Music 
Choice's PSS service in terms of music usage. See Del Beccaro WDT at 
16. While those types of services may increase over time, at this point 
the Judges do not find that the service offerings that fall within this 
category are sufficiently distinct from the existing service offerings 
to justify the creation of a separate rate methodology. Nevertheless, 
the Judges acknowledge SoundExchange's assertion that PSS services that 
might fall within the expanded service category have recently increased 
and may warrant a different rate methodology in the future. See Del 
Beccaro WRT at 25; 5/18/17 Tr. 4658-59, 4661 (Del Beccaro).

D. Music Choice's Internet Streaming Service

    For the first time, in the present proceeding, SoundExchange 
proposed a separate rate for PSS that stream their services over the 
internet. For all licensed transmissions and related ephemeral 
recordings through an internet streaming service qualifying as a PSS 
(or any similar service capable of tracking the individual sound 
recordings received by any particular consumer), SoundExchange 
requested that the per-performance royalty fee for a commercial 
webcaster set forth in 37 CFR 380.10 apply.\62\ Music Choice

[[Page 65226]]

contended that its streaming activity is already included within the 
PSS statutory license and the royalty rate that PSSs pay already 
includes this service. See Del Beccaro WRT at 27. As a result, Music 
Choice contended that no additional royalty payment should apply for 
internet streaming of the PSS service. Id.
---------------------------------------------------------------------------

    \62\ If a PSS does not have the technological capability to 
track individual performances, SoundExchange proposes that the PSS 
estimate its performances by multiplying its Aggregate Tuning Hours 
by the average number of recordings played per hour across its 
service. SX Amended Proposed Rates and Terms at 8.
---------------------------------------------------------------------------

1. Referral to the Register of Copyrights
    The Judges concluded that the threshold issue of whether the 
streaming activities of a PSS were included within the scope of the PSS 
license was a novel material question of copyright law that the Judges 
must refer to the Register of Copyrights (Register). 17 U.S.C. 
802(f)(1)(B). Hence, the Judges referred the issue to the Register, 
asking:

    (1) Are a preexisting subscription service's transmissions of 
multiple, unique channels of music that are accessible through that 
entity's website and through a mobile application ``subscription 
transmissions by preexisting subscription services'' for which the 
Judges are required to determine rates and terms of royalty payments 
under Section 114(f)(1)(A) of the Copyright Act?
    (2) If yes, what conditions, if any, must the PSS meet with 
regard to streaming channels to qualify for a license under Section 
114(f)(1)(A)? For example, must the streamed stations be identical 
to counterpart stations made available through cable television? Is 
there a limitation on the number of channels that the PSS may 
stream? Is there a limitation on the number or type of customers 
that may access the website or the mobile application?

Order Referring Novel Material Question of Substantive Law and 
Setting Briefing Schedule at 3-4 (Oct. 5, 2017).
2. Register's Conclusions
    The Register concluded that

transmissions by a PSS entity that are accessible to a cable or 
satellite television subscriber through that entity's website and 
through a mobile application can be ``subscription transmissions by 
preexisting subscription services'' for which the CRJs must 
determine rates and terms of royalty payments under section 
114(f)(1)(A), but only if such transmissions are sufficiently 
similar to the transmissions made to those subscribers via the 
entity's preexisting residential cable or satellite music service.

Memorandum Opinion at 12.

    As a preliminary matter, ``the preexisting services must be limited 
to the three named entities in the [DMCA] Conference Report, i.e., DMX 
(operated by TCI Music), Music Choice (operated by Digital Cable Radio 
Associates), and [DiSHCD] (operated by Muzak).'' Id. at 14, internal 
footnotes omitted. Moreover, the Register noted that ``not every 
subscription transmission made by a PSS entity is subject to section 
114(f)(1).'' Id. at 13. The Register observed that the DMCA's 
amendments to section 114 of the Copyright Act were designed to move 
the industry to market rates. Id. at 23. Nevertheless, the Register 
noted that ``Congress intended for PSS entities to be able to expand 
their service offerings to some limited extent and still have those 
service offerings be considered PSS offerings.'' Id. at 14.
    According to the Register, the ultimate question is ``whether a 
particular program offering by a PSS entity qualifies as a PSS offering 
within the meaning of section 114(j)(11), and is therefore subject to 
the grandfathered rate standard under section 114(f)(1).'' Id. at 15.
    The Register distinguished among three different types of service 
offerings:

    (1) A service offering identified by Congress as being a PSS 
offering as of July 31, 1998, that is still offered today in the 
same transmission medium identified by Congress in 1998. (The 
Register refers to this type of offering as an ``existing service 
offering''). According to the Register, an existing service offering 
would be entitled to both a rate established under the grandfathered 
rate standard under section 114(f)(1) and the grandfathered license 
requirements in section 114(d)(2)(B). Id.
    (2) A service offering identified by Congress as being a PSS 
offering as of July 31, 1998, that is still offered today, but in a 
different transmission medium than the one identified by Congress in 
1998, where only transmissions similar to the existing service 
offering are provided. (The Register refers to this type of offering 
as an ``expanded service offering''). According to the Register, an 
expanded service offering would be entitled to a rate established 
under the grandfathered rate standard in section 114(f)(1), but 
would not be able to take advantage of the grandfathered license 
requirements in section 114(d)(2)(B). A PSS that offered this type 
of service would be required to comply with the more detailed 
license requirements in section 114(d)(2)(C). Memorandum Opinion at 
15-16.
    (3) A service offering that is not an existing service offering 
or an expanded service offering. (The Register refers to this type 
of offering as a ``different service offering''). A ``different 
service offering'' is insufficiently similar to an ``existing 
service offering'' to be considered an ``expanded service offering'' 
and would not be entitled to either a rate established under the 
grandfathered rate standard under section 114(f)(1) or the 
grandfathered license requirements in section 114(d)(2)(B). Instead, 
the royalty rate for a different service offering would be set under 
the willing buyer/willing seller standard in section 114(f)(2). A 
PSS marketing a different service offering would be required to 
comply with the license requirements in section 114(d)(2)(C).\63\
---------------------------------------------------------------------------

    \63\ The Register's categorizations of service types presumes 
that a service offering is eligible for the section 114 license. The 
categorization is meant to delineate whether the rate for a license-
eligible service is determined pursuant to section 114(f)(1) or 
section 114(f)(2). If a PSS entity began offering an interactive 
service, for example, that service offering would not fall into one 
of the categories and would not be eligible for the statutory 
license. Memorandum Opinion at 16-17.

---------------------------------------------------------------------------
Memorandum Opinion at 16.

    The Register noted that ``an existing service offering can grow and 
expand significantly within the same transmission medium while 
remaining a PSS offering.'' Id at 19. Consistent with this 
understanding, the Register noted that

[t]he user interface can be updated, certain functionality can be 
changed, the number of subscribers can grow, and channels can be 
added, subtracted, or otherwise changed. The only restriction is 
that the existing service offering as it is today must be 
fundamentally the same type of offering that it was on July 31, 
1998--i.e., it must be a non-interactive, residential, cable or 
satellite digital audio transmission subscription service.

Id. at 19-20 (internal footnotes omitted).

    With respect to the second category of offerings (i.e., expanded 
service offerings) ``a [PSS] does not lose its designation as such in 
the event the service decides to utilize a new transmission medium, 
provided that the subscription transmissions are similar.'' Id. at 20 
n.72.\64\
---------------------------------------------------------------------------

    \64\ For a service offering to qualify as an expanded service 
offering, the PSS entity must continue to operate its existing 
service offering. According to the Register, ``[a] service offering 
that is not an existing service offering can only be subject to the 
grandfathering provision if it provides transmissions similar to 
their existing service.'' Memorandum Opinion at 20, internal quotes 
omitted.
---------------------------------------------------------------------------

    In assessing whether a service offering is an expanded service 
offering and thus qualifies as a PSS offering, the Judges must compare 
the service offering in question to the existing service offering as it 
exists at the time of the comparison (rather than as it existed on July 
31, 1998). Id. at 21. To aid the Judges in this comparison, the 
Register offers a non-exhaustive list of factors:

    (1) Whether the service offering has a similar effect on 
displacing or promoting sales of phonorecords.
    (2) Whether the quantity and nature of the use of sound 
recordings by the service offering is similar.
    (3) Whether the service offering provides similar content to 
similar user groups.
    (4) Whether the service offering is consumed in a similar 
manner, provides a similar user experience, and has similar form, 
feel, and functionality.
    (5) Whether and to what degree the service offering relates to 
the pre-July 31, 1998 investments Congress sought to protect.
    (6) Whether and to what degree the service offering takes 
advantage of the capabilities of the medium through which it is 
transmitted (i.e., whether and the extent to which differences 
between the service offerings are due to limitations in the existing 
service

[[Page 65227]]

offering's transmission medium that are not present in the other 
service offering's transmission medium).
Id. at 21-22.\65\

    \65\ Even if a service offering is found to be an expanded 
service offering (rather than an existing service offering) 
qualifying for the section 114(f)(1) grandfathering provision for 
purposes of rate calculation, it would still not be eligible for the 
section 114(d)(2)(B) grandfathering provision (regarding license 
requirements) because it uses a different transmission medium than 
the existing service offering. Such an offering would be subject to 
the license requirements in section 114(d)(2)(C). Memorandum Opinion 
at 22.

    A ``different service offering'' (the third category the Register 
identified) can never qualify as a PSS offering because it would not be 
one of the specifically identified pre-July 31, 1998 business 
operations (i.e., the three PSS offerings) Congress sought to protect 
when it enacted the DMCA. This is true regardless of whether the 
service offering is developed internally or acquired. Id. at 22. When a 
PSS entity expands its operations and provides additional transmissions 
to subscribers to a different service, this is an entirely new 
investment and is not a PSS offering. Id. at 23.
    The Register offered guidance regarding applications of the above 
categorization of service offerings. First,

in accordance with the principles of narrow construction afforded to 
grandfathering provisions, the Register finds that, as a matter of 
law, it is irrelevant whether or not Music Choice or another PSS 
entity, to some limited degree, was making transmissions via a 
different medium than those specified in the legislative history on 
July 31, 1998, such as the internet. If such a service was in fact 
doing so, it would not be as part of an existing service offering--
any such transmissions today would be considered either an expanded 
service offering or a different service offering. . . .

Id. at 19.

    The Judges must determine a royalty rate for the former type of 
service (i.e., expanded service offering) in the current proceeding. 
The latter type of service (i.e., different service offering) is 
outside the scope of the current proceeding; a royalty rate for any 
different service offering by a PSS (if any) must be determined by 
reference to existing rate regulations covering that type of service 
offering, in a separate, future proceeding under the willing buyer/
willing seller standard, or through voluntary negotiations.
    The Register observed that

the mere fact that a service offering is transmitted to cable or 
satellite television subscribers over the internet does not 
automatically disqualify the service offering from being an expanded 
service offering subject to the grandfathered rate standard, so long 
as the service offering, as a factual matter . . . is sufficiently 
similar to the PSS entity's existing cable or satellite service 
offering.

Id. at 25.

    In assessing whether an internet-based service offering is 
sufficiently similar to a PSS entity's existing cable or satellite 
service offering, the Judges should consider ``the degree to which 
making the existing service offering accessible outside the home of the 
subscriber constitutes a fundamental change to the offering.'' Id.
    According to the Register:

At least in the cable television market, there appears to be a 
distinction drawn between accessing content within the home and 
accessing that same content outside of it. To be clear, this 
distinction is one based on the location where the PSS offering is 
consumed, not the type of device on which the service is accessed. 
If the service offering is available through an internet-connected 
smartphone or tablet, but is designed so that the service offering 
will only work when accessed within the confines of the subscriber's 
residence, then it would be within the home and more similar to the 
PSS entity's existing cable or satellite service offering.

Id. at 26 (internal footnote omitted).

    With respect to the impact that the number and type of channels 
offered by a service has in determining its categorization for rate-
setting purposes, the Register identified examples of factors the 
Judges could consider, such as how many additional or fewer channels 
there are, how many channels offer different programming, and how 
different that programming is from that offered by the existing service 
offering. Id. The Register also notes that the Judges should consider 
the reasons why any such differences exist. If the service offering has 
more channels because of some benefit the internet provides (e.g., 
greater bandwidth or different contractual arrangements with cable 
operators), then the PSS entity could be taking advantage of the 
capabilities of the internet as a transmission medium, which could tend 
to disqualify that service offering from the grandfathered royalty 
calculation method. Id. at 26-27. A similar analysis could be conducted 
with respect to the number and type of customers. Id. at 27.\66\
---------------------------------------------------------------------------

    \66\ Differences in a service offering that directly and solely 
result from the imposition of the section 114(d)(2)(C) requirements 
that do not apply to the existing service offering (which is subject 
to section 114(d)(2)(B)) should not alone disqualify the service 
from the grandfathered royalty calculation methodology necessitated 
by the change in medium, nor should minor differences in the user 
interface or in the visual presentation. Memorandum Opinion at 27.
---------------------------------------------------------------------------

    The Register noted that if a service offering qualifies for the 
grandfathered rate-setting methodology, the Judges still have the 
authority under section 114(f)(1)(A) to distinguish among the different 
types of digital audio transmission services in operation. If material 
differences between an existing service offering and an expanded 
service offering exist, the Judges may set separate rates based on 
those difference, using the section 801(b)(1) standard. Id. at 27-28.
3. Application of Register's Conclusions to Current Proceeding
    Music Choice provides 50 channels of audio music programming 
delivered to subscribers' televisions (the Cable Radio Service). It 
also makes these 50 channels, plus an additional 25 internet-only 
channels, available to authenticated television subscribers through its 
website and a mobile app (the internet Service). Del Beccaro WDT at 
4.\67\
---------------------------------------------------------------------------

    \67\ See also Wazzan CWDT at ] 62(e) (``Music Choice provides 75 
audio channels through various MVPDs, . . . and streaming to 
subscribers of the cable services that carry its channels, through a 
family of apps and a web portal.'') (internal footnotes omitted).
---------------------------------------------------------------------------

    The Register has determined, as a matter of law, that Music 
Choice's internet Service \68\ is not an ``existing service offering.'' 
Memorandum Opinion at 19. Consequently, the internet Service is either 
an ``expanded service offering'' (i.e., qualifying for grandfathered 
royalty determination under the Section 801(b) factors but subject to 
the expanded license requirements under section 114(d)(2)(C)) or a 
``different service offering'' outside the scope of the PSS license.
---------------------------------------------------------------------------

    \68\ Neither party asked the Judges to determine whether Music 
Choice's Cable Radio Service, as it exists today, constitutes an 
``existing service offering'' or and ``expanded service offering'' 
by a PSS. As the Judges have already determined that the PSS rate 
covers both types of offerings, the question is moot and the Judges 
need not address it.
---------------------------------------------------------------------------

    By reference to the Register's six-factor list of criteria to 
differentiate an expanded service offering from a different service 
offering, the Judges find that an internet-based service that allows 
subscribers to access music outside their residences is a ``different 
service offering'' and is not eligible for grandfathered PSS rate 
structures or license requirements applicable to PSS. The regulations 
in Appendix A, therefore, exclude internet-based transmissions to the 
extent they are available outside a subscriber's residence.

[[Page 65228]]

V. SDARS Performance License--Rate Structure

A. Rate Structure Arguments

1. Maintaining the Current Rate Structure
    Sirius XM emphasized that the Judges have utilized a percent-of-
revenue rate structure for ten years, and that absent any new and 
sufficient factual bases to deviate from that history, the Judges 
should continue to adopt this rate structure. SXMRPFF ] 384 (and record 
citations therein). Moreover, it noted that SoundExchange itself 
proposed a percent-of-revenue rate structure, not a ``greater-of'' 
structure, as recently as in the SDARS II proceeding. SXMPFF ] 253 (and 
record citations therein).
    SoundExchange did not take issue with the historical bona fides of 
the current rate structure. However, SoundExchange noted that it urged 
the Judges to adopt what it describes as a simpler percent-of-revenue 
approach in SDARS II, but the Judges refused, opting instead for a more 
complicated structure that led to substantial disputes. SERPFF ] 253.
    The Judges are not convinced by Sirius XM's argument that the rate 
structure should be maintained merely because it has been in place over 
the past two rate periods. The Judges are charged with setting rates 
and terms de novo for each period. If there are sufficient valid 
reasons why the rate structure should be changed, then the Judges will 
adopt those changes. Accordingly, the Judges consider the issues to 
determine whether to change the existing rate structure.
2. Factors Relating to a Change in Structure
a. Lack of Expert Support
    SoundExchange advocated a deviation from the percent-of-revenue 
rate structure that has existed throughout the SDARS I and SDARS II 
rate periods. SoundExchange asked the Judges to establish a ``greater 
of'' structure, by which the royalty rate is calculated ``on a calendar 
year basis,'' but payable monthly, as the greater-of a specified 
percentage of revenue or a specified per subscriber dollar value. See 
Amended Proposed Rates and Terms of SoundExchange, Inc. and Copyright 
Owner and Artist Participants App. A at 14-15. (Jun. 14, 2017).
    Sirius XM noted that no economist appearing in this proceeding 
endorsed the use of a greater-of formula. SXM RPFF ] 383. Moreover, 
Sirius XM pointed out that Mr. Orszag, an economic witness appearing 
for SoundExchange, expressly testified that he advocated either a 
percent-of-revenue rate structure or a per subscriber structure, and 
that he did not testify in support of a structure incorporating those 
two approaches in a single greater-of approach. SXM PFF ] 251. In 
response, SoundExchange did not identify any testimony that explicitly 
or adequately endorsed the use of a greater-of formula from an economic 
point of view.
    The Judges are troubled by the lack of a cogent explanation from 
the licensors' economic witnesses as to the merits, on balance, of a 
greater-of rate formula. The absence of such evidence could be overcome 
by explanations derived from other evidence or testimony. Not having 
that further evidence, the Judges find it significant that no economist 
has sufficiently explained the benefits of this greater-of approach.
b. Impact on the Parties' Risks and Rewards
    SoundExchange maintained that its proposed greater-of approach is 
warranted because it allows record companies to share in the growth of 
Sirius XM's revenue, while offering protection to the record companies 
on the downside if revenues are too low. SEPFF ] 252 (and record 
citations therein). Sirius XM argued, in essence, that this approach 
smacks of a heads I win, tails you lose approach, whereby record 
companies share the upside of Sirius XM's success, but have protection 
in the form of a default to the per subscriber rate if the upside does 
not materialize. SXM PFF ] 252.
c. Benchmarks Include a Greater-Of Rate Structure
    SoundExchange emphasized that many interactive license agreements 
utilize the greater-of approach that SoundExchange advocates here, 
demonstrating the market's adoption of this approach. SEPFF ]] 164-165 
(and record citations therein). However, Sirius XM noted that these 
interactive agreements were all negotiated in a market characterized by 
the lack of effective competition, and that the lack of competition 
would affect the structure as well as the level of rates. SXMPFF ] 385 
(and record citations therein).
    The Judges find Sirius XM's effective competition point well-taken 
in this context. Given that SoundExchange's expert economic witnesses 
acknowledged the need for rates that reflect an effectively competitive 
market, it is no surprise that none of their economists touted the 
greater-of structure as a reflection of effective competition. The 
Judges find that the greater-of rate structure, advantageous to 
licensors through the shifting risks, may well represent an example of 
what licensors can and would obtain when they exploit their ``must 
have'' status for a special competitive advantage. The Judges do not 
find it persuasive that interactive streaming services and record 
companies adopt the greater-of structure in their negotiated licenses.
d. Impact on Royalty Disputes
    SoundExchange argued at length that a greater-of rate structure 
that contains a per-subscriber prong will eliminate disputes regarding 
the definition of revenue under the percent-of-revenue approach. SEPFF 
]] 1646-1650 (and record citations therein). However, Sirius XM 
convincingly countered that a greater-of formula will not eliminate the 
issues of revenue definition and identification, because the issue of 
which prong creates the ``greater'' royalty will itself be dependent on 
the definition, identification, and calculation of the revenue-based 
royalty prong. SXM PFF ] 386.
    The Judges agree with Sirius XM. If SoundExchange had proposed a 
per-subscriber rate only, then the issues surrounding the percent-of-
revenue rate would be eliminated. But SoundExchange did not proposed a 
pure per-subscriber rate; nor did Sirius XM. Thus, the problems 
regarding the revenue-based royalty would continue to be present 
(albeit perhaps less often than under a pure revenue-based rate).
e. The Greater-Of Rate Structure and Trial Subscriptions
    SoundExchange argued that its greater-of proposal helps to obviate 
the dispute between the parties regarding the length of free trials 
offered to potential subscribers by new owners of automobiles. 
SoundExchange noted that interactive services are generally required to 
pay royalties for any free trial that exceeds [REDACTED]. Orszag AWDT ] 
85.\69\ By contrast, Sirius XM typically offers free trials to new and 
used car purchasers that last three to twelve months.\70\ Id. ] 81. 
SoundExchange argued that ``there is no

[[Page 65229]]

sound economic basis for the present disparate treatment, under which 
Sirius XM is permitted to offer the repertoires of rights owners for 
durations greater than one month without the payment of royalties,'' 
id. at ] 85, and proposed to eliminate that disparate treatment by 
classifying trial users as ``subscribers'' for royalty purposes, and 
setting a per-subscriber rate that varies depending on how long the 
user has been in the free trial period.\71\ Thus, it would be 
irrelevant to the licensors if the free trial generated no revenue or 
lower revenue from automobile Original Equipment Manufacturers (OEMs) 
during the period offered free to the listener. SEPFF ]] 1657-1665.
---------------------------------------------------------------------------

    \69\ The benchmark interactive services agreements address free 
trials longer than [REDACTED] by imposing a [REDACTED] royalty. See 
Orszag AWDT ] 89.
    \70\ Some paid promotions (where the automobile Original 
Equipment Manufacturer pays a reduced subscription fee to Sirius XM 
during the free (to the consumer) trial period) may last longer than 
[REDACTED] months. See Trial Ex. 322 at 14, 15 ([REDACTED]-month 
free trial for purchasers of certain high-end luxury cars 
([REDACTED])). Under a percentage revenue rate structure Sirius XM 
pays a royalty on this discounted subscription revenue. See Orszag 
AWDT ] 82.
    \71\ SoundExchange's amended rate proposal would charge no 
royalties for subscribers who are in the first month of their free 
trial. During the second and third months of a free trial, 
SoundExchange proposes a per-subscriber royalty rate that represents 
a discount of approximately 42% off SoundExchange's proposed full 
per-subscriber rate. The full per-subscriber rate would apply to all 
free trials after three months. See Amended Proposed Rates and Terms 
of SoundExchange, Inc. and Copyright Owner and Artist Participants, 
at 3 (Jun. 14, 2017).
---------------------------------------------------------------------------

    Sirius XM argued that trials, both paid and unpaid, provide value 
to licensors to the extent they entice new subscribers whose 
subscription revenue is then shared by the licensors. Sirius XM 
described the trials as a ``joint effort'' by Sirius XM and the record 
companies to attract more Sirius XM subscribers and produce future 
subscription revenues that inure to their mutual benefit. Corrected 
Written Rebuttal Testimony of Carl Shapiro, Trial Ex. 9, at 55 (Shapiro 
CWRT). Sirius XM further argued that it is in the best position to 
determine the most beneficial length of the trial period, and that 
requiring Sirius XM to pay per-subscriber royalties without recompense 
from the trial users would act as a disincentive to Sirius XM to 
utilize what it otherwise understood to be the optimal trial period. 
SXMRPFF ] 388.\72\
---------------------------------------------------------------------------

    \72\ Sirius XM also argued that the record companies have a 
higher benefit/cost ratio from trial subscriptions than Sirius XM, 
and would thus agree in an unregulated market to waive royalties 
``for as long as Sirius XM would choose to run unpaid trials.'' 
Shapiro CWRT at 55-56. SoundExchange rejected this argument because 
Professor Shapiro assumed, in computing his benefit/cost ratio, that 
no record company is a ``must have'' for Sirius XM. SEPFF ] 1619; 
see 4/24/17 Tr. 562 (Shapiro). As a result of this assumption, 
Professor Shapiro's benefit/cost calculation relied on a much lower 
record company opportunity cost than that adopted by the Judges. See 
infra, section VI.B.3. The Judges do not rely on this Sirius XM 
argument, therefore, in rejecting SoundExchange's proposal with 
regard to trial subscriptions.
---------------------------------------------------------------------------

    The Judges agree with Sirius XM. Under a percent-of-revenue royalty 
structure, Sirius XM and the record companies are aligned in their 
interest to minimize the time period for unpaid trials and trials paid 
by OEMs at less than the full subscription rate. Moreover, because 
Sirius XM is in the business of recruiting and interacting with 
potential subscribers, it would be less efficient for the licensors (or 
the Judges) to second-guess Sirius XM's downstream (retail) business 
model as it relates to the optimal period of trial use. Although it 
would appear from a cursory analysis that artists and record companies 
suffer from the use of their recordings without recompense (or 
sufficient recompense) during trial periods, the fuller view, given 
Sirius XM's aligned economic incentive to maximize revenues, 
demonstrates that the length and terms of trial periods are likely 
consonant with the interests of the licensors. This record evinces no 
evidence to the contrary.\73\
---------------------------------------------------------------------------

    \73\ For example, there is no credible evidence that Sirius XM 
is interested in growing market share irrespective of revenue 
growth, in order to compete for the market (rather than merely in 
the market). This is unsurprising, because Sirius XM has already 
captured the satellite radio market. See infra, text following note 
116.
---------------------------------------------------------------------------

B. Conclusion Regarding the Rate Structure

    For the foregoing reasons, the Judges adopt a percent-of-revenue 
rate structure in this proceeding for the 2018-2022 rate period.

VI. SDARS Performance License: SoundExchange Proposal

    SoundExchange proposed a royalty fee that is the greater-of a per-
subscriber rate and a percent-of-revenue rate. With regard to the 
percent-of-revenue prong, SoundExchange requested a rate equal to 23% 
of Sirius XM's ``Gross Revenues,'' as that quoted term shall be defined 
in the forthcoming regulations. See SoundExchange's Proposed Rates and 
Terms, at 2-3.\74\ The per-subscriber rate proposed by SoundExchange is 
set forth in the table below:
---------------------------------------------------------------------------

    \74\ The definition of ``Gross Revenues'' for the forthcoming 
rate period is discussed infra, section XI.A.2.

------------------------------------------------------------------------
                                            Free trial
                                            subscribers      All other
                  Year                      (months two     subscribers
                                            and three)
------------------------------------------------------------------------
2018....................................           $1.45           $2.48
2019....................................            1.49            2.55
2020....................................            1.54            2.63
2021....................................            1.58            2.71
2022....................................            1.63            2.79
------------------------------------------------------------------------

    For affirmative economic support of its rate proposal, 
SoundExchange relied principally on the expert opinions of two economic 
witnesses, Mr. Jonathan Orszag and Professor Robert Willig. Mr. Orszag 
used a ``ratio equivalency'' analysis, which he applied through two 
separate approaches. Professor Willig considered several economic 
models: (1) An ``Opportunity Cost'' analysis; \75\ (2) a ``Ramsey 
Pricing'' analysis; \76\ and (3) a ``Nash Bargaining Solution'' 
approach.\77\ Professor Willig also discussed a fourth model--the 
Efficient Component Pricing Rule (ECPR), which he noted in his oral 
testimony as analytically analogous to his ``Opportunity Cost'' 
analysis, and yielded the same rate.\78\
---------------------------------------------------------------------------

    \75\ See infra, sections VI.A-VI.C.
    \76\ See infra, section VI.G.
    \77\ See infra, section VI.F.
    \78\ See infra, section 0.
---------------------------------------------------------------------------

A. Professor Willig's Opportunity Cost Model

1. ``Walk-Away'' Opportunity Cost
    SoundExchange called Professor Robert Willig in support of its 
proposed rates. Professor Willig approached the rate determination 
using an opportunity cost model. As Professor Willig testified, 
opportunity costs are incurred when ``sales through one distribution 
channel reduce (i.e., substitute for, or ``cannibalize'') sales through 
other distribution channels (thereby reducing compensation earned by 
content creators from those other channels . . . ).'' Written Rebuttal 
Testimony of Robert Willig, Trial Ex. 46, ] 20 (Willig WRT); see also 
Written Direct Testimony of Carl Shapiro, Trial Ex. 8, at 19 (Shapiro 
WDT) (sellers incur opportunity cost when sales in one market diminish 
sales in other markets). Based upon his interpretation of survey 
evidence, Professor Willig established a walk-away opportunity cost of 
$2.55 per subscriber, which he equates to [REDACTED]% of Sirius XM's 
relevant revenue.
    SoundExchange asserted that the appropriate opportunity cost for 
rate-setting purposes is the ``walk-away'' opportunity cost. SE PFF ]] 
486-95. Professor Willig defined a record label's walk-away opportunity 
cost as ``compensation that it would earn from other sources of 
distribution,'' if a label were ``to literally walk away from a 
distributor.'' 5/2/17 Tr. 2014-15 (Willig). Professor Willig referred 
to the opportunity cost as ``creator compensation cannibalization,'' 
\79\ and observed that ``the need to cover opportunity cost is part of 
what assures efficiency in the ultimate choice of the

[[Page 65230]]

balance of . . . varieties of modes of distribution.'' 5/2/17 Tr. 2019-
20 (Willig). In an unregulated market, a supplier (record label or 
copyright owner) will not sell (license) to a service unless the 
supplier is compensated at or above its walk-away opportunity cost. See 
id. at 2019. In this regulated market, however, the creators do not 
have the option to walk away; the licenses are compulsory. Id. at 2015. 
Professor Willig thus perceived the role of the Judges to ``redress 
that imbalance created by the statutory license.'' \80\ Id. at 2017.
---------------------------------------------------------------------------

    \79\ Sirius XM's rebuttal economic expert, Professor Farrell, 
concurred with the substance of this definition, agreeing that walk-
away opportunity cost ``is the profit that a label would realize 
elsewhere'' if it did not license to Sirius XM. 4/24/17 Tr. 607 
(Farrell).
    \80\ Opportunity costs are more than a theoretical concept. For 
example, UMG recognizes that on-demand subscription services may 
substitute for sales of digital downloads. See Written Direct 
Testimony of Aaron Harrison, Trial Ex. 32, at ] 17 (Harrison WDT). 
Accordingly, when UMG licenses fully interactive streaming services, 
it [REDACTED]. Because the direct marginal costs of distributing 
additional sound recordings to Sirius XM are ``zero or nearly 
zero,'' the principal marginal cost to a record company of licensing 
to a service is its opportunity cost. Shapiro WDT at 19; see also 
SEPFF ] 460 (not disputing Professor Shapiro's point that physical 
marginal cost is zero and that the only marginal cost at issue is 
marginal opportunity cost).
---------------------------------------------------------------------------

    As a matter of economic principle, Sirius XM did not dispute the 
use of an opportunity cost approach as appropriate in identifying a 
market-based SDARS royalty rate. See SX RPFF ] 109. However, Sirius XM 
disagreed with Professor Willig's use of ``walk-away opportunity 
cost,'' as he defined that phrase. Id.
    The Judges summarize the parties' opportunity cost dispute as: 
Whether, in a hypothetical market with freely negotiated rates, 
opportunity cost should (1) include the value of each Major's ``must-
have'' status which gives each Major the theoretical ability to put 
Sirius XM out of business by refusing to grant it a license at a 
royalty less than opportunity cost; or (2) exclude this value--a 
complementary oligopoly power--by which each Major hypothetically could 
put Sirius XM out of business.\81\
---------------------------------------------------------------------------

    \81\ Professor Willig calculated walk-away opportunity cost on 
the tautological assumption that, because each Major is a ``must 
have,'' its refusal to provide a license to Sirius XM would cause 
Sirius XM to go out of business. As discussed elsewhere in this 
Determination, Professors Shapiro and Farrell proposed the use of a 
different form of opportunity cost, one that does not assume that 
the loss of any one Major would cause Sirius XM's demise.
---------------------------------------------------------------------------

    Professor Willig asserted that the walk-away opportunity cost for a 
``must-have'' label is effectively the same as the label's pro rata 
share of the industry-wide opportunity cost.\82\ See 5/2/17 Tr. 2137 
(Willig); \83\ see also SEPFF 502 at ] 502. Professor Willig's 
opportunity cost calculation thus measures what a must-have single 
record label would earn elsewhere, and proposes it as an industry-wide 
measure, even if that single record label is the only label that 
declines to license. On this theoretical point, Professor Farrell, one 
of Sirius XM's economic experts was in basic agreement. See, e.g., 4/
24/17 Tr. 665-66 (Farrell) (for label to recover pro rata walk-away 
opportunity cost, industry-wide royalty rate would have to be at least 
equal to industry-wide opportunity cost).
---------------------------------------------------------------------------

    \82\ The evidence in this proceeding strongly demonstrates the 
``must have'' status of each Major. See SE PFF ]] 517-525 (and 
record citations therein). Indeed, Sirius XM implicitly acknowledged 
the ``must have'' status of a Major, citing a steering adjustment as 
a method by which to mitigate the ``must have'' status and 
complementary oligopoly power of a Major to allow for an effectively 
competitive market.
    \83\ Professor Willig did not cite any authority that has 
previously used the phrase ``walk-away opportunity cost.'' Sirius 
XM's economic experts asserted that Professor Willig's ``walk-away 
opportunity cost'' is actually the ``monopoly'' or ``cartel'' 
opportunity cost. For the sole purpose of referring to and 
discussing Professor Willig's approach, the Judges will use his 
``walk-away'' terminology; that usage does not suggest an 
equivalence with, or distinction from, monopoly or cartel 
opportunity cost.
---------------------------------------------------------------------------

    Further, Professor Willig opined that individual labels would 
bargain with an understanding that a royalty unacceptable to that label 
is likely also unacceptable to other labels. As a result, a label 
inclined to reject a proposed royalty will expect that other labels 
will do the same, with the result that each label's opportunity cost 
will equate to an industry-wide opportunity cost. See 5/2/17 Tr. at 
2030 (Willig).
2. Sirius XM's Criticism of Willig's Use of ``Walk-Away'' Opportunity 
Cost
    Sirius XM disputed the notion that opportunity costs should be 
defined and calculated on an industry-wide basis; rather, it asserted 
that the appropriate calculation must be undertaken in a ``label 
specific'' manner. Sirius XM asserted an essential and disqualifying 
premise: The opportunity cost Professor Willig calculated is the 
opportunity cost of ``either a single monopoly record label or a fully 
effective cartel.'' \84\ Farrell WRT ] 27; see also id. ] 31. As 
Professor Shapiro noted:

    \84\ Professor Farrell testified that if a particular label's 
decision to license is based on ``the profit impact on the industry 
as a whole, that's what we would normally describe as monopoly or 
cartel behavior.'' 4/24/17 Tr. 614 (Farrell).
---------------------------------------------------------------------------

    Most fundamentally, Professor Willig is asking the wrong 
question. Rather than attempting to calculate the opportunity cost 
to an individual label of having its sound recordings performed on 
Sirius XM, Professor Willig calculates the opportunity cost to the 
entire recorded music industry, as if a single entity (or a fully 
functioning cartel) controls the rights to all sound recordings.

Shapiro CWRT at 34. Moreover, Sirius XM claimed Professor Willig 
acknowledged that his opportunity cost calculation was identical to the 
opportunity cost that would apply ``if there were a single monopoly 
seller of sound recordings. . . .'' 5/2/17 Tr. at 2140 (Willig); see 
also Farrell WRT ]] 67-71 (Willig's calculation is ``extreme'' and 
leads to inflated opportunity costs).
    According to Sirius XM, Professor Willig's opportunity cost 
approach ignores the goal of determining a statutory rate reflective of 
an effectively competitive marketplace (as tempered by the enumerated 
section 801(b)(1) factors). See 4/20/17 Tr. 418 (Shapiro) (``he is 
measuring the wrong thing by looking at the monopoly opportunity 
cost.''). Thus, Professors Shapiro and Farrell both opined that a rate 
based on this industry-wide opportunity cost would be inconsistent with 
the economic concept of ``workable competition.'' \85\ See Shapiro CWRT 
at 37; Farrell WRT ]] 27-29.
---------------------------------------------------------------------------

    \85\ ``Effective'' competition, as used in this Determination is 
synonymous with the term ``workable competition'' that is more 
commonly used by economists.
---------------------------------------------------------------------------

    Sirius XM candidly admitted that its criticism of Professor 
Willig's walk-away opportunity cost analysis is premised on the 
assumption that a single label ``does not have the `must-have' monopoly 
power to effectively shut-down Sirius XM's music offering . . . .'' SXM 
PFFCL ] 367 (and record citations therein). Having made this 
assumption, Sirius XM's witnesses explained what they characterize as a 
fairly simple intuition grounded on their economic modeling in the 
record: ``[A] change in Sirius XM's music mix (i.e., something less 
dramatic than losing access to all music) is likely to result in only 
some relatively modest loss in subscribers, if any--not, as Professor 
Willig models, every Sirius XM subscriber seeking music elsewhere. See 
Farrell WRT ] 67.\86\
---------------------------------------------------------------------------

    \86\ Professor Farrell's argument ``demonstrated mathematically 
that if Sirius XM's failure to obtain a license from a record label 
led to the loss of some, but not all, subscribers, then the walk-
away opportunity cost for that label would be significantly less 
than that label's pro-rated share of the monopoly opportunity cost 
calculated by Professor Willig, the difference between the two 
depending on the fraction of Sirius XM subscribers who would cancel 
their subscriptions in response to the failure of Sirius XM to 
secure a license from the individual label.'' Farrell WRT ]] 68, 71.
---------------------------------------------------------------------------

    Sirius XM lodged another fundamental objection to Professor 
Willig's opportunity cost approach. As Sirius XM noted, Professor 
Willig's $2.55 opportunity cost calculation was

[[Page 65231]]

derived by applying the royalties alternative services pay to record 
companies. In Web IV, the Judges found these rates to be inflated by 
the complementary oligopoly power of the Majors. Sirius XM criticized 
``importing'' that ``supracompetitive'' rate into this statutory 
setting in the absence of any adjustment or allowance for effective 
competition. The royalty with the most disproportionate impact in this 
regard is the $[REDACTED]/month royalty charged to subscription 
interactive services.\87\ See Written Direct Testimony of Robert 
Willig, Trial Ex. 28, ] 41 & Table 2 (Willig WDT). Professor Farrell 
argued that Professor Willig's calculations are significantly infected 
by the noncompetitive market for licenses to interactive services. See 
4/24/17 Tr. 636, 640 (Farrell). Professor Farrell cautioned against 
putting ``heavy weight on a rate that has been found to be 
supracompetitive and driven by complementary oligopoly . . . .'' 4/24/
17 Tr. at 641 (Farrell). Even Professor Willig agreed that a lack of 
steering in the interactive market could inflate the opportunity cost 
calculation for Sirius XM. 5/2/17 Tr. at 2037-38 (Willig).
---------------------------------------------------------------------------

    \87\ Based upon Professor Dhar's survey, interactive services' 
diversion ratio of 31% comprises 70% of Professor Willig's $2.55 
opportunity cost. The Judges examine the survey data infra, section 
VI.B.
---------------------------------------------------------------------------

    Further, Sirius XM chastised Professor Willig for a claimed 
inconsistency. Professor Willig acknowledged on the one hand that 
benchmarks from other distribution channels, such as the interactive 
services benchmark, must be free of the effects of complementary 
oligopoly. Nonetheless, he applied the rates from these same 
distribution channels without a downward adjustment to offset the 
upward impact of the complementary oligopoly effect when computing 
opportunity cost. See 5/2/17 Tr. 2152-54 (Willig).
    Sirius XM also criticized Professor Willig for his second 
alternative justification for using the industry-wide opportunity cost; 
that is what Sirius XM labeled his ``unilateral alignment'' approach. 
See SXM PFFCOL ]] 379-382. Sirius XM characterized this as the 
``conscious parallelism'' of like-minded oligopolists, viz., a form of 
anticompetitive ``tacit collusion which, even though not a violation of 
any antitrust laws, would nonetheless lead to results that would be 
inconsistent with the necessity that rates be consistent with the 
principles of effective (workable) competition.'' Id. ] 381 (and record 
citations therein).
3. The Judges' Use of the Opportunity Cost Model To Set the SDARS 
Royalty Rate
    The Judges find that Professor Willig's industry-wide walk-away 
opportunity cost approach is an appropriate tool, on the present 
record, to apply as an interim step in crafting the statutory rate. On 
the one hand, there is no dispute between the parties that the Majors 
would use this industry-wide opportunity cost calculation to set 
royalty rates in an unrestricted market. On the other hand, the Judges 
find there is no bona fide dispute but that these rates would partially 
reflect the complementary oligopoly effect of Majors.
    Standing alone, the complementary oligopoly effect within the walk-
away opportunity cost model would inflate the rate above the 
``reasonable rate'' the Judges must determine. However, the Judges may 
mitigate the industry-wide walk-away opportunity cost that incorporates 
complementary oligopoly effects, as they do in their ``fork in the 
road'' approach later in this Determination. Thus, even if one could 
construe Professor Willig's ``walkaway'' approach, standing alone, as 
inconsistent with the concept of effective competition, that 
inconsistency can be--and is--mitigated because the because the Judges 
have considered and accounted for such ``must have''/complementary 
inefficiencies by also accepting Professor Willig's practical and 
reasonable ``fork in the road'' approach, discussed below.
    The Judges find unhelpful SoundExchange's alternative justification 
for the use of walk-away opportunity costs in the marketplace. This 
alternative point simply noted that the major record labels, who are 
oligopolists, would engage in some form of what is known as ``conscious 
parallelism'' when negotiating royalties. See 5/2/17 Tr. 2027 (Willig) 
(``decision-making is unilateral, but parallel, across the record 
[l]abels''); see also SE PFF ] 526. This exposition explains why 
oligopolists would move in concert without engaging in explicit 
collusion, but begs the question whether that concerted price movement 
would incorporate walk-away opportunity cost ab initio. It is Professor 
Willig's first point--that each Major's knowledge of its ``must have'' 
status imbues it with individual market power to walk-away--that is 
sufficient to demonstrate the market logic of the industry's collective 
exploitation of walk-away opportunity cost. See 5/2/17 Tr. 2031-34 
(Willig).
    The Judges also find unhelpful Sirius XM's argument that Professor 
Willig's opportunity cost approach is the equivalent of a benchmarking 
approach. To be sure, the point is correct, but its advancement as a 
criticism is wrong. When properly weighted, the opportunity cost 
approach is tantamount to a useful benchmark, because the weightings 
are quite analogous to (and more precise than) the ``adjustments'' the 
Judges consistently make to proposed benchmarks. To the extent the 
opportunity cost is infected by complementary oligopoly inefficiencies 
that increased the rates from which that opportunity cost is derived, 
the Judges look to the entire record to ascertain whether and how to 
account for that factor, as they have by applying Professor Willig's 
``fork in the road'' approach.

B. Application of the Opportunity Cost Approach

    To apply the walk-away opportunity cost approach in the satellite 
radio market, Professor Willig utilized the survey conducted by 
Professor Ravi Dhar (Dhar Survey) to calculate his $2.55 per subscriber 
per month opportunity cost of licensing sound recordings to Sirius XM. 
Willig WDT ] 41. Professor Willig's analysis is built upon two 
principal elements: Diversion ratios and creator compensation data.
    Professor Willig derived the first element (his ``diversion 
ratios''), from substitution data which indicate the other sources and 
modes of distribution of recorded music to which Sirius XM subscribers 
would gravitate if Sirius XM were no longer available at acceptable 
prices. 5/2/17 Tr. 2057-58 (Willig). More particularly, the Dhar Survey 
examined how Sirius XM subscribers would react to a higher price for a 
subscription to Sirius XM. 5/2/17 Tr. 2057-58 (Willig). The Dhar Survey 
first asked respondents if they would discontinue their Sirius XM 
service at various higher prices. Willig WDT ] 40. Those respondents 
who answered these ``pricing questions'' by stating they would cancel 
their Sirius XM subscriptions were then asked certain ``switching 
questions.'' The respondents were asked how they would listen to music, 
and specifically which of the alternative distribution channels 
presented in the survey question they would select. Willig WDT ] 40 
(summarizing relevant aspects of Dhar Survey); Corrected Written Direct 
Testimony of Ravi Dhar, Trial Ex. 22, ]] 58-60 & App. D at 69-70 (Dhar 
CWDT).
    With the foregoing information in hand, Professor Willig needed to 
assign monetary values to the diversion ratios.

[[Page 65232]]

This second element, for which Professor Willig coined the phrase 
``creator compensation data,'' is the amount of compensation that would 
flow to sound recording licensors from the distribution platforms to 
which Sirius XM subscribers would migrate. 5/02/17 Tr. 2058-59 
(Willig).\88\
    To link the diversion ratio and creator compensation data for each 
alternative distribution mode to which Sirius XM subscribers would 
migrate, Professor Willig multiplied the diversion ratio by the creator 
compensation data (per subscriber). The product according to Professor 
Willig equals the opportunity cost associated with consumers listening 
to Sirius XM as opposed to each alternative distribution mode. 5/2/17 
Tr. 2059-60 (Willig).
    Professor Willig then added each of the positive weighted levels of 
monthly creator compensation for each alternative distribution mode. 
Willig WDT ] 41. According to Professor Willig, this summation 
represents the total opportunity cost of licensing Sirius XM across all 
alternative modes of distribution. He summarized his calculations in 
the following table.

                       Opportunity Cost Based on Dhar Survey Responses--Summary of Results
----------------------------------------------------------------------------------------------------------------
                                                                   Alt. mode mix   Unit creator    Wghtd creator
              Distribution across alternative modes                     (%)       comp $/Sub-Mo.  comp $/Sub-Mo.
----------------------------------------------------------------------------------------------------------------
Paid Interactive................................................              31      [REDACTED]      [REDACTED]
Paid Noninteractive.............................................              15      [REDACTED]      [REDACTED]
Purchase CDs/downloads..........................................              10      [REDACTED]      [REDACTED]
Ad-supported Noninteractive.....................................               4      [REDACTED]      [REDACTED]
Ad-supported Interactive........................................               3      [REDACTED]      [REDACTED]
Music video.....................................................               2      [REDACTED]      [REDACTED]
Cable/satellite music channels..................................               2            0.00            0.00
Other (zero creator comp).......................................              32            0.00            0.00
                                                                 -----------------------------------------------
    Total/Weighted-Average......................................             100            2.55            2.55
----------------------------------------------------------------------------------------------------------------

Willig WDT ] 41, Table 2.
---------------------------------------------------------------------------

    \88\ Professor Willig detailed how he derived the creator 
compensation data for each line item in his table. See Willig WDT ]] 
477-485. (The calculation methods are not in dispute.)
---------------------------------------------------------------------------

    As his tabular data demonstrate, Professor Willig calculated the 
full opportunity cost across all alternative modes of distribution as 
totaling $2.55 per subscriber per month. Willig WDT at ] 41. This 
opportunity cost calculation is consistent with SoundExchange's 
proposed per-subscriber royalty range of $2.48 in 2018 to $2.79 in 
2022. Given Sirius XM's ARPU of $[REDACTED] per month, Professor 
Willig's $2.55 per subscriber rate is equivalent to [REDACTED] % of 
revenue.\89\ Thus, Professor Willig's conclusion is consistent with 
SoundExchange's 23%-of-revenue rate proposal covering all five years in 
the forthcoming rate period.
---------------------------------------------------------------------------

    \89\ ARPU is the industry acronym for ``Average Revenue per 
User.'' See also infra note 142 regarding the quantification of 
ARPU.
---------------------------------------------------------------------------

1. Survey Data Underlying ``Opportunity Cost'' Approach
    Professor Willig's opportunity cost approach is dependent upon the 
weights he placed on various distribution channels. The Judges, 
therefore, test the underlying survey data on which he relied to assess 
their reliability or, more specifically, their strength in supporting 
Professor Willig's conclusions.
    The Dhar Survey was conducted as an online survey. The purpose was 
to measure, inter alia, the preferences of Sirius XM subscribers who 
would choose to cancel their Sirius XM subscriptions at a given price. 
Dhar CWDT ] 10; 5/8/17 Tr. 2728 (Dhar). The survey respondents 
consisted of current paid Sirius XM subscribers who stated they have 
the Sirius Select package, as well as current users of a free trial 
subscription to Sirius XM (typically available with certain new or used 
vehicle purchases). Dhar CWDT ] 10. Accordingly, the potential 
population of survey respondents excluded those who understood 
(correctly or incorrectly) that they subscribed to any other Sirius XM 
package, such as ``XM Select,'' ``Mostly Music,'' or ``All Access.''
    Professor Dhar directed and conducted the survey between September 
14 and September 22, 2016. To ensure the reliability and validity of 
his online survey results, Professor Dhar designed and administered the 
survey by applying principles of survey research applicable to online 
surveys. In total, 2,602 respondents completed the survey. Dhar CWDT ]] 
18-19.\90\
---------------------------------------------------------------------------

    \90\ An online survey obtains respondents from existing panels 
of individuals who have expressed a willingness to participate. 
Thus, the respondents are not randomly selected from a statistical 
perspective and, accordingly, no margin of error or confidence 
interval can be applied to the results. However, Professor Dhar used 
what is known as a ``bootstrapping procedure,'' by which a sampling 
of the survey respondents is itself randomly selected and thereby 
created a confidence interval around each of the reported survey 
results. Dhar CWDT ] 90.
---------------------------------------------------------------------------

    As noted above, the Dhar Survey consisted of two broad types of 
questions: ``pricing questions'' and ``switching questions.'' The 
pricing questions measured the preferences of Sirius XM subscribers who 
would choose to cancel their subscriptions at given prices. The Dhar 
Survey results demonstrated that 76% of Sirius XM subscribers would 
cancel their subscriptions to Sirius XM at various prices between 
$11.49 and $20.49 per month.
    The first of the ``switching questions'' asked the 76% who said 
they would cancel their Sirius XM subscription (at any of the price 
levels examined) to identify the type of music distribution channel to 
which they would subscribe. The results showed that 28% of Sirius XM 
subscribers said they would switch to a paid on-demand (i.e., 
interactive) music streaming service and 14% said they would switch to 
a paid not-on-demand (i.e., noninteractive) music streaming service. 5/
8/17 Tr. 2761-62 (Dhar).\91\ In offering survey respondents

[[Page 65233]]

alternative subscription services, the Dhar survey specified a cost of 
$9.99 per month for interactive services and $4.99 per month for 
noninteractive services. Respondents were prompted to choose only ``a 
new subscription . . . not . . . a music service that you currently 
subscribe to.'' Dhar CWDT App. D at 69.
---------------------------------------------------------------------------

    \91\ The percentages of respondents selecting an alternative 
service are stated as a portion of the entire population of the 
Sirius XM respondents in the survey, rather than as a portion of 
those who would choose to cancel their Sirius XM subscription. There 
were 388 respondents who stated they would cancel their Sirius XM 
subscription at various price points, which is the denominator 
Professor Dhar used in his trial testimony to arrive at the 28% and 
14% figures. Dhar CWDT ] 92. Professor Willig's percentages were 
higher because he excluded 33 respondents who answered ``Don't Know/
Unsure'' to the switching question. Professor Willig thus determined 
that 31% (not 28%) of the relevant universe would switch to a paid 
on-demand service and 15% (not 14%) to a paid not-on-demand service. 
Willig WDT, App. B at B-2. Sirius XM's witness, Professor Farrell, 
did not dispute that the relevant denominator is the number of 
respondents who would choose to cancel their Sirius XM subscription. 
He used the same adjustment in his rebuttal opportunity cost 
analysis, as explained elsewhere in this Determination.
---------------------------------------------------------------------------

    The Dhar Survey also explored preferences of respondents who 
indicated they would not subscribe to a paid music service. Respondents 
were permitted to choose more than one alternative music source from 
among: (1) Purchased physical or digital tracks or albums, (2) free 
music, (3) other, (4) none of the above, and (5) ``don't know/unsure.'' 
The follow-on question to those respondents who chose ``free music'' 
asked them to identify all of the free music sources they would choose. 
Dhar CWDT at 59-60. The free music options listed included, inter alia, 
(1) free not-on demand (including AM/FM radio over the internet), (2) 
free (ad-supported) on-demand music services, (3) borrowed recordings, 
(4) recordings the respondent already owns, and (5) AM/FM or AM/FM HD 
broadcast radio. Id.
    Professor Willig used the results of this Dhar Survey to identify 
the ``Alternative Mode Mix'' in his Opportunity Cost analysis, and 
presented his results in the previous table.
2. Professor Hauser's Criticisms of the Dhar Survey
    Sirius XM called Professor John Hauser as a rebuttal expert witness 
on survey design and methodology. In his written and oral testimony, 
Professor Hauser leveled a number of criticisms at the Dhar Survey. In 
particular, he criticized the switching questions and accompanying 
response choices in the Dhar Survey. Professor Hauser testified that 
the Dhar Survey was constructed in a manner that biased its results 
because it: (1) Over-emphasized paid interactive and paid 
noninteractive subscriptions in a biased and artificial manner; (2) 
``buried'' the choice of free music, such as terrestrial radio \92\ as 
an alternative to Sirius XM; and (3) failed to give respondents the 
option of replacing a Sirius XM subscription with increased listening 
to an existing (as opposed to a new) paid interactive or non-
interactive subscription. Rebuttal Expert Report of John Hauser, Trial 
Ex. 11, ]] 66-69 (Hauser WRT).
---------------------------------------------------------------------------

    \92\ In this Determination, ``terrestrial radio'' refers to 
free, over-the-air AM/FM and AM/FM HD radio, but not to AM/FM radio 
streamed over the internet.
---------------------------------------------------------------------------

    As a preliminary matter, Sirius XM and Professor Hauser asserted 
that Professor Dhar's tilt toward paid subscription services was the 
consequence of his understanding that the relevant inquiry was ``if 
[respondents] cancelled their [Sirius XM] subscription, what would they 
subscribe to.'' 5/8/17 Tr. 2886-87 (Dhar). Accordingly, Sirius XM 
asserted that the Dhar Survey was tainted from the inception because it 
presented respondents only with definitions for three types of 
services: Satellite radio, on-demand services, and non-on-demand 
services. Dhar CWDT at 66 (Question 200), 69 (Question 200 and 210). 
According to Professor Hauser, putting only these three types of 
services in respondents' minds immediately prior to asking the 
switching questions ``emphasize[d] both on-demand and not on-demand 
services.'' 5/9/17 Tr. 3034-35 (Hauser). Professor Hauser contended 
that the Dhar survey ``provided no cues to aid in the recall of other 
music options (e.g., terrestrial radio) to which respondents could 
switch.'' Hauser WRT ] 68. As Professor Hauser explained, ``[b]y aiding 
in the recall of paid music services, but relying on unaided recall for 
other music options (including free music options), Professor Dhar 
biase[d] his results in favor of switching to paid music services.'' 
Id.
    According to Professor Hauser, this phrasing and choice selection 
inevitably skewed responses in a way that did not reflect real-world 
behavior. Specifically, he opined that the non-subscription option that 
Professor Dhar provided as a potential response (``No, I would not 
subscribe to a paid music service'') was not nearly specific enough to 
capture a wide range of non-paid music options that respondents might 
consider, including terrestrial radio. He further testified that, if 
Professor Dhar had ``provided a list of non-paid alternatives or 
existing paid subscriptions to which respondents might reasonably 
switch, respondents may have been more likely to select non-paid 
alternatives or existing paid subscriptions and less likely to select 
new paid subscriptions.'' Hauser WRT ] 69; see also 5/9/17 Tr. 3034-35 
(Hauser) (discussing ``availability heuristic'' and how ``when you show 
people something, it becomes available in memory and they're much more 
likely . . . to choose it'').
    Accordingly, Professor Hauser concluded that the Dhar Survey 
wrongly buried other switching options such as listening to terrestrial 
radio and omitted altogether listening to services to which the 
respondents already paid to subscribe. Hauser WRT ]] 65-70.\93\ He 
described the terrestrial radio option as buried because, for a Dhar 
Survey respondent to select terrestrial radio as a choice, he or she 
would first need to indicate an unwillingness to subscribe to a paid 
music service in place of Sirius XM. Only then would the respondent be 
shown the undifferentiated choice of listening to ``free music.'' Even 
then, the respondent would need to indicate that he or she would 
``listen to free music,'' and still would not be offered the explicit 
choices of listening to terrestrial radio or to increase listening to a 
streaming service to which he or she already subscribed or listened. 
Only if the survey respondent selected the ``free music'' option would 
he or she be presented--for the first time--with terrestrial radio as 
an optional answer. See SXM PFF ] 390 (citing Dhar CWDT at 69; 5/8/17 
Tr. 2916-20 (Dhar)).
---------------------------------------------------------------------------

    \93\ Confirming the importance of this criticism, Professor 
Willig criticized the survey by Joseph Lenski, on behalf of Sirius 
XM, for the same failure to offer the alternative of more intense 
listening to an existing subscription service. Willig WRT ] 48. This 
is an important failure, according to Professor Willig, because a 
survey that does not offer respondents the option of listening more 
to an existing subscription ``cannot provide the information needed 
to assess the relevant effect, namely, the impact on creator 
compensation.'' Willig WRT ] 46.
---------------------------------------------------------------------------

    In addition to critiquing the Dhar Survey's switching questions, 
Professor Hauser created and implemented a ``Modified Dhar Survey.'' In 
the Modified Dhar Survey, he essentially repeated Professor Dhar's 
pricing questions, but attempted to reformulate the switching questions 
in order to provide respondents with the immediate and explicit choices 
of replacing Sirius XM with either terrestrial radio or increased 
listening to streaming services to which they already subscribed.\94\
---------------------------------------------------------------------------

    \94\ Professor Hauser also criticized the ``pricing'' questions 
in the Dhar Survey for listing from ``low to high'' the choice of 
prices at which Sirius XM subscribers would not renew their 
subscriptions, rather than also randomly reversing the order to 
``high to low'' for 50% of the surveys. He also found fault with the 
overall Dhar Survey because it only permitted participation by 
individuals who thought they were subscribers to Sirius Select. Only 
about 27% of all Sirius XM subscribers subscribe to the Sirius 
Select package, and it was unclear whether subscribers knew the name 
of the Sirius XM product to which they subscribed. Hauser WRT ] 124 
& Figure 13; see also 5/8/17 Tr. 2858-2859 (Dhar). However, 
Professor Hauser essentially utilized the same predicates to the 
``switching'' questions in his Modified Dhar Survey.
---------------------------------------------------------------------------

    In the Modified Dhar Survey, Professor Hauser first moved the 
option of listening to terrestrial radio forward in the survey. 5/9/17 
Tr. 3049-50 (Hauser). He also added additional alternative responses to 
the options of

[[Page 65234]]

choosing ``new CDS and/or music downloads,'' the respondent's 
``existing collection of CD and/or music downloads,'' and ``other free 
music option(s) (e.g., free, ad-supported Pandora or Spotify, AM/FM 
radio over the internet, and YouTube.)'' Hauser WRT ] 79; id. App. I at 
10. Professor Hauser then added yet more response options to allow 
respondents to choose explicitly to switch to existing music service 
subscriptions. Hauser WRT ]] 79, 88, App. I at 10; 5/9/17 Tr. 3061 
(Hauser).
    When Professor Hauser administered his Modified Dhar Survey to a 
group of on-line survey respondents, he obtained results significantly 
different from those Professor Dhar reported. Specifically, Professor 
Hauser's modifications led to a material drop in the percentage of 
Sirius Select respondents who indicated that they would replace their 
Sirius XM subscription with a new paid on-demand service: From 28% of 
respondents in Professor Dhar's survey (31% as measured by Professor 
Willig) to only 15% in the Modified Dhar Survey. See Hauser WRT Table 1 
& ]] 101, 104; 5/9/17 Tr. 3056 (Hauser).
    In addition, when Professor Hauser provided respondents the 
terrestrial radio option early and explicitly, approximately 78% of 
Sirius Select respondents indicated they would switch to terrestrial 
radio. Hauser WRT Figure 11-A; 5/9/17 Tr. 3059 (Hauser). This result 
was in stark contrast to the results from the original Dhar Survey, 
which indicated that only 29% of the total Sirius Select respondents 
would replace Sirius XM with terrestrial radio. Hauser WRT Fig 10-B; 
Dhar CWDT ] 52, Table 1. Sirius XM notes that Professor Dhar himself 
was unsurprised by these results. He testified at the hearing that he 
anticipated that, if he had explicitly offered respondents the choice 
of free music or AM/FM radio from the outset, he would have expected 
the number of people who chose those options to be higher. 5/8/17 Tr. 
2920-22 (Dhar).
    The Judges find the original Dhar Survey to be seriously flawed. 
The Dhar Survey failed to make prominent to respondents the option of 
selecting terrestrial radio as an alternative source of music if they 
made a price-based decision not to renew their Sirius XM subscriptions. 
Equally problematic are the absences from the Dhar Survey of any choice 
for a respondent to state that he or she would either increase 
listening to a streaming service to which he or she already subscribed, 
or to increase listening to downloads or CDs that the respondent 
already owned.
    Professor Dhar testified that the purpose of the study, as 
explained to him by the SoundExchange economic expert witnesses, was to 
estimate the number of cancelling Sirius XM subscribers who would then 
subscribe to an on-demand or a ``not-on-demand'' music streaming 
service. He explained that he did not make alternative free choices 
more prominent and explicit because the ``marketplace context'' that 
``the [SoundExchange] economists . . . were really interested in'' was 
the subscription streaming context. Tr. 5/18/17 2752 (Dhar); see also 
id. at 2751, 2752, 2754, 2810, 2889, 2921 (multiple instances of 
justifying the original formulation by reference to ``marketplace 
context''). The Judges find this testimony to be credible, and it 
suggests that Professor Dhar was not engaged to prepare a study that 
would give equal prominence to the potential alternative that Sirius XM 
subscribers might choose free alternatives. Thus, the Judges agree with 
Sirius XM that, by his own admission, Professor Dhar did not 
comprehensively measure what Sirius XM subscribers would do if they 
stopped using Sirius XM. By focusing myopically on what he 
(misleadingly) was told was the ``marketplace context'' of subscription 
streaming, the Dhar Survey essentially assumed its conclusion. This is 
a crucial defect, given that the use for which the Dhar Survey was 
intended was to weight ``opportunity costs'' in a manner that expressly 
included at least one free alternative, i.e., the substitution of 
terrestrial radio. It is disingenuous for SoundExchange to argue, 
through Professor Dhar, that its intention was not to identify the 
percent of Sirius XM listeners who would choose terrestrial radio (or 
any other free alternative), given that the Dhar Survey actually did 
solicit such responses, albeit in a fashion that reduced the frequency 
of that response, particularly in contrast with the results of the 
Modified Dhar Survey.
    The switching questions in the original Dhar survey are problematic 
for additional reasons. First, the power of a ``free'' alternative is 
well-understood. See C. Anderson, Free: The Future of a Radical Price 
4, 2 (2009) (``Free is both a familiar concept and a deeply mysterious 
one. . . . `Free-to-air' radio . . . created the mass market.''); D. 
Ariely, Predictably Irrational at 51-52 (2009) (when offered a Lindt 
Truffle for 26 cents and a Hershey's Kiss for 1 cent, 40% opted for 
each choice; when price of each decreased by one cent (making the Kiss 
free), 90% opted for free chocolate).
    Second, as the Lenski Survey \95\ made clear, 62% of Sirius XM 
subscribers had listened primarily to terrestrial radio before 
switching to Sirius XM. Written Direct Testimony of Joe Lenski, Trial 
Ex. 7, at 8 (Lenski WDT). Notwithstanding any problems in the Lenski 
Survey, it is not disputed that a substantial portion of the Sirius XM 
listener base migrated from listening to terrestrial radio. Sirius XM 
also presented testimony that the ``vast majority'' of Sirius XM 
listening, occurs in the automobile, and most listeners in automobiles 
still utilize terrestrial radio as their primary music source. See 
Written Direct Testimony of James Meyer, Trial Ex. 1, ] 21 (Meyer WDT). 
Simply put, the marketplace is suffused with evidence of the 
substantial past and present use of terrestrial radio.
---------------------------------------------------------------------------

    \95\ Sirius XM commissioned a listener survey to determine the 
sources of Sirius XM listeners and the destinations to which they 
would migrate if Sirius XM were not available. The Lenski survey is 
discussed infra, section VII.D.
---------------------------------------------------------------------------

    These data underscore the Judges' finding that the Dhar Survey's 
burying of the terrestrial radio alternative fails to depict the 
marketplace reality. Indeed, it is surprising that Professor Dhar (and 
anyone who directed him regarding the purpose of his survey) would 
repeatedly rely on the ``marketplace context'' rationale to justify the 
construction of the switching questions in the Dhar Survey and the 
results those questions elicited. The failure of the Dhar Survey 
explicitly to offer to a respondent, in any set of responses to any 
questions, the choice of increased listening to a streaming service to 
which the respondent has an existing subscription is especially 
problematic. From an economic perspective increased listening by a 
respondent to a service to which a respondent already subscribes is 
marginally ``free,'' because there is no increase in cost to access an 
existing monthly ``all-you-can-eat'' subscription to a music service in 
the car. More egregiously, the Dhar Survey explicitly instructs 
respondents before presenting the first switching question:

    Keeping in mind all other music services you subscribe to would 
you or would you not subscribe to a paid music service in place of 
Sirius? This would only include a new subscription, and would not 
include a music service that you currently subscribe to.

Dhar CWDT, at 69, App. D. Thus, not only did the Dhar Survey fail to 
provide respondents with an explicit choice to utilize a music 
streaming service to which they had an existing subscription, it 
explicitly primed them to think specifically of such services

[[Page 65235]]

and then to consciously NOT select that service as an alternative.
    The Judges' foregoing critique should not be understood as a 
finding that Professor Hauser's Modified Dhar Survey is without 
defects. Professor Hauser altered the composition of the survey 
population by excluding respondents who had recently taken a music 
survey (in an attempt, he claimed, to eliminate respondents who 
participated in the original Dhar Survey). Hauser WRT ] 96. Professor 
Hauser's different population renders the Modified Dhar Survey less 
than perfectly analogous to the original Dhar Survey. The record does 
not reflect that this alteration of the survey population biased the 
results; nor is there any evidence that the change was in any way 
material. Consequently, the Judges do not find this defect to render 
the Modified Dhar Survey unreliable.
    In addition, 24 participants in the Modified Dhar survey said they 
would listen to an on-demand service to which they already subscribe, 
even though they had answered the ``pricing question'' by stating that 
they were not then subscribing to such a service.\96\ See 5/8/17 Tr. 
2822 (Dhar); Trial Ex. 293, at 1. In his defense, Professor Hauser 
explained that he used Professor Dhar's non-switching (i.e., pricing) 
questions verbatim in order to tease out any differences arising from 
the switching questions, and that the non-switching questions listed 
only Spotify and Apple Music as interactive services, and Pandora, then 
a noninteractive service. See Dhar CWDT, App. D at 61, 63. Professor 
Hauser testified that, in his opinion, the anomaly could be explained 
by the fact that respondents who used other interactive streaming 
services, such as those offered by Amazon or Google, might have thought 
the ``pricing'' question about existing subscriptions to interactive 
services was limited to Apple Music and Spotify. Thus the respondents 
indicated they did not subscribe to either of them, but could respond 
affirmatively that they would listen to another On-Demand service to 
which they subscribed. 5/9/17 Tr. 3104-05 (Hauser). While that 
explanation is plausible, it is unsupported by record evidence.\97\ As 
Professor Dhar demonstrated, this anomaly materially affected the 
survey results: If one were to re-categorize those 24 responses as 
having stated that they would subscribe to a new on-demand service, the 
percentage of respondents who would switch to a new interactive service 
would increase from 15% to 19%. 5/8/17 Tr. 2822-23 (Dhar).\98\ The 
Judges adopt Professor Dhar's re-categorization to correct this anomaly 
in the Modified Dhar Survey.
---------------------------------------------------------------------------

    \96\ Professor Dhar identified a potential similar problem with 
regard to respondents who indicated they would switch to an existing 
noninteractive service, but had previously indicated they did not 
subscribe to such a service. However, he did not make any 
adjustments to correct this problem.
    \97\ Professor Dhar posited a different explanation for this 
anomaly. See 5/8/17 Tr. 2814-16 (Dhar). In light of Professor 
Hauser's failure adequately to explain the anomaly, the Judges need 
not consider Professor Dhar's alternative explanation.
    \98\ Professor Hauser also conceded that he checked all the 
numbers in Trial Ex. 293 (in which Professor Dhar tabulated 
inconsistent answers in Professor Hauser's survey and listed the 
sources for the data), and Professor Hauser found them to be 
correct. 5/9/17 Tr. 3143-44 (Hauser).
---------------------------------------------------------------------------

    Finally, Professor Hauser did not identify confidence intervals 
around his survey results which could have been estimated by use of the 
``bootstrap'' method. Such a subsequent sub-sampling and calculation 
would have bolstered Professor Hauser's weighting based on the Modified 
Dhar Survey. Cf. Dhar CWDT ] 90. There is no evidentiary requirement 
that an on-line survey that, by its non-random nature, fails to produce 
a statistical random sample must be subjected to a bootstrapping 
approach to carry evidentiary weight. Indeed, the requirements for 
precise statistical reliability that exist in the academic world should 
not constrain Judges from accepting and relying on evidence that is 
otherwise probative when considered in the context of the entire 
evidentiary record. See, e.g., Matrixx Initiatives, Inc. v. Siracusano, 
563 U.S. 27, 44 (2011) (demonstration of ``statistical significance'' 
not required to demonstrate reliable causal relationship when 
relationship demonstrated through ``content and context'' evidence). 
Moreover, the standard-setting organization for survey work, the 
American Association for Public Opinion Research (AAPOR), upon which 
Professor Dhar relied to use a bootstrapping approach, is by its 
express language a ``nonbinding document,'' and thus does not require 
the use of the bootstrapping technique through which statistical 
significance could be ascertained. See Dhar WDT, Ex. G, at 1(AAPOR 
Guidance on Reporting Precision for Nonprobability Samples).
    On balance, the Judges find the Modified Dhar Survey (corrected by 
Professor Dhar, as noted supra) to be more probative than the original 
Dhar Survey. Once corrected to account for the anomalous responses 
described above, the potential deficiencies in Professor Hauser's 
Modified Dhar Survey appear to the Judges to be of relatively marginal 
significance when compared with the defects in the original Dhar 
survey. The Modified Dhar Survey came closer to the core of the issue 
at hand: Distinguishing among the alternative distribution channels to 
which erstwhile Sirius XM subscribers would migrate if the Sirius 
subscription price became so high as to dissuade renewal.
3. Re-Weighting Opportunity Cost Calculation With Modified Dhar Survey
    Professor Farrell took Professor Hauser's data from the Modified 
Dhar Survey and plugged them into Professor Willig's opportunity cost 
calculations. In so doing, Professor Farrell persuasively demonstrated 
that Professor Willig's opportunity cost fell significantly below the 
$2.55 per subscriber per month level, and thus below the [REDACTED]% 
royalty rate Professor Willig found to be implied by that $2.55 
figure.\99\ See 4/24/17 Tr. 636-37 (Farrell); Farrell WRT ]] 62-66.
---------------------------------------------------------------------------

    \99\ To be clear, Professor Farrell did not agree with the 
opportunity cost values that Professor Willig calculated, because 
Professor Farrell described them as monopoly-based opportunity costs 
(as noted, supra, Professor Willig called them walk-away opportunity 
costs). However, Professor Farrell's re-working of Professor 
Willig's opportunity cost analysis utilizes, arguendo, Professor 
Willig's ``walk-away'' opportunity costs.
---------------------------------------------------------------------------

    Professor Farrell noted that the Modified Dhar Survey had 498 
respondents who self-identified as paid Sirius XM subscribers. Among 
these 498 respondents, 13 answered the survey's pricing questions by 
stating that they would continue to subscribe to Sirius XM at any 
price. Therefore, like Professor Willig, Professor Farrell excluded 
these 13 from the pool used to weight the opportunity cost calculation. 
Another 22 respondents to the Modified Dhar Survey answered ``Don't 
know/unsure'' to whether they would cancel at various hypothetical 
Sirius XM subscription prices. Again, consistent with Professor 
Willig's treatment of respondents who answered in this manner, 
Professor Farrell excluded these 22 respondents from the pool used to 
weight the opportunity cost calculation. The remaining 463 respondents 
were then asked what source of music they would switch to in lieu of 
listening to Sirius XM. Farrell WRT, App. F at F-1.
    Professor Farrell presented in tabular form (1) the options from 
which the 463 respondents in the Modified Dhar Survey could choose; (2) 
the counts of respondents who chose each option; (3) the ratio by which 
the respondents would divert to each option; and (4) the creator 
compensation for each option. His calculations are detailed on the 
following table.

[[Page 65236]]



                       Modified Dhar Survey Responses--Diversion and Creator Compensation
----------------------------------------------------------------------------------------------------------------
                                                                                     Diversion     Creator comp/
                        Respondent choice                              Count         ratio (%)    subscriber/mo.
----------------------------------------------------------------------------------------------------------------
Alternate paid interactive service (e.g., Spotify/Apple Music)..              69          15.10%     $[REDACTED]
Existing paid interactive service (e.g., Spotify/Apple Music)...              57           12.50            0.00
Alternate paid non-interactive service (e.g., Pandora One etc.).              45            9.90      [REDACTED]
Existing paid non-interactive service (e.g., Pandora One etc.)..              30            6.60      [REDACTED]
Alternate CDs or music downloads................................              97           21.30      [REDACTED]
Existing CDs or music collection................................             240           52.60            0.00
AM/FM radio.....................................................             359           78.70            0.00
Other free options..............................................             184  ..............  ..............
    Free, ad-supported non-interactive service..................             138           30.30      [REDACTED]
    Free, ad-supported interactive service......................              92           20.20      [REDACTED]
    Free, ad-supported music video sites........................              70           15.40      [REDACTED]
    Music channel included in existing cable/SAT TV subscription              59           12.90            0.00
    Peer-to-peer file sharing or free download sites............              17            3.70            0.00
    Borrow CDs, vinyl or tapes from friends or a library........              52           11.40            0.00
    Other free services.........................................              13            2.90            0.00
    Don't know/unsure...........................................               9            2.00      [REDACTED]
Other...........................................................              15            3.30            0.00
None............................................................               8            1.80            0.00
Don't know/unsure...............................................               7
                                                                 -----------------------------------------------
    Total.......................................................             463
----------------------------------------------------------------------------------------------------------------

Farrell WRT, App. F at F-2 (Table 3).\100\
---------------------------------------------------------------------------

    \100\ Professor Farrell used the creator compensation figures 
from Table 2 in the Willig WDT whenever available. However, 
Professor Willig had not covered in his Table 2: Peer-to-peer file 
sharing or free download sites, borrowed CDs, vinyl or tapes from 
friends or a library, other free services, don't know/unsure 
regarding free options, and ``other.'' Professor Farrell discounted 
this point, noting that (with the exception of ``Don't know/unsure'' 
under free options), these other services not in Professor Willig's 
Table 2 have zero creator compensation value.
---------------------------------------------------------------------------

    Professor Farrell used the above data to calculate the opportunity 
cost (i.e., the walk-away opportunity cost). More particularly, 
Professor Farrell engaged in a nine-step calculation to compute 
opportunity costs.
    Professor Farrell first eliminated the seven respondents who chose 
``Don't know/unsure,'' noting that this was equivalent to assuming that 
these seven would divert to the different options in the same 
proportions as the remaining 456 respondents.\101\ He calculated the 
diversion ratio for each option as the number of respondents who chose 
that option divided by 456. Professor Farrell then used the same values 
for ``creator compensation per subscriber per month'' as set forth in 
Table 2 of Professor Willig's WDT, including Professor Willig's 
adjustments for intensity of use.\102\ See Farrell WRT, App. F at F-2.
---------------------------------------------------------------------------

    \101\ Professor Willig adopted the same approach when treating 
``Don't know/unsure.'' Willig WDT at B-3.
    \102\ Professor Farrell did not opine on the appropriateness of 
Professor Willig's adjustment for intensity of use. Farrell WRT at 
F-2.
---------------------------------------------------------------------------

    Professor Farrell noted that in both the Dhar Survey and the 
Modified Dhar Survey, many respondents chose multiple nonsubscription 
options. Professor Farrell generally matched Professor Willig's 
approach, assuming equal intensity of use for the multiple options 
chosen by a given respondent.\103\ Professor Farrell calculated the 
overall intensity of use for a given option across all respondents who 
selected that option as equal to the average intensity of use for that 
option across all respondents who selected that option. See Farrell 
WRT, App. F at F-3. Applying this foregoing approach for each option, 
Professor Farrell calculated an ``intensity-adjusted creator 
compensation.'' \104\ Professor Farrell's calculation generated an 
opportunity cost of $1.44 per subscriber per month.\105\ (Professor 
Farrell also applied the diversion data from the Lenski Survey 
(discussed later in this Determination) and arrived at a similar 
opportunity cost estimate of $1.43. Farrell WRT ] 66.\106\)
---------------------------------------------------------------------------

    \103\ See Willig WDT at B-3 and B-4. Unlike Professor Willig, 
Professor Farrell assumed equal intensity of use percentages 
whenever individuals selected combined free options and paid 
services in in their multiple option choices, whereas Professor 
Willig assigned 50% to alternate CD or music downloads, and 25% to 
each of the free options. According to Professor Farrell, this 
difference did not have a large impact on the size of the 
opportunity cost.
    \104\ Professor Farrell assumed that creator compensation for 
the option ``Other'' to be zero. See Farrell WRT, App. F, at F-3. 
Professor Willig appeared to make the same assumption. See Willig 
WDT at B-8.
    \105\ Professor Farrell recognized that the value (unweighted) 
of the monthly ``unit creator compensation $ per subscriber'' could 
decrease if a lower intensity of use (fewer plays) among those who 
selected multiple options also reduced the overall revenue base 
under a per play royalty structure as calculated under Professor 
Willig's assumptions. The $1.44 opportunity cost set forth in the 
accompanying text assumes (in favor of the licensors) that creator 
compensation for paid services and paid non-interactive services 
does not decrease for decreased intensity of use. Professor Farrell 
opined that--if noninteractive services alone would pay a lower 
royalty (because their royalty payments are based on a per-play/
intensity-based formula), but interactive service royalties would 
not be similarly reduced because of a reduction in intensity of use 
(i.e., if they more likely to pay royalties on a per-subscriber or 
percent-of-revenue basis)--his opportunity cost calculation would 
generate a lower opportunity cost of $1.35. See Farrell WRT, App. F, 
at F-3. However, Professor Farrell does not provide in his written 
or oral testimony a basis to make this ``creator contribution'' 
adjustment based on relative changes in intensity, and the Judges 
therefore do not credit his argument that--under his reworking of 
Professor Willig's opportunity cost calculations--the opportunity 
cost can be reduced from $1.44 to $1.35.
    \106\ As explained elsewhere in this Determination, the Lenski 
Survey did not provide pricing information to respondents, making it 
a less valuable tool for estimating opportunity cost. Accordingly, 
the Judges do not rely on Professor Farrell's $1.43 opportunity cost 
calculation that is based on the Lenski Survey as an independent 
basis to calculate opportunity cost, but rather consider it as 
confirmation that Professor Willig's opportunity cost calculation 
(based on the original Dhar Survey) was too high.
---------------------------------------------------------------------------

    Professor Farrell used the same methodology for survey respondents 
who were Sirius XM free trial subscribers. See id., App F at F-3-F-4. 
However, the Judges do not find the trial subscriber population to be 
an appropriate universe from which to calculate opportunity cost 
because trial subscribers have not demonstrated a positive WTP.
    SoundExchange failed to raise persuasive objections to Professor 
Farrell's opportunity cost calculation

[[Page 65237]]

based on the Modified Dhar Survey. In its PFF, SoundExchange asserts 
only:

    Professor Farrell also revised Professor Willig's opportunity 
cost calculations to show what the industry-wide opportunity cost 
would be if one used diversion ratios from the Hauser and Lenski 
surveys. Trial Ex. 10 at 17-21 (Farrell WRT); 4/24/17 Tr. 636:2-7 
(Farrell). It is not clear what the point of this exercise was -- 
neither the Lenksi nor the Hauser survey can reliably be used to 
calculate opportunity costs, as Sirius XM's own experts admit.

SEPFF561. Likewise, in its RPFF, SoundExchange does not attack any 
aspect of Professor Farrell's application of the Modified Dhar Survey, 
but rather renews its attack on the underlying work of Professor 
Hauser:

    Professor Farrell's recasting of Professor Willig's calculations 
using the Hauser survey is invalid since the Hauser survey entirely 
misstated the switching question, see SE FOF ]]614-22, and since 
Professor Hauser conceded unequivocally that the economists should 
not rely on his survey, see SE FOF ]619 (citing Hauser testimony).

SERPFF, Response to ] 408 at 266.

    SoundExchange's objection to the use of Professor Farrell's 
approach is dependent on its antecedent criticism of Professor Hauser's 
analysis. As discussed, however, the Judges have found the Modified 
Dhar Survey results to be more accurate and probative than the results 
produced by the Dhar Survey. Accordingly, SoundExchange's criticism is 
without merit.\107\
---------------------------------------------------------------------------

    \107\ In its RPFF, SoundExchange added to its argument: 
``Professor Hauser conceded unequivocally that the economists should 
not rely on his survey.'' However, Professor Hauser made this 
comment because he also objected to other aspects of the Dhar 
Survey, particularly with regard to its ``pricing'' questions, that 
he nonetheless retained in the Modified Dhar Survey. Thus, he argued 
that these antecedent deficiencies in the Modified Dhar Survey 
precluded reliance on the results derived from his modified 
``switching'' questions in the Modified Dhar Survey. The Judges 
disagree with Professor Hauser's characterization of the 
deficiencies he identified in the Dhar Survey that were unrelated to 
the ``switching'' questions. Thus, the Judges can and do give 
considerable weight to the Modified Dhar Survey, which they find 
sufficiently credible and probative.
---------------------------------------------------------------------------

    Using Professor Dhar's corrected calculation indicating that 19% of 
Sirius XM subscribers would switch to a new interactive subscription 
service, the per Sirius XM subscriber opportunity cost increases from 
$1.44 to $[REDACTED].\108\ Given Sirius XM's ARPU of $[REDACTED], the 
percent-of-revenue royalty rate derived from the $[REDACTED] per 
subscriber per month opportunity cost is 15.5%.\109\
---------------------------------------------------------------------------

    \108\ 15.1% of the ``creator contribution'' value of $[REDACTED] 
equals $[REDACTED]. 19% of $[REDACTED] equals $[REDACTED]. The 
difference is $[REDACTED] ($[REDACTED] - $[REDACTED] = $[REDACTED]). 
When that $[REDACTED] is added to the $1.44 calculated by Professor 
Farrell, the full opportunity cost based on the Modified Dhar Survey 
(as adjusted for the foregoing anomaly in the Hauser survey answers) 
is $[REDACTED].
    \109\ Professor Willig attempted to corroborate Professor Dhar's 
diversion ratios with a regression analysis seeking to measure 
relative cross-elasticities. The Judges do not apply that analysis 
because: (1) The Dhar Survey results are without value (as discussed 
previously) and therefore cannot be ``corroborated''; and (2) there 
were significant disputes regarding the accuracy of Professor 
Willig's regression that rendered the value of that analysis 
inconclusive. See Shapiro WRT at 27-37.
---------------------------------------------------------------------------

C. Opportunity Cost Model and Effective Competition

    In Web IV, the Judges reconfirmed that a statutory willing-buyer, 
willing-seller royalty rate is one that would emerge in a market that 
is effectively competitive. See Web IV, 81 FR at 26334. Both 
SoundExchange and Sirius XM acknowledged that the rate set in this 
proceeding must reflect a market with such effective competition. 4/26/
17 Tr. 1103 (Orszag) (agreeing that ``the rates to be set here by the 
Judges . . . must reflect the workings of effective competition''); 
Shapiro CWDT at 21 (``My approach here is consistent with the one taken 
by the Judges in Web IV . . . . I use the terms `workably competitive' 
and `effectively competitive interchangeably.''); 4/20/17 Tr. 366 
(Shapiro) (``prices . . . at a complementary oligopoly level [are] not 
[at] a workably competitive level.'').
    The Judges defined an effectively competitive market In Web IV as 
one that ``mitigate[s] the effect of complementary oligopoly on the 
prices paid by . . . services . . . .'' Web IV, 81 FR at 26366. To 
obtain the rate that is effectively competitive, the Judges considered 
the services' ability to ``steer'' listeners as a sufficient 
counterweight to the Majors' complementary oligopoly power. Id. at 
26343. The Judges also noted in Web IV that SoundExchange had correctly 
described the concept of effective competition as ``fuzzy'' and that 
``no `bright line' can be drawn between effectively competitive and 
noncompetitive rates.'' Id. As the Judges further noted, the 
implication of this ``fuzziness'' was not that the principle of 
effective competition should be discarded, but rather that this ``fuzzy 
line'' needs to be drawn on a case-by-case basis, from the evidence and 
testimony adduced at the hearing.'' Id. (emphasis added).
    In the present proceeding, the parties' economists proposed that 
the Judges once again adjust for improper market power by applying a 
steering adjustment. SoundExchange proposed that the Judges select from 
one of three possible adjustments: (1) The 12% steering adjustment 
revealed by the specific steering evidence in Web IV; (2) a [REDACTED]% 
steering adjustment allegedly implied by the provisions of ``Mid-tier'' 
agreements \110\ between record companies and streaming services, see 
4/25/17 Tr. at 1053 (Orszag); or (3) a [REDACTED]% steering adjustment 
implied by rates in direct licenses between Sirius XM and certain 
Indies. See Written Rebuttal Testimony of Jonathan Orszag, Trial Ex. 
43, ] 70 (Orszag WRT). However, in this proceeding, these proposed 
adjustments are unacceptable.
---------------------------------------------------------------------------

    \110\ ``Mid-tier'' services means internet streaming services 
that offer only limited interactivity, and thus offer a tier of 
service between a noninteractive service and a fully interactive 
service. The limited interactive functionality of the mid-tier 
service offerings includes limited caching and playbacks.
---------------------------------------------------------------------------

    The Judges cannot simply import the 12% steering adjustment from 
Web IV into the satellite market; that 12% figure was derived from 
highly specific evidence presented in Web IV. There is not an adequate 
basis in the present record to support a finding that the 
noninteractive market from which that steering adjustment arose is 
sufficiently similar to the satellite radio market to render reasonable 
an importation of the 12% steering adjustment here. In particular, the 
record shows that Sirius XM does not steer in the satellite market 
despite the ability of its human programmers (as opposed to algorithmic 
programmers) to do so in order to potentially reduce rates in exchange 
for additional plays, which is the essence of steering. See infra, 
section VII.C.
    For two reasons, the Judges cannot accept the proffered [REDACTED]% 
steering adjustment that SoundExchange divined from the Mid-tier 
agreements. First, there is no evidence in the record to indicate 
whether that proposed adjustment may reflect a premium that a Major may 
impose not to prohibit a licensee from steering away from the licensor, 
rather than a discount offered to encourage a licensee to steer toward 
the licensor. Further, the rate differentials in those agreements on 
which SoundExchange's economic expert, Mr. Orszag, relied appear to be 
the product of many other differences in those agreements in addition 
to the steering/no-steering distinction, as Mr. Orszag candidly 
acknowledged. 4/26/17 Tr. 1155-56 (Orszag); see also SXM RPFF ]] 85-86 
(and record citations therein).
    Finally, the Judges reject any steering adjustment based on the 
direct licenses between Sirius XM and various Indies. As explained in 
the discussion of

[[Page 65238]]

Professor Shapiro's reliance on these direct licenses as benchmarks, 
the record is clear that multiple other provisions of those direct 
licenses provided substantial consideration to the Indie licensors to 
justify their willingness to enter into those deals. Moreover, the 
Indie direct licenses contain neither legal guarantees nor economic 
incentives that would compel or motivate steering by Sirius XM in favor 
of direct licensors.
    Accordingly, the Judges must review the record in this proceeding 
to identify a means to establish rates that are consistent with 
effective competition. The Judges accept certain principles regarding 
the nature of effective competition. ``Between the extremes of a market 
with `metaphysically perfect competition' and a monopoly (or collusive 
oligopoly) market devoid of competition there exists `[in] the real 
world . . . a mindboggling array of different markets' . . . all of 
which possess varying characteristics of a `competitive marketplace.' 
'' Web IV at 26333 (citing Web III Remand, 79 FR at 23114, n.37).\111\ 
Economists have long understood that the ``fuzzy'' nature of the 
concept of effective competition is inescapable, yet the concept must 
be applied, lest pragmatic economic analysis be straightjacketed by 
rigid textbook models such as perfect competition and simple 
monopoly.\112\ The D.C. Circuit has recognized this conceptual 
fuzziness, acknowledging in the rate-setting context the need for 
pragmatic market analysis, establishing rates intermediate between the 
pedagogical poles of perfect competition and pure monopoly. See 
Intercollegiate Broad. Sys., Inc. v. Copyright Royalty Board, 574 F.3d 
748, 757 (D.C. Cir. 2009) (IBS) (statutory provisions ``do[ ] not 
require that the market assumed by the Judges achieve metaphysical 
perfection in competitiveness'' (emphasis added)).\113\
---------------------------------------------------------------------------

    \111\ See J. M. Clark, Toward a Concept of Effective 
Competition, 30 a.m. Econ. Rev. 241, 243 (1940) (``The specific 
character of competition in any given case depends on a surprisingly 
large number of conditions . . . .'').
    \112\ See A. Kahn, Antitrust Policy, 67 Harv. L. Rev., 28, 35, 
(1953) (``[T]here exists no generally accepted economic yardstick 
appropriate for incorporation into law with which objectively to 
measure monopoly power or determine what degree is compatible with 
workable competition.''); J. Markham, An Alternative Approach to the 
Concept of Workable Competition 349, 361 (1950) (The concepts of 
``market performance and workable competition are essentially 
pragmatic''); G. Stocking, Economic Change and the Sherman Act: Some 
Reflections on ``Workable Competition,'' 44 Va. L. Rev. 537, 553 
(1958) (``the economists' concept of workable competition . . . is 
vague . . . .).
    \113\ The quoted language refers to section 114(f)(2)(B), which 
governs the compulsory license for eligible nonsubscription services 
and new subscription services. Under the license at issue in the 
present case, the D.C. Circuit has not required the Judges to adopt 
market rates. However, to the extent that the Judges choose to use 
market rates as an input for the development of rates under section 
801(b)(1) (as they do here), the quoted language from IBS is 
instructive.
---------------------------------------------------------------------------

D. Professor Willig's ``Fork in the Road'' Approach and Sirius XM's Own 
Market Power

    The Judges find no basis to lock themselves into a Hobson's choice 
by which they must either adopt an inapplicable steering adjustment as 
a proxy for an adjustment to reflect effective competition, or accept a 
rate that is higher than an effectively competitive rate.\114\ 
``Steering'' is not the only way the inefficient market power of 
complementary oligopoly can be offset or mitigated in order to 
establish an effectively competitive rate.
---------------------------------------------------------------------------

    \114\ A third possibility would be to utilize an otherwise 
appropriate market benchmark rate that is effectively competitive. 
However, the Judges cannot identify such a rate in the present 
record.
---------------------------------------------------------------------------

    In this regard, in his hearing testimony, Professor Willig 
explained how and why his opportunity cost approach would result in a 
rate that is effectively competitive. Professor Willig described a 
``fork in the road'' for the Judges as follows:

    [T]he fork in the road is whether, in considering the comparison 
between the opportunity cost and the royalty rate in the target 
market, should you take the other markets as they are or should you 
bring in hypotheticals and make adjustments to the opportunity cost 
based on . . . changes in the other markets? And that to me is a 
very consequential fork in the road . . . .

5/2/17 Tr. 2040 (Willig); see id. at 2047, 2153. Professor Willig 
opined that attempts to adjust one rate downward, such as the 
interactive rate, to account for the complementary oligopoly effect, 
would be incomplete, because other distribution modes, such as 
terrestrial radio, do not generate sound recording royalties and thus 
do not create a positive opportunity cost. Thus, Professor Willig 
described as a ``morass'' any attempt to take the ``fork-in-the-road'' 
by which the Judges attempt to adjust every rate that fails to reflect 
market forces. See id. at 2057, 2048. Rather, he recommends that the 
Judges ``should take the fork in the road that says take those markets 
as they are because that's what drives honest-to-goodness opportunity 
cost.'' Id. at 2057.
    This is precisely what the Judges accomplish by taking the 
opportunity cost analysis that results in the 15.5% rate.\115\ The 
Judges further note that Sirius XM did not challenge Professor Willig's 
``fork in the road'' concept, either in cross-examination or in its 
post-hearing proposed findings and replies to proposed findings.
---------------------------------------------------------------------------

    \115\ The Judges' rate is less than the rate proposed by 
Professor Willig, because the Judges give less probative weight to 
the Dhar Survey, not because they disagree with Professor Willig's 
opportunity cost approach.
---------------------------------------------------------------------------

    Accordingly, the Judges find that the 15.5% opportunity-cost 
derived rate: (1) Reflects the offsetting market forces of higher 
complementary oligopoly rates and lower (zero) opportunity costs 
attributable to listeners who otherwise would migrate to terrestrial 
radio; and (2) is consistent with Professor Willig's opinion regarding 
the need for a consistent treatment of market forces, as described in 
his ``fork in the road'' analysis.
    This ``fork in the road'' approach is also consistent with a 
recognition of the countervailing downstream market power that Sirius 
XM, the sole SDARS licensee, possesses as a monopolist in that 
downstream market, narrowly defined as the market for the sale of 
subscriptions to satellite radio. To be sure, this narrow definition of 
the market ignores various other forms of music distribution, such as 
terrestrial radio and all other alternative distribution channels 
identified in the survey analyses. However, as that survey evidence 
makes clear, even terrestrial radio, which is free to the listener, 
cannot attract sufficient listeners to deprive Sirius XM of the 
substantial profits it realizes from its unique position as the only 
supplier of satellite radio in the market. Further, Sirius XM is priced 
higher than interactive (and noninteractive) streaming services. Yet, 
despite their differentiated features, those services to date have been 
unable to convince enough Sirius XM subscribers to convert to a new 
paid subscription service to reduce the revenues and profits realized 
by Sirius XM. Clearly, Sirius XM's uniquely differentiated service has 
struck a chord with music listeners--particularly those who listen to 
Sirius XM in the car. This point was made clearly by Professor Shapiro, 
who testified:

    Sirius XM spends substantial sums of money on its infrastructure 
and satellites. In doing so, it creates a unique differentiated 
service. That is quite valuable to consumers. That's why they are 
willing to pay for the service and, of course, most of the listening 
is in the car.

5/4/17 Tr. 2550 (Shapiro).\116\
---------------------------------------------------------------------------

    \116\ Sirius XM is both a monopolist, in the sale of satellite 
radio subscriptions, and a competitor among the various distribution 
channels more broadly. This is not an inconsistency. Since 1933, 
economists have recognized that a firm may be a ``monopolistic 
competitor,'' with the power of a monopoly (as reflected in the 
downward sloping demand curve it faces) but the restraints of 
competition (making that demand curve relatively elastic compared to 
the demand curve for the product of a full-fledged monopolist). See 
E. Chamberlin, The Theory of Monopolistic Competition (1933).


[[Page 65239]]


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

    Correspondingly, Sirius XM bears all the hallmarks of a ``natural 
monopoly.'' A natural monopoly develops when ``it is cheaper for [an] 
entrepreneur to produce q units than it is to have those units produced 
by two [or more] smaller firms . . . .'' A. Schotter, Microeconomics: A 
Modern Approach 416 (2009); see also W. Baumol and R. Willig, Fixed 
Costs, Sunk Costs, Entry Barriers, and Sustainability of Monopoly, 96 
Q.J.Econ. 405, 409, 418 (1981) (``[A]n industry has been called a 
natural monopoly if . . . industry outputs can be produced more cheaply 
by a single firm than by any combination of several firms. These per 
unit costs arise from relatively large sunk costs (compared to marginal 
costs) and those sunk costs act as ``barriers to entry [that] . . . 
impede the establishment of new firms [because] [t]he need to sink 
money into a new enterprise, whether into physical capital, 
advertising, or anything else imposes a difference between the 
incremental cost and the incremental risk that are faced by an entrant 
and an incumbent''); H. Varian, Intermediate Economics: A Modern 
Approach at 453 (``When there are large fixed costs and small marginal 
costs, [that] situation is referred to as a natural monopoly.''). As a 
natural monopolist in the satellite radio market, Sirius XM can, and 
does, realize substantial profits, as demonstrated in fine detail by 
Professor Lys. The history of Sirius XM bears out this point. When 
there were only two satellite firms--Sirius and XM--both were on the 
brink of bankruptcy. See SDARS II, 78 FR at 23069. After they merged, 
they were transformed from two pumpkins into a single coach, as it 
were, realizing profits across many financial measures. See Lys WDT, 
passim.
    In the hypothetical market the Judges construct in this proceeding, 
they identify significant power on both the licensor side and the 
licensee side. On the licensor side, that power is reflected in the 
opportunity cost analysis--the ``creator contribution'' values 
identified by Professor Willig. Those values embody the complementary 
oligopoly features that flow from the ``must have'' nature of the 
Majors' repertoires. On the licensee side, there are profits that flow 
from two sources: (1) The highly differentiated nature of Sirius XM's 
offerings that permits it to attract listeners who otherwise would 
listen to free terrestrial radio; and (2) the entrepreneurial ability 
by which Sirius XM has harnessed the natural monopoly structure of 
satellite radio delivery to its financial benefit.
    The Judges find from this record that the hypothetical upstream 
market negotiations between such economically powerful entities would 
resemble a bilateral monopoly. Thus, as Professor Willig testified, the 
record companies would be expected to recover their opportunity costs 
(inclusive of any complementary oligopoly profits). Through its own 
market power, Sirius XM could afford to pay those opportunity costs 
because, as Professor Lys explained,\117\ it earns sufficient profits 
to pay those opportunity costs and still earn a significant profit.
---------------------------------------------------------------------------

    \117\ Professor Lys's detailed examination of Sirius XM's 
profitability is discussed later in this Determination.
---------------------------------------------------------------------------

    Thus, Professor Willig's ``fork in the road'' approach, and Sirius 
XM's capacity to pay the market-based opportunity costs, taken together 
or separately, are supportive of the 15.5% rate determined by the 
Judges.

E. The ``Efficient Component Pricing Rule''

    Professor Willig identified another approach to rate-setting: The 
Efficient Component Pricing Rule (ECPR). As he described this approach:

    The ECPR rates would be calculated by adding on to the direct 
cost of providing access the opportunity cost of the competitive 
entry; i.e. the margin on the competitive business that the 
copyright owners would lose if the entrant won that business away. 
In short, ECPR prescribes rates for access equal to direct plus 
competitive opportunity costs.

Willig WDT ]35.

    Professor Willig testified that the ECPR could be ``somewhat 
relevant here since the statutory royalty at issue can be construed as 
the price of access to the copyrights protecting the sound recordings, 
and since the various modes of distribution of the sound recordings do 
compete with each other to various extents.'' Willig WDT ]14. Moreover, 
Professor Willig noted that ``by its very design, ECPR is arguably 
consistent with the policy objectives (a), (b), and (c) of section 
801(b)(1).'' Id. At first blush, it is puzzling that Professor Willig 
did not include in his written testimony an explicit application of the 
ECPR model.\118\ However, in a colloquy with the Judges, Professor 
Willig acknowledged that his ``opportunity cost'' model constituted an 
application of the ECPR model.\119\
---------------------------------------------------------------------------

    \118\ The absence of a more explicit application of the ECPR 
approach by Professor Willig in his Written Direct Testimony is also 
somewhat surprising because Professor Willig has been identified by 
his colleagues as the economist who first developed the ECPR 
approach, also known as the ``parity pricing'' principle. See W. 
Baumol, J. Ordover, and R.D. Willig, Parity Pricing and Its Critics: 
A Necessary Condition for Efficiency in the Provision of Bottleneck 
Services to Competitors, 14 Yale J. Reg. 145, 148 n.4 (1997) (``So 
far as we have been able to determine, the ECPR proposal stems from 
Willig's work. Robert D. Willig, The Theory of Network Access 
Pricing, in Issues in Public Utility Regulation 109 (1979).'').
    \119\ See 5/2/17 Tr. at 2107.
---------------------------------------------------------------------------

    Professor Willig testified that he was reluctant to rely solely on 
the ECPR approach because it is intended to establish rates that 
correct for the case in which an owner of an upstream essential (``must 
have'') input also competes downstream in the retail market (i.e., a 
vertically-integrated firm) but refuses to make the essential input 
available to would-be competitors (i.e., the upstream firm engages in 
what is known as ``foreclosure'').
    The Judges find the Opportunity Cost/ECPR approach to be more 
applicable here than Professor Willig suggested. Although the Judges do 
not constitute an ``antitrust court,'' the parties acknowledge that the 
Judges must establish rates that are effectively competitive, i.e., 
that adjust or offset sufficiently for any complementary oligopoly 
power in the benchmark markets or in the markets from which opportunity 
costs arise. Whereas an ``antitrust court'' would seek to remedy, ex 
post, pricing that was in excess of an ECPR-derived price, the Judges 
here are charged with setting a rate, ex ante, that reflects an 
effectively competitive rate. There is no reason why an ECPR rate could 
not accommodate ex ante rate-setting as well provide an ex post 
remedy.\120\
---------------------------------------------------------------------------

    \120\ One of Professor Willig's colleagues and frequent co-
authors, and a developer of the ECPR approach, the late Professor 
William Baumol, explicitly noted the appropriateness of applying the 
ECPR approach to the setting of royalties for licenses in the music 
industry. W. Baumol, The Socially Desirable Size of Copyright Fees, 
1 Rev. Econ. Res. on Copyright Issues 83 (2004).
---------------------------------------------------------------------------

    Moreover, a particular limitation of the Opportunity Cost/ECPR 
approach is expressly accounted for in the present statutory and 
regulatory structure. That is, some economists have questioned whether 
the ECPR truly models for an efficient and competitive price, because 
the opportunity cost of the upstream supplier(s) that must be covered 
by the rate has embedded within it supracompetitive profits that are 
not the consequence of more efficient operations. See generally C. 
Decker, Modern Economic Regulation 151 (2015) (``[T]he ECPR does not 
seek to

[[Page 65240]]

address concerns about monopoly pricing . . . . [T]he ECPR approach 
effectively guarantees the pre-entry profits of the incumbent, 
including any inefficiency associated with its historic 
activities.'').\121\ In rate-setting proceedings, when presented with 
sufficient evidence, the Judges can and do expressly adjust or offset 
marketplace rates in order to reduce the royalty to a level that better 
reflects effective competition, rather than simply allowing the rate to 
incorporate (without a downward adjustment or offset) the full 
complementary oligopoly effect baked into the opportunity cost.
---------------------------------------------------------------------------

    \121\ The inefficiently high downstream price is set when, in 
the usual situation, the vertically-integrated supplier sells at a 
monopoly retail price. In the present context, the Majors, as 
complementary oligopolists, price their sound recordings in the 
unregulated interactive market above even the monopoly level and the 
retail interactive services must cover their input costs through 
retail prices higher than they would be in the absence of such 
inefficiently high input prices. See Web IV, 81 FR at 26343.
---------------------------------------------------------------------------

    On balance, the Judges find Professor Willig's discussion of the 
ECPR approach to be persuasive confirmation of the Judges' finding that 
his Opportunity Cost approach provides an appropriate basis for setting 
a reasonable rate when the proper survey data are used as inputs.\122\
---------------------------------------------------------------------------

    \122\ As discussed in connection with Factor C in the itemized 
801(b)(1) factors, Sirius XM's development of a differentiated 
product through its satellite-based network constitutes a form of 
product differentiation that creates value and profits that, under 
Factor C (and under an appropriate consideration of the ECPR 
approach) should continue to inure to the benefit of Sirius XM, net 
of the licensors' opportunity costs.
---------------------------------------------------------------------------

F. Professor Willig's Nash Bargaining Solution Approach

    Professor Willig asserted that the walk-away opportunity cost he 
calculated, $2.55 per subscriber per month, represented only the 
minimum that each label would accept in unregulated negotiations with 
Sirius XM. As he further explained, in an unregulated market, even 
after receiving the full walk-away opportunity cost, the label would 
still negotiate with Sirius XM for a portion of the surplus value 
(revenue over costs) that remained. In order to quantify this surplus, 
and to calculate and then add the label's share of the surplus to the 
label's walk-away opportunity cost, Professor Willig applied what is 
known in game theory and in economics as the ``Nash Bargaining 
Solution,'' which he described as a type of price discovery engaged in 
by an ``unregulated profit-maximizing firm.'' Willig WDT ]38. The Nash 
Bargaining Solution is an analytic approach that identifies a price 
agreed to in a bilateral negotiation between one buyer and one seller, 
in which each party will refuse to accept a value below that which it 
would receive absent an agreement (referred to as its ``threat,'' 
``disagreement,'' or ``fallback'' point), and each party uses its 
``bargaining power'' to negotiate for itself the greatest share of any 
surplus value (i.e., value in excess of the sum of both parties' 
``threat/disagreement'' point values). See id. Under this model, the 
surplus that can be created may be split evenly between the parties. 5/
2/17 Tr. 2116-18 (Willig). A 50:50 split of the surplus assumes the 
parties have equal bargaining power and means the parties benefit 
equally by executing the agreement.\123\ 5/2/17 Tr. 2110 (Willig).
---------------------------------------------------------------------------

    \123\ Importantly, this does not mean each party enjoys equal 
profit. The parties may not profit equally ``because their fallback 
values (opportunity costs) may have been different.'' 5/2/17 Tr. 
2110 (Willig). Even if parties do not possess equal bargaining 
power, and even if that disparity in bargaining power is 
incorporated into a Nash model, neither party would be compelled by 
the assumptions of the model to accept less than its fallback value, 
i.e., its opportunity cost. Id. at 2110-11 (Willig).
---------------------------------------------------------------------------

    In this model a record label's fallback point would be its walk-
away opportunity cost, which Professor Willig calculated to be $2.55 
per subscriber per month. Willig WDT ]48; 5/2/17 Tr. 2110-11 (Willig). 
Sirius XM's fallback point would be its projected ARPU in the absence 
of music programming, less variable costs (i.e., its earnings in a 
world absent an agreement with the single seller (record company) in 
this model).\124\ Professor Willig computed this amount to be 
$[REDACTED] per subscriber per month. See Willig WDT ]48.
---------------------------------------------------------------------------

    \124\ Professor Willig based his projection on the finding in 
the Boedeker Survey that 70% of Sirius subscribers would leave in 
the absence of music programming. See Willig WDT ]48 & n.22. He 
computed variable costs as [REDACTED]% of ARPU, based on Professor 
Lys's testimony. See id. ]48 & n.21.
---------------------------------------------------------------------------

    Professor Willig calculated the total earnings created by Sirius 
XM's compulsory license (Sirius XM's ARPU less variable costs exclusive 
of royalties) as $[REDACTED] per subscriber per month. This resulted in 
a surplus from the agreement of $2.78 per subscriber per month.\125\ 
Assuming that the parties would divide the surplus equally, Professor 
Willig opined that the record labels would earn from the agreement 
their opportunity cost of $2.55 plus one-half of the surplus ($1.39) 
for a total of $3.94 per subscriber per month. See id. ]49. Given a 
Sirius XM ARPU of $[REDACTED], this per subscriber rate is equivalent 
to a percent-of-revenue rate of [REDACTED]%.
---------------------------------------------------------------------------

    \125\ Professor Willig computed the surplus as the total 
earnings from the agreement less the sum of the parties' fallback 
points. See Willig WDT ]48.
---------------------------------------------------------------------------

    Based on this alternative approach, SoundExchange concluded that 
``Professor Willig's Nash Bargaining Solution therefore appropriately 
suggests a rate above the copyright owners' opportunity costs.'' SEPFF 
]725 (emphasis added). As such, SoundExchange argued that this approach 
confirms the reasonableness of its even lower $2.55 per month 
subscriber royalty and the equivalent 23%-of-revenue rate implied by 
that per-subscriber proposal.
    Sirius XM leveled two basic criticisms at Professor Willig's Nash 
Bargaining Solution model. First, it asserted that Professor Willig's 
Nash Bargaining Solution posited a monopoly seller of sound recording 
performance licenses, which is antithetical to the requirement that the 
statutory rate must represent the product of a hypothetical market that 
is effectively competitive. SXMRPFF ]196 (and record citations 
therein).\126\ Second, Sirius XM noted that SoundExchange's proposal 
that the Nash surplus be deemed split 50/50 (rather than in favor of a 
record company) is irrelevant, because the opportunity cost figure of 
$2.55 is already inflated by the complementary oligopoly effect in that 
opportunity cost figure. See id. ]197 (and record citations therein).
---------------------------------------------------------------------------

    \126\ Sirius XM also relies on Professor Farrell's ``Nash-in-
Nash'' model, as a counterpoint to Professor Willig's Nash 
Bargaining Solution. Professor Farrell injects a second record 
company to the Nash approach, as contrasted with the single record 
company assumed by Professor Willig. However, Sirius XM acknowledged 
that Professor Farrell's ``Nash-in-Nash'' approach was not intended 
to provide a separate rate proposal, but rather to demonstrate the 
fact that the absence of competition would inflate the rate above an 
effectively competitive rate. Id. ]]198-200 (and record citations 
therein).
---------------------------------------------------------------------------

    As the Judges have held previously, a significant problem with a 
Nashian analysis is that the bargaining power of the respective parties 
is speculative and thus the outcome of the bargain is indeterminate. 
See SDARS I, 74 FR at 23058; see also id. at 23083 (dissenting opinion) 
(concurring on the indeterminacy of a ``surplus-splitting'' analysis). 
In the present case, the Nash Bargaining Solution again was not 
developed sufficiently in the record for the Judges to rely on that 
approach as an independent useful tool for setting the statutory rate.

G. Professor Willig's ``Ramsey Pricing'' Approach

    In another pricing approach, Professor Willig applied the economic 
concept of ``Ramsey Pricing.'' This approach is

[[Page 65241]]

designed to address the economic issue of ``[h]ow to price various 
products or services whose supply draws on common assets in a fashion 
that maximizes consumer welfare while also providing enough net revenue 
to meet an overall financial target.'' Willig WDT ]13.\127\ In the 
context of this proceeding the ``common assets'' are the sound 
recordings supplied by the record labels. Professor Willig did not look 
to the Ramsey Pricing approach to recommend an SDARS royalty rate; 
rather, he used the Ramsey Pricing approach as ``directional'' guidance 
to substantiate his conclusion that the SDARS royalty rate should be 
higher than the current statutory rate. 5/2/17 Tr. 2086 (Willig).
---------------------------------------------------------------------------

    \127\ Ramsey pricing is frequently employed as an analytic 
framework for such applications as sales taxes levied to raise 
sufficient revenue to meet a government financial target, prices for 
various telecommunications services that all are enabled by the same 
underlying electronic network, and prices for various railroad 
services that all make use of the same track infrastructure. Willig 
WDT ]13 n.4.
---------------------------------------------------------------------------

    Ramsey pricing requires that for different modes of distribution of 
sound recordings, price-cost margins should be inversely proportional 
to each distributor's own price elasticity of demand. See Willig WDT 
]32; 5/2/17 Tr. 2094 (Willig). In setting prices to meet the Ramsey 
financial target, ``the Services that should contribute relatively 
more, relative to their cost, on a percentage basis are the Services 
with the relatively low own price elasticities of demand.'' 5/2/17 Tr. 
2095 (Willig).\128\
---------------------------------------------------------------------------

    \128\ Shorn of economic jargon: For certain distribution 
channels, subscribers will be relatively less likely to cancel their 
subscriptions if their subscription charge increases, as compared 
with other distribution channels.
---------------------------------------------------------------------------

    When demand for a music service is relatively less sensitive to 
price, that suggests that the service is relatively more valuable to 
its users. Willig WDT ]33. Accordingly, it follows that Ramsey prices 
should be relatively higher for users of that service, to allow for 
greater contributions toward compensation to the producers of the 
recorded music (i.e., the common asset used by all distribution 
channels). Willig WDT ]32. Services with relatively lower elasticities 
of demand will lose relatively less downstream revenue, so higher 
royalties, even if passed on to subscribers or advertisers, will have 
less impact on usage decisions made by those distribution modes and 
their consumers, as compared to services with higher elasticities of 
demand. See Willig WDT ]]32-33.
    Ramsey pricing reasonably assumes there is a target amount of money 
that the producers of the common assets need to realize. In the present 
context, Professor Willig identified that financial target as equal to 
the monetary value of download sales lost by the labels due to the 
increase in streaming. Willig WDT ]31. To identify his Ramsey target, 
Professor Willig measured the amount of creator compensation lost as a 
result of the movement toward streaming and away from paid downloads 
since 2010. Willig WDT ]22. Based on his econometric analysis, he 
concluded that substitution of streaming services for downloads has 
cost the recording industry about $800 million per year from 2010 
through 2016. Willig WDT ]]22-28, & App. B. Professor Willig concluded 
that the Ramsey Pricing across distribution channels must be sufficient 
to offset these shortfalls, and that, specifically, SDARS royalties 
must be increased.
    Professor Willig then estimated the relevant upstream elasticity of 
Sirius XM's demand for sound recordings, factoring in both downstream 
and upstream effects. He opined that, at current royalty rates, Sirius 
XM's upstream demand for sound recordings is much more inelastic than 
the upstream demand of interactive services. Given this finding, 
Professor Willig concluded that ``even at royalty rates proposed by 
SoundExchange, the music input would still be a significantly smaller 
percentage of the downstream price for Sirius, meaning that upstream 
[price] elasticity is not going to be bigger, probably lower than the 
upstream elasticities for the other Services that we're talking 
about.'' 5/2/17 Tr. 2099-2100 (Willig). Thus, Professor Willig 
estimated that Sirius XM could pay a royalty of $[REDACTED] per 
subscriber per month and still achieve the same margin as the 
interactive streaming services. Willig WDT ]50. According to Professor 
Willig the upshot of that conclusion is that Ramsey pricing principles 
suggest that Sirius XM should pay a substantially higher royalty in 
order to contribute appropriately (under his Ramsey approach) to meet 
the Ramsey revenue target. Willig WDT ]50.
    Sirius XM noted the facial ``theoretical attractions'' of an 
appropriately specified Ramsey pricing approach, but finds Professor 
Willig's approach not to constitute an actual Ramsey pricing analysis. 
Sirius XM found two essential elements of the Ramsey pricing approach 
missing from Professor Willig's analysis. First, he did not identify a 
financial target sufficient to provide for the creation of the sound 
recordings. See 5/2/17 Tr. 2171-72 (Willig); 4/24/17 Tr. 652 (Farrell); 
see also 5/2/17 Tr. 2176-77 (Willig) (acknowledging no analysis of 
``how much revenue is actually necessary to fund the recording 
industry's investment in sound recordings'').\129\
---------------------------------------------------------------------------

    \129\ While (as noted in the text, supra) Professor Willig did 
offer a regression analysis purporting to identify $800 million in 
annual losses to the record industry over the past several years 
caused by ``streaming'' (not simply satellite radio), Willig WDT 
]]22-27, he acknowledged that the figure played no direct role in 
any of his calculations, including his ``Ramsey'' analysis. 5/2/17 
Tr. 2167:24-2169:18 (Willig).
---------------------------------------------------------------------------

    Second, Sirius XM asserted that Professor Willig did not identify 
all users of the common assets and set prices for each that 
collectively would meet the Ramsey financial target, i.e., cover record 
industry costs while maximizing consumer welfare. Professor Willig 
concedes this point. See 5/2/17 Tr. 2172 (Willig) (did not ``analyze[ ] 
all the different modes of distribution that use sound recordings and 
determine[ ] the Ramsey prices that would result''); id. at 2177-78 
(Willig) (``I have not done a formal financial analysis of impacts of 
royalty rates on either creation or what you just called 
availability.'').
    In addition, Sirius XM noted that the analysis takes as its 
starting point the same measure of opportunity cost used in all of 
Professor Willig's approaches, the improper $2.55 opportunity cost 
inflated by complementary oligopoly effects. See Farrell WRT ]]90-94; 
see also 4/24/17 Tr. 653-54 (Farrell).
    The Judges find Professor Willig's implementation of the Ramsey 
pricing approach unhelpful. Professor Willig ultimately neither derived 
nor proposed a royalty rate from this analysis.\130\ Nor could he do 
so, given that his analysis does not establish a revenue target, and 
does not factor in the contribution of other users of the common 
assets. To the extent Professor Willig's assertion that his Ramsey 
approach has value in this proceeding because it provides 
``directional'' evidence has any validity, the Judges note that the 
adoption of the 15.5% rate derived from his opportunity cost analysis 
is consistent with this directional guidance.
---------------------------------------------------------------------------

    \130\ Professor Willig stated that one reason he declined to 
propose the $[REDACTED] monthly per subscriber royalty (which the 
Judges understand to be equivalent to [REDACTED]% of revenue) is 
that he could not evaluate how such a substantial increase in the 
royalty rate would increase subscription rates and create a loss of 
subscribers and subscriber revenue. In economic terms, he could not 
opine as to whether, assuming that Sirius XM passed through to 
subscribers such a higher royalty rate, the downstream elasticity at 
that price point would be so high as to actually reduce Sirius XM's 
revenue.
---------------------------------------------------------------------------

H. Mr. Orszag's Ratio Equivalency Model

    SoundExchange also presented expert testimony from Mr. Jonathan 
Orszag. Mr. Orszag's approach to determining

[[Page 65242]]

SDARS rates was based upon ratio equivalencies. Specifically, he opined 
that the royalties in the target market (i.e., those paid by an SDARS) 
should be set at a rate that makes the ratio between royalties and 
revenues in that target market equal to the ratio between royalties and 
revenues in a benchmark market. Mr. Orszag noted that the Judges 
``found this assumption to be warranted as a matter of economic 
theory'' in Web IV. Amended Written Direct Testimony of Jonathan 
Orszag, Trial Ex. 26, ]37(Orszag AWDT).
    Mr. Orszag began his analysis by opining that in this case ``[i]t 
is . . . appropriate to use current marketplace agreements in 
evaluating the range of reasonable rates for the upcoming licensing 
period.'' 4/25/17 Tr. 953 (Orszag) (emphasis added). Marketplace rates 
are the appropriate starting points, according to Mr. Orszag, because 
``a standard way in which economists estimate a reasonable royalty rate 
for the blanket license under consideration in this proceeding is by 
examining comparable rates generated through arm's length negotiations 
outside the purview of the compulsory license regime for which 
satellite radio qualifies,'' i.e., ``[r]ates yielded through . . . 
unfettered negotiations . . . .'' Orszag AWDT ]12. Accordingly, Mr. 
Orszag utilized a marketplace benchmarking approach.
    Mr. Orszag's first step was to identify what he found to be 
comparable benchmark rates that he could adjust, if and as warranted, 
to determine the rates that would apply in the target market (SDARS) if 
it were unregulated. Orszag AWDT ]13. He looked first at royalty rates 
in the interactive music streaming services for data. Then, he analyzed 
retail price data for both the interactive and noninteractive music 
streaming services. In selecting his benchmarks, Mr. Orszag looked for 
agreements entered into by record companies with streaming services 
that in his opinion are comparable to satellite radio across pertinent 
dimensions. Additionally, he considered whether the benchmark evidence 
permitted him to account for material differences, if any, between the 
benchmarks and the target market. Orszag AWDT ]28.
1. Mr. Orszag's Benchmark ``Approach One'': Ratio Equivalency With the 
Interactive Market
    Applying these considerations, Mr. Orszag identified the market for 
the licensing of sound recordings by record companies to interactive 
streaming subscription services as the best available benchmark 
category for satellite radio, due to what he believed to be ``the 
comparability of the two types of service along key dimensions and the 
availability of reasonable methodologies with which to adjust for 
pertinent differences.'' Orszag AWDT ]29. More particularly, Mr. Orszag 
identified the following alleged comparable qualities in the 
``downstream market'' \131\ between the target and benchmark markets:
---------------------------------------------------------------------------

    \131\ The ``downstream market'' is the market in which licensees 
of sound recordings offer their services to subscribers or other end 
users/consumers. The ``upstream market'' is the market in which 
record companies (a/k/a/labels), as licensors, license their 
repertoires to services, as licensees, for ultimate dissemination in 
the downstream market. See Web IV, 81 FR at 26332 n.69.

     Both categories of services offer a full repertoire of 
music;
     both categories of services offer subscription-based 
models, thereby demonstrating that their listeners' have a positive 
willingness to pay;
     both categories of services face similar downstream 
elasticities of demand;
     both categories of services offer products that compete 
with each other;
     consumers in both categories of services receive music 
digitally;
     consumers in both categories of services obtain 
unlimited usage;
     both categories of services offer mobile functionality, 
Sirius XM principally through in-vehicle receivers and interactive 
streaming through smartphones and other mobile devices; and
     interactive streaming services increasingly offer a 
``lean-back'' \132\ functionality (akin to the functionality of 
Sirius XM listening) through playlists generated by the services, 
third parties, and subscribers, as well as algorithmic streams.
---------------------------------------------------------------------------

    \132\ Functionally noninteractive services are generally 
described in the industry as ``lean-back'' services, as contrasted 
with ``lean forward'' services that have varying degrees of 
interactivity. See Web IV, 81 FR at 26336 n.75.

---------------------------------------------------------------------------
4/25/17 Tr. 968 (Orszag); Orszag AWDT ]32.

    Mr. Orszag further opined that sound recording performance rights 
are similarly indispensable inputs in the upstream market for both 
interactive streaming services and Sirius XM. From an economic 
perspective, he explains that the upstream demand for sound recording 
rights is what economists call a ``derived demand,'' i.e., upstream 
demand is derivative of downstream consumer demand. Mr. Orszag further 
opined that, because of this indispensability, sound recording 
copyright holders should receive a material portion of the overall 
value of satellite radio service, as reflected in the prices paid by 
subscribers, just as they do for interactive music services. Orszag 
AWDT ]31.
    To determine the rates actually paid by subscription interactive 
services, Mr. Orszag reviewed the monthly royalty rates and royalty 
payments set in 27 current license agreements between three major 
record labels \133\ and nine interactive streaming services,\134\ from 
January 2014 through June 2016. Orszag AWDT ]45; see 4/25/17 Tr. 985 
(Orszag) (``So I got the royalty statements from each of the . . . 
Services for each of the labels by month, and I went to what they 
actually were being paid, which prong was governing.'').\135\
---------------------------------------------------------------------------

    \133\ Sony Music Entertainment (Sony), Universal Music Group 
(UMG), and Warner Music Group (WMG) are the three major record 
labels (together, the Majors).
    \134\ The nine services are listed in the table that follows in 
the text, infra.
    \135\ The agreements Mr. Orszag studied contain royalty rate 
provisions that require the services to calculate royalty 
obligations under separate ``prongs'': a [REDACTED] metric and a 
[REDACTED] metric, and in some cases a [REDACTED] metric, and then 
pay each label its pro rata share of [REDACTED]. A label's pro rata 
share of the royalty is based on the share of the total performances 
on the service accounted for by sound recordings controlled by that 
label. Orszag AWDT ]45.
---------------------------------------------------------------------------

    The table below presents the actual monthly per-subscriber royalty 
payments made by the subscription interactive services to each of the 
Majors. These data produce an average monthly per-subscriber payment of 
$[REDACTED], weighted by the number of subscribers per service. Orszag 
AWDT ]46.

[[Page 65243]]



                                                                              Actual Licensing Fees Per-Subscriber
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                                                        Sony                                                   UM                                                    WM
                               -----------------------------------------------------------------------------------------------------------------------------------------------------------------
                                      2014              2015              2016              2014              2015              2016              2014              2015              2016
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Apple Music...................  ................  $[REDACTED].....  $[REDACTED].....  ................  $[REDACTED].....  $[REDACTED].....  ................  $[REDACTED].....  $[REDACTED]
Beats.........................  $[REDACTED].....  $[REDACTED].....  ................  $[REDACTED].....  $[REDACTED].....  ................  $[REDACTED].....  $[REDACTED].....  ................
Google Play...................  $[REDACTED].....  $[REDACTED].....  $[REDACTED].....  $[REDACTED].....  $[REDACTED].....  $[REDACTED].....  $[REDACTED].....  $[REDACTED].....  $[REDACTED]
Microsoft.....................  $[REDACTED].....  $[REDACTED].....  $[REDACTED].....  $[REDACTED].....  $[REDACTED].....  $[REDACTED].....  $[REDACTED].....  $[REDACTED].....  $[REDACTED]
Rdio..........................  $[REDACTED].....  $[REDACTED].....  ................  $[REDACTED].....  $[REDACTED].....  ................  $[REDACTED].....  $[REDACTED].....  ................
Rhapsody......................  $[REDACTED].....  $[REDACTED].....  $[REDACTED].....  $[REDACTED].....  $[REDACTED].....  $[REDACTED].....  $[REDACTED].....  $[REDACTED].....  $[REDACTED]
Slacker.......................  $[REDACTED].....  $[REDACTED].....  $[REDACTED].....  $[REDACTED].....  $[REDACTED].....  $[REDACTED].....  $[REDACTED].....  $[REDACTED].....  $[REDACTED]
Spotify.......................  $[REDACTED].....  $[REDACTED].....  $[REDACTED].....  $[REDACTED].....  $[REDACTED].....  $[REDACTED].....  $[REDACTED].....  $[REDACTED].....  $[REDACTED]
TIDAL.........................  ................  $[REDACTED......  $[REDACTED].....  ................  $[REDACTED].....  $[REDACTED].....  ................  $[REDACTED].....  $[REDACTED]
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
 Source: Royalty payment data from Sony, UMG, and WMG.

Orszag AWDT at 19, Table One.
    For the nine subscription interactive services in the above table, 
over the 2014-2016 period covered, individual subscriptions were 
offered to consumers at $9.99 per month. At that monthly price, the 
weighted average monthly per-subscriber payment of $[REDACTED] 
translates to a royalty equal to approximately [REDACTED] % of the 
services' revenues ($9.99 x [REDACTED]). Orszag AWDT ] 47.\136\
---------------------------------------------------------------------------

    \136\ Mr. Orszag did not include in his royalty calculation any 
non-rate consideration, such as access to the services' user data 
and user email addresses; the services' marketing and promotional 
support; and the record companies' right to offer exclusives to 
services; including the right to ``window'' certain sound recordings 
(i.e., to offer an initial, time-limited exclusivity). Because these 
non-pecuniary items are not available under the statutory license at 
issue in this proceeding, Mr. Orszag asserts that his omission of 
these non-monetary benefits renders his calculated royalty payment 
lower than it otherwise would be, thus reducing the royalty rate 
derived from his benchmark in favor of Sirius XM. Orszag AWDT ] 106. 
See also SE PFF ]] 119-122 (and record citations therein).
---------------------------------------------------------------------------

    Because Mr. Orszag's interactive data were limited to agreements 
with the Majors, he also considered whether the rates paid by 
subscription interactive streaming services to the Indies were lower 
than those paid to the Majors. He determined that, whether the Indies' 
recordings were distributed by a Major or a Major affiliate, or were 
distributed by another entity, the terms regarding royalties were 
``highly similar'' to the rates paid to the Majors. Consequently, Mr. 
Orszag made no adjustment to his interactive benchmark to account for 
the rates paid by interactive services to independent record labels. 
Orszag AWDT ]] 101-105; see Written Direct Testimony of Jeremy Sirota, 
Trial Ex. 36, at 3 (Sirota WDT).
    Mr. Orszag utilized the concept of ``ratio equivalency'' to compare 
his benchmark rate for the interactive streaming market to the target 
SDARS market. He applied essentially the same ratio equivalency 
approach as the Judges applied to the noninteractive subscription 
market in Web IV.\137\ Orszag AWDT ] 37. More specifically, Mr. Orszag 
relied on the following points from Web IV to identify what he 
considered necessary conditions for the application of a ratio 
equivalency approach:
---------------------------------------------------------------------------

    \137\ In Web IV, the Judges stated that the ratio equivalency 
concept ``assume[s] equality between two ratios: (1) subscription 
revenues to royalties in the interactive market; and (2) 
subscription revenues to royalties in the noninteractive market.'' 
Web IV, 81 FR at 26344.

    (1) Revenues in both markets must be derived from subscription 
revenues and thus be reflective of buyers with a positive 
willingness to pay (WTP) for streamed music;
    (2) Functional convergence and downstream competition for 
potential listeners must indicate a sufficiently high cross-
elasticity of demand as between interactive and noninteractive 
services, provided the noninteractive subscription rate is reduced 
to reflect the absence of the added value of interactivity; and
    (3) The benchmark market rate must be adjusted downward \138\ to 
eliminate the ``complementary oligopoly'' effect arising from the 
presence of multiple ``must have'' suppliers, thereby establishing a 
rate that is ``effectively competitive.''
---------------------------------------------------------------------------

    \138\ In Web IV, the Judges applied a ``steering adjustment'' to 
reflect noninteractive services' ability to offset the complementary 
oligopoly power of the Majors by ``steering'' listeners to sound 
recordings licensed from Indies at lower royalty rates.

Id. ] 41 (citing Web IV, 81 FR at 26353). Mr. Orszag posited that all 
---------------------------------------------------------------------------
three of these Web IV conditions are satisfied in this proceeding.

    He noted that in both the interactive streaming and SDARS markets 
revenues are derived from subscribers with a positive WTP. More 
particularly, subscribers to interactive services typically pay $9.99 
per month, Orszag AWDT ] 36, while subscribers to Sirius XM typically 
pay at least that amount. Id. at ] 49 & n.40. With regard to the second 
condition, Mr. Orszag cites record evidence of functional ``lean-back'' 
convergence and downstream competition, particularly with regard to the 
use of playlists and enhanced mobile technology, which have allowed 
interactive streaming services to gain an increasing share of in-car 
listening. See 4/24/17 Tr. 605 (Farrell); Orszag AWDT ] 39. Finally, 
Mr. Orszag testified that changes in the interactive market after Web 
IV had obviated the need for a complementary oligopoly adjustment. 
Nonetheless, he provided three alternative potential steering 
adjustments in the event the Judges disagreed with his conclusion 
regarding complementary oligopoly: (1) A [REDACTED]% steering 
adjustment derived from Sirius XM's direct licenses; (2) a 12% steering 
adjustment borrowed from Web IV; or (3) a [REDACTED]% steering 
adjustment identified in a comparison of two ``Mid-tier'' services 
contracts, one with a prohibition on steering and the other 
without.\139\
---------------------------------------------------------------------------

    \139\ These potential steering adjustments are discussed in 
detail infra.
---------------------------------------------------------------------------

    The interactive market benchmark ratio equivalency approach is 
well-depicted in algebraic form: \140\
---------------------------------------------------------------------------

    \140\ The ratios are sometimes expressed reciprocally, with 
royalties in the denominator and revenues in the numerator. Because 
royalty rates in this proceeding are expressed as a percent-of-
revenue, it is more intuitive to state the ratio as set forth in the 
text, supra.

[[Page 65244]]



 
 
 
                                                           Benchmark Ratio                                Target Market Ratio
 
                                                                       (A)   ............                                   (C)
                                                 Royalty Payment (in $) in   ............           Royalty Payment (in $) in
                                                          Benchmark Market             =                        Target Market
                                       -------------------------------------              -------------------------------------
                                                                       (B)                                                (D)
                                              Downstream Revenue (in $) in                          Downstream Revenue (in $)
                                                          Benchmark Market                                   in Target Market
 
                                        (Rates and revenues to be calculated on a per-subscriber per month basis.)
 

    By inserting the known (i.e., calculable) values for (A) and (B), 
Mr. Orszag was able to calculate a ratio, or percentage, that--under 
the ratio equivalency approach--he opined would also be applicable to 
the target market. That is, the royalty payment (C) in the Target 
Market would be the same percent of (D) as (A) is a percent of (B) in 
the Benchmark Market.
    In this, his ``Approach One,'' Mr. Orszag calculated the royalty 
payments of interactive subscription services as a percentage of their 
subscription revenues by dividing the effective monthly per-subscriber 
royalty payment by the monthly consumer subscription price of the 
benchmark services. Orszag AWDT at ] 43. Applying the theory of ratio 
equivalency, Mr. Orszag then proposed that the record companies receive 
the same percentage of Sirius XM's subscription revenue as they receive 
from the interactive services. See 4/25/17 Tr. 985-86 (Orszag).
    Because Sirius XM provides listeners with both music and non-music 
content, Mr. Orszag opined that his Benchmark Market Ratio must be 
adjusted to be comparable to the Target Market Ratio. Relying 
principally on a survey by Stefan Boedeker, Mr. Orszag determined that 
the music content on Sirius XM constituted 50% of the value of total 
content.\141\ Orszag AWDT ]54. Additionally, SoundExchange asserted 
that the pricing structure reflects Sirius XM's understanding that its 
customers value music at least as much as non-music content. Id. ] 49 & 
n.40 (discussing Sirius XM monthly pricing of $10.99 for News, Sports & 
Talk versus $12.52 for Mostly Music). Moreover, as SoundExchange noted, 
in the previous SDARS proceeding, Sirius XM itself took the position 
that music accounts for more than 55% of Sirius XM's content value. 
SDARS II, 78 FR at 23064-65 (Sirius XM's expert Roger Noll attributed 
55% of value to music content). Both parties and the Judges agreed on 
this issue. See id. at 23063, 23088 (noting SoundExchange's expert Dr. 
Ordover conservatively assumed music accounts for at least 50%); id. at 
23065, 23089 (Judges finding ``the success of Sirius XM is dependent 
upon its access to music'' citing testimony of Sirius XM witnesses). 
The Judges take note that Sirius XM provided no evidence or argument to 
support a different position that might place in doubt Mr. Orszag's 
reliance on the Boedeker survey. Mr. Orszag reasonably and 
conservatively utilized an assumption that at least 50% of the value of 
a Sirius XM subscription is derived from music offerings. Applying this 
assumption, Mr. Orszag divided the benchmark ratio result, [REDACTED]% 
of revenue, by two to arrive at a proposed percentage-of-revenue rate 
of [REDACTED]% for Sirius XM. Orszag AWDT ] 54.
---------------------------------------------------------------------------

    \141\ Mr. Boedeker surveyed subscribers to Sirius satellite 
radio packages that contain both music and non-music programming, 
(i) to measure the degree to which these subscribers value the music 
versus non-music content; (ii) to examine subscribers' willingness 
to accept a hypothetical Sirius XM package that contains just music 
programming or just non-music programming; and (iii) to identify the 
discounts they would demand for such a hypothetical product. Written 
Direct Testimony of Stefan Boedeker, Trial Ex. 21, ]]7, 19 (Boedeker 
WDT); 5/8/17 Tr. 2933, 2947-49 (Boedeker). Mr. Boedeker concluded 
from the survey results that Sirius XM subscribers value music 
content significantly more than non-music content. Boedeker WDT at 
]] 14, 97; 5/8/17 Tr. 2933-34, 2963 (Boedeker). More precisely, 
70.1% of all survey respondents said they would no longer subscribe 
to Sirius XM satellite radio at their current subscription rates if 
music programming were no longer offered, while only 32.4% said they 
would no longer subscribe at their current subscription rates if 
non-music programming were no longer offered. Boedeker WDT ]77; 5/8/
17 Tr. 2951 (Boedeker). Even if discounts were offered for a non-
music service, 42.7% of respondents still would no longer subscribe 
to their Sirius XM package, compared with only 10.0% of respondents 
would no longer subscribe to their current package if non-music 
programming were no longer offered (even with a discount). Boedeker 
WDT ]]83-84; see also 5/8/17 Tr. 2952-53 (Boedeker). In a critique 
of Mr. Boedeker's survey, Professor John Hauser, a Sirius XM expert 
witness, identified several inconsistencies in Mr. Boedeker's survey 
results. Nonetheless, it was undisputed by Sirius XM that Mr. 
Boedeker's results are generally consistent with other available 
evidence. See SEPFF ]] 252-258 (and record citations therein). Thus, 
Mr. Orszag opined that his use of the 50% figure was conservative, 
in the sense that it favored Sirius XM rather than the party for 
whom he testified, SoundExchange. Orszag AWDT ] 54.
---------------------------------------------------------------------------

    Mr. Orszag opined that a benefit of his ``Approach One'' is that it 
avoids the need to account explicitly for differences between the 
target and benchmark services. Rather, he stated that the differences 
are implicit in the formula and thus revealed by the market. A 
service's retail (subscription) revenues are a direct function of 
consumer subscription prices. Those prices should reasonably reflect 
consumer valuation of the features and functions of the benchmark and 
target services, respectively. In turn, according to Mr. Orszag, 
percentage-of-revenue royalty rates should reflect such differences, 
because the sound recordings performed by the services in the benchmark 
and target markets are identical. Id. ] 55.
    As noted, SoundExchange is proposing a greater-of statutory rate 
with a per-subscriber prong as well as a percent-of-revenue prong. To 
obtain what Mr. Orszag described as an equivalent per-subscriber rate, 
he applied the [REDACTED]% of revenue rate (derived from his benchmark 
ratio equivalency analysis) to the ARPU. Mr. Orszag adjusted the Sirius 
XM ARPU of $[REDACTED] (as gross revenue is calculated using the 
statutory license terms) using the same ratio he applied to reach a 
percent-of-revenue rate.\142\ This resulted in a per-subscriber rate of 
$[REDACTED] (i.e., $[REDACTED] x [REDACTED]). See id. ] 54.
---------------------------------------------------------------------------

    \142\ Mr. Orszag calculated ARPU using Sirius XM's regulatory 
revenue base for the first six months of 2016. See Orszag AWDT ]] 
58-60 and Table Three. Professor Shapiro, on behalf of Sirius XM, 
initially identified a monthly ARPU of $[REDACTED] per subscriber, 
apparently using Sirius XM's 10-Q filing with the SEC and an 
internal Sirius XM planning document. See Lys WRT ]] 151-152 nn.174, 
177 & Fig. 18. However, the parties apparently reached agreement 
that, under the current definition of ``Gross Revenues,'' the 
appropriate monthly ARPU is $[REDACTED]. See SX RPFF ] 392 (``That 
$[REDACTED] figure was used directly by economists from both parties 
to convert monthly per-subscriber fees into proposed percent-of-
revenue rates.''); see also Lys WRT ]] 149-155.
---------------------------------------------------------------------------

2. Mr. Orszag's ``Approach Two'': Retail Price Comparison
    Mr. Orszag's Approach One implicitly accounted for the different 
values of interactive and noninteractive services by utilizing retail 
prices in the denominators that reflected the market-based differences 
in those values. In ``Approach Two,'' Mr. Orszag applied an alternative 
methodology designed to

[[Page 65245]]

account explicitly for the absence of interactivity in the target SDARS 
market. Orszag AWDT ] 56.
    In Approach Two, Mr. Orszag continued to use the interactive market 
as his polestar. In this approach, however, he compared the interactive 
retail subscription price not to the target SDARS market, but to the 
market for noninteractive services, on the assumption that an SDARS 
functionally is a noninteractive service.\143\ In this manner Mr. 
Orszag was able to isolate explicitly the value of interactivity by 
comparing the retail prices of interactive and noninteractive 
subscription services. See 4/25/17 Tr. 986 (Orszag). Mr. Orszag opined 
that this approach is sensible because these two categories of service 
differ only with respect to the distinguishing feature: Interactivity. 
See id.\144\
---------------------------------------------------------------------------

    \143\ A noninteractive service is one that meets the statutory 
definition and pays statutory royalties calculated under 17 U.S.C. 
114(f)(2)(B). An SDARS service may be described as functionally a 
noninteractive service because the listener cannot interact with the 
service to select, repeat, skip, or cache specific sound recordings. 
See supra, n.73 and accompanying text.
    \144\ Approach Two avoids the need to adjust for non-music 
content because streaming services are music-only services. It also 
avoids any purported need to adjust for the separate value of a 
satellite network because streaming services are internet-based. See 
Orszag AWDT at ]56. The Judges address later the question Sirius XM 
raises relating to whether its satellite network creates an 
additional value that should reduce the statutory royalty rate.
---------------------------------------------------------------------------

    To determine the monthly retail price in the noninteractive market, 
Mr. Orszag used the retail prices of three non-interactive subscription 
services: Pandora One, Rhapsody (Napster) unRadio, and Slacker Radio. 
He calculated their weighted average monthly retail price to be $4.91. 
See Orszag AWDT ] 56 & Table Two.
    As noted before, the monthly retail price for interactive 
subscription services was $9.99. Accordingly, the ratio of the 
subscription price from the noninteractive market to the subscription 
price from the interactive market was $4.91/$9.99, or 0.49. Mr. Orszag 
then used the ratio of 0.49 to convert the interactive subscription 
services monthly per-subscriber royalty rate of $[REDACTED] to an 
equivalent per-subscriber rate for Sirius XM of $[REDACTED] (0.49 x 
$[REDACTED]). See id. ] 57.
    The final step in Mr. Orszag's Approach Two is the calculation of a 
percentage-of-revenue rate that corresponds to this $[REDACTED] per-
subscriber rate. Applying the same $[REDACTED] ARPU \145\ to the per-
subscriber rate of $[REDACTED], Mr. Orszag derived a percentage-of-
revenue rate of [REDACTED]%. See id. ] 60.
---------------------------------------------------------------------------

    \145\ See supra note 142 and accompanying text.
---------------------------------------------------------------------------

3. Adjustment for Lack of Effective Competition in Benchmark Market
    In his attempt to apply the Web IV prerequisites for use of a 
``ratio equivalency'' benchmarking approach, Mr. Orszag considered 
whether to apply a downward adjustment to reflect any alleged lack of 
``effective competition'' in his benchmark interactive market. He 
acknowledged that in Web IV the Judges found that the market for 
subscription interactive services (i.e., Mr. Orszag's benchmark market 
here) was not effectively competitive. The Judges, therefore, adjusted 
downward the rate SoundExchange's economic expert calculated using an 
interactive services benchmark. Web IV, 81 FR at 26344.
    In this proceeding, however, Mr. Orszag concluded that the record 
establishes that more recently the market for subscription interactive 
services has become effectively competitive. Mr. Orszag concluded that 
he need not adjust to offset a lack of effective competition. Mr. 
Orszag's opinion is based on:

     The presence in the market of larger interactive 
streaming services, such as Amazon, Apple, Google, and Spotify, 
which has injected countervailing ``substantial bargaining power and 
leverage'' on the licensee side of the equation, offsetting any 
relative disproportionate power that the record companies might have 
previously possessed. Written Rebuttal Testimony of Aaron Harrison, 
Trial Ex. 49, ]]3-5 (Harrison WRT); 5/16/17 Tr. at 3953-57 
(Harrison).
     The increasing importance of interactive services as a 
revenue source to the record companies, which gives the services 
leverage strengthen their bargaining position in negotiations for 
sound recording performance licenses. Written Rebuttal Testimony of 
David Blackburn, Trial Ex. 39, ]]18, 20 (Blackburn WRT).
     The treatment of Spotify's licensing agreement with the 
Majors when it expired, by not [REDACTED], but rather [REDACTED]. 5/
01/17 Tr. 1703-04, 1804-05 (Blackburn).
     The additional bargaining power of individual services 
because they have differentiated their offerings, based on platform 
preference ([REDACTED]); catalog size ([REDACTED]); and payment 
terms ([REDACTED]), meaning that the withdrawal of any 
differentiated service from the market would result in customer 
``churn'' that would negatively affect record companies financially. 
5/16/17 Tr. 3942-45 (Harrison).
     The lack of market evidence of: (1) Suppression of the 
output of recorded music; (2) supracompetitive profits achieved by 
the record companies; or (3) ready alternatives to which downstream 
consumers might turn. SEPFF ]] 305-322 (and record citations 
therein).
     The inability of the Majors to act as price-setters, 
[REDACTED]. 5/16/17 Tr. 3926-27, 3946-47 (Harrison).
     The Majors' agreements in the Mid-Tier limited 
interactivity sector to rates as low as [REDACTED] % of revenue when 
the licensing agreement includes [REDACTED]. SEPFF ] 356 (and record 
citations therein).
     The agreements between Indies and interactive streaming 
services that [REDACTED]. SEPFF ]] 335-340 (and record citations 
therein).

    Mr. Orszag maintained that the interactive streaming rates reflect 
an ``effectively competitive'' market. He nonetheless offered three 
alternative ``steering adjustments'' to apply to those benchmark rates, 
should the Judges find the interactive market to be not effectively 
competitive. Mr. Orszag first presented a [REDACTED]% steering 
adjustment, reflecting his calculation of an arguable steering effect 
arising from Sirius XM's direct licenses with certain Indies.\146\ 
Next, Mr. Orszag proposed a 12% steering adjustment, simply adopting 
the adjustment the Judges made in Web IV. See Web IV, 81 FR at 26404-
05. Finally, he presented a [REDACTED]% steering adjustment, that 
reflects the differences in royalty rates in the mid-tier market, 
depending upon whether the license agreement has a [REDACTED] (and an 
attendant lower rate) or [REDACTED] (with an attendant higher royalty 
rate). See 4/25/17 Tr. 1054 (Orszag). The Table below summarizes Mr. 
Orszag's alternative rates based on the absence of a steering 
adjustment and on all three of the alternative steering adjustments.
---------------------------------------------------------------------------

    \146\ These direct licenses are discussed in more detail in the 
Judges' consideration of Sirius XM's reliance on these licenses as 
potential benchmarks.

----------------------------------------------------------------------------------------------------------------
                                               Approach One                            Approach Two
         Steering adj  %         -------------------------------------------------------------------------------
                                        Rev.  %             Per sub             Rev.  %             Per sub
----------------------------------------------------------------------------------------------------------------
None............................  28.0..............  $ 3.00............  25.7..............  $ 2.76
[REDACTED]......................  [REDACTED]........  $[REDACTED].......  [REDACTED]........  $[REDACTED]
12..............................  24.6..............  $ 2.64............  22.7..............  $ 2.43

[[Page 65246]]

 
[REDACTED]......................  [REDACTED]........  $[REDACTED].......  [REDACTED]........  $[REDACTED]
----------------------------------------------------------------------------------------------------------------

SE PFF ] 361 (Sirius XM did not dispute the accuracy of this summary 
table derived from record evidence.).
4. The Mid-Tier Agreements as Corroboration
    According to Mr. Orszag, the applicability of the theory of ratio 
equivalency is further supported by agreements between record companies 
and Mid-tier services. These Mid-tier Agreements'' are comprised of 
recently executed voluntary direct licenses for subscription mid-tier 
services, between Pandora and iHeart, respectively, as licensees, and 
the Majors and Merlin, a digital rights agency representing Indie 
record companies, as licensors.\147\
---------------------------------------------------------------------------

    \147\ The agreements executed by Pandora and iHeart also covered 
fully interactive tiers and, in the case of Pandora, an ad-supported 
tier. See, e.g., Trial Exs. 112-114. For ease of exposition, the 
Judges use the term ``Mid-tier Agreements'' to refer to the portion 
of each agreement that relates to the subscription service offered 
to consumers for $4.99 and providing limited on-demand 
functionality.
---------------------------------------------------------------------------

    The Table below provides a breakdown of rates contained in Mid-tier 
Agreements that were admitted into evidence in this proceeding: \148\
---------------------------------------------------------------------------

    \148\ The agreements in the table were made a part of the 
record. See Trial Ex. 112-16B at sec. 11 (SoundX_000107538-39) 
(Pandora Plus and Pandora Premium royalty provisions); Trial Ex. 
112-16A at Service Schedule #1 sec. 7(a) (SoundX_000107458) (iHeart 
Plus royalty provisions); Trial Ex. 112-16A at Service Schedule #2 
sec. 7(a) (SoundX_000107492) (iHeart All Access royalty provisions); 
Trial Ex. 113-017B at Schedule 1 sec. 3.1(a)(i)-(ii), sec. 
3.2(a)(i)-(ii), sec. 4.1 and sec. 4.2 (SoundX_000107051-52, 056); 
(Pandora Plus and Pandora Premium Royalty provisions); Trial Ex. 
113-017A at Schedule 1 sec. 1.1 and sec. 1.2 (SoundX_000106973) 
(iHeart Plus and iHeart All Access royalty provisions). Trial Ex. 
113-017B at Schedule 1 sec. 3.2(a)(iii) (SoundX_000107052, 056). 
Trial Ex. 114-018B at 11-14 (SoundX_000107127-30) (Pandora Plus and 
Pandora Premium royalty provisions); Trial Ex. 114-018A at sec. 3(a) 
and sec. 3(b) (SoundX_000107206-07) (iHeart Plus and iHeart All 
Access provisions). Trial Ex. 243 at sec. 3(b) and sec. 3(c) 
(SoundX_000477169-170) (Pandora Plus and Pandora Premium royalty 
provisions); Trial Ex. 272 at Schedule 3 (SoundX_000488916) (iHeart 
Plus and iHeart All Access).

                                                                                [Restricted]--Mid-Tier Agreements
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                                           Pandora plus ($4.99)                   Pandora premium ($9.99)                   iHeart plus ($4.99)                  iHeart all access ($9.99)
                                 ---------------------------------------------------------------------------------------------------------------------------------------------------------------
                                     % of Revenue           Per sub          % of Revenue           Per sub          % of Revenue           Per sub          % of Revenue           Per sub
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Sony............................  [REDACTED]........  $[REDACTED].......  [REDACTED],         $[REDACTED],-$[RED  [REDACTED],-[REDAC  $[REDACTED],-$[RED  [REDACTED],-[REDAC  $[REDACTED],-$[RED
                                                                           [REDACTED].         ACTED].             TED].               ACTED].             TED].               ACTED]
UMG.............................  [REDACTED]-[REDACT  $[REDACTED]-$[REDA  [REDACTED]-[REDACT  $[REDACTED]-$[REDA  [REDACTED]........  $[REDACTED].......  [REDACTED]........  $[REDACTED]
                                   ED].                CTED].              ED].                CTED].
WMG.............................  [REDACTED]-[REDACT  $[REDACTED]-$[REDA  [REDACTED],         $[REDACTED]-$[REDA  [REDACTED],-[REDAC  $[REDACTED],-$[RED  [REDACTED],-[REDAC  $[REDACTED],-$[RED
                                   ED].                CTED].              [REDACTED].         CTED].              TED].               ACTED].             TED].               ACTED]
Merlin..........................  [REDACTED]........  $[REDACTED].......  [REDACTED],         $[REDACTED],-$[RED  [REDACTED],-[REDAC  $[REDACTED],-$[RED  [REDACTED],-[REDAC  $[REDACTED],-$[RED
                                                                           [REDACTED].         ACTED].             TED].               ACTED].             TED].               ACTED]
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

These Mid-tier Agreements bundled terms for separate tiers offered by 
Pandora and iHeart, respectively, including the actual mid-tier 
services identified as Pandora Plus and iHeart Plus, respectively, with 
limited interactive functionality, and a tier providing fully 
interactive functionality. Orszag WDT ] 38.
    Mr. Orszag found confirmation for his benchmarking approach in the 
rates at which Pandora and iHeart will license from major and 
independent record companies, i.e., at rates ranging from $[REDACTED]-
$[REDACTED] per subscriber per month. These rates are similar to the 
per subscriber rates SoundExchange proposes in this proceeding. Trial 
Exs. 112-114. Mr. Orszag also noted that these Mid-tier Agreements 
include [REDACTED]. See Orszag AWDT at ] 38. When these percent-of-
revenue rates are halved (as in his Approach One) to reflect that 50% 
of the value of Sirius XM's service is attributable to non-music 
content, the percent-of-revenue rates in these Mid-tier Agreements lie 
in the range of [REDACTED]-[REDACTED]%, ``strikingly similar'' to the 
23% royalty rate SoundExchange has proposed. See SXPFF ]] 845-847.
    Mr. Orszag found the rates in these Mid-tier Agreements to be 
instructive and corroborative of SoundExchange's rate proposal. 
SoundExchange conceded that the mid-tier services of iHeart and Pandora 
offer some interactivity, whereas Sirius XM's satellite service offers 
no interactivity. Mr. Orszag opined, however, that it is not plausible 
that the differential would have a significant impact on consumer 
valuations and, consequently, on per-subscriber rates. In support of 
that argument, he noted that subscriptions to the mid-tier services 
offered by Pandora and iHeart are priced at the same $4.99 per month as 
Pandora's prior noninteractive offering. See Harrison WDT at ] 19. 
Further, Mr. Orszag noted that his highly conservative estimate of the 
value of music content on Sirius XM, is even higher, at $[REDACTED]. 
See Orszag WRT ] 55 & n.68.
    More particularly, Mr. Orszag noted that Pandora's offering of 
increased skips, rewind capability, and limited caching to convert its 
noninteractive service into a mid-tier service did not cause Pandora to 
increase its monthly subscription price above the $4.99 it charged 
previously for its noninteractive service. Mr. Orszag testified that 
this suggests that consumers' valuation of the increased functionality 
is not so high as to allow Pandora to increase its mid-tier retail 
subscribership price off the $4.99 per month and closer to the $9.99 
monthly price for fully interactive services. 4/25/17 Tr. 1063-64 
(Orszag). Mr. Orszag concluded that these facts demonstrate that the 
mid-tier services have a value commensurate with a noninteractive 
service.
    Finally, Mr. Orszag recognized the hypothetical possibility that, 
because these Mid-tier Agreements bundle fully interactive services, 
the record companies could have applied their market power in that 
segment to extract higher rates and better terms in the mid-tier 
segments. To test that hypothetical, Mr. Orszag reviewed the 
negotiation documents relating to the Mid-tier Agreements and concluded 
that they contained no evidence that the Majors used their alleged 
market power in the fully-interactive services market to obtain 
concessions on mid-tier terms. Orszag WRT ] 55. To the contrary, the 
evidence suggests that Merlin obtained

[[Page 65247]]

rates similar to those negotiated by the Majors in its licensing 
agreements with [REDACTED]. Id. Sirius XM did not proffer any evidence 
that the record companies leveraged their alleged interactive market 
power to obtain better terms in the mid-tier market.
5. Evaluating Orszag Ratio Equivalency Benchmarking Approaches
    Sirius XM asserted that Mr. Orszag incorrectly emphasized an 
economically unimportant point, i.e., that ``there is no difference 
between interactive streaming services and satellite radio in terms of 
the music content they deliver to subscribers.'' See 4/26/17 Tr. 1190-
91 (Orszag) (emphasis added). According to Sirius XM, similarity ``at 
this high level of generality'' is meaningless. SXM RPFF ]11.
    The Judges agree. Although markets in which sound recording 
performances are licensed (upstream) and delivered (downstream) to 
subscribers may be considered as potential benchmarks for each other, 
that broad brush of comparability does not indicate whether the 
benchmark is suitable on the whole. Mr. Orszag was correct that the 
benchmarking approach can commence at a high level of generality, even 
though that basic level of comparison is by no means probative or 
dispositive.\149\ Not every market in which sound recording 
performances are licensed could serve as a benchmark for every other 
sound recording performance market.
---------------------------------------------------------------------------

    \149\ In fact, a market in which some product other than music 
is delivered could be a useful benchmark market if it is otherwise 
comparable in terms of economic structure. For example, patents, as 
a form of intellectual property, may be found to have similar 
economic characteristics as copyrights, rendering relevant 
information from the market for patent licenses.
---------------------------------------------------------------------------

    Sirius XM argued that the common use of digital transmissions and 
the allowance of unlimited usage by listeners are not illuminating 
similarities. SXM PFF ] 12. Once again, the Judges agree; these basic 
points are not probative of the usefulness of the interactive market as 
a benchmark. Nonetheless, Mr. Orszag's reliance on such common elements 
is helpful in identifying and then narrowing the range of potential 
benchmarks.
    Sirius XM criticized as superficial Mr. Orszag's assertion that the 
target and benchmark markets are similar because each offers ``mobile 
functionality.'' SXM RPFF at 19; Orszag AWDT ] 32. The Judges find this 
criticism to be without merit.\150\ The majority of Sirius XM listening 
occurs in the car, Meyer WDT ] 21 n.5, and the improved mobile 
functionality of interactive streaming through ``connected cars'' and 
more complete cellular coverage allows listeners to access streaming 
services in the car. SE PFF ]] 156-159 (and record citations therein). 
Thus, the Judges do not agree with Sirius XM that Mr. Orszag's reliance 
on the interactive services' mobile functionality is superficial; 
indeed, the issue of whether their respective mobile functionalities 
are substitutional for each other bears on the Opportunity Cost/ECPR 
analysis undertaken by Professor Willig.
---------------------------------------------------------------------------

    \150\ The Judges address the value of Sirius XM mobile 
functionality elsewhere in this Determination.
---------------------------------------------------------------------------

    Nonetheless, the Judges decline to adopt Mr. Orszag's reliance on 
evidence he claimed suggested a ``growing'' use of streaming services, 
including interactive services, in the car. Orszag AWDT ] 39(C). 
Although the evidence on which he relied is somewhat supportive of this 
point, it is not sufficiently persuasive. The Judges are reluctant to 
adopt or extrapolate from potential market trends or rates of change 
and use them as a basis for a fixed five-year rate. As the Judges have 
noted on other occasions, the adoption of market predictions is a 
fraught exercise. More probative in the Judges' opinion are the results 
from the survey experts who have appeared for both parties. These 
experts have attempted to measure present intentions regarding the 
substitutability of interactive services (and other services) for 
Sirius XM. While their surveys yield starkly different results when 
attempting to elicit whether Sirius XM listeners would switch to 
interactive services if Sirius XM were nonexistent or too expensive, 
none shows anything close to a 1:1 substitutability of interactive 
services for Sirius XM.\151\
---------------------------------------------------------------------------

    \151\ The Judges analyze these survey results in detail, supra, 
sections VI.B.1-VI.B.2.
---------------------------------------------------------------------------

    The survey results highlight a related criticism by Sirius XM of 
Mr. Orszag's ratio equivalency approaches. Sirius XM correctly argued 
that the economic rationale that supports a ratio equivalency approach 
requires ``significant competition, or a high cross-elasticity of 
demand, between Sirius XM and subscription services. . . . [A] limited 
degree of head-to-head competition . . . will not suffice.'' Shapiro 
CWRT at 12; see also Web IV, 81 FR at 26353; 4/26/17 Tr. 1198 (Orszag).
    In Web IV, the Judges stated that the ratio equivalency approach 
might be appropriate if the record reflected that

functional convergence and downstream competition for potential 
listeners indicate a sufficiently high cross-elasticity of demand as 
between interactive and noninteractive services, provided the 
noninteractive subscription rate is reduced to reflect the absence 
of the added value of interactivity[.]

81 FR at 26353. In the present case, Mr. Orszag did not provide either 
qualitative or quantitative evidence of a sufficiently high cross-
elasticity. In fact, it is noteworthy that even the survey results 
reported by SoundExchange's own survey witnesses, Professors Ravi Dhar 
and Itmar Simonson, indicated that there is no such high 
substitutability between subscribership to interactive services and to 
Sirius XM. These survey conclusions negate any complete or overwhelming 
ratio equivalency Mr. Orszag has posited. Moreover, even Professor 
Willig, another SoundExchange economic expert, relied on and adopted 
Professor Dhar's survey, which revealed a substitutability of 
interactive services for Sirius XM at significantly less than 1:1. See 
Willig WDT ] 41.
    Sirius XM also challenged SoundExchange's predicate that there is 
``increasing convergence of the interactive services and Sirius XM'' 
because of ``some `lean back' functionality'' offered by the 
interactive services (in the form of pre-programmed playlists). Sirius 
XM noted that Mr. Orszag acknowledged on cross-examination that, if the 
rate-setting exercise were based solely on his posited convergence, any 
increased use of playlists by interactive services would suggest that 
interactive services were becoming more like noninteractive services, 
rather than vice versa. If any purported convergence is in the 
direction of lean-back service, then interactive services' rates should 
be falling in an effectively competitive market, rather than 
noninteractive or satellite services' rates increasing. 4/26/17 Tr. 
1191-92 (Orszag).
    Sirius XM's criticism in this regard is well-taken. There is 
insufficient evidence in the record to show that interactive services' 
royalty rates have fallen in response to any asserted increase in 
listener use of playlists. Indeed, as Sirius XM correctly noted, 
[REDACTED]. See, e.g., 5/16/17 Tr. at 3939 (Harrison); 5/15/17 Tr. at 
3836 (Walker).\152\
---------------------------------------------------------------------------

    \152\ Playlists could engender price competition. As the Judges 
noted in Web IV, services could lower royalty rates with playlist 
steering. Further, the possibility of steering could result in lower 
industrywide rates without any actual steering taking place. See Web 
IV, 81 FR at 26367. In the present case, there is no evidence of any 
such price competition through playlist-based steering in the fully 
interactive market.
---------------------------------------------------------------------------

    Ultimately, the Judges place no weight on the alleged corroboration 
of the Mid-tier Agreements identified by Mr. Orszag, for several 
reasons. First, as

[[Page 65248]]

a SoundExchange industry witness testified, UMG requires [REDACTED]. 
Harrison WDT ] 20 (``Even if mid-tier subscription services succeed in 
drawing some consumers away from poorly-monetized free ad-supported 
streaming services, there is also a danger that they could to a degree 
cannibalize the premium on-demand subscription services. [REDACTED].
    Second, the mid-tier services include interactive features which 
the record companies recognize are valuable to subscribers. Id. Absent 
evidence in this record of an interactivity adjustment specifically 
related to the valuable but limited interactive functionality of the 
mid-tier services, the probative value of the mid-tier rates in this 
proceeding is compromised.
    In sum, the Judges agree with Sirius XM that the record does not 
provide sufficient evidence to support Mr. Orszag's ratio equivalency 
approaches to rate-setting in this proceeding.\153\
---------------------------------------------------------------------------

    \153\ Therefore, Mr. Orszag's attempted steering adjustments are 
moot with regard to his approaches. The applicability of those 
adjustments, vel non, is addressed in connection with the 
establishment of effectively competitive rates elsewhere in this 
Determination. Also, because Mr. Orszag did not present the mid-tier 
royalties as benchmarks in their own right, but rather as 
corroborative evidence supporting his (now rejected) ratio 
equivalency approach, the Judges do not accept Mr. Orszag's use of 
mid-tier royalties as corroborative or probative.
---------------------------------------------------------------------------

VII. SDARS Performance License--Sirius XM Proposal

    In its specific proposed rate regulations, Sirius XM advocated a 
single royalty fee--8.1% of ``Gross Revenues.'' See Second Amended 
Proposed Rates and Terms of Sirius XM . . . at Sec.  382.12(a) (2d 
APR). However, more broadly, Sirius XM proposed a rate range of 8.1% to 
11% of relevant revenue, which it claims is consistent with the 
evidence. 2d APR at 1. The existing rate, for 2017, is 11%.
    Sirius XM's expert witness, Professor Carl Shapiro, analyzed three 
possible starting points for setting the performance royalty rates in 
this proceeding. Professor Shapiro began with an analysis of the 
existing rates. He also analyzed two potential benchmarks: Direct 
licenses negotiated between Sirius XM and 498 Indie record labels and 
the rates determined by the Judges for noninteractive digital 
performances over the internet (webcasting).\154\
---------------------------------------------------------------------------

    \154\ Professor Shapiro did not label the existing rate as a 
``benchmark'' per se. Rather, he opined that the existing ``11 
percent of revenue rate that Sirius XM will pay in 2017 can be 
viewed as an upper bound on the reasonable royalty level for the 
2018-2022 period.'' Shapiro WDT at 34. The Judges consider Professor 
Shapiro's use of the existing rate as an ``upper bound'' is 
functionally similar to a use of that rate as a ``benchmark.'' That 
is, he is urging a similarity between: (1) The description of the 
SDARS market as it was presented to the Judges in SDARS II in 2012, 
and the rates that were set in that Determination (the de facto 
benchmark); and (2) the description of the SDARS market (the target 
market) as it has been presented to the Judges in this 2017 
proceeding.
---------------------------------------------------------------------------

A. Current Rates

    Professor Shapiro noted that the current statutory rate is 11% of 
``Gross Revenues,'' as defined by the relevant regulations. See 37 CFR 
part 382, subpart B. The Judges configured the SDARS rates for the 
period 2013 to 2017 to increase from 9% to 11% over the five-year 
period. Before recommending adoption of the extant rate for the ensuing 
rate period, Professor Shapiro analyzed the state of the music industry 
to determine whether any changes in the marketplace might warrant a 
deviation from the current rate. See Shapiro WDT at 27. Evidence in 
this proceeding overwhelmingly supports a finding of increased use of 
streaming, both interactive and noninteractive, as the preferred method 
of ``consuming'' music. Professor Shapiro's testimony was no exception. 
Id. at 28. As Professor Shapiro noted, in 2012, streaming accounted for 
approximately 12% of record industry revenues; whereas in the first 
half of 2016, streaming accounted for 43% of record industry 
revenues.\155\ Id. Analogously, Sirius XM's subscribership grew from 
approximately 24.9 million subscribers in 2014 to 28.3 million 
subscribers in 2015. Id. at 29.\156\ This growth in subscribers 
increased satellite radio's share of music industry revenues during the 
period from [REDACTED]% to [REDACTED]%. Id. at 28, Fig. 5.
---------------------------------------------------------------------------

    \155\ Professor Shapiro defined revenue from streaming services 
as that derived from subscription and on-demand services as well as 
webcasting. Music industry revenues included those streaming 
services, physical sound recording sales, digital downloads, 
synchronization royalties, and satellite radio. Shapiro WDT at 28.
    \156\ Sirius XM predicts [REDACTED] during the upcoming rate 
period from an estimated [REDACTED] million subscribers in 2018 to 
[REDACTED] million subscribers in 2021. Shapiro WDT at 29.
---------------------------------------------------------------------------

    Professor Shapiro proposed continuing the current percent-of-
revenue rate structure. He concluded that, when using percent-of-
revenue rates, any increase in Sirius XM's relevant revenue would 
redound to the benefit of the record companies obviating a need to 
change the rate. See Shapiro WDT at 29-30.
    He further argued that the relevant starting consideration for the 
Judges would be the rate that would emerge in an effectively 
competitive marketplace. 5/3/17 Tr. 2479-80 (Shapiro). Professor 
Shapiro asserted that Sirius XM's overall profits would be irrelevant 
to the negotiation. Shapiro WRT at 51-52. He opined that, in an 
effectively competitive market, the negotiating parties would look only 
to the licensee's ``contribution margin''; that is, ``the percentage of 
Sirius XM's receipts from a subscriber . . . that drops to their bottom 
line.'' Id. This contribution margin is the measure of sales revenue 
available for fixed costs and profit after paying variable costs. See 
Lys WDT ] 83. According to Professor Lys, Sirius XM includes in 
variable costs [REDACTED]. Id. ] 85. Professor Shapiro and Professor 
Lys agree that Sirius XM's contribution margin has remained 
``remarkably consistent'' over time. See id. ] 87; Shapiro WRT at 5.
    Professor Shapiro focused on the stability of the Sirius XM 
contribution margin to argue for a like stability in royalty rates. 
Countering that proposition, Professor Lys looked at an economic 
bargaining model and concluded that with greater overall profitability, 
Sirius XM and any licensor would negotiate to divide those overall 
profits, which would result in a higher percentage royalty rate.
    Neither expert's opinion in this regard, however, is persuasive. 
Professor Lys may well be correct that record companies, given their 
``must have'' status, i.e., in the absence of effective competition, 
would seek in unregulated market negotiations to appropriate a portion 
of the additional profits (through a rate increase in addition to the 
automatic increase from a larger pool of revenue), notwithstanding that 
the profits accrued via Sirius XM's scale and growth rather than 
through an increase in the contribution margin. On the other hand, as 
discussed elsewhere in this Determination, the growth of Sirius XM's 
profits allows it to compensate the record companies for the 
opportunity costs the latter incur when licensing to Sirius XM. But 
neither of these factors is relevant to the appropriateness of adopting 
the extant rate in the forthcoming rate period.
    SoundExchange opposed reliance on the current, SDARS II royalty 
rates, asserting that the current rates do not capture the effect of 
the expansion of music streaming on the labels' opportunity cost. 
SoundExchange contended that Professor Shapiro's analysis of current 
rates fails to acknowledge or address changes (1) in opportunity cost, 
(2) in Sirius XM's financial performance, (3) in the upstream market 
for digital sound recording rights,\157\ and (4) in current

[[Page 65249]]

circumstances as opposed to those prevailing at the time of the SDARS 
II determination.
---------------------------------------------------------------------------

    \157\ For this third point of criticism, SoundExchange focused 
on the direct licenses Sirius XM negotiated with Indie labels. The 
criticism is better directed at the direct license benchmark and the 
Judges will discuss it in that portion of the Determination, section 
VII.B.
---------------------------------------------------------------------------

    SoundExchange's arguments regarding opportunity cost relied on the 
assumption that Sirius XM and streaming services are closely 
substitutable for one another. However, that assumed close 
substitutability is contradicted by the survey results as analyzed by 
the Judges, supra, in connection with Professor Willig's opportunity 
cost analysis. SoundExchange also does not take into account Sirius 
XM's unique position of being the only satellite radio provider--
resulting in a remarkable growth in subscribers--as well as the fact 
that changes in Sirius XM revenues have resulted from additional 
factors, i.e., lower non-music content costs and lower royalty rates in 
negotiated direct licenses.\158\ Thus, to the extent discussed above, 
changes in the overall market do militate against using current rates 
as an appropriate starting point.
---------------------------------------------------------------------------

    \158\ The Judges do acknowledge Sirius XM's increased 
profitability in a different context, i.e., whether Sirius XM should 
contribute to the legitimate opportunity costs incurred by the 
record companies without disruption that would threaten the 
viability of Sirius XM. See infra, section X.D.
---------------------------------------------------------------------------

    Moreover, the current rates as set in SDARS II were a function of 
the deficiencies in the proffered evidence in that proceeding, evidence 
that, by comparison, made the then extant rates a relatively superior 
guide to an appropriate rate. The Judges were dissatisfied with a 
benchmark derived from licenses in the interactive streaming business. 
Further, the Judges found it necessary to allow for a downward 
adjustment (within the zone of reasonableness) to account for the 
enormity of Sirius XM's satellite launch and replacement costs. See 
SDARS II, 78 FR at 23069. SoundExchange argued that the ``incredible 
financial success'' enjoyed by Sirius XM during the current license 
period obviates the need for consideration of Sirius XM's costs of 
doing business for the license period at issue in this proceeding. See 
Lys WRT ] 56. The Judges agree; in fact, that financial success is a 
basis for increasing the royalty rate in this proceeding, as indicated 
above.
    For the reasons highlighted by SoundExchange and its experts, the 
Judges will not use the extant rates as a starting point (or benchmark 
or upper bound) for determination of appropriate rates for the period 
2018 through 2022. The SDARS II rates were derived on a record much 
less robust than the record in this proceeding. The participants in 
this proceeding have presented sufficient facts and analysis to inform 
the Judges and to lessen the value of the current rates as a desired 
starting point for analysis in these changed circumstances.

B. Current Direct Licenses Negotiated by Sirius XM

    Professor Shapiro proposed a benchmark derived from direct licenses 
Sirius XM has negotiated in the market at issue in this proceeding, 
i.e., the satellite radio music streaming (upstream) market. In 2012, 
when the Judges established rates for the 2013 through 2017 rate 
period, direct licensing was in its infancy, with approximately 100 
direct licenses executed at the time of the determination. Shapiro WDT 
at 34. By 2016, Sirius XM had negotiated almost 500 direct licenses 
with record labels. Id. at 35. Because of its direct license effort, 
Sirius XM has access to approximately 23,000 music catalogs containing 
as many as 5 million tracks, or 6.4% of the tracks on the Sirius XM 
playlists. Shapiro WDT at 35 (citing White WDT). Professor Shapiro 
promoted the direct licenses as ideal benchmarks, asserting that they 
represent market outcomes involving the same sellers (record labels), 
the same buyer (Sirius XM), and the same rights (digital performance of 
sound recordings) and effectively competitive conditions for the 
negotiations. Id. at 37.
    Professor Shapiro reasoned that these negotiations reflect an 
effectively competitive marketplace because Sirius XM controls such a 
small share of the record industry's overall revenues (approximately 
[REDACTED]%). See Shapiro WDT at 37. Measuring Sirius XM's royalties 
against the entirety of music industry revenues, however, ignores the 
fact that Sirius XM dominates the market for paid services that 
listeners use in a vehicle. As the primary alternative to (non-royalty 
paying) terrestrial radio in cars, Sirius XM in fact wields tremendous 
bargaining power, which would tend to drive down the negotiated rates. 
Professor Shapiro contended that, in fact, direct license rates 
negotiated in an unregulated market would be lower because based on 
recent trends, he believes the statutory license rates act as a 
``magnet'' to pull directly negotiated rates up to the statutory rates. 
Id. at 45.
    Professor Shapiro's endorsement of direct licenses as a benchmark 
ignored the difficulties inherent in determining the effective royalty 
rates the parties negotiated. With the direct licenses, Sirius XM 
receives the same rights it would under the statutory license and 
additional benefits, such as a relaxation of the statutory performance 
complement rule, allowing Sirius XM to rely more heavily on the (lower 
priced) directly-licensed tracks. Id. at 35-36. Licensors also benefit 
from consideration negotiated in direct licenses that is not available 
under a statutory license. Licensors might receive more exposure for 
their recordings, might benefit from direct payment of both recording 
and artist royalties, and could avoid the SoundExchange administrative 
fee. No expert in this (or any similar) proceeding has attempted to 
value the considerations behind the headline percent-of-revenue rates 
in direct licenses, let alone determine which party enjoys the net 
benefit.
    Looking at the upstream market (record labels to streaming 
services), Professor Shapiro anticipated more negotiation of direct 
licenses influenced by the noninteractive streaming services' ability 
to ``steer'' listeners to a particular catalog of music. Id. at 30. As 
Professor Shapiro noted, in the webcasting market, the availability of 
steering resulted in negotiation of direct licenses with headline rates 
below the statutory rates based on the potential benefits of greater 
streaming frequency of the labels' music. Id. at 30.
    SoundExchange was critical of Professor Shapiro's reliance on 
direct licenses primarily because more recent direct license agreements 
have omitted steering incentives or have included anti-steering 
alternatives that recognize the prospect of steering but muddy the 
analytical waters with regard to the effect steering might have on 
their negotiated rates. Even Professor Shapiro conceded that he could 
not ``quantify the value of steering.'' 4/20/17 Tr. 488 (Shapiro). 
Furthermore, the direct licenses involve exchanges of consideration 
apart from the headline royalty rate that no party has attempted to 
value.\159\
---------------------------------------------------------------------------

    \159\ The record labels also derive benefit from the direct 
licenses. See Shapiro WDT at 36. Notably, Sirius XM is able to 
distribute both the label's share and the artists' share of 
performance royalties directly to the contracting label. Sirius XM 
provides administration of the royalties without charging the fee 
that would be payable to SoundExchange under the statutory scheme. 
Under the direct license agreements with Sirius XM, some licensors 
also benefit from a more generous methodology for calculating the 
label's royalty pool. Id.
---------------------------------------------------------------------------

    The Judges do not accept Sirius XM's direct licenses as 
sufficiently probative of the relevant market to accept them as a 
meaningful benchmark. Direct licenses cover only a small portion of the 
sound recordings on Sirius XM's playlists.

[[Page 65250]]

They are uninformative of any effect of steering on royalty rates 
because none of them contain steering guarantees or economic incentives 
to promote (or avoid) steering. There is no basis for the Judges to 
segregate consideration in these licenses that is properly attributed 
to elements that are unavailable under the compulsory license.

C. Web IV Rates

    Professor Shapiro offered as a final benchmark the rates 
established by the Judges in Web IV. The Judges used benchmarks in Web 
IV, including direct licenses,\160\ and considered interactive market 
(non-statutory) negotiated direct license rates to determine the Web IV 
rates. See Shapiro WDT at 49. Professor Shapiro converted the Web IV 
per-performance rate of $0.0022 to derive a percentage-of-revenue rate 
applicable in this proceeding of 8.1%. Id. at 55. Professor Shapiro 
used a figure of 469 performances per subscriber per month for his 
conversion. Id. at 54.\161\
---------------------------------------------------------------------------

    \160\ Professor Shapiro opined that the direct licenses, such as 
the Pandora/Merlin agreement, ``reflected the forces of competition 
at work,'' namely the leveling power of steering. Shapiro WDT at 49.
    \161\ In a similar exercise, Professor Willig used a weighted 
average figure of [REDACTED] performances per subscriber in his 
calculation of creator compensation cannibalization (opportunity 
cost). The higher opportunity cost would result in a higher 
percentage-of-revenue rate. See Willig WDT at B-7.
---------------------------------------------------------------------------

    Anticipating questions regarding whether webcasting and satellite 
radio are too different to warrant this benchmark, Professor Shapiro 
analyzed the Web IV benchmark to resolve the differences. According to 
Professor Shapiro, there are two key differences to examine. First is 
the possible difference between a label's full marginal cost of a 
Sirius XM satellite performance and a webcast performance. 
Specifically, Professor Shapiro defined the marginal cost difference, 
if any, as one of relative promotional or substitutional effects. 
Second, Professor Shapiro looked at differences in the ability to steer 
as between Sirius XM and a webcaster. Noting that Sirius XM relies on 
human programmers while webcasters rely more heavily on algorithms, 
Professor Shapiro felt Sirius XM might be more able to steer without 
losing listeners. On the other hand, he noted that webcasters (using 
Pandora as an example) have the ability to and the practice of allowing 
listeners to create individualized ``stations'' giving Pandora greater 
flexibility to steer without alienating listeners. See Shapiro WDT at 
56-57.
    In the end, Professor Shapiro concluded that Sirius XM and 
webcasters are ``quite comparable along both dimensions.'' Shapiro WDT 
at 50. When he combined the favorable comparison of satellite radio and 
webcasting with the fact that the sellers in both markets are the same, 
the rights at issue are the same, and that the Web IV benchmark 
accounts for the forces of competition, ``it becomes clear that the Web 
IV benchmark is a very good benchmark for rate setting in this 
proceeding.'' Id.
    Sirius XM witness, Steven Blatter, detailed anecdotal evidence of 
the promotional effects of sound recording plays on Sirius XM. See 
Written Direct Testimony of Steven Blatter, Trial Ex. 5, passim 
(Blatter WDT). Mr. Blatter touted Sirius XM's subscription model as 
supportive of its ability to broaden the listening (and presumably 
consumption) habits of its subscribers. Freed of the commercial demands 
of ad-supported radio, Mr. Blatter contended, Sirius XM can cultivate a 
broader audience than the ``Top-40'' stations. Listeners to Sirius XM's 
curated playlists and niche channels thus discover music that might 
otherwise have gone unnoticed. Id. ] 2. Mr. Blatter recited ``thank-
you'' letters from artists and labels, trade publication reporting and 
analysis, and sales statistics on selected titles as evidence of Sirius 
XM's promotional value to licensors. In addition to artist testimonials 
and press coverage, Mr. Blatter noted that ``many musicians and record 
labels'' grant Sirius XM waivers of statutory limitations relating to 
frequency of play under a statutory license (i.e., the ``sound 
recording performance complement'') in order to enjoy the benefits of 
promotion on Sirius XM. Id. ] 36.
    Countering Mr. Blatter's assertions, SoundExchange expert, Dr. 
George Ford, opined that promotional effects of a particular platform 
are irrelevant to the Judges' task in this proceeding. See Written 
Direct Testimony of George S. Ford, Trial Ex. 23, at 3-4 (Ford WDT). 
Dr. Ford pointed out most notably that no ``broad inter-platform 
analysis'' of promotion and substitution is in evidence. Id. Further, 
he asserted promotional effect is meaningless unless it is net of 
substitutional effects. In the current music marketplace, Dr. Ford 
asserted, given the dramatic decline in sales of permanent music media, 
a streaming service's promotion of CD sales and downloads is outdated. 
Id. at 4. Professor Willig actually performed econometric analyses 
looking at all streaming services (including Sirius XM) and found a net 
substitutional effect when compared to permanent sales. Willig WDT ]] 
24-27. According to Professor Willig, the substitution of streaming for 
permanent sales contributed to a dramatic drop in creator compensation, 
meaning the opportunity cost to artists and labels of streaming is 
significant. Id. ] 30.
    Mr. Orszag likewise disputed Professor Shapiro's reasoning relating 
to the relative ability to steer in satellite radio and webcasting. As 
Mr. Orszag reasoned, the Judges relied on direct licenses and their 
steering provisions to make an adjustment to bring the webcasters' 
marketplace in line with a hypothetical effectively competitive market. 
See Orszag WDT ]] 64-66. Direct licenses negotiated by Sirius XM are 
[REDACTED], however. Id. ] 67. Nor is there any record evidence of any 
actual steering by Sirius XM. As the Judges noted elsewhere in this 
Determination, [REDACTED].
    The most salient criticism of Professor Shapiro's Web IV benchmark 
came from Professor Willig. Professor Willig discounted use of the Web 
IV rates, specifically the Pandora noninteractive rates, for various 
reasons, but the most telling was his uncontradicted assertion that not 
even [REDACTED] uses the statutory rates. After the Web IV 
determination, [REDACTED] negotiated direct licenses with [REDACTED]. 
Using the renegotiated rates as a benchmark, Professor Willig 
calculated the SDARS rate resulting from Professor Shapiro's 
methodology would be [REDACTED]% of revenue, approximately [REDACTED] 
the 8.1% of revenue proposed by Professor Shapiro. See Willig WRT ] 57.
    The Judges are troubled by the implicit assumption in Professor 
Shapiro's use of the Web IV per play rate, given that Sirius XM, as 
opposed to noninteractive streaming, is listened to predominantly in 
the car. As Mr. Orszag testified, any per play analysis implicitly 
starts with the questionable assumption that each play has an 
equivalent value in both distribution channels. Orszag WRT ] 53. 
Further diminishing the value of a per play analogy, the Judges note 
that the parties' use of a percent-of-revenue form of royalty is 
inconsistent with the idea that there is a single per play value that 
cuts across all distribution channels
    Further, the Judges agree with Mr. Orszag that there is no valid 
reason--and certainly no proof in the record--that would permit the 
Judges to conclude or presume an equal per play value for a Sirius XM 
play--usually in the car--and a play of a noninteractive song. In fact, 
the Judges find that, as a matter of common sense, there is likely 
greater utility in a sound recording played in an automobile. A driver 
(in particular) has a limited set of options for entertainment, given 
his or her need to remain attentive to the road and to

[[Page 65251]]

traffic. In the car, therefore, radio listening is a scarce form of 
entertainment and therefore more valuable product than it is elsewhere, 
where it competes with all other forms of utility and diversion (market 
and non-market).\162\
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    \162\ Sirius XM asserted that Mr. Orszag did not undertake any 
empirical analysis in support of this argument. SXM RPFF ]] 273-274. 
However, Mr. Orszag explained sufficiently that this value is a 
particular form of ``access'' value, whereby the driver knows he or 
she has the option of listening to music on Sirius XM in the car, a 
particular value given the limited alternatives for entertainment 
and diversion behind the wheel. See SE PFF ]] 1228-1229 (and record 
citations therein). Moreover, the limited nature of alternatives for 
entertainment and diversion for a driver are matters of common 
knowledge, and that point is not dependent upon expert testimony. 
Further, because Sirius XM advanced the argument that the per play 
values are equivalent across these two distribution channels, it 
should have proffered evidence to support the assertion that 
consumers value access and per play values provided by Sirius XM the 
same as they value such benefits when provided by a noninteractive 
service, given the greater use of Sirius XM in the car.
---------------------------------------------------------------------------

    The participants have not provided evidence sufficient for the 
Judges to reach any conclusions regarding a conversion of the Web IV 
per-play rates to a Sirius XM percent-of-revenue rate. Even if the 
parties had provided sufficient evidence to make the conversion, the 
Judges are unconvinced that the characteristics of webcasting and 
satellite radio are sufficiently similar to transfer, without 
adjustment, the royalty rate from one platform to the other.

D. Lenski Survey Data

    Sirius XM engaged Mr. Joe Lenski of Edison Research to collect 
empirical data regarding the sources of Sirius XM satellite radio 
listeners and to evaluate where those listeners might turn for music 
consumption if Sirius XM were unavailable. See Written Direct Testimony 
of Joe Lenski, Trial Ex. 7, 2 (Lenski WDT). Sirius XM also asked Mr. 
Lenski to develop similar data for Pandora listeners.\163\ See id. Mr. 
Lenski conducted a national random digit dial telephone survey, using 
both landline and cellular telephone contacts (Lenski Survey). He 
employed a survey methodology ``widely recognized as the most reliable 
form of survey research and . . . used by most major polling 
organizations. . . .'' Id. at 3. The survey queried 983 Sirius XM 
listeners and 1,323 Pandora listeners. Of the total respondents, 350 
identified themselves as listeners to both Sirius XM and Pandora. The 
surveyors asked respondents in the two groups (Sirius XM and Pandora) 
separate sets of questions. Respondents identifying as listeners to 
both Sirius XM and Pandora answered both sets of questions.
---------------------------------------------------------------------------

    \163\ At the time of the Lenski Survey, Pandora had not yet 
launched its fully interactive subscription service. It operated 
only lean-back or Mid-tier services that were not fully interactive.
---------------------------------------------------------------------------

    A large majority--62%--of Sirius XM listeners responded that they 
migrated from terrestrial radio, with 20% of respondents answering that 
before Sirius XM they listened to ``CDs or your own music downloads.'' 
See id. at 5. Online streaming services, AM/FM stations streaming on 
the internet, and interactive streaming services in the aggregate 
accounted for 7% of Sirius XM's current listeners. Id. As for 
alternatives to Sirius XM, survey respondents indicated they would turn 
to terrestrial radio (74%), CDs or music downloads (65%), online 
streaming services (49%) and interactive streaming services (32%).\164\ 
Id. Once survey respondents identified all possible alternatives to 
Sirius XM, the surveyors asked respondents to distribute their possible 
alternatives by frequency. In this cut, a plurality of respondents' 
listening time, 40.8%, would be to terrestrial radio. Id. at 6. CDs and 
digital downloads would capture 23.1% of former Sirius XM listening 
time. In the aggregate, 22.1% of listening time would be to 
noninteractive (14.3%) and interactive (7.8%) streaming services.
---------------------------------------------------------------------------

    \164\ At this juncture, listeners could choose more than one 
potential alternative to Sirius XM; hence the percentages exceed 
100%. Notably, 28% of survey respondents answered they would listen 
to less audio overall if Sirius XM were unavailable. See Lenski WDT 
at 5.
---------------------------------------------------------------------------

    By contrast, Pandora listeners reported migrating slightly more 
frequently from ``CDs or your own music'' (35%) than from terrestrial 
radio (33%).\165\ As alternatives, if Pandora were no longer available, 
survey respondents chose CDs or music downloads (67%), terrestrial 
radio (59%), interactive streaming services (47%), noninteractive 
streaming services (46%), and Sirius XM (23%).\166\ When asked to 
allocate their time among the alternatives, Pandora listeners allocated 
their listening time to CDs or music downloads (26.3%), terrestrial 
radio (24.4%), interactive streaming services (16.6%) and other 
noninteractive streaming services (11.7%). Id. at 7.
---------------------------------------------------------------------------

    \165\ Sixteen percent of Pandora respondents answered that their 
Pandora listening was new listening time, not diverted from other 
sources. Lenski WDT at 6-7.
    \166\ As they did with Sirius XM, the surveyors first 
established all alternatives (adding to more than 100%) before 
having respondents allocate their time by preference. Id. at 6.
---------------------------------------------------------------------------

    These survey results showed that Sirius XM competes most directly 
with terrestrial radio, whereas Pandora's noninteractive service 
competes almost equally with CDs and downloads, interactive streaming 
services, and terrestrial radio. Professor Shapiro applied these 
conclusions to support his assertion that Sirius XM is mostly 
substitutional for terrestrial, non-royalty paying, radio. See Shapiro 
WRT at 14. In other words, Sirius XM is not cannibalizing creator 
compensation from other sources; it is augmenting creator compensation 
with an alternate source of royalties. Id. at 37. Professor Shapiro 
pointed out that, using the Modified Dhar Survey, Professor Farrell 
calculated a much lower opportunity cost than Professor Willig, viz., 
$1.35 per subscriber per month as compared with $2.55 per subscriber 
per month. See id. The Farrell conclusions, he testified are ``notably 
closer'' to the results Professor Shapiro obtained using the Lenski 
Survey. Id.
    Professor Dhar criticized the Lenski Survey as having ``no 
scientific value.'' Dhar WRT ] 9. Professor Dhar criticized the 
methodology, the response order, and the word choices in the Lenski 
Survey. See Dhar WRT passim. In essence, Professor Dhar concluded the 
Lenski Survey could not be of any value in reflecting ``marketplace 
reality.'' See, e.g., id. ] 16. The thrust of the Dhar criticisms 
revealed the differences in the assignments the parties gave their 
survey experts. Sirius XM asked Professor Lenski to gather listener 
preference information, whereas SoundExchange tasked Professor Dhar 
with looking at a defined, limited marketplace.
    Professor Willig acknowledged that the ``the structures of these 
two surveys [Dhar and Lenski] are fundamentally different: they ask 
fundamentally different questions.'' Willig WRT ] 41. Professor Willig 
also criticized the Lenski Survey because it purported to measure 
listeners' assessments of their use of time whereas the Dhar Survey 
measures listeners' assessment of their spending, or more precisely, 
their willingness to pay. See Willig WRT ]] 13, 46. Professor Willig 
asserted that the latter would be a more appropriate measure to 
determine creator compensation cannibalization. Id. Professor Willig, 
at bottom, criticized Professor Shapiro's reliance on the Lenski Survey 
data to evaluate relative substitutional effects of webcasting and 
satellite radio because the Lenski Survey did not give Professor 
Shapiro a basis to quantify the effects. Professor Shapiro testified in 
response to that criticism that, nonetheless, ``switching behavior 
that's not price-based is quite useful in terms of how [economists] . . 
. see things,'' yet he cautioned that ``I would accept that because Mr. 
Lenski is

[[Page 65252]]

asking about where would you move your listening, that could give a 
different answer than what would you subscribe to if Sirius XM were 
more expensive.'' 4/20/17 Tr. 3765-76 (Shapiro).
    The Judges accept that the Lenski Survey and the Dhar Survey (and 
even the Modified Dhar Survey) were not aimed at establishing the same 
empirical evidence. The Judges do not agree with Professor Dhar's 
criticism of the Lenski Survey methodology. Without parsing every 
question in the Lenski Survey for ambiguity or order bias, the Judges 
also accept that both the Lenski Survey and the Dhar Survey were 
faulty. Those surveys are, however, sources of empirical evidence 
available in this proceeding. The Modified Dhar Survey resulted in 
adjustment of Professor Willig's analyses and conclusions. The Lenski 
Survey supported Professor Shapiro's analyses and conclusions. But in 
addition, the Judges understand the Lenski Survey to be of limited use 
in comparing the opportunity cost analyses conducted by Professors 
Willig and Farrell, as discussed supra.

VIII. GEO Music Rate Proposals for PSS and SDARS

A. Rate Structures and Proposals

    Mr. George D. Johnson testified \167\ on behalf of GEO Music and 
proposed that the Judges bridge what he described as a ``gap'' in 
creator compensation. See 5/2/17 Tr. at 2203, 2209-10 (Johnson). The 
premise upon which GEO relied is that each performance of a copyrighted 
work should be compensated. See (Corrected) Testimony of George D. 
Johnson (GEO), Trial Ex. 60, at 24-25 (Johnson CWDT). GEO acknowledged, 
however, that for some digital services, including the two services 
seeking licenses in this proceeding, measurement of individual 
performances might not be possible. Consequently, GEO sought rate 
structures that could provide

    \167\ As adjuncts to his testimony, Mr. Johnson proffered 
numerous exhibits. Sirius XM and Music Choice filed objections to 
GEO's exhibits, citing lack of foundation, hearsay, and relevance 
objections. The Judges grant those objections in their entirety. The 
GEO exhibits are not admitted for the truth of the matters asserted 
therein, but are nonetheless permitted to remain in the record as 
illustrative of Mr. Johnson's testimony.
---------------------------------------------------------------------------

a livable music royalty rate . . . [with which creators] can be sure 
in our royalty payments, real payments, that are guaranteed, at a 
rate we would get if there were no `shadow' of a compulsory license 
. . . .

Id. at 5; see id. at 14 (``to know that they are secure in their 
royalty income . . . .'').
    The solutions GEO proposed appeared to arise from a per-work 
formula.\168\ He began his analysis with reference to the history of 
``mechanical'' royalties paid to license musical works.\169\ Mechanical 
royalties for physical phonorecords and permanent digital downloads 
have and continue to be structured on a per-unit basis. To capture a 
value he considered equivalent to a per-unit royalty for streaming 
services, Mr. Johnson proposed four different rate structures: A per-
subscriber rate, a percentage of revenue rate, a per-play rate, and a 
permanent download rate.
---------------------------------------------------------------------------

    \168\ Mr. Johnson has advocated in each of his appearances 
before the CRB a holistic approach to licensing music performances. 
See id. at 2209. In his approach he asked the Judges to take into 
account royalties for all uses of musical works embodied in sound 
recordings: Royalties for the publishers, songwriters, record 
companies, and artists.
    \169\ Section 115 of the Copyright Act creates the compulsory 
license to make and distribute phonorecords of musical works. See 17 
U.S.C. 115; 106(1) and (3) (exclusive right to reproduce in copies 
or phonorecords and to distribute reproductions of musical works). 
The definition of phonorecords has evolved to include digital 
reproductions of embodied musical works.
---------------------------------------------------------------------------

    GEO proposed a per-subscriber SDARS rate ranging from $ 4.96 per 
subscriber per month in 2018 to $ 5.58 per subscriber per month in 
2022. GEO would have this rate apply to all subscribers except those 
that receive channels with no, or incidental, music content and free 
trial period subscribers (limited to 30 days royalty free). Proposed 
Rates and Terms of George D. Johnson . . . at 10 (GEO Rates). GEO 
proposed PSS per-subscriber rates ranging from $ 0.10 in 2018 to $ 0.20 
in 2022. Id. at 14.
    GEO proposed a SDARS percentage of revenue rate within a ``current 
marketplace'' range of 25% to 40% of ``Gross Revenues.'' He proposed 
defining ``gross revenues'' in a manner similar to the current 
regulations, but to include payments or payments in kind to key 
executives or shareholders. See id. at 12. For PSS, GEO proposed using 
the same definition of ``gross revenues'' and calculating the royalty 
rate at 45% of gross revenues.
    For per-play rates for SDARS, GEO relied on ``anonymous, but 
actual'' Sirius XM royalty rates and adjusted those rates by varying 
the percent-of-revenue target. Id. at 13.
    As an additional revenue stream for both the services and the 
copyright owners, GEO proposed requiring both Sirius XM and Music 
Choice to create a ``BUY button.'' In this proposal, GEO envisioned 
listeners acquiring (1) a permanent download to the listener's device 
of choice, (2) a ``cloud locker'' stored sound recording, or (3) a 
permanent download to a purchased content locker or paid locker 
service.\170\ GEO proposed a royalty range of $1.00 in 2018 to $2.50 in 
2022 per purchase. Id. at 15.
---------------------------------------------------------------------------

    \170\ GEO did not clarify how a paid locker service or purchased 
content locker service might be different from a ``cloud locker.''
---------------------------------------------------------------------------

    The economic underpinnings of Mr. Johnson's proposals are that 
streaming and broadcasting music, i.e., the access models of music 
consumption, have substituted for (``cannibalized'') music sales. With 
this shift in music consumption, Mr. Johnson opined, users and 
exploiters of the artists' work have continued to prosper as the 
artists' revenue streams have declined. See Johnson CWDT at 36-40.
    Sirius XM did not rebut directly the GEO proposals, but filed 
replies to GEO's proposed findings and conclusions. See generally 
Sirius XM . . . Reply to George Johnson's Proposed Findings . . . 
(Sirius XM Reply to GEO). With one exception,\171\ Sirius XM disputed 
all of GEO's proposed findings and conclusions. With respect to all 
other proposed findings and conclusions, Sirius XM did not uniformly 
dispute the content of GEO's cited material, but argued that the 
citations were inapposite or irrelevant to the SDARS/PSS rate 
proceeding or without factual or legal support. Id., passim. Sirius XM 
argued that GEO's proposals conflated with SDARS the rate 
configurations for different licenses, e.g., Phonorecords and 
Webcasters, without regard for the differences in rate setting 
standards for those configurations and without acknowledging the 
separateness of the record evidence supporting those different rates.
---------------------------------------------------------------------------

    \171\ Sirius XM did not dispute GEO's Proposed Conclusion of Law 
number 24, to wit: ``George D. Johnson is an individual pro se 
singer/songwriter, music publisher and independent sound recording 
creator.'' Sirius XM Reply to GEO at 27.
---------------------------------------------------------------------------

    Music Choice addressed directly the GEO proposals. Mr. David Del 
Beccaro, President and CEO of Music Choice, testified that he could not 
parse the GEO proposals. See Del Beccaro WRT at 65. Mr. Del Beccaro 
pointed out that the GEO rate proposals lacked explanation, 
``benchmark, model, or any other evidence . . . .'' Id. at 66.
    Further, Mr. Del Beccaro took issue with the GEO proposal that 
Music Choice be required to offer a digital download service. As Mr. 
Del Beccaro observed, the digital performance sound recording license 
at issue in this proceeding does not extend to sales of sound 
recordings--physical or digital. Id. Music Choice has not licensed the

[[Page 65253]]

rights necessary to sell phonorecords. Further, Music Choice provided 
retail sales of physical phonorecords (CDs), a business that did not 
require a license from record companies. Ultimately, Music Choice 
abandoned that service because it was not profitable. Id. at 66-67.
    The Judges agree with Sirius XM that GEO's proposed rates and terms 
are unsupported by record evidence. The Judges also agree with the 
Music Choice criticisms of GEO's presentations. GEO's arguments are 
primarily policy arguments beyond the scope of this proceeding. The GEO 
proposed findings, conclusions, and rate proposals are inadequately 
supported in the record.

B. Statutory and Constitutional Considerations

    GEO referred to the constitutional provision giving Congress the 
power to provide for copyrights.\172\ He acknowledged that Congress 
provided for certain ``exclusive rights'' for copyright holders in 
section 106 of the Act. He argued unconvincingly, however, that the 
statutory licenses inappropriately infringe on the exclusive rights 
Congress created. He also questioned whether the Judges, or their 
predecessors whose precedent the Judges consider, were at worst 
confiscating, or at best marginalizing, copyright owners' rights by 
failing to provide for fair compensation. See Johnson CWDT at 6, 13. 
GEO asserted that current statutory royalty rates are ``extremely low 
below-market'' rates. Id. at 13.
---------------------------------------------------------------------------

    \172\ Article I, Section 8, clause 8 of the Constitution gives 
Congress the power ``to promote the progress of science and useful 
arts, by securing for limited times to authors and inventors the 
exclusive right to their respective writings and discoveries.'' U.S. 
Const., Art. I, sec. 8, cl. 8.
---------------------------------------------------------------------------

    GEO made much of the ``full independence'' of the Judges. See, 
e.g., Johnson CWDT at 7; 5/3/17 Tr. at 2244 (Johnson). Mr. Johnson 
appeared to equate judicial independence for the Copyright Royalty 
Judges with disconnection from the dictates of the law. His arguments 
failed to analyze the separate licenses created by Congress or the 
differing standards by which the Judges must set those rates. By 
focusing unduly on ``fair market'' considerations, Mr. Johnson ignores 
the policy factors Congress established for certain licenses in section 
801(b)(1) of the Act. Further, in every rate setting or rate adjustment 
proceeding, the Judges hear testimony from economists and other market 
experts to determine a fair rate for each license under the 
circumstances extant at each license period.
    Notwithstanding the import of Mr. Johnson's (and other's) evidence 
of economic imbalances in the present-day music industry, nothing in 
the Constitution or the Copyright Act empowers the Judges to create new 
law or fill in legislative ``gaps'' arising by the course of commerce. 
Only Congress has that power.

IX. Adjustment for Promotional or Substitutional Effect

    Neither SoundExchange nor Sirius XM proposed an adjustment to the 
rates that they advocated to account for any promotional effect. 
Compare Shapiro WDT at 56 (``good reason'' to conclude promotional 
value from performances on Sirius XM greater than promotional value of 
performances by webcasters, ``I am not able to precisely quantify just 
how much lower the royalty rate would be, so I make no downward 
adjustment to the rate) with Orszag AWDT ]] 97-100 (considered whether 
adjustment was required between target market (Sirius XM) and benchmark 
market (interactive services) with respect to promotion and concluded 
no adjustment necessary).
    Additionally, as the Judges explained in Web IV:

    To the extent that the Judges adopt a rate based on benchmark 
evidence, it is not necessary to make additional adjustments to 
benchmarks to reflect the promotion and substitution factors. The 
Judges hold in this determination, as they have held consistently in 
the past, that the use of benchmarks ``bakes-in'' the contracting 
parties' expectations regarding the promotional and substitutional 
effects of the agreement.

Web IV, 81 FR at 26326

    The Judges have also repeatedly found that relative promotion, not 
absolute promotion/substitution, is the relevant factor in their 
consideration of statutory rates. See SDARS II, 78 FR at 23066-67 
(``Because only the relative difference between the benchmark market 
and the hypothetical target market would necessitate an adjustment, the 
absence of solid empirical evidence of such a difference obviates the 
need for such further adjustment''). Testimony from a SoundExchange 
economic expert in the present proceeding re-confirmed the logic of 
these conclusions in more formal economic terms. See 5/1/17 Tr. 1827 
(Ford); see generally Ford WDT; Written Rebuttal Testimony of George 
Ford, Trial Ex. 41 (Ford WRT). In the present case, the parties' 
position is consistent with these pronouncements regarding relative 
promotion, in that they do not propose a rate adjustment on the basis 
of any relative promotional differences.
    Accordingly, the Judges do not adjust the rates they establish in 
this proceeding to reflect any hypothetical, absolute or relative 
promotional effects arising from performances on Sirius XM.\173\
---------------------------------------------------------------------------

    \173\ There is anecdotal evidence in the record regarding 
promotional effect. The Judges have previously noted the 
insufficiency of anecdotal evidence to support a rate adjustment. In 
this proceeding, however, they find that issue to be moot given that 
the parties' respective experts have not proposed a rate adjustment 
to reflect promotional effect.
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    Further, as discussed elsewhere in this Determination, the 
substitution effects arising from record company licensing of sound 
recordings to Sirius XM is a lynchpin for the setting of the rate in 
this proceeding.

X. The Itemized Section 801(b) Policy Considerations

    As detailed in this Determination, the Judges find that the 15.5% 
of revenue rate arising from the Opportunity Cost approach represents a 
market-based rate that, in its entirety, mitigates the complementary 
oligopoly effects of certain positive opportunity costs embedded within 
it and reflects the parties' existing market power. Further, the record 
in this proceeding does not support any adjustment to the resulting 
rate to account for performances on Sirius having a promotional or 
substitutional effect. Accordingly, the Judges find this 15.5% of 
revenue rate to be an effectively competitive rate, and therefore a 
``reasonable rate'' under 17 U.S.C. 801(b)(1) before consideration of 
the policy factors within that statutory section.
    The Judges now analyze each of the itemized 801(b)(1) policy 
considerations to determine whether they should make any upward or 
downward adjustment in this proceeding and, if so, the magnitude of any 
such adjustment. In this and prior proceedings, the Judges have 
concluded that these four factors cannot necessarily be considered 
separately from one another. See, e.g., SDARS I, 73 FR at 4094. 
Moreover, in the process of identifying the ``reasonable rate'' before 
specifically applying these four itemized factors, the Judges may have 
already considered issues that overlap with the four factors, such that 
any further application of the same considerations would constitute 
improper double-counting of those considerations.
    SoundExchange argued that the first three statutory objectives 
promote policies that are generally advanced through market 
transactions. According to its economic expert, Mr. Orszag, ``market-
based rates are consistent with

[[Page 65254]]

the first three of the 801(b) factors.'' 4/25/17 Tr. 954 (Orszag). If 
that were true, then any attempt by the Judges to adjust a market-based 
rate would be improper or, to the extent the Judges had already 
considered market principles, a form of double-counting, were they to 
use those factors again to adjust the rate.
    By contrast, Sirius XM asserted that, as a matter of law, ``it is 
well established that reasonable 801(b)(1) rates need not correspond to 
market rates.'' SXPFF ] 87 (citing SoundExchange v. Librarian of 
Congress, 571 F.3d 1220, 1224 (D.C. Cir. 2009) (any ``claim that 
[section 801(b)] clearly requires the use of market rates is simply 
wrong''); Recording Indus. Ass'n of Am. v. Librarian of Congress, 176 
F.3d 528, 533 (D.C. Cir. 1999) (same).
    Thus, Sirius XM further asserted that in a proceeding governed by 
the section 801(b)(1) rate standard, ``market-approximating rates'' 
must be further evaluated against the Section 801(b)(1) policy 
objectives in order to arrive at ``reasonable rates'' that comport with 
the statutory command. Id. The Judges do not agree that this 
construction of their statutory charge is legally mandated or otherwise 
necessary. The Judges understand that they may establish ``reasonable 
rates,'' and only thereafter decide whether or how to apply the four 
itemized factors. If the Judges find that a market-based rate \174\ is 
consistent with a ``reasonable rate,'' they may adopt that rate and 
apply the four factors to that rate. And, if the record does not 
support a further adjustment based on an application of the four 
itemized factors, or any of them individually, then the Judges may 
allow their market-based reasonable rate to stand as the new statutory 
rate.
---------------------------------------------------------------------------

    \174\ Although the Judges are not required to utilize market-
based rates, they surely are not prohibited from doing so, as 
discussed supra.
---------------------------------------------------------------------------

    As the foregoing analysis of the parties' proposals makes clear, 
the Judges have found that the 15.5% rate is a ``reasonable rate'' 
derived from a combination of market-based opportunity costs, survey 
evidence and countervailing considerations. Thus, the Judges do not 
consider the four itemized factors in section 801(b)(1) as bearing upon 
the reasonableness of the market-based rate they have already 
identified as ``reasonable.'' Rather, in this case, the Judges consider 
whether these four factors, separately or in combination, require any 
policy-based adjustments of the 15.5% rate and whether the Judges have 
already incorporated those factors into the analysis that led them to 
identify the 15.5% rate.
    Before embarking on an analysis of the parties' separate factor 
arguments, the Judges note an overarching theme in many of those 
discrete arguments. The parties argue broadly that their costs and 
investments are significant (Factor C issues) and that they are 
entitled to a ``fair'' income or return (Factor B issues) that is not 
disruptive of their businesses (Factor D issues), in order to maximize 
the distribution of sound recordings to the public (Factor A issues). 
These arguments echo the historical ambiguity in the creation of the 
itemized section 801(b)(1) factors and the debate between Messrs. 
Nathan and Arnold prior to the adoption of those factors, as discussed 
supra.\175\ Because the historic antecedent of the factors is the 
traditional public utility rate-setting process, the Judges cannot 
easily apply the factors to a determination of rates that is not based 
on a rate of return that accounts for specified costs, invested 
capital, a delineated rate base and a return on invested capital. 
Rather, the arguments in this context are by necessity more directional 
in nature. With this caveat, the Judges examine the parties' evidence 
regarding the need for any adjustment pursuant to the four itemized 
factors in section 801(b)(1).
---------------------------------------------------------------------------

    \175\ See supra, section II.B
---------------------------------------------------------------------------

A. Factor A: Maximizing the Availability of Creative Works to the 
Public

    SoundExchange construed Factor A as calling for royalty rates that 
are sufficiently high to foster the creation of new content, but not so 
high as to jeopardize the ongoing viability of a licensee-service 
``that has gained acceptance among consumers in the marketplace.'' SE 
PFF ]1435. Based on this understanding of Factor A, SoundExchange 
asserts that the market-based rates it has proposed do not require 
adjustment to satisfy the objectives of Factor A.
    In support of this point, SoundExchange first relied on an 
explanation by Professor Willig as to why Factor A is consistent with 
his Ramsey Pricing approach. Willig WDT ] 13 (``The defining objective 
of Ramsey pricing is the maximization of consumer welfare, and this is 
an economic concept fully consistent with the portion[ ] of the Section 
801(b)(1) criteria that call[s] for the maximization of the 
availability of creative works to the public.''); see also 5/2/17 Tr. 
1981 (Willig) (``Ramsey pricing by definition . . . says the price has 
got to be high enough to be financially sustainable on the supply side, 
but balanced across uses in a way that maximizes consumer welfare.''). 
However, because Professor Willig did not identify a proposed rate 
under his Ramsey pricing approach, the Judges do not find that this 
approach compels a Factor A adjustment.
    Nevertheless, Professor Willig did indicate that his Ramsey Pricing 
approach generally demonstrated that the statutory rate should increase 
from the present rate of 11%. Because the reasonable market-based rate 
identified by the Judges of 15.5% is 41% higher than the present rate, 
the Judges see no need to make an additional increase in order to be 
consonant with Professor Willig's directional recommendation arising 
from his Ramsey pricing approach.
    SoundExchange's other economic expert, Mr. Orszag, provided a 
separate reason why SoundExchange's rate proposal was consistent with 
the Factor A principles. He stated that rates that are ``market-based'' 
meet the Factor A criteria because they cause rates to be 
``sufficiently high to incentivize copyright holders to create content, 
as reflected in content distributors' [licensees']--and by extension 
consumers'--willingness to pay for sound recordings.'' Orszag WDT ] 15. 
In addition, Mr. Orszag opined that the presence of streaming services 
operating under market-based rates demonstrates that those ``market-
based rates are not so high as to prevent content distributors from 
earning economic returns sufficiently attractive to induce the 
investments required to transmit content to consumers, to broaden their 
distribution networks, and to develop quality enhancements and a richer 
menu of features and functionality.'' Id. Thus, he concluded that 
``market-based rates will produce rates that are high enough to incent 
artists and labels to create their product,'' and ``are high enough for 
the content distributors to earn sufficiently high returns that they 
will want to distribute that content.'' 4/25/17 Tr. 956-57 (Orszag).
    In support of this argument, SoundExchange noted the many specific 
costly ways in which labels must invest in their businesses, incurring 
repeated ``sunk costs,'' in order to provide a continuing flow of 
recorded music. As SoundExchange noted, the testimony and evidence 
highlight these specific risky and costly investments incurred to sign 
artists, create and produce recordings, manufacture product, market and 
distribute the music, build an audience and fan base, and license the 
copyrighted content to services such as Sirius XM for listening by end 
users. See, e.g., Written Direct Testimony of Jason Gallien, Trial Ex. 
30, at 2 (Gallien WDT).

[[Page 65255]]

    In opposition, Sirius XM correctly argued that Mr. Orszag ``merely 
offers truisms,'' such as that higher revenue encourages record 
companies to make sound recordings available to the public. However, 
Sirius XM noted that SoundExchange does not go beyond this truism to 
``elucidate how properly determined market rates fail to ensure that 
record companies are fairly compensated.'' SXRPFF ] 340.
    The mere (and obvious) fact that record companies incur substantial 
costs is not illuminating, because that fact simply begs the question 
whether rates are sufficient in light of those costs. Moreover, the 
Judges do not acknowledge that SoundExchange's position even rises to 
the level of a ``truism.'' An increase in the royalty rate will not 
necessarily result in an increase in revenue, if the increase causes a 
downstream retail percentage reduction in quantity demanded that is 
greater than a percentage increase in subscription prices.
    The Judges find that a rate properly crafted to reflect an 
effectively competitive market rate will maximize the availability of 
creative works to the public by providing appropriate market 
incentives. Lower rates, ceteris paribus, would result in increased 
distribution but less incentive to produce sound recordings. Higher 
rates, ceteris paribus, would encourage increased production of sound 
recordings but discourage distribution. Nothing in the record indicates 
that, on balance, either an increase or a decrease in the reasonable 
rate of 15.5% would increase the availability to the public of sound 
recordings.
    Further, because the 15.5% rate identified by the Judges is market-
based, the Judges are advancing the general proposition asserted by 
SoundExchange, that the market, properly construed, will balance the 
interests of producers (licensors) and distributors (licensees), 
without an increase in that rate under Factor A. See 5/2/17 Tr. 1956-57 
(Willig) (from economic perspective, factor will ``require rates, 
royalty rates and terms generally that perform the economic function of 
motivating the record companies and the artists to create desirable 
sound recordings . . . [and] at the same time, . . . those rates and 
those terms should motivate . . . the distribution Services, to 
distribute those recordings to the public in a way that reflects 
consumer preferences.'').
    Sirius XM suggested that the record supports a reduction in the 
royalty rate below the present 11% rate. In support of that point, it 
relied on the testimony of Professor Shapiro, who noted that an element 
of providing proper economic incentives to both the creators of sound 
recordings and to Sirius XM to make the necessary investments to 
``maximize the availability of creative works to the public'' is the 
extent to which plays on Sirius XM's satellite radio service promote or 
substitute for other record label revenue streams. Shapiro WDT at 57-
58. The Judges find this argument to be as much a ``truism'' as 
SoundExchange's argument emphasizing the incentivizing effect of higher 
royalty rates, and thus equally unavailing. Moreover, the Judges have 
already incorporated into their rate analysis survey evidence that 
demonstrates the substitution patterns between Sirius XM and other 
distribution channels. In that analysis, the Judges relied on an 
evidentiary roadmap provided to them by Sirius XM, through Professors 
Hauser and Farrell, for the identification and valuation of the 
substitutability of other distribution channels for Sirius XM.
    Finally with regard to Sirius XM's argument, although Professor 
Shapiro asserted that a downward adjustment is warranted because Sirius 
XM is more promotional and less substitutional than non-interactive 
webcasters for other record label revenue streams, he found it too 
difficult to measure the magnitude of such an adjustment. Id. at 58 & 
App. D. Accordingly, he declined to propose such an adjustment. Shapiro 
WDT at 58. The Judges, therefore, have no evidentiary basis to make 
such a downward adjustment, even if they had found that a reduction was 
warranted.
    The Judges interpret the ``maximize'' directive more broadly than 
either party to this proceeding. SoundExchange interpreted maximization 
as an upstream supply issue while Sirius XM interpreted maximization as 
a downstream distribution issue. The Judges must look at both steps in 
the process. Aside from the economic issues the parties argued, there 
is also simply no record evidence that indicates a shortfall in the 
overall production of sound recordings, or in the dissemination of 
sound recordings through Sirius XM or other distribution channels. For 
all these reasons, the Judges find no basis in the record for a policy 
adjustment to the 15.5% ``reasonable rate'' based on Factor A.

B. Factor B: Fair Income/Fair Return Under Existing Market Conditions

    Factor B requires the Judges to balance fair return to licensors 
and fair income to licensees. There is an inherent tension within this 
factor. Further, economic analysis cannot identify royalty rates or a 
division of revenue that is ``fair.'' See 4/25/17 Tr. 957 (Orszag) 
(``Fairness is not a well-defined term in the economics literature.''). 
Economics can, however, provide a framework for a fair process. Id. at 
958 (``Market-based rates are fair in the sense of, as long as they are 
being determined in a workably competitive environment, they are going 
to produce outcomes that are efficient.''). Thus, the Judges analyze 
the Factor B issues with an understanding of the inherent subjectivity 
of the endeavor, and an appreciation for the nuanced distinction 
between a ``fair outcome'' and a ``fair process.''
    Equating the market rate with a rate that provides a fair return, 
SoundExchange argued that the current rate does not afford a fair 
return to copyright owners because it is lower than a market rate. 
Exacerbating this problem, according to SoundExchange, is the decline 
in sales of downloads and physical products, which have made royalty 
revenues from Sirius XM (and other services that offer ``access'' 
rather than ``ownership'') even more important than in the past. See 
Gallien WDT at 3-6. To the extent this argument is simply a plea by 
SoundExchange for rates that subsidize declining business segments, it 
is rejected. As the Judges have said previously with regard to 
services' business models, rates are not set merely to support a 
particular business model. See Web IV, 81 FR at 26329 (the statute 
``neither requires nor permits the Judges to protect any given business 
model proposed or adopted by a market participant''). Likewise in this 
proceeding, the Judges are not obliged to offset, mitigate, or 
subsidize a decline in physical or download sales by setting higher 
royalty rates for satellite radio. Moreover, as Sirius XM correctly 
argued, in this proceeding there is no record evidence that the decline 
in revenues from other distribution channels can be laid at the 
doorstep of Sirius XM and, further, any such decline cannot 
automatically mean that the current level of income received by the 
record companies is not ``fair.'' See SXM RPFF ] 344.
    SoundExchange refined its argument by reformulating its 
substitution/cross-elasticity argument as a basis to raise rates 
pursuant to Factor B. More particularly, noting the self-evident fact 
that consumers have a limited amount of time to listen to music, 
SoundExchange pointed out that, when subscribers tune in to Sirius XM, 
they forego other direct revenue generating services, like Apple Music 
or Spotify, and that may also diminish their purchases of physical 
product and downloads because they spend their music-listening time 
tuned in to Sirius

[[Page 65256]]

XM. Gallien WDT at 7. The Judges reject this argument as a basis to 
adjust the rates pursuant to Factor B. In setting the ``reasonable 
rate'' of 15.5% for an effectively competitive market, the Judges 
examined the survey evidence that demonstrated the relevant 
substitution patterns. The Judges cannot gainfully pursue that same 
issue a second time by reconfiguring it as a basis for making 
adjustments under Factor B.
    Approaching the Factor B issue from the other side of the ledger, 
so to speak, SoundExchange argued that ``Sirius XM earns far more than 
a fair income under the current 11% rate, and will continue to do so 
under SoundExchange's rate proposal.'' SE PFF at 605. In support of 
this conclusion SoundExchange pointed to several facts proffered by 
Professor Lys that demonstrate how and why Sirius XM has realized 
substantial and profitable growth: \176\
---------------------------------------------------------------------------

    \176\ The summary of Professor Lys's exhaustive analysis of 
Sirius XM's financial success lays out SoundExchange's Factor B 
analysis and also demonstrates that the 15.5% rate set by the Judges 
cannot be construed as ``unfair.'' The rate provides the record 
companies with their opportunity costs, a form of return that 
Professor Willig acknowledged to be appropriate, while allowing 
Sirius XM to realize ongoing profits.

    (a) At the time of SDARS I, Sirius and XM were two separate 
companies competing for subscribers based on price, and likewise 
engaged in price competition for non-music content such as sports 
leagues and talk show personalities. However, in July 2008, Sirius 
and XM merged, and the merged entity, Sirius XM, became the sole 
provider of satellite radio in the United States, holding a monopoly 
in this market segment. Lys CWDT ] 43.
    (b) The merger eliminated price competition between the two pre-
merger satellite radio services for subscribers and for non-music 
content, and also allowed the combined company to take advantage of 
the economies of scale that are central to its business model. Lys 
CWDT ] 44.
    (c) Sirius XM's operating costs are predominantly fixed with 
respect to subscriber revenue. These fixed costs include programming 
and content, satellite and transmission, sales and marketing, 
engineering and design, subscriber acquisition costs, and general 
and administrative costs.\177\ Id. ] 45.
---------------------------------------------------------------------------

    \177\ Alternatively, these costs are the same whether one person 
is listening to a Sirius XM broadcast, or millions.
---------------------------------------------------------------------------

    (d) Sirius XM's variable operating costs (i.e., costs that do 
vary with subscriber revenue) are small in comparison, and include 
royalties, customer service, and cost of equipment. See id ] 46; see 
also id. ] 46 n.17 (citation omitted).
    (e) Because of its largely fixed cost structure and its post-
merger market share growth, Sirius XM's profits increased 
dramatically once its sales reached its ``break-even point,'' i.e., 
the point at which its fixed costs are covered. Id. ] 47.
    (f) This growth in profits is reflected in Sirius XM's high 
contribution margin (i.e., the fraction of each additional revenue 
dollar that covers fixed costs or increases profits). Specifically, 
by 2015, Sirius XM achieved a contribution margin of [REDACTED] %, 
meaning that each additional dollar of revenue increases pre-tax net 
income and cash flows by $[REDACTED]. Id.
    (g) Sirius XM's ``free cash flow'' (FCF) (a metric commonly used 
to assess a company's performance and value), captures the amount of 
cash that is available, after necessary business investment 
(including satellite investments), that can be used to pay dividends 
and repurchase shares. In 2012, Sirius XM's FCF was [REDACTED]% of 
EBITDA,\178\ a higher percentage than other large entertainment-
media companies. That is, Sirius XM can distribute [REDACTED]% of 
its EBITDA to its shareholders without affecting its operations.
---------------------------------------------------------------------------

    \178\ EBITDA means earnings before interest, taxes, depreciation 
and amortization.
---------------------------------------------------------------------------

    (h) Looking at FCF over a longer period, over the past decade 
Sirius XM has generated $2.6 billion in such FCF. Since the merger, 
starting in 2009 Sirius XM has recorded seven straight years of 
positive FCF and has over that seven-year period generated $4.91 
billion of FCF. Lys CWDT ]] 91-92. Sirius XM's FCF has increased 
from a deficit of $1.23 billion in 2006 (meaning that the company 
was not generating sufficient cash and needed to rely on external 
funding sources for its operations and investments) to a positive 
$1.32 billion in 2015. This means that after it satisfied its 
investment needs, its operations generated $1.32 billion in cash 
that it could distribute to its investors. Id. ] 55. Cumulatively, 
from 2006-2015, Sirius XM earned $5.9 billion in operating cash 
flows. Id. ] 90.
    (i) Sirius XM's executives trumpet the company's more recent 
performance as ``one of the best growth stories in media,'' and 
conclude that its ``business is thriving''--a claim confirmed by 
Professor Lys's analysis. Id. ] 52 & nn.24-25.
    (j) In the 2009-2015 post-merger period, Sirius XM earned a 
total of $5.6 billion in EBIT.\179\ Similarly, in the period since 
the merger, Sirius XM has generated over $7 billion in adjusted 
EBITDA, an increase from negative $690 million in 2006 to positive 
$1.66 billion in 2015. Lys CWDT ] 54.
---------------------------------------------------------------------------

    \179\ EBIT means earnings before interest and taxes.
---------------------------------------------------------------------------

    (k) Turning from financial to volume metrics, over the past 
decade, Sirius XM has substantially increased its number of 
subscribers, even as it has increased the prices and fees it 
charges. Lys CWDT ] 57; see also 4/26/17 Tr. 1323 (Lys) (Sirius XM's 
historic revenue base). Specifically, over the past decade Sirius 
XM's subscriber base has grown on average [REDACTED]% per year, more 
than doubling from [REDACTED] million subscribers in 2006 to 
[REDACTED] million subscribers at the end of 2015. Lys CWDT ] 59. As 
of March 2016, Sirius XM had over 30 million subscribers. Id. ] 58 & 
n.34.
    (l) Sirius XM's total revenue has grown even faster than the 
growth in the number of its subscribers--from $1.57 billion in 2006 
to $4.57 billion in 2015--a 12.6 percent compounded annual growth 
rate (CAGR). Lys CWDT ] 65. This higher revenue growth resulted from 
Sirius XM's increase in its subscription prices and fee charges that 
occurred contemporaneous with the growth of its subscriber base, 
allowing Sirius XM to realize a 15.8% increase in its ARPU between 
2008 and 2015, corresponding to a compounded annual growth rate of 
1.6%. See id. ] 66, Fig. 11. The table below presents the increase 
in the total effective monthly cost of subscribing to Sirius XM's 
most popular subscription package, the ``Select'' package), i.e., 
combining the subscription fee and the U.S. Music Royalty Fee:

                         Sirius XM Historical Effective Monthly Total Subscription Cost
                                          [Select subscription package]
----------------------------------------------------------------------------------------------------------------
                                                                       Total
              Date                    Nominal       U.S. Music       effective       Increase       % Increase
                                   subscription     royalty fee    subscription
----------------------------------------------------------------------------------------------------------------
1-Jan-06........................          $12.95           $0.00          $12.95             n/a             n/a
29-Jul-09.......................           12.95            1.98           14.93            1.98            15.3
6-Dec-10........................           12.95            1.40           14.35          (0.58)            -3.9
1-Jan-12........................           14.49            1.42           15.91            1.56            10.9
1-Feb-13........................           14.49            1.81           16.30            0.39             2.5
1-Jan-14........................           14.99            1.81           16.80            0.50             3.1
5-Jan-15........................           14.99            2.08           17.07            0.27             1.6
27-Apr-16.......................           15.99            2.22           18.21            1.14             6.7
----------------------------------------------------------------------------------------------------------------


[[Page 65257]]

Id. ] 70, Fig. 12; see also Summary of U.S. Music Royalty Fees by 
Package, Trial Ex. 321 (excerpt from Sirius XM website). As this figure 
shows, Sirius XM's pricing on its Select subscription package has 
increased by 41% over the past decade, from $12.95 in 2006 to $18.21 as 
of April 2016, corresponding to a total increase of $5.26 or a 
compounded annual increase of 3.5%. Lys CWDT ] 71.
    According to Professor Lys, Sirius XM's pricing increases appear to 
have had little effect on demand for its services, as evidenced by the 
essentially non-existent impact of the price increases on subscriber 
``churn'' (defined by Sirius XM as ``the monthly average of self-pay 
deactivations for the period divided by the average number of self-pay 
subscribers for the period''). Sirius XM Holdings, Inc., Proxy 
Statement & 2015 Annual Report, Trial Ex. 372, at 21 (Sirius XM 2015 
Annual Report).\180\
---------------------------------------------------------------------------

    \180\ The only noticeable bump is an increase in churn from 1.8% 
to 2.0% in 2009 when Sirius XM introduced the U.S. Music Royalty 
Fee, resulting in the largest percentage increase in the effective 
subscription price, and coinciding with the 2008-09 recession. Lys 
CWDT ] 73.
---------------------------------------------------------------------------

    Sirius XM's most recent annual performance has been consistent with 
its past post-merger growth and profitability, as evidenced by the 
following points.

    In 2016 Sirius XM set records for subscribers, revenue, adjusted 
EBITDA, and free cash flow, beating its guidance on all of those 
metrics. 5/15/17 Tr. 3759-60 (Meyer).
    In 2016, Sirius XM added more than 1.7 million net subscribers, 
outperforming expectations. It added 1.66 million ``self-pay net 
subscribers,'' also exceeding expectations (Sirius XM's original 
guidance was 1.4 million). Trial Ex. 25, Figs. 43 at 56.
    In 2016, Sirius XM's subscriber level increased by 6%, raising 
its subscribership level to 31.346 million. Lys WRT ] 164.
    In 2016, Sirius XM's 2016 revenue grew by 10% compared to 2015, 
to more than $5 billion; EBITDA grew by 13% to $1.9 billion; FCF per 
share grew 26% to $0.30; and net income grew 46% to $746 million. 
Lys WRT ] 166.

    In sum, SoundExchange argued that there is abundant and undisputed 
evidence that Sirius XM's profitability has grown dramatically--and 
significantly faster than its revenue--indicating an improved ability 
to monetize the operational gains and scale.
    Accordingly, SoundExchange's critical conclusion from Professor 
Lys's exhaustive analysis was this: Sirius XM has been facing a 
relatively inelastic demand, enabling it to increase prices to 
consumers without causing a loss of subscribers. Lys CWDT ] 74.\181\
---------------------------------------------------------------------------

    \181\ Professor Lys also opined that Sirius XM will continue to 
grow across these metrics for all of 2017 and into the foreseeable 
future. See Lys CWDT ]] 152-198. As the Judges have stated 
previously, they are less than sanguine about projections and 
forecasts given the inherent speculative nature of such a process. 
However, as Professor Lys pointed out, his projections in SDARS II 
regarding the future financial performance of Sirius XM were 
accurate, and prior financial forecasts, as well as Sirius XM's own 
internal forecasts, [REDACTED]. See id. These facts suggest that 
there is no present reason to project a scenario in which Sirius 
XM's current level of profitability will fall or will not be 
maintained.
---------------------------------------------------------------------------

    Sirius XM did not challenge the wealth of evidence demonstrating 
its economic, market, and financial success. Rather, Sirius XM 
contended that these measures of Sirius XM's economic position are 
``entirely irrelevant to the rate-setting task at hand.'' Shapiro CWRT 
at 5. More specifically, Sirius XM argued that ``Professor Shapiro has 
demonstrated'' through his direct and rebuttal testimony ``that Sirius 
XM's overall profitability would not be among the variables impacting 
the outcome of a license negotiation in a workably competitive 
market.'' See Shapiro CWRT, App. D. & 24-26.
    Professor Shapiro explained that, in his opinion, it is not the 
overall profits that are relevant in a Factor B analysis, but ``the 
incremental profit f[rom] additional Sirius XM customers, as measured 
by the contribution margin (which takes into account only variable 
costs) that enters the analysis. Shapiro CWRT at 52 (emphasis added). 
Sirius XM noted that its ``contribution margin'' has been essentially 
unchanged over time, and that even Professor Lys acknowledged that the 
contribution margin had ``remained remarkably consistent over time.'' 
See Lys WDT ] 87) (emphasis added).
    Sirius XM sought to impeach Professor Lys with excerpts from his 
testimony in Web IV:

    From the standpoint of economics, a company's ability to pay 
royalties, while still remaining profitable, and the ``willing 
buyer/willing seller'' standard are two very distinct concepts.

See 4/27/17 Tr. 1592-93 (Lys).

    It ``is wrong to suggest that [a service's] current or past 
profitability should be used to determine the royalty rate a willing 
buyer and a willing seller would agree upon.''

See 4/27/17 Tr. 1593 (Lys).

    It was ``incorrect'' to ``suggest[ ] that Pandora's current 
profitability and financial performance determine its ability to pay 
royalties, and that Pandora's ability to pay determines the rates 
the Judges should adopt.''

See 4/27/17 Tr. 1592 (Lys).

    Sirius XM also pointed out that its non-music content costs have 
declined, demonstrating that there is no positive correlation between 
its profitability and its content costs. See Shapiro CWDT at 52-53 & 
Fig. 4.
    In sum, Sirius XM concluded that its potential ability to pay 
higher royalties out of increasing profits is simply irrelevant to the 
question whether it is receiving a ``fair return'' pursuant to Factor 
B.
    The Judges find that Sirius XM's increased profitability does not 
provide an independent basis to adjust the 15.5% identified by the 
Judges. Sirius XM earns sufficient profits, as the only satellite radio 
provider, to allow it to pay the opportunity costs of its service to 
the record companies. Those opportunity costs, properly weighted, 
constitute the building blocks for the 15.5% rate. The evidence, again, 
as detailed by Professor Lys, makes it abundantly clear that Sirius XM, 
through its monopoly of the satellite radio distribution channel, has 
the financial capacity to pay higher rates and still maintain a high 
level of profitability.
    The Judges find no inconsistency with regard to Professor Lys's Web 
IV testimony and his testimony in this proceeding. If a service were 
operating at a loss rather than a profit, the record companies would 
not consider that fact relevant, especially if the service did not add 
new (i.e., non-cannibalizing) listeners who could be monetized by 
subscription or advertising revenues. However, when a service is 
profitable, in an unregulated market, the record companies, empowered 
by their ``must have'' status, can and will seek to acquire as much of 
the surplus (profits) as they can through the bargaining process. As 
explained in this determination (and in Web IV), though, the Judges 
reject a division of profits based on the ``must have'' power of the 
record companies, absent application of an appropriate offsetting 
factor, such as identified in the steering analysis in Web IV or in the 
opportunity cost analysis in this determination.
    Beyond Professor Lys's financial analysis, SoundExchange made 
additional arguments with regard to Factor B that do not aid in the 
Judges' analysis. SoundExchange argued essentially that a fair 
allocation of the revenue attributable to satellite radio will arise 
either from: (1) A Ramsey pricing approach as described by Professor 
Willig; or (2) arm's-length negotiations in a benchmark market such as 
the interactive market suggested by Mr. Orszag. Neither of these points 
supports a Factor B analysis. First,

[[Page 65258]]

Professor Willig did not identify a rate pursuant to his Ramsey pricing 
approach, and he argued that this approach counseled generally for an 
increase in the existing rate (which the Judges have found to be 
appropriate pursuant to their reasonable rate analysis). Mr. Orszag's 
assertion that arm's length negotiations in the interactive market 
demonstrate a fair process (if not necessarily a fair outcome) is 
belied by the fact that: (1) The survey results reached by all survey 
experts demonstrates the inapposite nature of the interactive 
benchmark; and (2) the interactive benchmark is tainted by a 
complementary oligopoly effect that cannot be mitigated, on the present 
record, by a fact-based steering adjustment.
    SoundExchange, again relying on Mr. Orszag, cautioned that the 
Judges should not apply Factor B so as to provide an unjustified 
ceiling on the royalty rate, which could constitute a subsidy to Sirius 
XM. The Judges' 15.5% reasonable rate does not constitute an arbitrary 
ceiling or a subsidy, because it is derived pursuant to the 
``opportunity cost'' approach that, according to Professor Willig, 
resulted in a reasonable rate.\182\
---------------------------------------------------------------------------

    \182\ To be sure, Professor Willig calculated a higher rate 
because he used the diversion ratios in the Dhar Survey, but the 
Modified Dhar Survey (as corrected), with its superior diversion 
ratios, applies the same opportunity cost approach advocated by 
Professor Willig, and even applied his ``Creator Contribution'' 
walk-away values.
---------------------------------------------------------------------------

    Sirius XM found no basis under Factor B to change its proposed 
rate. Shapiro WDT at 58. Of course, the Judges' 15.5% rate is above 
Sirius XM's proposed rate range that extends to 11% (the current rate). 
However, Sirius XM made no arguments that would support a reduction of 
the 15.5% rate pursuant to Factor B. See Shapiro WDT at 58. Sirius XM 
limited its Factor B analysis to the bald assertion that its 
benchmarking analysis (rejected by the Judges) led to a fair return for 
copyright owners and a fair income for copyright users.

C. Factor C: Relative Roles of the Parties

    SoundExchange asserted that, pursuant to Factor C, the statutory 
rate should be above its proffered benchmark, or at least at the high 
end of its benchmark range. In support of this argument, SoundExchange 
pointed to testimony that record companies and artists make substantial 
contributions through their search for artistic talent, a process that 
is long, competitive, and often unsuccessful. See 5/11/17 Tr. at 3542-
43 (Kushner). More particularly, SoundExchange explained that Artist & 
Repertoire (A&R) representatives from labels go to clubs and concerts 
worldwide, listen to thousands of demonstration (demo) recordings, and 
search the internet to identify emerging and undiscovered artists. 
According to SoundExchange, these tasks are labor-intensive, because 
finding musical talent requires people with sufficient industry 
knowledge and experience. Gallien WDT at 8. SoundExchange pointed to a 
2015 RIAA study that found the major labels spent $13.4 billion between 
2003 and 2012 to find new artists and help them reach an audience. 
Written Direct Testimony of Michael Kushner, Trial Ex. 34, ] 77 
(Kushner WDT).
    SoundExchange noted that after record companies incur the foregoing 
costs, they must also incur costs to shape the artists' music and image 
in order to maximize their commercial appeal. Those investments can 
include the costs of dance and vocal lessons, personal stylists, makeup 
artists, trainers, and media training. Many of those investments do not 
yield a financial return. See 5/11/17 Tr. 3542-43 (Kushner) (``[I]f you 
look at the totality of the number of artists we sign and the numbers 
that are successful, clearly the unsuccessful ones outweigh the 
successful ones'').
    SoundExchange further noted that recording companies incur 
substantial additional costs to create recorded works, and to market, 
manufacture, and distribute recorded music.\183\ SoundExchange avers, 
for example, that in 2015 alone, UMG spent $[REDACTED] million on 
recording costs, mastering costs, producer and sampling fees, royalty 
advances, and overhead funding to contracting parties who provide A&R 
services. Gallien WDT at 8. Mr. Kushner testified for Atlantic Records 
that, on an album basis, the recording costs for a maiden album from a 
new artist typically range from $[REDACTED] to $[REDACTED]--and can 
exceed $[REDACTED] for an established artist. Kushner WDT ] 36. If the 
record companies cannot recoup these expenditures and advances from 
sales revenue, they--not the artists or the music services--bear the 
unrecouped cost and foregone profits.\184\
---------------------------------------------------------------------------

    \183\ These costs typically may include the additional expense 
of a producer's salary, studio rental, hiring a sound engineer, 
paying musicians to play with the featured artist, and preparing a 
master recording. See Written Direct Testimony of Bruce Iglauer, 
Trial Ex. 33, at 10-11 (Iglauer WDT); Kushner WDT at ]] 48-50.
    \184\ For example, SoundExchange proffered UMG's 2015 income 
statement, which reflects $[REDACTED] in (1) advances and recording 
costs for new unproven artist signings and (2) write offs of 
investments in established artists, net of recoveries. Gallien WDT 
at 10.
---------------------------------------------------------------------------

    As to marketing costs, Mr. Kushner testified that for Atlantic 
Records, the typical initial U.S. marketing budget for an album cycle 
for a new artist is in the range of $[REDACTED] to $[REDACTED]. Id. ] 
68. In fiscal year 2015, UMG alone spent $[REDACTED] specifically on 
gross marketing costs, as well as $[REDACTED] in overhead costs for its 
various departments that also provided marketing services. For UMG, 
marketing costs included over $[REDACTED] in advertising, $[REDACTED] 
in artists' press and TV appearances, over $[REDACTED] in internet 
marketing & advertising, over $[REDACTED] in radio promotion, and over 
$[REDACTED] in video production costs. With specific reference to 
streaming and playlisting efforts, UMG has also invested in the setup 
costs and personnel to establish a team dedicated to streaming 
marketing and playlisting efforts. Gallien WDT at 13-14.
    Regarding recording companies' manufacturing and distribution 
costs, they remain substantial in spite of the industry's transition 
away from physical media. Because of declining physical product sales, 
physical manufacturing has been declining, but it still carries high 
costs. UMG reported that its manufacturing costs for physical records, 
including costs they advance for pressing and distribution deals, were 
$[REDACTED] in fiscal year 2015. Id. at 14. Digital distribution has 
been increasing, and there is misperception that it is costless to the 
record companies. The reality is that digital distribution is highly 
complex and requires expensive investments. UMG reported that since the 
early 2000s, it has invested over $[REDACTED] in IT infrastructure and 
operating costs, as well as the professionals that today distribute the 
thousands of digital files it provides to hundreds of music services 
and to handle the processing of billions of micro transactions related 
to recognizing digital revenues and calculating the associated royalty 
obligations. Id. at 14. And in 2016 and throughout 2017, UMG will be 
investing in its 3rd generation of digital supply systems and digital 
revenue processing systems at an estimated cost of over $[REDACTED]. 
Id. at 15-16.\185\
---------------------------------------------------------------------------

    \185\ Indies' costs differ in magnitude from those of the 
Majors, but the categories are similar, according to SoundExchange. 
Mr. Iglauer provided qualitative testimony stating that his Indie 
label, Alligator Records, spends substantial time seeking out 
recording artists to sign--listening to demos, attending shows and 
music festivals, reading the music press, and taking referrals from 
other bands, labels, managers, and booking agents. It also devotes 
significant resources to promoting the music and touring of artists 
they have signed, including the payment of recording costs and 
advances. Iglauer WDT at 9.

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[[Page 65259]]

    In sum, SoundExchange asserted that major labels spend billions of 
dollars finding and developing new artists, helping them reach an 
audience, and creating and marketing recorded music.
    Sirius XM gave short shrift to these lengthy descriptions of the 
record companies' various expenses. First, Sirius XM claimed that 
SoundExchange's request for an upward adjustment pursuant to Factor C 
is inconsistent with the latter's prior broad proclamation that the 
first three itemized 801(b)(1) factors are satisfied by market rates. 
Second, Sirius XM noted that the categories of costs that SoundExchange 
has itemized ``have long prevailed in the recording industry,'' and 
that nothing set forth in SoundExchange's Factor C argument provided 
specific reasons to suggest that those costs have changed in a manner 
to support an adjustment upward in the statutory rate. Third, Sirius XM 
noted that SoundExchange did not measure ``the investments made by the 
record companies'' against ``Sirius XM's investments ``and thus did not 
perform the ``relative'' analysis of costs, risks, and other factors 
expressly required by the statutory language. In this criticism, Sirius 
XM also noted parenthetically that SoundExchange did not explain how or 
why particular portions of the record industry's costs should be 
allocable to Sirius XM, rather than other distribution channels.
    Additionally, relying on Professor Shapiro's testimony, Sirius XM 
argued that when the emphasis is placed properly on the ``relative'' 
contributions of the parties, the record companies' cost of creating 
sound recordings, ``is almost certainly significantly less than the 
contribution that Sirius XM plans to make over the 2018-2022 license 
period,'' including the launching of two new satellites and improving 
its repeater network.'' Shapiro WDT at 58. Although he concluded that 
this relative difference points toward reducing the statutory rate, the 
relative balancing ``does not readily lend itself to quantifying'' an 
appropriate downward adjustment. Id.
    Sirius XM also claimed that it contributes additional value through 
its ``delivery network.'' As Professor Shapiro argued: ``[B]y combining 
music, non-music, curation, and a delivery platform all into one 
bundle, Sirius XM is creating significant value for consumers, with 
each piece of the bundle contributing to the overall value of the 
service.'' 4/20/17 Tr. 398-99 (Shapiro) (emphasis added).\186\
---------------------------------------------------------------------------

    \186\ Sirius XM did not address its contribution of this 
additional network value in its Factor C argument. However, the 
Judges find that this issue is best considered in the context of 
Factor C, which broadly addresses relative contributions.
---------------------------------------------------------------------------

    In response, SoundExchange, through Mr. Orszag, asserted that 
Sirius XM's ``delivery platform'' does not add separate value, because 
any value created by that platform flows principally to Sirius XM; that 
is, even under the SoundExchange proposal the record companies receive 
only 23% of Sirius XM's revenue. Therefore, he noted, most of the gains 
flow to Sirius, ``but there is a portion that goes to the labels which 
[provide] a necessary input,'' 4/25/17 Tr. 1034 (Orszag), which is 
``consistent with sound economics.'' Id. at 1034-35 (Orszag) (emphasis 
added).
    In reply, Sirius XM argued that Mr. Orszag's justification for the 
labels' sharing of any value added (via revenue) from Sirius XM's 
unique inputs begs the question as to ``what the split should be,'' and 
fails to ``address whether an adjustment to the [interactive] benchmark 
is warranted to account for Sirius XM's independent contributions to 
the value of its service offerings.'' SXM RPFF ] 62.
    The Judges agree with Sirius XM that the value of its unique inputs 
(relative to interactive and other services), such as its expensive 
satellite and ancillary technical equipment \187\ and its use of live 
``on-air'' talent and other specialized personnel,\188\ are intended 
to--and do--create a product that is differentiated from interactive 
services. However, SoundExchange is correct that inputs do not have 
independent value per se.\189\
---------------------------------------------------------------------------

    \187\ See, e.g., Written Direct Testimony of James E. Meyer, ] 
12 (Meyer WDT); Written Direct Testimony of Bridget Neville, passim 
(Neville WDT); Written Direct Testimony of Terrence Smith, passim 
(Smith WDT).
    \188\ See Blatter WDT ]] 9-10.
    \189\ As Professor Orszag asserted, David Frear, Sirius XM's 
CFO, conceded this point during the SDARS II proceeding: [REDACTED] 
See Orszag WRT ] 53 n.65.
---------------------------------------------------------------------------

    Rather, Sirius XM incurs the cost of these inputs to create a 
differentiated and thus more profitable service. If it succeeds, the 
benefits will be evidenced by higher revenues (in excess of those input 
costs) and will, therefore, result in higher profits. A separate 
accounting of the costs of the Sirius XM satellite radio platform would 
constitute a clear double-counting of value.
    By contrast, if the cost of Sirius XM's investments in its unique 
inputs failed to differentiate its output (i.e., its service) from, 
say, interactive services, then there would be no justification for 
Sirius XM to obtain any recompense for its investments, either through 
an adjustment to the revenue (royalty) base or to the royalty rate. As 
the Judges noted previously, a party is not entitled to a rate simply 
to preserve its particular business model. See, e.g., Web IV, 81 FR at 
26329 (``the statute neither requires nor permits the Judges to protect 
any given business model proposed or adopted by a market 
participant.''). If Sirius XM's unique and expensive inputs have 
marketplace value, those inputs will differentiate its service in an 
attractive manner, resulting in relatively low cross-elasticities and 
own-elasticities, lower opportunity costs for the labels in licensing 
to Sirius XM, and higher profits for Sirius XM. It is through this 
economic transmission mechanism that Sirius XM may extract value from 
its unique inputs--not from a separate valuation of the inputs.
    This argument does not fully address Mr. Orszag's point that the 
labels, as providers of a ``necessary input'' would, in an unregulated 
market, command a portion of the value created by these unique Sirius 
XM inputs. Again, Mr. Orszag concluded that such ``sharing'' is simply 
``sound economics.'' However, that reasoning is ``sound'' only to the 
extent the Judges would find it appropriate to reject Professor 
Willig's opportunity cost approach and adopt instead his Nash 
Bargaining Solution model. For the reasons set forth at length supra, 
the Judges have done precisely the opposite: Accepting his opportunity 
cost approach and rejecting his Nash Bargaining Solution approach.\190\
---------------------------------------------------------------------------

    \190\ The Judges' finding appears consistent with Sirius XM's 
position: ``SoundExchange's attempt to expropriate a portion of the 
value that Sirius XM alone creates is entirely at odds with the 
section 801(b) factors.'' SXM RPFF ] 64. However, Sirius XM's claim 
of expropriation is hyperbolic. By its logic, Sirius XM's use of the 
labels' music likewise would constitute expropriation--of the sound 
recording value that the labels created. The difficult issue is the 
application of the statutory and economic factors to allocate the 
value of the output created by a production function (containing 
sound recordings and a delivery network) that utilizes these 
separate inputs in combination, to cover all costs (including 
opportunity costs) while rewarding the investment in technology that 
leads to innovative product differentiation. The Judges' 15.5% rate 
addresses these various and competing factors in a reasonable 
manner.
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D. Factor D: Minimizing Disruptive Impact on Structure of the 
Industries Involved and Generally Prevailing Industry Practices

    The Judges' long-standing test for whether a rate is ``disruptive'' 
pursuant to Factor D provides that a rate change would be disruptive if 
it ``directly

[[Page 65260]]

produce[s] an adverse impact that is substantial, immediate, and 
irreversible in the short-run because there is insufficient time for 
either the SDARS or the copyright owners to adequately adapt to the 
changed circumstances produced by the rate change and, as a 
consequence, such adverse impacts threaten the viability of the music 
delivery service currently offered to consumers under this license.'' 
SDARS II, 78 FR at 23069 (quoting SDARS I, 73 FR at 4097). Accordingly, 
the Judges apply this standard to the 15.5% rate they have found to be 
reasonable in this proceeding to determine whether the 15.5% rate would 
be disruptive.\191\
---------------------------------------------------------------------------

    \191\ Nothing in the record indicates that the reasonable rate 
of 15.5% identified by the Judges (a 41% rate increase from 11% to 
15.5%) would be disruptive to the record companies, even though it 
is below the 23% rate sought by SoundExchange. See Shapiro WDT at 
Fig. 5 and p. 59 (noting industry data showing that Sirius XM 
accounted for only about 4% of overall record industry revenue in 
2016). Given the 4% figure identified by Professor Shapiro, 23% of 
that percentage equals .9%, and 15% of that 4% equals .6%. The 
difference in revenue to SoundExchange between its percent-of-
revenue proposal and the rate set in this Determination therefore is 
approximately .3% of overall record industry revenue, and thus not 
disruptive within the applicable standard. Accordingly, the Judges 
focus on whether this increase would be disruptive for Sirius XM.
---------------------------------------------------------------------------

    SoundExchange relied on the testimony of Professor Lys, who 
demonstrated that Sirius XM would still earn substantial returns 
(compared to other companies in closely-related industry sectors), even 
if the Judges were to increase the statutory royalty rate to 24%. See 
4/26/16 Tr. 1321-23 (Lys).\192\ First, Professor Lys calculated that 
the pre-tax incremental impact of even a 24% royalty payment (based on 
2015 figures available to him when preparing his direct testimony) was 
$[REDACTED] million and the net after-tax impact would be $[REDACTED] 
million. Lys CWDT ]] 129-30. At those levels, Sirius XM would obtain 
the following financial results:
---------------------------------------------------------------------------

    \192\ The Judges provide this detailed summary of Professor 
Lys's exhaustive analysis of Sirius XM's financial picture not only 
to demonstrate the proper application of an itemized factor, but 
also to underscore that Sirius XM can easily afford to pay the 
market-based reasonable rate of 15.5% crafted by the Judges.

  Sirius XM 2015 Performance Metrics Under 24% Royalty Rate vs. SIC 483
------------------------------------------------------------------------
                                                                Average
                                                                for SIC
                                                    SXM (@24%     483
                Performance metric                   royalty)  broadcast
                                                                radio/TV
                                                                  (%)
------------------------------------------------------------------------
Return on Assets..................................        5.5        3.0
EBITDA Margin.....................................       27.4       19.9
Free Cash Flow Margin.............................       23.0        6.1
------------------------------------------------------------------------

Lys CWDT ]] 132-42 & Fig. 33; see 4/26/17 Tr. 1321-22 (Lys).
    Professor Lys also analyzed Sirius XM's forecasted performance, 
again assuming arguendo that the Judges set the statutory rate at 24% 
of revenue. His analysis shows that, at that rate, the incremental 
after-tax impact on Sirius XM would range between $[REDACTED] million 
in 2018 and $[REDACTED] million in 2021. Professor Lys noted that 
Sirius XM is expecting to perform so well in the future that it could 
easily absorb this higher rate for the SDARS III period, 2018 through 
2022. Lys WRT ] 219. More particularly, under this scenario, Professor 
Lys testified that Sirius XM:

    Would earn between $[REDACTED] and $[REDACTED] in EBITDA in 
every year of the forecast, and would continue growing. Id. ] 220.
    Would earn over $[REDACTED] in net income each year of the 
forecast, and would continue growing. Id. ] 221.
    Would generate over $[REDACTED] in free cash flow almost every 
year of the forecast and would continue growing. Id. ] 222.

    Professor Lys further noted that, even under Sirius XM's own 
internal forecasts, with a royalty rate of 24%, it would remain 
extremely profitable throughout the SDARS III term (2018-22), earning 
$[REDACTED] in EBITDA, $[REDACTED] in net income, and $[REDACTED] in 
free cash flow. Id. ] 223. Additionally, Sirius XM's 2016 [REDACTED] 
indicates that, at the end of the forecasted period (2022), it would 
have a strong balance sheet, with $[REDACTED] in cash and equivalents, 
total assets of $[REDACTED], and shareholder equity of $[REDACTED]. Id. 
] 224.\193\
---------------------------------------------------------------------------

    \193\ The Judges place much less emphasis on projections 
compared with current facts, absent additional proof that the entity 
making the projection has a track record that makes its projection 
credible. However, the Judges note that these projections are 
consistent with [REDACTED].
---------------------------------------------------------------------------

    For these reasons, SoundExchange argued that Sirius XM can 
comfortably afford a rate increase from the current 11% to its proposed 
23% of revenue. As Professor Lys colorfully and emphatically opined: 
[REDACTED]. 4/27/17 Tr. 1391-92 (Lys).
    Professor Lys also examined in great detail Sirius XM's growth in 
equity value compared to broader market metrics such as the S&P 500 and 
the Dow Jones Industrial Average, and noted that Sirius XM far outpaces 
those indices. He further noted that Sirius XM outperforms other firms 
in the noninteractive markets. From these facts, Professor Lys 
concluded that Sirius XM enjoys an ``unfair advantage over competing 
digital music services that pay higher royalty rates.'' SE PFF ] 1584; 
see Lys CWDT ]] 117-124.
    To provide yet another perspective on the financial success of 
Sirius XM, Professor Lys calculated how its performance would have 
changed in 2015 if the statutory rate had been increased above the 10% 
applicable in that year. His calculations demonstrated that:

    Sirius XM could have afforded to have its 2015 statutory royalty 
rate increased from 10.0% to up to 41.9%, 35.9% or 31.4% and still 
earned an average EBITDA level of $735.7 million . . . , $909.5 
million . . . , or $1.037 billion . . . , respectively. While this 
level of the royalty rate would have reduced Sirius XM's EBITDA 
profitability by $921 million, $747 million, and $620 million, 
respectively (from the actual $1,657 million), would have only 
equated Sirius XM's performance with its industry peers' EBITDA 
profitability levels.

Lys CWDT ] 136.

    Sirius XM could afford to have its 2015 statutory royalty rate 
increased from 10.0% to 65.1% and still earn a free cash flow level 
commensurate with SIC 483 of $278.8 million.

Id. ] 138.

    Sirius XM could afford to have its 2015 statutory royalty rate 
increased from the actual 10.0% to 35.0% and still earn an average 
SIC 483-level (in terms of return on assets) net income level of 
$39.6 million.

Id. ] 142.

    In sum, SoundExchange made a compelling case that an increase in 
rates far greater than the 15.5% identified as a reasonable rate by the 
Judges would be easily sustainable for Sirius XM, and therefore not 
disruptive under the Factor D standard as quoted supra. Moreover, 
Sirius XM did not provide any evidence sufficient to question Professor 
Lys's analysis, which indicated that Sirius XM could afford a much 
larger rate increase. Accordingly, the Judges find that, a fortiori, 
Professor Lys's analysis indicates that Sirius XM could also afford a 
smaller increase, to the 15.5% rate determined by the Judges.\194\
---------------------------------------------------------------------------

    \194\ SoundExchange also asserts that Sirius XM has paid less 
than an appropriate rate in previous rate terms. See SEPFF ]] 1598-
1606 (and record citations therein). However, the Judges do not 
conclude that, as a matter of law, they can set rates for a 
forthcoming period that reimburse a licensor for any alleged 
underpayments caused by a purported error in the statutory rate for 
a past rate period.
---------------------------------------------------------------------------

XI. Terms

    Besides seeking a revision of the royalty rates for the 2018-22 
rate period, the participants proposed certain additional changes to 
the extant regulations. The final regulations appended to this 
determination reflect

[[Page 65261]]

the Judges' decisions on points that were in controversy. For the 
reasons detailed below,\195\ the Judges adopted some of the proposed 
changes and declined to adopt others, as indicated in the final 
regulatory language.
---------------------------------------------------------------------------

    \195\ The Judges do not provide narrative discussion about every 
detail of the regulatory changes; rather, they concentrate on the 
areas of legally significant controversy.
---------------------------------------------------------------------------

A. Generally Applicable Terms

1. Advance Payment and Minimum Fee
    SoundExchange did not propose any substantive change to the current 
ephemeral royalty minimum fee of $100,000 per year, which is creditable 
to ephemeral royalty payments for the relevant year (37 CFR 382.3(b)). 
SE PFF 85. SoundExchange sought to designate the $100,000 annual 
advance payment as the minimum fee for use of the section 112 Ephemeral 
License by SDARS and PSS. Under SoundExchange's proposal, the advance 
payment would be applied first to section 112 royalties due, and the 
balance, if any, would be nonrefundable and not applicable to a 
subsequent year's license. Music Choice argued rightly that section 114 
does not provide for a minimum fee for SDARS or PSS. Compare 17 U.S.C. 
114 (f)(1)(A) with section 114(f)(2)(A).\196\ Section 112 does, 
however, require the Judges to set a minimum fee for ``each type of 
service offered by transmitting organizations'' using the ephemeral 
license. See 17 U.S.C. 112(e)(3).
---------------------------------------------------------------------------

    \196\ The extant regulation setting the PSS advance payment does 
not mention a ``minimum fee'' but it does limit application of the 
advance payment to ephemeral license royalties and prohibit rollover 
of any portion of the advance payment to subsequent royalty years. 
See 37 CFR 382.3(b) (2016). Perversely, the current regulation 
establishing the $100,000 advance payment by SDARS is entitled 
``Ephemeral Recordings Minimum Fee.'' See 37 CFR 382.12(c) (2016). 
Nothing in the subsection mentions a minimum fee, however. Id.
---------------------------------------------------------------------------

    By agreement of the parties and in conformity with prior rate 
periods, the section 112 ephemeral license royalty fee is set at a five 
percent portion of the total bundled royalty for both section 112 and 
section 114 and is included in that bundled royalty payment. Music 
Choice contended that in SDARS II, SoundExchange and Music Choice 
stipulated to advance payment language that would have allowed the full 
advance payment to be creditable to the PSS's entire royalty payment, 
rather than to its ephemeral payment only. MC PFF ] 554. According to 
Music Choice, the stipulated language was changed in the final rule 
(i.e., the advance payment is creditable only to the ephemeral royalty 
payment) with no explanation or justification. Music Choice asserted 
that the language SoundExchange and Music Choice stipulated to in SDARS 
II should be adopted and SoundExchange provided no rationale for 
retaining the current language. MC PFF ]] 556-57. SoundExchange did not 
appear to dispute Music Choice's assessment that the extant recoupment 
provision differs from what the parties had stipulated to and has not 
provided a compelling reason to retain the current offset provision for 
PSSs. See, e.g., 5/10/17 Tr. 3308-13 (Bender). Therefore, the Judges 
adopt the minimum fee language Music Choice proposes.
    It would seem incongruous to require an advance payment for section 
114 and section 112 royalties in the aggregate but to require the 
entirety of that payment to be applied as a ``minimum fee'' for the 
ephemeral license. No participant objects to the $100,000 advance 
royalty payment. The Judges have no basis upon which they could 
allocate 100% of that payment to the ephemeral license.
    To comply with the statutory requirement that they set a minimum 
fee for use of the section 112 ephemeral license by transmission 
services, viz., SDARS and PSS, the Judges set the section 112 minimum 
fee at five percent of the advance payment, or $5,000, for each type of 
SDARS or PSS service for which the Judges establish a different section 
114 performance royalty. SoundExchange must, thereafter, apply the 
remaining amount of the advance payment, after application of $5,000 
per type of service to ephemeral licenses, to section 114 royalties.
2. Definitions
    Music Choice objected to the placement of ``Definitions'' at the 
end of each subpart of the regulations. The Judges agree with Music 
Choice that the placement seems counterintuitive. Definitions will 
migrate to the beginning of each subpart. In addition, Gross Revenues 
calculations will migrate from the Definitions section to the services' 
respective subparts.
a. GAAP
    The parties were in essential agreement regarding imposing a U.S. 
geographical limitation in the definition of GAAP. Sirius XM asked the 
Judges to apply a temporal element to the definition requiring 
application of the version of GAAP in effect ``during the month when 
the performances giving rise to a Licensee's royalty payment obligation 
were transmitted.'' SoundExchange countered that a more definite time 
limit would be preferable, viz., ``on the last day of the accounting 
period to which the subject payment relates'' or ``the date payment 
[was] due.'' The Judges adopt the definitive date for choosing GAAP 
principles as the date payment was due.
b. Qualified Auditor
    In prior iterations of royalty rate regulations relating to various 
licenses, the Judges noted the repetition of the phrase ``independent 
and qualified auditor.'' In their Web IV determination, the Judges cut 
the verbiage by 50% by defining a Qualified Auditor to be one that is 
independent. In this proceeding, the parties have proposed language to 
assure both the qualification and the independence of any auditor 
working to verify royalty payment and distribution.
    In a slight departure from the Web IV language, the Judges 
eliminate the Web IV requirement for an auditor to be licensed in the 
state in which the audit is conducted. In this proceeding, the Judges 
accept that Certified Public Accountants are governed by a code of 
ethics that permits them the ``mobility'' to practice across state 
lines. To remove any doubt, the Judges refer to the Code of 
Professional Conduct adopted by the American Institute of Certified 
Public Accountants.
c. Additional Definitions
    On their own motion, the Judges added ``Payor'' and ``Verifying 
Entity'' as defined terms. These terms were added during the revamping 
of regulations following the Web IV proceeding because they clarified 
that auditing rights did not reside exclusively in the Collective. In 
this iteration, the Judges clarify the terms they added to convey this 
reciprocal audit right.
    The Judges also amended SoundExchange's proposed definition of 
``Licensee'' for clarity.
3. Regulatory Terms
a. Section 382.3(a) 197--Payment to the Collective
---------------------------------------------------------------------------

    \197\ Section references are to the new numbering system that 
results from reorganizing the regulations in part 382.
---------------------------------------------------------------------------

    In general, any due date in federal litigation that falls on a 
Saturday, Sunday, or federal holiday is tolled until the next following 
business day. The Judges regulations currently adopt this convention as 
a general procedural rule when discussing litigation filing deadlines. 
See 37 CFR 350.5. The Judges see no reason not to adopt the suggestion 
of Sirius XM to enunciate the same rule when referring to royalty 
payment due dates.

[[Page 65262]]

b. Section 382.4(a)(3)--Signature
    In updating the royalty regulations after the Web IV proceeding, 
the Judges clarified the capacity of signers of Statements of Account. 
Music Choice objected to reconfiguration of the Web IV language 
suggested by SoundExchange. The Judges agree with Music Choice that the 
language in the Web IV regulation is more appropriate for these 
participants.\198\
---------------------------------------------------------------------------

    \198\ The Judges are not swayed by Music Choice's plaint that it 
could not have an authorized signer because Music Choice is a 
partnership made up of corporations. Music Choice's sophisticated 
representatives can figure out how the partnership may designate an 
authorized signer.
---------------------------------------------------------------------------

c. Section 382.5(a)(2)--Best Efforts
    SoundExchange is obliged to use ``best efforts'' to locate 
Copyright Owners and Performers entitled to receive a distribution of 
royalty payments. The Judges' regulations need not specify the 
specifics of those ``best efforts.''
d. Section 382.5(b)--Unclaimed Funds
    At the conclusion of the Web IV proceeding, the Judges adopted 
language proposed by one of the Licensees directing SoundExchange to 
treat unclaimed funds in accordance with federal, state, or state 
common law. SoundExchange argued against this provision seeking to 
retain permission to apply unclaimed funds to administrative expenses. 
The Judges conclude that governance of applicable law will provide more 
transparency regarding the disposition of unclaimed funds.
e. Section 382.6(c)(3)--Outside Counsel
    SoundExchange proposed a change to the rule regarding dissemination 
and use of confidential information relating to royalty collection and 
distribution. Music Choice objected to the additional language 
SoundExchange proposed and the Judges agree with Music Choice. 
SoundExchange is required to use and analyze sensitive business 
information in its administration of royalty collection and 
distribution. On occasion, SoundExchange might employ consultants or 
experts to assist in that effort or in the auditing of the 
administrative systems.
    SoundExchange sought to allow outside counsel access to 
confidential information ``for the purpose of performing their duties 
during the ordinary course of their work.'' This dissemination of 
confidential information is not sufficiently constrained to limit it to 
collection and distribution of royalty payments. The notion of outside 
counsel obtaining the sensitive information ``in the ordinary course of 
their work'' is too broad. The Judges will not grant that privilege. 
Outside counsel has express authority to see confidential information 
when acting on behalf of the Collective for ``verification of a . . . 
statement of account'' or on behalf of a Copyright Owner or Performer 
for purposes of ``verification of royalty distributions . . . .'' This 
permission is sufficient.\199\
---------------------------------------------------------------------------

    \199\ Further, in a litigated rate proceeding, outside counsel 
are entitled to obtain confidential information without signing a 
non-disclosure agreement pursuant to a Protective Order specific to 
each proceeding.
---------------------------------------------------------------------------

f. Section 382.7(c)--Notice of Intent To Audit
    SoundExchange requested that the Judges change the requirement that 
a Verifying Entity ``deliver'' a copy of its filed Notice of Intent to 
Audit to the Payor to a requirement that the Verifying Entity ``send'' 
the notice. Music Choice defended the term ``delivery'' because it 
provides ``protections'' to the PSS. See MCRFF at 323. The Judges 
conclude that this language issue is a solution in search of a problem. 
The language will remain unchanged.
g. Section 382.7(d)--The Audit
    Music Choice and SoundExchange disagreed regarding language 
SoundExchange sought to add to the provision that permits a licensee to 
perform its own, independent audit.\200\ SoundExchange asked the Judges 
to add the qualifier ``with respect to the information that is within 
the scope of the audit'' to describe an acceptable ``defensive audit.'' 
This qualifying language is in the current regulation relating to 
audits of SDARS and webcasters. The Judges see no reason not to make it 
equally applicable to PSS. A report of a Qualified Auditor will include 
a description of the scope of the audit and if the scope of the 
defensive audit is too narrow to meet the specific needs of 
SoundExchange, then SoundExchange should be permitted to round out the 
findings with its own audit, limited to the points omitted from the 
scope of the defensive audit.
---------------------------------------------------------------------------

    \200\ Music Choice uses the term ``defensive audit'' for this 
procedure.
---------------------------------------------------------------------------

h. Section 382.7(f)--Issuance of Audit Report
    On their own motion, the Judges change the word ``rendering'' to 
the word ``issuing'' for clarity.
i. Section 382.7(g)--Interest on Underpayments Discovered by Audit
    The current regulations do not provide for a specific interest 
accrual on underpayments discovered by audit. Sirius XM requested that 
the Judges add a provision setting interest on underpayments discovered 
by audit at the federal post-judgment rate in 28 U.S.C. 1961. 
SoundExchange urged applying the late payment interest rate of 1.5% per 
month, compounded monthly. Sirius XM requested that the federal post-
judgment rate that it seeks to be applied to late payments also be 
applied to underpayments and overpayments discovered by audit. However, 
Sirius XM opposed as punitive the use of SoundExchange's proposed 1.5% 
per month interest rate, noting that audits may be delayed by up to 
three years, while interest accrues. Barry WDT ] 8.
    The proposed regulations the Judges adopt in this proceeding 
utilize the federal post-judgment rate rather than the more punitive 
1.5% per month rate. Audits can uncover good faith errors as well as 
bad faith manipulations, and the Judges do not find that a punitive 
interest rate, spanning up to three years on underpayments, is 
appropriate in such a circumstance.
j. Section 382.7(h)--Cost Shifting
    Current SDARS/PSS regulations provide that the Verifying Entity 
bears the cost of an audit, unless the auditor finds an underpayment of 
sufficient magnitude to justify shifting responsibility for payment to 
the Payor. For PSS, the underpayment that triggers cost-shifting 
currently is 5%. For SDARS, the underpayment that triggers cost-
shifting is 10%.\201\ Music Choice sought to equalize the cost-shifting 
threshold, making all services liable if an audit discrepancy reaches 
10%. SoundExchange argued that cost-shifting should occur when an 
auditor discovers underpayment of 5% for PSS or SDARS. The rationale is 
that the absolute value of SDARS royalty payments justifies reducing 
the trigger.
---------------------------------------------------------------------------

    \201\ For Webcasters, the costs of the audit shift to the Payor 
when an underpayment equals 10% or more.
---------------------------------------------------------------------------

    The Judges are unconvinced that absolute payment amounts are a 
sufficient basis to change the cost-shifting trigger. Further, the 
Judges can find no evidentiary basis to change the cost-shifting 
threshold when all participants in this proceeding indicate that cost-
shifting has yet to occur at the current thresholds.

[[Page 65263]]

k. Sections 382.23(a) and (b)
    SoundExchange proposed changes to the methodology for Sirius XM to 
calculate the direct license share and the pre-1972 license share. 
Besides inserting language relating to Aggregate Tuning Hours (ATH) 
data, SoundExchange sought to impose a requirement on Sirius XM to 
report that usage data for every eligible track it claims as a directly 
licensed or pre-1972 sound recording for which Sirius XM seeks a 
royalty adjustment. Sirius XM contended that current reporting 
requirements, based on Reference Channel metrics are sufficient to 
support the royalty adjustments it takes for these exempt sound 
recordings.
    As the Judges decline to adopt the additional ATH language 
requested by SoundExchange, they see no basis to impose the additional 
reporting requirements on Sirius XM at this time.
l. Proposed Section--Distribution of SDARS Royalties
    SoundExchange proposed a new section 382.22 adding language to the 
regulations that would permit it to adjust its distribution model by 
reference to ATH if and when Sirius XM becomes able to track listener 
usage of its satellite radio service. Sirius XM countered that it 
anticipates offering next-generation technology within the rate period 
at issue, but that this developing technology will not be sufficiently 
reliable or have sufficient market saturation to make any reports of 
its usage reliable. See 5/17/17 Tr. 4358 (Barry).
    Given the contingent nature of both the launch and the saturation 
of Sirius XM's anticipated technological advances, the Judges decline 
to adopt contingency regulations at this time.
m. Proposed Section--Finality of Audit Results
    Sirius XM proposed an additional subsection for the audit 
provisions to establish the finality of disputed audit reports. Sirius 
XM sought to establish a two-year statute of limitations for disputed 
audit findings after which the Licensee's calculations would be deemed 
binding and final, unless the Collective initiated a legal action 
before the running of that proposed limitations period.
    SoundExchange objected to the creation of this statute of 
limitations, asserting that the change Sirius XM requests would have 
the effect of overriding the three-year statute of limitations provided 
for in the Copyright Act. As SoundExchange argued, the Judges do not 
have the authority to overrule a statutory provision by regulation.
    The Judges see no reason to establish a statute of limitations in 
the context of rate setting proceedings where the Act does not provide 
for one. Further, any pursuit of remedies relating to audit findings 
would be outside the Judges' jurisdiction and the Judges would be 
overstepping to attempt to impose a limitation of actions over which 
they have no authority.

B. Gross Revenues

    In this proceeding, SoundExchange proposed a per-subscriber rate 
structure for PSS and proffered PSS regulations consistent with its 
proposed rate structure. Accordingly, SoundExchange proposed to place 
its definition of ``Gross Revenues'' only in ``Subpart C,'' the subpart 
regarding SDARS. The Judges have determined that PSS rates shall 
continue to be calculated on a percent-of-revenue basis. Because the 
business models of SDARS and PSS are different, however, the Judges 
maintain separate elements for the calculation of the respective Gross 
Revenues bases for PSS and SDARS.
    Neither Music Choice nor SoundExchange proposed a change to the 
current definition of Gross Revenues applicable to PSS. The Judges 
adopt that term to describe the method of calculating PSS royalties for 
the 2018 to 2022 period.
    Sirius XM and SoundExchange proposed essentially the same 
definition to establish the SDARS base for Gross Revenues. Their 
substantive differences arose in the nature and explication of 
permissible exclusions from that base.\202\ In adopting the definition 
applicable to the license period at issue in this proceeding, the 
Judges modified SoundExchange's proposed language to eliminate 
ambiguity \203\ and to effect the decisions detailed below.
---------------------------------------------------------------------------

    \202\ Both SoundExchange and Sirius XM presented proposals to 
resolve long-standing controversies that were brought into focus by 
the primary jurisdiction referral of the questions from the D.C. 
District Court. The need for the referral arose in SoundExchange v. 
Sirius XM, 65 F. Supp. 3d 150 (D.D.C. 2014). In September 2017, the 
Judges issued their amended ruling on the referred questions. See 
Amended Restricted Ruling on Regulatory Interpretation Referred by 
the United States District Court for the District of Columbia, No. 
2006-1 CRB DSTRA (20017-12) (Sept. 11, 2017). (Ruling on Referred 
Questions). The Judges resolve the same controversies in this 
proceeding in conformity with that Ruling.
    \203\ In constructing its proposed definition of Gross Revenues, 
SoundExchange began with a limited definition of what to include in 
the base: Subscription revenues and ad revenues including those 
categories of revenues if they were paid to a parent, subsidiary, or 
division of the Licensee. SoundExchange then listed types of revenue 
that should be excluded from the base ``to the extent otherwise 
included'' in the definition of the base. The result is in the 
nature of a double-negative configuration. For example, equipment 
sales income is NOT included in the revenue base, but the exclusion 
of equipment sales revenues would apply only ``to the extent [those 
equipment sales revenues were] otherwise included'' in the base. The 
better approach is to retain the current regulatory language, which 
states simply, ``Gross Revenues shall exclude . . . .''
---------------------------------------------------------------------------

    SoundExchange proposed to amend the definition of ``Gross 
Revenues'' currently found in 37 CFR 382.11 to confirm that revenue 
from non-music offerings ``offered for a separate charge'' shall be 
excludable only when those offerings are ``provided on a standalone 
basis.'' Bender WDT at 22. SoundExchange did not view this new proposed 
language as a substantive deviation from the existing regulations, but 
rather made the proposal ``[p]urely [as] a clarification to language 
that we had previously thought was sufficient.'' 5/10/17 Tr. 3184 
(Bender).
    SoundExchange recounted that, since SDARS I, it has consistently 
understood that the references to a ``separate charge'' in current 
paragraph (3)(vi)(A) and (B) were unambiguous. See SDARS I, 73 FR at 
4087 (explaining that the ``gross revenues'' definition ``excludes 
monies attributable to premium channels of nonmusic programming that 
are offered for a charge separate from the general subscription charge 
for the service.''). See id. at 4081 (noting that, with regard to 
``data services,'' the ``separate charge'' language was added by the 
Judges ``to make clear that this portion of the definition dealing with 
data services does not contemplate an exclusion of revenues from such 
data services, where such data services are not offered for a separate 
charge from the basic subscription product's revenues.''). 
Additionally, SoundExchange pointed out that, in SDARS II, the Judges 
reiterated the necessity of a ``separate charge,'' ``stress[ing] that 
the exclusion is available only to the extent that the channels, 
programming, products and/or other services are offered for a separate 
charge.'' SDARS II, 78 FR at 23072 n.45.\204\
---------------------------------------------------------------------------

    \204\ SoundExchange asserted that its auditor alerted it to the 
fact that, throughout the SDARS I period (at least), Sirius XM was 
[REDACTED]. Trial Ex. 101 at 5-6, Schedule 3. As of the time 
SoundExchange filed its direct case in the present proceeding, 
Sirius XM continued to assert that the ``separate charge'' language 
permitted deduction of an allocated part of its Premiere package. 
Ruling on Referred Questions at 17.
---------------------------------------------------------------------------

    Subsequent to the filing of direct cases in this proceeding, the 
Judges decided that ``the language in the revenue exclusion described 
in subsection (vi)(B) did not permit Sirius XM to exclude from the 
Gross Revenues

[[Page 65264]]

royalty base the price difference, i.e., the Upcharge, between the 
Premier package and the Basic package.'' Amended Restricted Ruling on 
Regulatory Interpretation Referred by the United States District Court 
for the District of Columbia at 17, No. 2006-1 CRB DSTRA (2007-12) 
(Ruling on Referred Questions). Given that decision, SoundExchange 
noted that its proposed clarification may be unnecessary. Nonetheless, 
in the interest of clarity, SoundExchange urged the Judges to ``confirm 
again'' their position as to the meaning of the regulatory language 
concerning exclusions to gross revenues. Bender WDT at 22.
    Sirius XM, conversely, criticized the current regulatory language 
that limits the exclusion to revenue recognized for the provision of 
data services and non-music channels, programming, products and/or 
other services to those instances in which the subject programming is 
offered for a ``separate charge.'' Sirius XM proposed to strike the 
longstanding ``separate charge'' requirement and add new language to 
the Gross Revenues definition allowing allocation of all bundle revenue 
regardless of whether the components of the bundle are offered for a 
separate charge. That proposed language specifies that the exclusion to 
be taken in the case of any bundle is ``the difference between: (a) the 
stated sale price of the bundle, minus (b) the stated sale price of the 
bundle multiplied by a fraction, the numerator of which is the publicly 
stated retail price of the standard music/non-music package when sold 
on a standalone and undiscounted basis, and the denominator of which is 
the publicly stated retail price of the bundle when sold on a 
standalone and undiscounted basis.'' Sirius XM First Amended Proposed 
Rates and Terms at 3 (Feb. 17, 2017); 5/17/17 Tr. 4342-48 (Barry); 
Barry WRT ] 21.
    Sirius XM had no choice but to acknowledge that its proposal fails 
to address the ``economic indeterminacy'' of its bundling approach. In 
the Ruling on Referred Questions, the Judges held that--to use Sirius 
XM's own words--``the difference between the larger bundle price and 
the Select package price may not in all cases reliably measure the 
economic value of the additional programming to consumers, at least 
absent some objective evidence of the market value of that additional 
programming.'' SXM PFF ] 440.
    Sirius XM sought to minimize the importance of this acknowledged 
economic indeterminacy by noting the importance of bundling to Sirius 
XM's business model and by pointing out the ubiquity of bundling by 
many major businesses. Barry WRT ]] 12-18 & n.6. The Judges recognize 
the importance of product bundling as described by Mr. Barry, both for 
Sirius XM and numerous retailers of multiple products. As the Judges 
explained at length in the Ruling on Referred Questions, such bundling 
is a common form of price discrimination that increases revenue. That 
is, sellers can induce buyers/subscribers to reveal their Willingness 
to Pay (WTP) and pay more through bundling.
    In a context in which the retailers pay for their inputs on a per 
unit basis, bundled retail pricing is benign, because input suppliers 
would be indifferent to downstream pricing and bundling. However, when 
the input suppler, as here, is paid as a percent of retail revenue, and 
the bundled revenue consists of some revenue attributable to the 
royalty base and other revenue excluded from the royalty base, the 
economic indeterminacy of the revenue attributable to each bucket 
creates a measurement problem, absent further information regarding the 
WTP of buyers/subscribers to the bundle.
    Nonetheless, Sirius XM urged that the ``practical benefits'' of its 
proposal outweigh such economic indeterminacy. The Judges disagree and 
reaffirm their conclusions in the Ruling on Referred Questions arising 
from the SDARS I proceeding. As Mr. Barry made clear, such bundling was 
undertaken to increase Sirius XM's revenues and it would be reasonable 
to assume that Sirius XM has information relevant to the economic 
allocation of the bundled revenue. However, Sirius XM presented no such 
evidence at the hearing. Sirius XM must bear the burden of providing 
evidence that might mitigate the acknowledged ``economic 
indeterminacy'' problem inherent in bundling, because any such evidence 
would be in its possession, not in the possession of SoundExchange or 
the record companies. If Sirius XM lacks allocation information and 
prices its bundles without that data, it cannot assert ``practical 
benefits'' as grounds for subjecting licensors to the acknowledged 
economic indeterminacy of the revenue split.
    For all of the reasons stated, and based upon the Judges' analysis 
in the Ruling on Referred Questions, the Judges reject Sirius XM's 
attempts to rewrite the regulations to reach a contrary result. Because 
the Judges are reaffirming here their Ruling on Referred Questions, 
which confirmed the meaning of the present regulatory definition of 
Gross Revenues, they find (as SoundExchange itself anticipated) no need 
to amend the text of the regulatory definition. Accordingly, 
SoundExchange's request for a change in that definitional language is 
rejected as moot.
    Finally, Sirius XM proposed a change to the prefatory language in 
the exclusion from ``Revenues recognized by Licensee for the provision 
of'' to the simpler ``Licensee revenues for the provision of.'' (That 
language is set forth in forthcoming Sec.  382.22(b)(7)). As Mr. Barry 
explained, this is not meant to imply that Sirius XM can exclude 
revenues that have not been recognized. Rather, it is merely intended 
to avoid SoundExchange's perpetuating the argument (as addressed and 
rejected by the Judges in the recent litigation regarding the SDARS I 
period) that Sirius XM could not exclude revenue for portions of a 
bundle because those items were not separate units of accounting under 
GAAP (and the revenue for those items therefore was not 
``recognized''). Barry WRT ] 20 n.8.
    SoundExchange argued that there is no reason to delete the 
reference to ``[r]evenues recognized'' in the preamble, and some risk 
in doing so. SE Response to SXM PFF ] 442. However, SoundExchange did 
not cite to the record for this assertion of risk, nor did it identify 
that alleged risk. SoundExchange also noted that, at the hearing, Mr. 
Barry acknowledged his understanding that revenue would need to be 
``recognized'' to be excluded. 5/17/17 Tr. 4401-02 (Barry). Thus, 
SoundExchange concluded that deleting the reference to revenue 
recognition would create the implication that that is not the case.
    The Judges find that these differences can be bridged. The language 
at 382.22(b)(7) will read, ``Revenues recognized by Licensee (or 
otherwise received by Licensee if no GAAP ``recognition'' principles 
are applicable) for the provision of . . . .''

C. Ephemeral License Terms

    The participants in the present proceeding raised two issues 
relating to the section 112 Ephemeral Recordings license. The first 
issue was raised by Music Choice regarding the valuation of the 
ephemeral license. The second controversy between SoundExchange and 
Music Choice came to light in response to SoundExchange's proposed 
revisions to Sec. Sec.  382.3(b) and 382.12(c) regarding advance 
payments and minimum payments and is discussed supra, section XI.A.1. 
SoundExchange contended that the record in the proceeding 
``unanimously'' supports SoundExchange's proposal of a bundled rate for 
both the Section 112(e) and 114 rights, 5% of which should be allocated 
as the Section 112(e) royalty for the

[[Page 65265]]

making of ephemeral copies and the remaining 95% of which should be 
allocated as the Section 114 performance royalty. SoundExchange stated 
that ``[t]he parties agree in substance concerning this matter.'' SX 
PFFCL ] 2369. SoundExchange contended that ``it appears that both 
SoundExchange and Music Choice agree that the Judges should set some 
kind of an overall royalty payment and allocate it 95%/5%.'' SX PFFCL ] 
2373.
    Sirius XM mirrored SoundExchange's proposal. See SXM PFFCL at 1. 
Music Choice argued, however, that SoundExchange did not demonstrate 
that ephemeral copies have any independent value. See Del Beccaro WDT 
at 46-47 (``I am unaware of any marketplace context in which the record 
labels seek, or get, a separate payment just for ephemeral copies.''). 
Nevertheless, Music Choice acknowledged that the ephemeral license has 
been and can be bundled with the sound recording performance license, 
and took no position on SoundExchange's proposal to continue the 
current apportionment between the performance and ephemeral copying 
license. MC PFF ]551.
    SoundExchange, Sirius XM, and Music Choice agreed that a portion of 
the overall PSS royalties should be attributed to the ephemeral copying 
license. None of them suggested that the overall PSS royalty rate 
should be increased to account for ephemeral copying royalties. 
SoundExchange and Sirius XM proposed that the current 5% allocation of 
overall royalties to the section 112(e) license should continue in the 
upcoming rate period, and Music Choice took no position on the 
allocation. The only apparent issue concerning the ephemeral 
reproduction license is that Music Choice asserted that that license 
has no ``independent value,'' MC PFF at ]550 (emphasis added), while 
SoundExchange contended that ephemeral copies do ``have economic value 
. . . .'' Designated Web III Written Direct Testimony of Dr. George S. 
Ford, Trial Ex. 51, at 9 (Ford Web III WDT). Music Choice did not 
contend that the ephemeral copies have no economic value--only that the 
ephemeral copies have no economic value independent of the Section 114 
license. Music Choice's position was inconsistent with neither 
SoundExchange's contention that the ephemeral copying does have 
economic value, nor a bundled rate allocated between the two licenses.
    To support both the bundled rate and the proposed 5% allocation to 
the ephemeral license, SoundExchange relied on the designated testimony 
of Dr. George Ford from the Web III proceeding. See generally Ford Web 
III WDT; see also Web III, 76 FR at 13042 (``The testimony offered by 
SoundExchange supports this proposal and we adopt it.''). According to 
Dr. Ford, ``ephemeral copies have economic value to services that 
publicly perform sound recordings because these services cannot as a 
practical matter properly function without those copies.'' Ford Web III 
WDT at 9. Dr. Ford noted that ``marketplace benchmarks show that the 
royalty rate for ephemeral copies, if directly established, is almost 
always expressed as a percentage of the overall royalty rate for 
combined activities under Section 112 and 114.'' Id. at 9-10.
    As to the specific allocation between the two licenses, Dr. Ford 
noted that it is not the services, but the ``[r]ecord companies and 
artists [who] care about what portion of royalty payments are allocated 
to ephemerals because the higher the portion allocated to ephemerals, 
the lower the portion paid directly to artists per the terms of the 
Section 114 license.'' Id. at 4. Dr. Ford concluded that, in light of 
the purported disinterest by the willing buyer (or licensee) in the 
allocation between the Section 112(e) and 114 licenses, an agreement 
between the artists and the copyright owners (i.e., the licensors) is 
the best measure of how a willing buyer and willing seller would 
allocate royalties between the performance and ephemeral licenses. Id. 
at 10. As evidence of such an agreement, Dr. Ford was informed that 
``the recording artists and the record companies have reached an 
agreement that five percent (5%) of the payments for activities under 
Section 112(e) and 114 should be allocated to Section 112(e) 
activities.'' Id. at 15. He concluded that ``that appears to be a 
reasonable proposal.'' Id. Upon examination in Web III, Dr. Ford 
clarified that he was informed by counsel for SoundExchange that the 
SoundExchange board, which includes representatives from record labels 
and artists, had approved a recommendation that 5% of royalties should 
be allocated to the ephemeral license. Designated Hearing Testimony of 
George S. Ford, Trial Ex. 51, at 434 (Ford Web III Hrg. Test.).\205\
---------------------------------------------------------------------------

    \205\ Dr. Ford represented that he reviewed the minutes of the 
board meeting that referenced the agreement, and it appears that the 
Judges in Web III admitted the board minutes into evidence. Ford Web 
III Hrg. Test. at 434, 438. Those minutes were not introduced into 
evidence in the current proceeding, rendering hearsay Dr. Ford's 
testimony concerning the agreement between artists and record 
companies. The Judges exercise their discretion under 37 CFR 
351.10(a) to admit Professor Ford's hearsay testimony.
---------------------------------------------------------------------------

    The Judges find SoundExchange's proposals concerning the bundling 
of performance and ephemeral Royalties, as well as the 95%/5% 
allocation of royalties between the two licenses, to be reasonable and 
supported by the evidence, and therefore adopt them for both PSS and 
SDARS.

XII. Conclusion

    For all of the foregoing reasons, the Judges issue this 
Determination of Rates and Terms in the captioned proceeding. The 
Register of Copyrights may review the Judges' Determination for legal 
error in resolving a material issue of substantive copyright law. The 
Librarian shall cause the Judges' Determination, and any correction 
thereto by the Register, to be published in the Federal Register no 
later than the conclusion of the 60-day review period.

    Dated: October 11, 2018.

    Corrected: October 15, 2018.

Suzanne M. Barnett,
Chief Copyright Royalty Judge.

Jesse M. Feder,
Copyright Royalty Judge.

David R. Strickler,
Copyright Royalty Judge.

List of Subjects in 37 CFR Part 382

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

Final Regulations

    For the reasons set forth in the preamble, the Copyright Royalty 
Judges revise 37 CFR part 382 to read as follows:

PART 382--RATES AND TERMS FOR TRANSMISSIONS OF SOUND RECORDINGS BY 
PREEXISTING SUBSCRIPTION SERVICES AND PREEXISTING SATELLITE DIGITAL 
AUDIO RADIO SERVICES AND FOR THE MAKING OF EPHEMERAL REPRODUCTIONS 
TO FACILITATE THOSE TRANSMISSIONS

Subpart A--Regulations of General Application
Sec.
382.1 Definitions.
382.2 Scope and compliance.
382.3 Making payment of royalty fees.
382.4 Delivering statements of account.
382.5 Distributing royalty fees.
382.6 Handling Confidential Information.
382.7 Auditing payments and distributions.
Subpart B--Preexisting Subscription Services (PSS)
382.10 Royalty fees for the digital performance of sound recordings 
and the making of ephemeral recordings by preexisting subscription 
services.
382.11 Calculation of gross revenues for PSS.

[[Page 65266]]

Subpart C--Preexisting Satellite Digital Audio Radio Services (SDARS)
382.20 Definitions.
382.21 Royalty fees for the public performance of sound recordings 
and the making of ephemeral recordings by SDARS.
382.22 Calculation of Gross Revenues for SDARS.
382.23 Adjustments to royalty fee.

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

Subpart A--Regulations of General Application


Sec.  382.1  Definitions.

    In this subpart:
    Collective means the collection and distribution organization that 
is designated by the Copyright Royalty Judges.
    Copyright Owners means sound recording copyright owners who are 
entitled to royalty payments made under part 382 pursuant to the 
statutory licenses under 17 U.S.C. 112(e) and 114.
    Digital Audio Transmission has the same meaning as in 17 U.S.C. 
114(j)(5).
    Eligible Transmission means a Digital Audio Transmission made by a 
Licensee that is subject to licensing under 17 U.S.C. 114(d)(2) and the 
payment of royalties under 37 CFR part 382.
    Ephemeral Recording has the same meaning as in 17 U.S.C. 112.
    GAAP means generally accepted accounting principles in effect in 
the United States on the date payment is due.
    Licensee means the provider of an Satellite Digital Audio Radio 
Service (SDARS) or Preexisting Subscription Service (PSS) that has 
obtained a license under 17 U.S.C. 114 to make eligible transmissions 
and a license under 17 U.S.C. 112(e) to make Ephemeral Recordings to 
facilitate those Eligible Transmissions.
    Payor means the entity required to make royalty payments to the 
Collective or the entity required to distribute royalty fees collected, 
depending on context. The Payor is:
    (1) A Licensee, in relation to the Collective; and
    (2) The Collective in relation to a Copyright Owner or Performer.
    Performers means the independent administrators identified in 17 
U.S.C. 114(g)(2)(B) and (C) and the parties identified in 17 U.S.C. 
114(g)(2)(D).
    Preexisting Subscription Service (PSS) has the same meaning as in 
17 U.S.C. 114(j)(11). A service's offering on the internet that is 
available to a subscriber outside the subscriber's residence is not a 
Preexisting Subscription Service for purposes of this part.
    Qualified Auditor means a Certified Public Accountant independent 
within the meaning of the American Institute Certified Public 
Accountants Code of Professional Conduct.
    Satellite Digital Audio Radio Service (SDARS) means the preexisting 
satellite digital audio radio services as defined in 17 U.S.C. 
114(j)(10).
    Transmission has the same meaning as in 17 U.S.C. 114(j)(15).
    Verifying Entity means the party requesting an audit and giving 
notice of intent to audit. For audits of SDARS and PSS, the Verifying 
Entity is SoundExchange, Inc. For audits of SoundExchange, Inc. the 
Verifying Entity is any Copyright Owner or its authorized 
representative.


Sec.  382.2  Scope and compliance.

    (a) Scope. This part codifies rates and terms of royalty payments 
for the public performance of sound recordings in certain Digital Audio 
Transmissions by certain Licensees in accordance with applicable 
provisions of 17 U.S.C. 114 and for the making of Ephemeral Recordings 
by those Licensees in accordance with the provisions of 17 U.S.C. 
112(e), during the period January 1, 2018, through December 31, 2027.
    (b) Legal compliance. Licensees relying upon the statutory licenses 
set forth in 17 U.S.C. 112(e) and 114 must comply with the requirements 
of 17 U.S.C. 112(e) and 114, this part and any other applicable 
regulations.
    (c) Voluntary agreements. Notwithstanding the royalty rates and 
terms established in any subparts of this part, the rates and terms of 
any license agreements entered into by Copyright Owners and Licensees 
may apply in lieu of these rates and terms.


Sec.  382.3  Making payment of royalty fees.

    (a) Payment to the Collective. A Licensee must make the royalty 
payments due under subparts B and C of this part to SoundExchange, 
Inc., which is the Collective designated by the Copyright Royalty Board 
to collect and distribute royalties under this part. If any payment due 
date is a weekend or a federal holiday, then the payment is due on the 
first business day thereafter.
    (b) Advance payment. Licensees must pay the Collective an annual 
advance payment of $100,000 by January 31 of each year. The Collective 
must credit 5% of the advance payment as payment of the minimum fee for 
Ephemeral Recordings and credit the remaining 95% to section 114 
royalties. The funds are nonrefundable. Any uncredited portion of the 
funds shall not carry over into a subsequent year.
    (c) Minimum payments. A Licensee must make any minimum annual 
payment due under subpart B or C of this part by January 31 of the 
applicable license year.
    (d) Monthly payments. A Licensee must make royalty payments on a 
monthly basis. Payments are due on or before the 45th day after the end 
of the month in which the Licensee made Eligible Transmissions.
    (e) Late fees. A Licensee must pay a late fee for each payment and 
each Statement of Account that the Collective receives after the due 
date. The late fee is 1.5% (or the highest lawful rate, whichever is 
lower) of the late payment amount per month. The late fee for a late 
Statement of Account is 1.5% of the payment amount associated with the 
Statement of Account. Late fees accrue from the due date until the date 
that the Collective receives the late payment or late Statement of 
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.  382.4  Delivering statements of account.

    (a) Statements of Account. Any payment due under this part must be 
accompanied by a corresponding Statement of Account that must contain 
the following information:
    (1) Information as is necessary to calculate the accompanying 
royalty payment;
    (2) The name, address, business title, telephone number, facsimile 
number (if any), electronic mail address (if any) and other contact 
information of the person to be contacted for information or questions 
concerning the content of the Statement of Account;
    (3) The signature of:
    (i) The Licensee or a duly authorized agent of the Licensee;
    (ii) A partner or delegate if the Licensee is a partnership; or
    (iii) An officer of the corporation if the Licensee is a 
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;

[[Page 65267]]

    (6) A certification of the capacity of the person signing;
    (7) The date of signature; and
    (8) An attestation to the following effect:
    I, the undersigned owner/officer/partner/agent of the Licensee have 
examined this Statement of Account and hereby state that it is true, 
accurate, and complete to my knowledge after reasonable due diligence 
and that it fairly presents, in all material respects, the liabilities 
of the Licensee pursuant to 17 U.S.C. 112(e) and 114 and applicable 
regulations adopted under those sections.
    (b) Certification. Licensee's Chief Financial Officer or, if 
Licensee does not have a Chief Financial Officer, a person authorized 
to sign Statements of Account for the Licensee, must submit a signed 
certification on an annual basis attesting that Licensee's royalty 
statements for the prior year represent a true and accurate 
determination of the royalties due and that any method of allocation 
employed by Licensee was applied in good faith and in accordance with 
U.S. GAAP.


Sec.  382.5  Distributing royalty fees.

    (a) Distribution of royalties. (1) The Collective must promptly 
distribute royalties received from Licensees to Copyright Owners and 
Performers that are entitled thereto, or to their designated agents. 
The Collective shall only be responsible for making distributions to 
those who provide the Collective with information necessary to identify 
and pay the correct recipient. The Collective must distribute royalties 
on a basis that values all performances by a Licensee equally based 
upon the information provided under the Reports of Use requirements for 
Licensees pursuant to Sec.  370.3 or Sec.  370.4 of this chapter, as 
applicable, and pursuant to this part.
    (2) Identification of Copyright Owners. The Collective must use its 
best efforts to identify and locate copyright owners and featured 
artists to distribute royalties payable to them under section 112(e) or 
114(d)(2) of title 17, United States Code, or both. Such efforts must 
include, but are not limited to, searches in Copyright Office public 
records and published directories of sound recording copyright owners 
when consulting those records and directories is likely to be helpful.
    (b) Unclaimed funds. If the Collective is unable to identify or 
locate a Copyright Owner or Performer who is entitled to receive a 
royalty distribution under this part, the Collective must retain the 
required payment in a segregated trust account for a period of three 
years from the date of the first distribution of royalties from the 
relevant payment by a Licensee. No claim to distribution shall be valid 
after the expiration of the three-year period. After expiration of this 
period, the Collective must handle unclaimed funds in accordance with 
applicable federal, state, or common law.
    (c) Retention of records. Licensees and the Collective shall keep 
books and records relating to payments and distributions of royalties 
for a period of not less than the prior three calendar years.
    (d) Designation of the Collective. (1) The Judges designate 
SoundExchange, Inc., as the Collective to receive Statements of Account 
and royalty payments from Licensees and to distribute royalty payments 
to each Copyright Owner and Performer (or their respective designated 
agents) entitled to receive royalties under 17 U.S.C. 112(e) or 114(g).
    (2) If SoundExchange, Inc. should dissolve or cease to be governed 
by a board consisting of equal numbers of representatives of Copyright 
Owners and Performers, it shall be replaced for the applicable royalty 
period by a successor Collective according to the following procedure:
    (i) The nine Copyright Owner representatives and the nine Performer 
representatives on the SoundExchange board as of the last day preceding 
SoundExchange's cessation or dissolution shall vote by a majority to 
recommend that the Copyright Royalty Judges designate a successor and 
must file a petition with the Copyright Royalty Judges requesting that 
the Judges designate the named successor and setting forth the reasons 
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.  382.6  Handling Confidential Information.

    (a) Definition. For purposes of this part, ``Confidential 
Information'' means the Statements of Account and any information 
contained therein, including the amount of royalty payments and any 
information pertaining to the Statements of Account reasonably 
designated as confidential by the party submitting the statement. 
Confidential Information does not include documents or information that 
at the time of delivery to the Collective is public knowledge. The 
party seeking information from the Collective based on a claim that the 
information sought is a matter of public knowledge shall have the 
burden of proving to the Collective that the requested information is 
in the public domain.
    (b) Use of Confidential Information. The Collective may not use any 
Confidential Information for any purpose other than royalty collection 
and distribution and activities related directly thereto.
    (c) Disclosure of Confidential Information. The Collective shall 
limit access to Confidential Information to:
    (1) Employees, agents, consultants, and independent contractors of 
the Collective, subject to an appropriate written confidentiality 
agreement, who are engaged in the collection and distribution of 
royalty payments hereunder and activities related directly thereto who 
require access to the Confidential Information for the purpose of 
performing their duties during the ordinary course of their work;
    (2) A Qualified Auditor or outside counsel who is authorized to act 
on behalf of:
    (i) The Collective with respect to verification of a Licensee's 
statement of account pursuant to this part; or
    (ii) A Copyright Owner or Performer with respect to the 
verification of royalty distributions pursuant to this part;
    (3) Copyright Owners and Performers, including their designated 
agents, whose works a Licensee used under the statutory licenses set 
forth in 17 U.S.C. 112(e) and 114 by the Licensee whose Confidential 
Information is being supplied, subject to an appropriate written 
confidentiality agreement, and including those employees, agents, 
consultants, and independent contractors of such Copyright Owners and 
Performers and their designated agents, subject to an appropriate 
written confidentiality agreement, who require access to the 
Confidential Information to perform their duties during the ordinary 
course of their work;
    (4) Attorneys and other authorized agents of parties to proceedings 
under 17 U.S.C. 112 or 114, acting under an appropriate protective 
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.

[[Page 65268]]

Sec.  382.7  Auditing payments and distributions.

    (a) General. This section prescribes procedures by which any entity 
entitled to receive payment or distribution of royalties may verify 
those payments or distributions with an independent audit. The 
Collective may audit a Licensee's payments of royalties to the 
Collective and a Copyright Owner or Performer may audit the 
Collective's distributions of royalties to the Copyright Owners or 
Performers. Nothing in this section shall preclude a Verifying Entity 
and the Payor under audit from agreeing to verification methods in 
addition to or different from those set forth in this section.
    (b) Frequency of auditing. A Verifying Entity may conduct an audit 
of each Payor only once a year and the audit may cover any or all of 
the prior three calendar years. A Verifying Entity may not audit 
records for any calendar year more than once.
    (c) Notice of intent to audit. The Verifying Entity must file with 
the Copyright Royalty Judges a notice of intent to audit the Payor, 
which notice the Judges must publish in the Federal Register within 30 
days of the filing of the notice. Simultaneously with the filing of the 
notice, the Verifying Entity must send a copy to the Payor.
    (d) The audit. The audit must be conducted during regular business 
hours by a Qualified Auditor who is not retained on a contingency fee 
basis and is identified in the notice. The auditor shall determine the 
accuracy of royalty payments or distributions, including whether the 
Payor made an underpayment or overpayment of royalties. An audit of 
books and records, including underlying paperwork, performed in the 
ordinary course of business according to generally accepted auditing 
standards by a Qualified Auditor, shall serve as an acceptable 
verification procedure for all parties with respect to the information 
that is within the scope of the audit.
    (e) Access to third-party records for audit purposes. The Payor 
under audit must use commercially reasonable efforts to obtain or to 
provide access to any relevant books and records maintained by third 
parties for the purpose of the audit.
    (f) Duty of auditor to consult. The auditor must produce a written 
report to the Verifying Entity. Before issuing the report, unless the 
auditor has a reasonable basis to suspect fraud on the part of the 
Payor, the disclosure of which would, in the reasonable opinion of the 
auditor, prejudice any investigation of the suspected fraud. The 
auditor must review tentative written findings of the audit with the 
appropriate agent or employee of the Payor in order to remedy any 
factual errors and clarify any issues relating to the audit; provided 
that an appropriate agent or employee of the Payor reasonably 
cooperates with the auditor to remedy promptly any factual error[s] or 
clarify any issue raised by the audit. The auditor must include in the 
written report information concerning the cooperation or the lack 
thereof of the employee or agent.
    (g) Audit results; underpayment or overpayment of royalties. If the 
auditor determines the Payor underpaid royalties, the Payor shall remit 
the amount of any underpayment determined by the auditor to the 
Verifying Entity, together with interest at the post-judgment rate 
specified in 28 U.S.C. 1961, accrued from and after the date the 
payment was originally due. In the absence of mutually-agreed payment 
terms, which may, but need not, include installment payments, the Payor 
shall remit promptly to the Verifying Entity the entire amount of the 
underpayment determined by the auditor. If the auditor determines the 
Payor overpaid royalties, however, the Verifying Entity shall not be 
required to remit the amount of any overpayment to the Payor, and the 
Payor shall not seek by any means to recoup, offset, or take a credit 
for the overpayment, unless the Payor and the Verifying Entity have 
agreed otherwise.
    (h) Paying the costs of the audit. The Verifying Entity must pay 
the cost of the audit, unless the auditor determines that there was an 
underpayment of 10% or more, in which case the Payor must bear the 
reasonable costs of the audit, in addition to paying or distributing 
the amount of any underpayment.
    (i) Retention of audit report. The Verifying Entity must retain the 
report of the audit for a period of not less than three years from the 
date of issuance.

Subpart B--Preexisting Subscription Services (PSS)


Sec.  382.10  Royalty fees for the digital performance of sound 
recordings and the making of ephemeral recordings by preexisting 
subscription services.

    (a) Royalty fees. Commencing January 1, 2018, and continuing 
through December 31, 2027, Licensees must pay royalty fees for all 
Eligible Transmissions of sound recordings at the rate of 7.5 percent 
of Gross Revenues.
    (b) Ephemeral recordings royalty fee. (1) The fee for all Ephemeral 
Recordings is part of the total fee payable under this section and 
constitutes 5% of it. All Ephemeral Recordings that a Licensee makes 
that are necessary and commercially reasonable for making 
noninteractive Digital Audio Transmission as a PSS are included in the 
5%.
    (2) The minimum fee is $5,000 per year.


Sec.  382.11  Calculation of gross revenues for PSS.

    (a) Gross revenues are monies derived from the operation of the 
programming service of the Licensee and are comprised of the following:
    (1) Monies received by Licensee from Licensee's carriers and 
directly from residential U.S. subscribers for Licensee's programming 
service;
    (2) Licensee's advertising revenues (as billed), or other monies 
received from sponsors, if any, less advertising agency commissions not 
to exceed 15% of those fees incurred to a recognized advertising agency 
not owned or controlled by Licensee;
    (3) Monies received for the provision of time on the programming 
service to any third party;
    (4) Monies received from the sale of time to providers of paid 
programming such as infomercials;
    (5) Where merchandise, service, or anything of value is received by 
Licensee in lieu of cash consideration for the use of Licensee's 
programming service, the fair market value thereof or Licensee's 
prevailing published rate, whichever is less;
    (6) Monies or other consideration received by Licensee from 
Licensee's carriers, but not including monies received by Licensee's 
carriers from others and not accounted for by Licensee's carriers to 
Licensee, for the provision of hardware by anyone and used in 
connection with the programming service;
    (7) Monies or other consideration received for any references to or 
inclusion of any product or service on the programming service; and
    (8) Bad debts recovered regarding paragraphs (a)(1) through (7) of 
this section.
    (9) Revenues described in paragraphs (a)(1) through (8) of this 
section to which Licensee is entitled but which are paid to a parent, 
subsidiary, division, or affiliate of Licensee, in lieu of payment to 
Licensee but not including payments to Licensee's carriers for the 
programming service.
    (b) Gross Revenues exclude affiliate revenue returned during the 
reporting period and bad debts actually written off during reporting 
period.

[[Page 65269]]

Subpart C--Preexisting Satellite Digital Audio Radio Services 
(SDARS)


Sec.  382.20  Definitions.

    In this subpart:
    Directly-Licensed Recording means a sound recording for which the 
Licensee has previously obtained a license of all relevant rights from 
the sound recording Copyright Owner.
    Pre-1972 Recording means a sound recording fixed before February 
15, 1972, that is not a restored work as defined in 17 U.S.C. 
104A(h)(6) or otherwise subject to protection under title 17, United 
States Code.
    Reference Channels means internet webcast channels offered by the 
Licensee that directly correspond to channels offered on the Licensee's 
SDARS that are capable of being received on all models of Sirius radio, 
all models of XM radio or both, and on which the programming consists 
primarily of music.


Sec.  382.21  Royalty fees for the public performance of sound 
recordings and the making of ephemeral recordings by SDARS.

    (a) Royalty fees. Commencing January 1, 2018, and continuing 
through December 31, 2027, Licensees must pay royalty fees for all 
Eligible Transmissions of sound recordings at the rate of 15.5% of 
Gross Revenues.
    (b) Ephemeral recordings royalty fees. (1) The fee for all 
Ephemeral Recordings is part of the total fee payable under this 
section and constitutes 5% of it. All Ephemeral Recordings that a 
Licensee makes that are necessary and commercially reasonable for 
making noninteractive Digital Audio Transmissions as an SDARS are 
included in the 5%.
    (2) The minimum fee is $5,000 per year.


Sec.  382.22  Calculation of Gross Revenues for SDARS.

    (a) Gross Revenues are:
    (1) Revenue recognized by the Licensee in accordance with GAAP from 
the operation of an SDARS and comprised of the following:
    (i) Subscription revenue recognized by Licensee directly from U.S. 
subscribers for licensee's SDARS; and
    (ii) Licensee's advertising revenues, or other monies received from 
sponsors, if any, attributable to advertising on channels other than 
those that use only incidental performances of sound recordings, less 
advertising agency and sales commissions.
    (2) Revenues set forth above to which Licensee is entitled but 
which are paid to a parent, wholly-owned subsidiary, or division of 
Licensee.
    (b) Gross Revenues exclude:
    (1) Monies or other consideration attributable to the sale and/or 
license of equipment and/or other technology, including but not limited 
to bandwidth, sales of devices that receive the Licensee's SDARS and 
any shipping and handling fees therefor;
    (2) Royalties paid to Licensee for intellectual property rights;
    (3) Monies or other consideration received by Licensee from the 
sale of phonorecords and digital phonorecord deliveries;
    (4) Sales and use taxes;
    (5) Credit card, invoice, activation, swap and early termination 
fees charged to subscribers and reasonably related to the Licensee's 
expenses to which they pertain;
    (6) Bad debt expense; and
    (7) Revenues recognized by Licensee (or otherwise received by 
Licensee if no GAAP ``recognition'' principles are applicable) for the 
provision of:
    (i) Current and future data services offered for a separate charge 
(e.g., weather, traffic, destination information, messaging, sports 
scores, stock ticker information, extended program associated data, 
video and photographic images, and such other telematics and/or data 
services as may exist from time to time);
    (ii) Channels, programming, products and/or other services offered 
for a separate charge where such channels use only incidental 
performances of sound recordings;
    (iii) Channels, programming, products and/or other services 
provided outside of the United States; and
    (iv) Channels, programming, products and/or other services for 
which the performance of sound recordings and/or the making of 
Ephemeral Recordings is exempt from any license requirement or is 
separately licensed, including by a statutory license and, for the 
avoidance of doubt, webcasting, audio services bundled with television 
programming, interactive services, and transmissions to business 
establishments.


Sec.  382.23  Adjustments to royalty fee.

    (a) Reduction for Direct License Share. The royalty fee specified 
in Sec.  382.21(a) may be reduced by the percentage of Eligible 
Transmissions comprising the Direct License Share.
    (1) The Direct License Share reduction is available to a Licensee 
only if--
    (i) The Reference Channels constitute a large majority of and are 
generally representative of the music channels offered on the 
Licensee's SDARS; and
    (ii) The Licensee provides the Collective, by no later than the due 
date for the relevant payment under Sec.  382.3(d), a list of each 
Copyright Owner from which the Licensee claims to have a direct license 
of rights to Directly-Licensed Recordings that is in effect for the 
month for which the payment is made and of each sound recording for 
which the Licensee takes the reduction, identified by featured artist 
name, sound recording title, and International Standard Recording Code 
(ISRC) number or, alternatively to the ISRC, album title and copyright 
owner name. Notwithstanding Sec.  382.6, the Collective may disclose 
such information as reasonably necessary for it to confirm whether a 
claimed direct license exists and claimed sound recordings are properly 
excludable.
    (2) To arrive at the percentage allocable to the Direct License 
Share for each month, the Licensee shall divide the internet 
Performances of Directly-Licensed Recordings on the Reference Channels 
by the total number of internet Performances of all sound recordings on 
the Reference Channels. In no event shall the Direct License Share be 
an amount greater than the result of dividing the number of plays of 
Directly-Licensed Recordings on the SDARS by the total number of plays 
of all sound recordings on the SDARS.
    (3) The Licensee may not credit use of a Directly-Licensed 
Recording under this paragraph if that use is credited as a use of a 
Pre-1972 Sound Recording for purposes of claiming the Pre-1972 
Recording Share reduction to the royalty fee.
    (b) Reduction for Pre-1972 Recording Share. The royalty fee 
specified in Sec.  382.21(a) may be reduced by the percentage of 
Eligible Transmissions comprising the Pre-1972 Recording Share.
    (1) A Pre-1972 Recording Share reduction is available to a Licensee 
only if--
    (i) The Reference Channels constitute a large majority of and are 
generally representative of the music channels offered on the 
Licensee's SDARS; and
    (ii) The Licensee provides to the Collective, by no later than the 
due date for the relevant payment under Sec.  382.3(d), a list of Pre-
1972 Recordings for which the Licensee takes the reduction, identified 
by featured artist name, sound recording title, and International 
Standard Recording Code (ISRC) number or, alternatively to the ISRC, 
album title and copyright owner name.
    (2) To arrive at the percentage allocable to the Pre-1972 Recording 
Share for each month, the Licensee shall divide the internet 
Performances of Pre-1972 Sound Recordings on the

[[Page 65270]]

Reference Channels by the total number of internet Performances of all 
sound recordings on the Reference Channels.
    (c) Definition of Performance. For purposes of this section, 
Performance means:
    (1) Except as discussed in paragraph (c)(2) of this section, a 
Performance is an instance in which any portion of a sound recording is 
publicly performed to a listener within the United States by means of a 
Digital Audio Transmission (e.g., the delivery of any portion of a 
single track from a compact disc to one listener).
    (2) An instance in which a portion of a sound recording is publicly 
performed to a listener within the United States by means of a Digital 
Audio Transmission is not a Performance if it both:
    (i) Makes no more than incidental use of sound recordings 
including, but not limited to, brief musical transitions in and out of 
commercials or program segments, brief use during news, talk and sports 
programming, brief background use during disk jockey announcements, 
brief use during commercials of sixty seconds or less in duration, or 
brief use during sporting or other public events; and
    (ii) Does not contain an entire sound recording and does not 
feature a particular sound recording of more than thirty seconds (as in 
the case of a sound recording used as a theme song), except for ambient 
music that is background at a public event.

Suzanne M. Barnett,
Chief Copyright Royalty Judge.
Jesse M. Feder,
Copyright Royalty Judge.
David R. Strickler,
Copyright Royalty Judge.

    Approved by:
Carla D. Hayden,
Librarian of Congress.
[FR Doc. 2018-26922 Filed 12-18-18; 8:45 am]
BILLING CODE 1410-72-P