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PUBLIC VERSION Before the UNITED STATES COPYRIGHT ROYALTY JUDGES THE LIBRARY OF CONGRESS Washington, D.C. In the Matter of: Docket No. 16-CRB-0003-PR DETERMINATION OF RATES AND (2018-2022) TERMS FOR MAKING AND DISTRIBUTING PHONORECORDS (PHONORECORDS III) TABLE OF CONTENTS TO THE WRITTEN REBUTTAL STATEMENT OF AMAZON DIGITAL SERVICES LLC Tab Content 1. Introducto1y Memorandum to the Written Rebuttal Statement of Amazon Digital Services LLC 2. Index of Witness Testimony 3. Index of Exhibits 4. Declaration and Ce1i ification of Michael S. Elkin Regarding Restricted Materials 5. Redaction Log 6. Ce1i ificate of Se1v ice 7. Written Rebuttal Testimony ofRishi Mirchandani 8. Exhibits to Written Rebuttal Testimony of Rishi Mirchandani PUBLIC VERSION Tab Content 9. Written Rebuttal Testimony of Kelly Brost 10. Exhibits to Written Rebuttal Testimony of Kelly Brost 11. Expert Rebuttal Repo1i of Glenn Hubbard 12. Exhibits to Expe1i Rebuttal Repoli of Glenn Hubbard 13. Appendix A to Expert Rebuttal Repo1i of Glenn Hubbard 14. Written Rebuttal Testimony ofRobe1i L. Klein 15. Appendices to Written Rebuttal Testimony ofRobe1i L. Klein PUBLIC VERSION Before the UNITED STATES COPYRIGHT ROYALTY JUDGES Library of Congress Washington, D.C. In the Matter of: DETERMINATION OF RATES AND Docket No. 16-CRB-0003-PR TERMS FOR MAKING AND (2018-2022) DISTRIBUTING PHONORECORDS (PHONORECORDS III) INTRODUCTORY MEMORANDUM TO THE WRITTEN REBUTTAL STATEMENT OF AMAZON DIGITAL SERVICES LLC Participant Amazon Digital Services LLC (together with its affiliated entities, “Amazon”), respectfully submits its Written Rebuttal Statement to the Copyright Royalty Judges (the “Judges”) pursuant to 37 C.F.R. § 351.4. Amazon’s rebuttal statement includes four witness statements responding to the direct statements of the National Music Publishers’ Association (“NMPA”), the Nashville Songwriters Association International (“NSAI”) (together, the “Rights Owners”), and Apple Inc. (“Apple”), each of which is summarized below. In light of the proposals set forth, Amazon reiterates its proposed rates and terms as set forth in its Written Direct Statement submitted to the Judges on November 1, 2016. As detailed in Amazon’s witness statements, Amazon’s proposed rollover of the current regulatory scheme—with a few minor clarifications and adjustments—is best suited to continue to foster innovation and growth in the digital music industry, thereby maximizing the availability of creative works to the public while affording both digital service providers (“DSPs”) and rightsholders fair returns for their respective roles and minimizing unnecessary disruption. PUBLIC VERSION INTRODUCTORY STATEMENT The contrast between the parties’ competing rate proposals in this proceeding is stark. Amazon has proposed largely rolling over the current rates, preserving intact the different service categories upon which Amazon (and other DSPs) have relied to build a diverse and burgeoning array of interactive music streaming services. The Rights Owners, on the other hand, have proposed a wholesale scrapping of the existing regime in favor of a one-size-fits-all mechanical- only rate, at a level so high that it would, quite simply, eliminate many of those services. Abandoning the existing structure would be a big mistake and would be severely damaging not only to the DSPs that have relied upon it to build their interactive streaming services, but also to the industry as a whole. What the Rights Owners’ direct testimony fundamentally fails to recognize is that the diversity of offerings enabled by the existing structure benefits the entire industry. Amazon’s Prime Music service, for example—an ad-free, limited catalog streaming service available at no additional charge to Amazon Prime members—expands the overall royalty pool by introducing new users to streaming and serving as an onramp to paid subscription services. Similarly, Amazon Music Unlimited for Echo is a unique, limited functionality service that expands the overall royalty pool by appealing to customers who do not place a high value on portability and would not otherwise subscribe to a standard $9.99 per- month service offering. To support their proposal to eliminate the existing categories and dramatically increase royalty rates, the Rights Owners rely on familiar, new, and irrelevant theories as to why the current rates must be increased. Predictably, the Rights Owners emphasize the costs associated with creating and developing new content. But they also fail to identify ways in which their costs have increased, any new risks posed, or how their business models have fundamentally 2 PUBLIC VERSION changed since rates were last set. The Rights Owners also largely ignore independent and non- mainstream artists who have experienced far greater exposure and increased royalty revenues because of digital streaming. Such information is critical to assess whether the current state of mechanical royalties is truly as dire as the Rights Owners claim. Instead, the Rights Owners present a partial picture of their revenues by focusing solely on mechanical revenue when, in fact, performance, synchronization, and other revenues (which make up the bulk of their revenues) have increased. Dr. Mark Zmijewski, professor and Senior Consultant to Charles River Associates, analyzes the Rights Owners’ revenues and concludes that in many instances, In other words, when viewed in context, the Rights Owners’ revenues tell a very different story than the one being put forth by their witnesses. The reality is that the increase and proliferation of streaming is making it possible for music publishers and songwriters to make more money than ever before. The numbers bear this out, and as we see in the rebuttal testimony of Rishi Mirchandani, the Head of Content Acquisition and Catalog for Amazon’s digital music business, Amazon This has been brought about in a material way by the bevy of interactive streaming services structured around the current regulatory rate structure. T he Rights Owners advance three other more novel justifications for their proposal, including that: (1) music has an inherent value, (2) many DSPs have deep pockets and can afford to pay more, and (3) many DSPs unfairly sacrifice music-related revenues to drive value in other areas. But these arguments are deeply flawed, they fail to take into account the realities of today’s digital music industry, and they run counter to the Section 801(b)(1) policy objectives 3 PUBLIC VERSION that necessarily guide this proceeding. Amazon’s rebuttal case dispels these theories by providing additional evidence concerning music consumption preferences, consumer willingness to pay, the imbalance in risks assumed by DSPs and rightsholders, and the benefits of broad and diverse digital music offerings that maximize the availability of creative works to the public. Specifically, Amazon puts forth rebuttal testimony from its economic expert, Dr. Glenn Hubbard, demonstrating that the Rights Owners’ theory that music has an inherent value—which even they acknowledge is a subjective determination—fails to take account of several relevant factors. As Dr. Hubbard testifies, Dr. Hubbard emphasizes that a regulatory regime that allows for continual investments and innovation will increase the potential for industry expansion. Likewise, a consumer survey of music streamers conducted by Amazon’s market research expert, Robert Klein, demonstrates that His survey also demonstrates that As a result, These practical considerations 4 PUBLIC VERSION must be taken into account before imposing a radical departure from the current regulatory regime. The Rights Owners also repeatedly argue that rates should be increased because some of the DSPs are among the “wealthiest corporations in the world” and “can afford to pay more.”1 But the size or success of certain of the participating DSPs’ unrelated business operations is completely irrelevant to the determination of an appropriate royalty rate. As Mr. Mirchandani testifies, Amazon simply will not operate its streaming music services at severe losses, as it would be forced to do under the Rights Owners’ proposed rates and terms. Mr. Mirchandani also dispels the notion—repeatedly suggested by the Rights Owners—that Amazon uses music as a loss leader. To the contrary, as Mr. Mirchandani testifies, many of Amazon’s other businesses serve as unique distribution channels that Amazon uses to drive performance (and royalties) in music streaming. Finally, both Mr. Mirchandani and Dr. Hubbard also make clear that a revenue-based model can be fair when, like Amazon’s proposal, it includes reasonable alternatives to revenue that protect rightsholders in every scenario. As for the irrelevant premises, the Rights Owners’ musings as to whether there should be a compulsory rate at all are of no moment. The purpose of the present proceeding is to set a fair rate, and entertaining the Rights Owners’ misplaced objections only wastes time and distracts from the important issues at hand. Based upon this testimony, and in light of the negotiated regime under which the parties have been operating for nearly a decade, Amazon proposes to maintain the existing rates and terms, subject to a few minor clarifying changes. At the same time, Amazon respectfully urges the Judges to reject the inflated, one-size-fits-all model proposed by the Rights Owners (and, at a 1 Introductory Memorandum of the Rights Owners, at A-3; Witness Statement of David M. Israelite, at ¶ 103; 5 PUBLIC VERSION reduced rate, Apple) as unduly disruptive