PUBLIC VERSION Before the UNITED STATES COPYRIGHT ROYALTY JUDGES Library of Congress Washington, D.C. In the Matter of: Determination of Royalty Rates and. Docket No. 16—CRB—0001—SR/PSSR Terms for Transmission of Sound. (2018-2022) Recordings by Satellite Radio and "Preexisting" Subscription Services (SDARS III) VOLUME I MUSIC CHOICE'S WRITTEN DIRECT STATEMENT WRITTEN DIRECT TESTIMONY OF DAVID J. DKL BKCCARO WRITTEN DIRECT TESTIMONY OF DAMON WILLIAMS WRITTEN DIRECT TESTIMONY OF GREGORY S. CRAWFORD PhD Music Choice's Written Direct Statement 1000000000000000000000000000000000010000000 0 Before the UNITED STATES COPYRIGHT ROYALTY JUDGES Library of Congress Washington, D.C. 0 In the Matter of: Docket No. 16-CRB-0001—SR/PSSR Determination of Royalty Rates (2018-2022) 0 and Terms for Transmission of Sound Recordings by Satellite Radio and "Preexisting" Subscription Services (SDARS III) MUSIC CHOICE'S WRITTEN DIRECT STATEMENT Pursuant to 87 C.F.R. $ 851.4 and the Judges'otice of Participants, Order dated 0 Commencement ofVoluntary Negotiation Period, and Case Scheduling March 14, 2016 and the Judges'rder for Further Proceedings and Case Scheduling dated June 28, 2016 (the "Judges'rders"), Music Choice respectfully submits its written direct statement. CONTENTS OF MUSIC CHOICE'S WRITTEN DIRECT CASE 0 VOLUME I: WITNESS TESTIMONY Music Choice '~ Pursuant to 87 C.F.R. $ 851.4(b)(1) and. the Judges'rders, submits written direct testimony from the following expert and. fact witnesses, ,~ included in Volume I: Music (1) David J. Del Beccaro, the President and Chief Executive OKcer of 0 Choice, presents testimony concerning the business operations ofMusic Choice. He ("PSS") also testi6es concerning the history of the Preexisting Subscription Services royalty rate, including how it was initially set too high based upon an erroneous "PRO estimate of the aggregate musical composition performance royalty rate (the subsequently increased in a Rate") by the original CARP, and how that rate was series of settlements only to avoid. the expense of litigation. Mr. Del Beccaro also explains that the Judges'mposition of a further rate increase in the SDARS II proceeding was based solely upon the assumption of a future channel increase that Music Choice never actually implemented and was therefore (and for other reasons) erroneous. Mx. Del Beccaro then testi6es to various changes in the PSS marketplace that have led to a signi6cant change in Music Choice's business since the time of the SDARS II proceeding, and. demonstrates the impact of the implicit 7.5% rate from the SDARS II determination on Music Choice's business during the next rate period. In particular, addxessing each of the Section 801(b) policy objectives, he demonstrates the adverse impact the implicit 7.5% rate will have on those objectives, and why the change in circumstances since the SDARS II proceeding warrant a reduction in the PSS rate to a rate no higher than 5.6% of revenue. Mr. Del Beccaxo will further testify concerning the lack of any true marketplace value for the Section 112 ephemeral license royalty rate and. the lack of any need. to change the long-established terms of the PSS license. and (2) Damon Williams, the Senior Vice President of Programming Strategy Partnerships at Music Choice, presents testimony demonstrating the various ways in which Music Choice provides its own original, creative content to its residential 0 subscribers, including its unique approach to cuxation of the music channels 0 themselves, as well as various on-screen, social media, and. other visual elements related to the service, which increase subscriber engagement and. increase the promotional impact of the service. Mr. Williams also testi6es speci6cally about that promotional impact, particularly the many ways in which Music Choice increases record. sales and. on-demand streaming, and. promotes artists and genres that are therefore promoting the continued. release of a 0 underserved, by other music services, 0 wider variety of music to the public. 0 Dr. Greeorv Crawford. Ph.D., Professor of Economics, Director of Graduate 0 (3) Studies at the University of Zurich Department of Economics, provides his expert 0 opinion as to the proper rates to be set in this proceeding. After observing the Judges'rior ruling that there is no usable marketplace benchmark for the PSS, he 0 relies upon well-established economic principles to develop an economic framework to determine the likely outcome of a relevant hypothetical marketplace negotiation 0 of a license for the sound. recording performance right between a record. company and a PSS. He uses the Asymmetric Nash Bargaining Framework, examuung the 0 actual marketplace dynamics a8ecting Music Choice and the record. companies and analyzing the factors of agreement pro6ts, threat points and baxgaining power that would be applicable in the hypothetical negotiation. Professor Crawford then quanti6es those inputs using empirical data, including the cuxrent and. short-term projections of future performance ofMusic Choice's business if it were limited to the residential audio service covered by the PSS license. Using this methodology, Professor Crawford. demonstrates that in the relevant hypothetical marketplace negotiation, even with various conservative assumptions such as allocating no value to the promotional impact of Music Choice and allocating signi6cantly less value to Music Choice's bundled video offerings than the value supported by empirical evidence, the PSS rate would most likely be 8.5% of gross revenue, but in any event no higher than 5.6% of revenue. He also considers the Section 801(b)(l) policy objectives and. concludes that, on balance, they indicate that the PSS rate should be set below the high end. ofthe range yielded. by the hypothetical marketplace negotiation. VOLUME II 4 VOLUME III: MUSIC CHOICE EXHIBITS Pursuant to 87 C.F.R. $ 851.4(b)(1) and the Judges'rders, Music Choice submits the following exhibits, included in Volumes II L III: Exhibit Sponsoring Description Version No. Witness David J. Del Speaking Engagements Public Beccaro MC1 David J. Del Channel Lineups Public MC2 Beccaro David J. Del Register of Copyrights'006 PSS Decision Restricted MC8 Beccaro David J. Del 1993 Sony License Restricted MC4 Beccaro David J. Del 1994 EMI License Restricted MC5 Beccaro David J. Del 1993 WMGLicense Restricted MC6 Beccaro 0 Exhibit Sponsoring Description Version No. Witness Del ASCAP License Restricted ' David J. MC 7 Beccaro David J. Del BMI License Restricted 0 MC8 Beccaro ,0 David J. Del SESAC License Restricted 0 MC9 Beccaro David J. Del Music Choice Residential Audio Only Restricted MC 10 Beccaro Financials 0 David J. Del Music Choice Residential Consolidated Restricted MC 11 Beccaro Financials David J. Del News and Notes on 2016 Mid-Year Public MC 12 Beccaro RIAA Music Shi ment and Revenue Statistics David J. Del News and Notes on 2015 RIAA Shipment and Public Beccaro Revenue Statistics DamonWllhams Damon Williams Speaking Engagements Public Damon Wllllams July 2016 study by IPSOS OTX MediaCT Restricted Damon Williams Music Choice Channel Programming Restricted Plllloso ines Damon Williams Music Choice On-Screen Dis la Public Damon Williams Comparison of Music Choice Country Channel Restricted versus Radio Station Listenersbi Damon Williams Five Finger Death Punch Album Premiere Restricted MC 19 Reca DamonWilliams Brand New This Week Pro am Presentation Pubhc MC 20 Damon Williams Brand New This Week Artist Social Media Pubhc DamonWllllams Materials from Take Back Your Music, The F- Restricted MC 22 Word, MC Icons and Primed Pro rams Damon Williams PR that Music Choice Has Done for Artists Public Damon Williams Sampling of Other Emails Thanlang Music Restricted Choice Damon Williams Representative Plaques Recognizing Music Public MC 25 Choice Restricted MC 26 DamonWilliams Primed Reca Deck Restricted MC 27 DamonWilliams Music Choice Promotional Pro ram Deck Restricted 0 MC 28 Damon Williams Artist Post on Music Choice Blo DamonWilliams Record Label Promotional Emails Listing Public 0 MC 29 A'a on Music Choice Damon Williams Sample Email Re: Record Label Recognition Restricted MC 80 ofPromotional Im act Damon Williams Sample Email Re: Recognition Of Promotional Restricted MC 31 Im act 0 Exhibit Sponsoring Description Version No. Witness Damon Williams Recognition Received &om Rich Homie Quan Restricted and Promotional Materials Created for Rich MC 82 Homie Quan DamonWilliams Presentation Summarizing Rich Homie Quan Restricted MC 83 Promotion DamonWilliams List ofArtist Studio Visits and On Location Restricted MC 84 Promotions DamonWilliams A Case Study ofArtist Promotion on Music Restricted MC 85 Choice Damon Williams Presentation summarizing the Mainland Primed Restricted MC 36 program DamonWilliams Materials related to the Chris Brown Week Restricted MC 37 promotion DamonWilliams Case study ofMusic Choice Bugatti Beez Restricted MC 88 promotion MC 89 Damon Williams Neilsen Music 360 Report 2015 Highlights Public MC 40 Damon Williams Infinite Dial 2014 study Public DamonWilliams Bmails from labels and artists asking for Music Restricted MC 41 Choice's support MUSIC CHOICE'S RATE PROPOSAL Section Pursuant to 87 C.F.R. $ 851.4(b)(8), Music Choice proposes that the 114 sound. recording performance license rate for Music Choice be reduced. to no higher than 5.6 percent of gross revenues as that term is currently de6ned in the applicable regulations. Because the ephemeral copies made by Music Choice have no independent economic value, Music Choice proposes that the Section 112 ephemeral license fee be included within the performance royalty rate noted. above. Music Choice proposes that no changes be made to the terms and. other regulations applicable to the PSS license. 0 0 0 0 , ~ 0 DATED: October 19„2016 By ,0 Paul M. Fakler ,0 John Sullivan Margaret Wheeler-Frothingham 0 1675 Broadway 0 New York, NY 10019-5874 Tel: (212} 484-3900 Fax: (212) 484-3990 0 Email: [email protected] 0 [email protected] ' [email protected] , ~ ' Jackson D.