Reply of National Music Publishers'ssociation, Inc
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Before the COPYRIGHT ROYALTY JUDGES g), & g009 LIBRARY OF CONGRESS Washington, D.C. Qgptf)gt)(»»Q~» In the Matter of Docket No. 2006-3 CRB DPRA Mechanical and Digital Phonorecord Delivery Rate Adjustment Proceeding REPLY OF NATIONAL MUSIC PUBLISHERS'SSOCIATION, INC., THE SONGWRITERS GUILD OF AMERICA AND THE NASHVILLE SONGWRITERS ASSOCIATION INTERNATIONAL TO THE PROPOSED FINDINGS OF FACT OF THE RECORDING INDUSTRY ASSOCIATION OF AMERICA, INC. AND THE DIGITAL MEDIA ASSOCIATION July 1S, 200S PUBLIC Version TABLE OF CONTENTS I. Introduction. The Record Companies are Enjoying Growing Prosperity 2P A. The RIAA's Picture of the Record Companies'inancial Health Is Misleading. 1. The Record Companies Are Enjoying Record Profits,................. 33 2. The RIAA Has Failed To Prove that the Record Companies're Financially Troubled .....42 (a) The Record Companies'rofit Margins Simply Reflect Their Business Judgments .42 (b) There Is No Reason To Weigh Restructuring Costs Against Profits ............................................... 44 (c) Mr. Benson's Profitability Analysis is Fundamentally Flawed and Unreliable............................. 46 3. The Record Companies Have Failed To Contain Costs .............l.. 5( (a) Overhead Costs Have Increased. 52 (b) Artist Royalties Have Increased .............. 53 (c) Mechanical Royalties. 53 B. The RIAA Has Failed To Prove that the Record Companies Need a Rate Cut. .....J ...J....J.....I.....'....'...!....!.....'....,'.....'....... 55 III. The Digital Future Is Bright J ...J.....'.....L....L....i....i ....i....i ....~....... 57 A. Digital Distribution Is Not as Expensive @s PhySicajl Distribution ........... 57 B. Mr. Benson's Projections Are Unreliable'. ' '..'....'.....'............ 62 C. Forecasts Predict Strong Growth K the Digital Erai.. « i ...~....... 62 1. Professor Teece's Forecasts for the Industry. .66 2. Claire Enders'orecasts for the Digital Market........................... 68 IV. Songwriters and Music Publishers Make Vitail Contributions to the Availability of Musical Works to the Public ......................................... .....72 A. Overview ... ........ 72 B. Mechanical Royalties Received by Songwriters'and Music Publishers Are Declining.. .73 1. Music Publishers'echanicals Royalties Are Declining ..... 75 2. Songwriters'echanical Royalties Are Declining ............... 82 Other Revenues Earned by Songwriters and Music Publishers Are Not Relevant to the Determination of a Reasonable Mechanical Royalty Rate ................................................................... 88 D. The Successful Management of Music Publishing Companies Does Not Justify a Reduction in the Mechanical Royalty Rate.................. 1. The Profitability of Music Publishers Does Not Justify a Rate Reduction 99 2. Music Publishers'voidance of Substantial Restructurings Does Not Justify a Rate Reduction 100 3. The Value of Music Publishing Companies Does Not Justify a Rate Reduction 101 Music Publishers and Songwriters Take Substantial Risks, Play Critical Roles and Should be Rewarded 102 Music Publishers Make Critical Contributions to the Creation of Songs and the Success of the Industry..................... 102 Music Publishers Act as Music Publishers, Not as Record Companies............................... 105 Music Publishers Make Proportionally Substantial Investments. 108 Songwriters Take Severe Risks, Make Critical Investments and Should Also be Rewarded . 118 The Record Companies'elative Contributions Are Not Greater Than the Copyright Owners'ontributions 123 A. Recordings Are Not More Scarce Than Songs 123 B. The RIAA Exaggerates the Record Companies'ole in the Creative Process The RIAA Exaggerates the Record Companies'fforts to Market and Distribute Sound Recordings . 125 D. The Copyright Owners'ther Revenue Streams Are Irrelevant, and Not Due to the Record Companies'nvestments 126 E. Record Companies Are Not Technology Innovators 127 The RIAA Overstates the Magnitude of The Record Companies'ommitment to Anti-Piracy Activities . 130 The RIAA Exaggerates the Record Companies'echanical Licensing Efforts 131 H. The IHAA'. Argu~ments About Risk L,ack Merit. .. 132 VI. Professor Landes's Economic Analysis, Proposed Benchmarks and Empirical Work Are Sound. A. Overview. ... 134 Professor Landes's Economic Analysi's is Consi'stent with this Court's Precedent ... 134 1. Background on Professor Landes's Content Pool Analysis ....... 135 2. Professor Landes's Analysis is Consistent with Section 801(b) an.d this Court's Precedent . 138 Professor Landes Did Not ( onduct a "Surplus Analysis".......... 140 The RDW and D:iMA's Concerns Over the Breadth of Professor Landes's Range of R'.easonableness Are Meritless ..... 142 5. Professor Landes Has Not Advocated the "Bargaining Room" Theory Rejected by the CRT in .].981 .... 144 C. Professor Landes's Benchmarks Should He Accepted by this Court ..... 147 1. The Mastertone Benchmark is Sound . 147 (a) The RIAA and DiMA Have Failed to S.how that Charac,ter]istics of th.e Mastertone Market Undermine the Probative Value of the Mastertone Market. 148 (i) The R.IAA and:DiMA Have Not Shown that . Supply and Demand Characteristics of the Mastertone Market Differ Meaningfully from the Markets for Physical Phonorecords and Permanent Downloacls .. 148 (ii) Th.e Mastertone Market is Broad and Similar to the Market for R.ecorded Music Generally ..... 152 i(iii) Th.e R.ecord Does Not Support t]he ISA's Claim that the Mastertone Market Was Expected to Be Short-Lived 154 i(iv) Contrary to the REM's and:DiMA's Claims, Products in a Benchjmark Market Should Not Be Substitutable for Products in the Target Market When the Benchmark Involves Similar Sellers and Similar Rights ....... 156 (b) The Preexisting Monophonic ancl Polyphonic Ringtone Market Di.d Not Infl'.ate Mastertone Rates ....... 15'7 (c) The RIAA Has Failed to Show that the Mastertone Rates in the NDMAs Are a Poor Benchmark for Mechanical Rights 158 (i) The NDMAs and the HFA/EMI Mastertone Agreement Did Not Provide "Blanket Licenses" 158 (ii) There is No Evidence that the Mastertone Rates in the NDMAs Were Inflated by Trade-Offs. 159 (1) The RIAA's Application of Economic Theory is Fundamentally Flawed. 159 (2) The Mastertone Rates in the NDMAs Were Market Rates and Were Unaffected by the Terms for Other Products.. 161 (3) The NDMA Extensions Demonstrate that the Mastertone Rates were Market Rates 163 (4) Contrary to the RIAA's Claim, Standalone Mastertone Agreements Postdating the NDMAs Show that the NDMA Rates were Market Rates ..... 164 (d) Standalone Mastertone Agreements Between Music Publishers and Third-Party Ringtone Sellers Support the Mastertone Benchmark. 165 (e) Contrary to the RIAA's Claim, There is Nothing Unsound About Professor Landes's Application of the Mastertone Benchmark 167 (f) The RIAA Incorrectly Claims that the Mastertone Benchmark Does Not Support the Copyright Owners'astertone Rates. 168 (g) Professor Wildman's "Surplus Analysis" and "Adjustments" to the Mastertone Benchmark Are Entitled to No Weight ................. 170 (i) Professor Wildman's Calculations to Adjust the Mastertone Benchmark For Use with CDs, Digital Downloads and Mastertones Are Fatally Flawed. 170 (ii) Professor Wildman Has No Basis for Adjusting the Mastertone Benchmark For Use With Mastertones . '73 The Synchronization Benchmark is Sound. (a) Professor Landes's Use of the Synchronization Benchmark is Wholly Distinct from the Musical Works Benchmark Rejected in the Webcasting Proceedings. ......................................... 174 (b) The RIAA and DiMA's Claims about the Dynamics'n the Synchronization Market are Irrelevant ................. 176 (i) The Purpose for Which Music is Used in the Synchronization Market is Irrelevant to its Appropriateness as a Benchmark ....................... i 176 (ii) Competitive Pressures Affect Both Synchronization and Master Use License Transactions .........,...... 179 The RIAA Has Not Provided Sufficient Evidence to Conclude that Artists Inflate Synchronization Payments at the Expense of Master Use Payments 181 (iv) The Promotional Benefits of Synchronization and Master Use Licensing Do Not Affect the Division of Fees .................... 182 (v) The RIAA's Argument Concerning Sunk Costs Does Not Undermine the Synchronization Benchmark 183 3. Use of the Audio Home Recording Act as a Corroborative Benchmark is Sound................................................................ 184 Professor Landes's Empirical Work is Sound and Provides Support for a Rate Increase. ............................................ ..... 1 87 The RIAA's Criticisms of Professor Landes's Analysis of the HFA Licensing Data are Meritless. I 187 (a) Background on Professor Landes's Study of Discounted Licensing. (b) Each of the RIAA's Criticisms of Professor Landes's Study is Baseless or Without Merit.................'9'1 (i) The RIAA Incorrectly Claims that the Inclusion of Controlled Licenses Would Have Altered Professor Landes's Conclusions. v (ii) There is No Basis for the Claim That The HFA Licensing Data Contained "Substantial Gaps" 192 (iii) The RIAA's Claim that Professor Landes's "Data Dictionary" Was Flawed is Baseless ........ 193 (iv) Professor Landes's Exclusion of "Orphaned Licenses" Was Justified 196 (v) Professor Landes Justifiably Excluded "Other Digital" Licenses 198 (vi) The RIAA's Claims About Professor Landes's Classification of Physical Licenses are Unsupported by the Record. 198 (vii) The RIAA Incorrectly Claims that Professor Landes Improperly Excluded Over 735,000 "Discounted"