Electronically Filed Docket: 19-CRB-0005-WR (2021-2025) PUBLIC VERSION Filing Date: 09/26/2019 07:53:58 PM EDT Before the UNITED STATES COPYRIGHT ROYALTY BOARD LIBRARY OF CONGRESS Washington, D.C. In the Matter of: Determination of Rates and Terms for Docket No. 19-CRB-0005-WR Digital Performance of Sound Recordings (2021-2025) and Making of Ephemeral Copies to Facilitate those Performances (Web V) WRITTEN DIRECT STATEMENT OF THE NATIONAL ASSOCIATION OF BROADCASTERS Witness Testimony Volume 2 of 3 Sarang Vijay Damle (D.C. Bar No. 1619619) [email protected] 555 Eleventh Street, NW, Suite 1000 Washington, D.C. 20004-1304 T: (202) 637-2200 F: (202) 637-2201 Joseph R. Wetzel (CA Bar No. 238008) [email protected] Andrew M. Gass (CA Bar No. 259694) [email protected] 505 Montgomery Street, Suite 2000 San Francisco, CA 94111-6538 T: (415) 391-0600 F: (415) 395-8095 Counsel for the National Association of Broadcasters September 23, 2019 TAB A Before the COPYRIGHT ROYALTY BOARD LIBRARY OF CONGRESS Washington, D.C. In the Matter of: Determination of Rates and Terms for Docket No. 19-CRB-0005-WR Digital Performance of Sound Recordings (2021-2025) and Making of Ephemeral Copies to Facilitate those Performances (Web V) WRITTEN DIRECT TESTIMONY OF DR. GREGORY K. LEONARD NAB Written Direct Statement RESTRICTED – Subject to Protective Order Dkt. No. 19-CRB-0005-WR (2021-25) TABLE OF CONTENTS I. QUALIFICATIONS ...................................................................................................................1 II. ASSIGNMENT AND SUMMARY OF OPINIONS ..........................................................................2 III. BACKGROUND .......................................................................................................................5 A. Key Players in the Music Licensing Landscape ......................................................5 B. The Section 114 License ..........................................................................................9 1. Compulsory License for Public Performance Rights for Sound Recordings for Digital, Non-Interactive Streaming Services (i.e., Webcasting) .................................................................................................9 2. The Willing Buyer-Willing Seller Standard ..............................................13 3. Royalty Rates Established Under the Webcasting Proceedings ................15 C. Digital, Non-Interactive Streaming Services Subject to the Section 114 License ...................................................................................................................18 1. Simulcast ....................................................................................................18 2. Custom Radio.............................................................................................19 3. Internet Radio.............................................................................................19 IV. SIMULCAST DIFFERS ECONOMICALLY FROM CUSTOM RADIO IN WAYS THAT SUGGEST THAT THE STATUTORY RATE SHOULD BE LOWER FOR SIMULCAST THAN CUSTOM RADIO ..................................................................................................................20 A. Terrestrial Radio Stations Use Non-Music Content to Drive Audience and Revenues More Than Custom Radio .....................................................................20 B. Simulcast Listeners Have Weaker Preferences for Music Than Listeners of Custom Radio.........................................................................................................25 C. Advertisers Have Lesser Ability to Target Ads on Simulcasts Than on Custom Radio, Which Should Result in Lower WTP for Simulcast Ads .............27 D. Some Radio Stations Have Difficulty Generating Ad Revenue from Simulcast ................................................................................................................28 i NAB Written Direct Statement RESTRICTED – Subject to Protective Order Dkt. No. 19-CRB-0005-WR (2021-25) E. Taking Account of a Service’s Business Model Does Not Amount to Public Utility Style Rate of Return Setting and, In Fact, Is Necessary for a WBWS Analysis ....................................................................................................29 F. Summary ................................................................................................................30 V. THE ROYALTY FOR SIMULCAST BASED ON A BENCHMARKING APPROACH .........................31 A. iHeart’s License Agreements with Independent Record Labels Involving the Licensing of Public Performance Rights for Sound Recordings .....................32 B. Other License Agreements That Provide Useful Information ...............................44 1. Spotify’s License Agreements with Record Labels Involving the Licensing of Public Performance Rights for Sound Recordings Indicate that the Current Statutory Rates for the Section 114 License Are Too High ................................................................................44 2. Licenses (and Offered Licenses) Involving the Licensing of Public Performances Rights for Musical Compositions Assign a Lower Royalty Rate to Simulcast than to Internet Radio and Custom Radio ..........................................................................................................47 C. Other License Agreements Are Not Valid Comparables .......................................53 VI. THE ROYALTY FOR SIMULCAST BASED ON AN OPPORTUNITY COST FRAMEWORK ............55 A. Potential Direct Royalty Losses on the Label’s Other Royalty Streams ...............58 B. The Promotional Offset of Simulcast ....................................................................61 C. Conclusion on Net Opportunity Cost .....................................................................64 VII. OTHER ECONOMIC FACTORS ...............................................................................................66 A. The Decrease in Average Song Length Suggests the Per-Play Royalty Should Be Lowered................................................................................................66 B. The Statutory Rate Should Not Increase at the Rate of General Inflation .............66 ii NAB Written Direct Statement RESTRICTED – Subject to Protective Order Dkt. No. 19-CRB-0005-WR (2021-25) I. QUALIFICATIONS 1. My name is Gregory K. Leonard. I am an economist and partner at Edgeworth Economics, 333 Bush Street, Suite 1450, San Francisco, CA, 94104. 2. I received a Bachelor of Science in Applied Mathematics-Economics from Brown University in 1985 and a Ph.D. in Economics from the Massachusetts Institute of Technology in 1989. After receiving my Ph.D., I became an assistant professor at Columbia University. I subsequently moved into economic consulting and worked at several economic consulting firms prior to joining Edgeworth. 3. My specialties within economics are applied microeconomics, the study of the behavior of consumers and firms, and econometrics, the application of statistical methods to economics data. I have published over sixty articles in scholarly and professional publications, which are listed on my curriculum vitae, which is attached as Appendix E. Many of these articles address issues in industrial organization and the economics of intellectual property. 4. I am the Vice Chair for Economics of the Board of Editors of the Antitrust Law Journal and have served as a referee for numerous economics and other professional journals. I have given invited lectures on antitrust and intellectual property issues at the Federal Trade Commission (FTC), the United States Department of Justice (DOJ), the Directorate General for Competition of the European Commission, the Fair Trade Commission of Japan, and China’s Supreme People’s Court and Ministry of Commerce. I have been retained by the DOJ to consult on antitrust matters. 5. In 2009, I was invited to speak at a session of the FTC’s hearings on the “Evolving IP Marketplace” concerning the calculation of patent damages. In the report that the FTC subsequently issued, my views on damages calculation were cited extensively. In 2007, I served 1 NAB Written Direct Statement RESTRICTED – Subject to Protective Order Dkt. No. 19-CRB-0005-WR (2021-25) as a consultant to and testified before the Antitrust Modernization Commission, which was tasked by Congress and the President of the United States to make recommendations for revising U.S. antitrust laws. In its Uniloc decision, the U.S. Court of Appeals for the Federal Circuit cited one of my publications in support of its conclusion that a method of calculating reasonable royalty damages in a patent case (the so-called “25% Rule”) is an unreliable and flawed methodology. 6. I have served as an expert witness in a number of litigation matters before U.S. District Courts, state courts, arbitration panels, and the (U.S.) International Trade Commission. In addition, I provided expert testimony in the Phonorecords III case. A list of cases in which I have testified (in deposition or at trial) in the last five years is provided in Appendix E. II. ASSIGNMENT AND SUMMARY OF OPINIONS 7. I have been asked by counsel for the National Association of Broadcasters (“NAB”) to analyze the appropriate statutory royalty for public performance rights for sound recordings for digital, non-interactive streaming services (i.e., webcasting) under the Section 114 license for the period 2019-2024 and to evaluate NAB’s proposal regarding that statutory royalty. My opinions are based on the