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LIBRARY OF CONGRESS determining the SDARS rates, the For SDARS: 15.5% of Gross Revenues, Judges relied most heavily on the as that term is defined for SDARS. Copyright Royalty Board opportunity cost approach proffered by II. Background SoundExchange, but the Judges utilized 37 CFR Part 382 opportunity cost survey data that they A. Statutory Licenses [Docket No. 16–CRB–0001 SR/PSSR (2018– found more appropriate than the data In 1995, Congress granted to sound 2022)] relied on by SoundExchange. recording copyright owners the After the Judges issued the Initial exclusive right ‘‘to perform the Determination of Royalty Rates and Determination in this proceeding on copyrighted [sound recording] publicly Terms for Transmission of Sound December 14, 2017, both Sirius XM by means of a digital audio Recordings by Satellite Radio and Radio, Inc., (Sirius XM), the lone transmission.’’ 2 17 U.S.C. 106(6). ‘‘Preexisting’’ Subscription Services SDARS, and Music Choice filed timely Concurrently, Congress limited that (SDARS III) motions for rehearing. SoundExchange exclusive right by creating two statutory filed responses opposing each rehearing AGENCY: Copyright Royalty Board, licenses that would enable certain users, motion, and Sirius XM and Music Library of Congress. including SDARS and PSS, to transmit Choice filed replies. On April 17, 2018, digitally sound recordings without ACTION: Final rule and order. the Judges ruled on the rehearing obtaining a voluntary license from each motions. See Order Granting In Part and SUMMARY: The Copyright Royalty Judges copyright owner. See 17 U.S.C. 112(e), announce their final determination of Denying In Part . . . Motion[s] for 114(d). The section 112 license the rates and terms for the digital Rehearing (Apr. 17, 2018). By this order, (ephemeral license) allows an entity that transmission of sound recordings and the Judges denied the Music Choice transmits a sound recording digitally to the reproduction of ephemeral motion and asked for additional briefing make ephemeral phonorecords of the recordings by preexisting subscription on the primary issue Sirius XM raised, sound recording to facilitate the services and preexisting satellite digital viz., whether the Judges should reduce transmission. Section 112(e) describes audio radio services for the period the royalty rate for SDARS set in the conditions under which an entity may 3 beginning January 1, 2018, and ending Initial Determination to a rate not lower license the ephemeral sound recording. on December 31, 2027. than 14.7% of Gross Revenues. Id. at 9. Section 114 describes limits that apply The parties filed briefs and responses to the digital transmission license.4 DATES: and the Judges took the issue under Effective Date: December 19, 2018. advisement. B. The Standards for Determining Applicability Date: The regulations Royalty Rates On October 11, 2018, the President apply to the license period beginning signed into law the Orrin G. Hatch-Bob Section 801(b)(1) of the Act provides January 1, 2018, and ending December Goodlatte Music Modernization Act, that the Judges shall ‘‘make 31, 2027. Public Law 115–264, 132 Stat. 3676 determinations and adjustments of ADDRESSES: The final determination is (Oct. 11, 2018) (MMA). That law reasonable terms and rates of royalty posted in eCRB at https://app.crb.gov/. includes a provision amending section payments’’ for the statutory licenses set For access to the docket to read the final 804(b)(3)(B) of the Copyright Act (Act) forth in, inter alia, section 114(f)(1) determination and submitted to state that ‘‘with respect to pre- (‘‘digital performance license’’).5 The background documents, go to eCRB and existing satellite digital audio radio digital performance license requires that search for docket number 16–CRB–0001 services, the terms and rates set forth by the Judges set rates and terms that are SR/PSSR (2018–2022). the Copyright Royalty Judges on ‘‘reasonable.’’ Id. In addition, section FOR FURTHER INFORMATION CONTACT: December 14, 2017, in their initial 801(b)(1) provides that these Anita Blaine, CRB Program Assistant, by determination for the rate period ending ‘‘reasonable’’ rates shall be calculated to telephone at (202) 707–7658 or by email on December 31, 2022, shall be in effect achieve four specific objectives: at [email protected]. through December 31, 2027, without (A) To maximize the availability of creative works to the public. SUPPLEMENTARY INFORMATION: any change based on a rehearing under (B) To afford the copyright owner a fair section 803(c)(2) . . . .’’ Id. sec. 103. As I. Introduction return for his or her creative work and the a consequence of this statutory copyright user a fair income under existing The purpose of the Copyright Royalty provision, the Judges dismissed the economic conditions. Judges (Judges) in the present pending rehearing as moot. See Order (C) To reflect the relative roles of the proceeding is to determine the royalty Dismissing Rehearing Proceeding (Oct. copyright owner and the copyright user in rates and terms applicable to Preexisting 11, 2018). the product made available to the public with Subscription Services (PSS) and Based upon the totality of the record, Satellite Digital Audio Radio Services 2 See Digital Performance Right in Sound and in accordance with the following Recording Act of 1995, Public Law 104–39, 109 (SDARS) for licenses established by the reasoning and analysis, the Judges Stat. 336 (1995). Copyright Act (Act) to utilize determine that the applicable rates and 3 Section 112 provides that a sound recording copyrighted sound recordings. See 17 terms for the period beginning January transmitter may make no more than one ephemeral U.S.C. 112, 114. The Act requires the 1, 2018,1 shall be: phonorecord, ‘‘unless the terms and conditions of the statutory license allow for more.’’ 17 U.S.C. Judges to determine applicable rates and For PSS: 7.5% of Gross Revenues, as 112(e)(1). terms every five years. See 17 U.S.C. that term is defined for PSS. 4 Specifically, section 114 excludes from the 801(b)(1), 804(b)(3)(B). statutory license transmissions by interactive services. See 17 U.S.C. 114(d)(2)(A)(i). In determining the PSS rates, the 1 In the Judges’ Initial Determination in this Judges considered proposals from both proceeding, they established rates for the period 5 Sirius XM and SoundExchange agree in Music Choice and SoundExchange as January 1, 2018 through December 31, 2022. Under substance that the Judges should conform the guideposts rather than as benchmarks the MMA, these rates shall remain in effect until SDARS regulations regarding ephemeral licenses to December 31, 2027. See 17 U.S.C. 804(b)(3)(B) (as the language adopted by the Judges in Web IV. See and determined a rate based upon the amended by the MMA). Note that all redactions in SEPFF ¶ 2371; SXMPFF ¶ 492. The Judges approve current statutory rate as adjusted to this publication were made by the Copyright this agreement and adopt it in the regulations for meet statutory requirements. In Royalty Judges and not by the Federal Register. the forthcoming rate period. See infra, section III.

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respect to relative creative contribution, Recording Industry Association of ‘‘[m]onopoly and public utility aspects technological contribution, capital America (RIAA), through their counsel, are just not prevalent in this industry.’’ investment, cost, risk, and contribution to the Thurman Arnold, Esq., a well-known Id. opening of new markets for creative advocate of strong antitrust The licensees’ opposing position, expression and media for their communication. enforcement. See Hearing on S. 597, expressed by Mr. Arnold on behalf of (D) To minimize any disruptive impact on Subcomm. on Patents, Trademarks and the RIAA, contained the seeds of the the structure of the industries involved and Copyrights of the S. Committee on the standard ultimately adopted in section on generally prevailing industry practices. Judiciary, (Mar. 20–21, 1967) (Senate 801(b)(1). As Mr. Arnold testified, the 17 U.S.C. 801(b)(1). Hearing). statute should include, inter alia, Mr. Nathan criticized any proposed ‘‘accepted standards of statutory In SDARS 1, the Judges detailed the legislation that would subject the historical treatment of these section ratemaking,’’ including a rate ‘‘that songwriting industry to a statutory 801(b)(1) standards. See Determination insures the party against whom it is mechanical licensing scheme. Id. at 382. of Rates and Terms . . . 73 FR 4080, imposed a reasonable return on . . . He did not agree that licenses in the 4082–84 (Jan. 24, 2008) (SDARS I). investment’’ and ‘‘that divides the music industry should be treated There, the Judges noted that the section rewards for the respective creative differently than how ‘‘we generally 801(b)(1) factors originated in the contributions of the record producers function under competitive marketplace protracted legislative process that [the licensees] and the copyright owners bargaining arrangements whereby most ultimately produced the Copyright Act . . . equitably between them.’’ Id. at entities in our economy bargain for that of 1976. The SDARS I Judges examined 469. which goes into the creation of goods the legislative history of the 1976 Act Mr. Nathan criticized this approach and services and also bargain the price and noted that the motivation for on two fronts. First, he argued that the for which those goods and services are adopting the four itemized 801(b)(1) ‘‘personal service’’ nature of the sold.’’ Id. He further noted that the factors arose from an exchange between songwriting and publishing industry statutory mechanical royalty rate was in two law professors, Professor Ernest precluded application of a ‘‘reasonable part a reaction to an early 20th century Gellhorn, on behalf of certain copyright rate of return’’ requirement for concern regarding a Supreme Court users, and Professor Louis H. Pollack, establishing the compulsory royalty decision allowing a player-piano on behalf of certain copyright owners. rate. Second, with regard to the division manufacturer to play songs through the The issue between the professors was of the ‘‘rewards’’ proposal, Mr. Nathan use of perforated paper rolls fed into the the constitutionality of the Copyright stated that ‘‘I have never in all my new devices (player pianos), without a Royalty Tribunal (CRT), a predecessor of experience encountered this novel license and without a duty to pay the Copyright Royalty Board. As concept of dividing rewards for creative royalties to the songwriters and recounted in SDARS I: ‘‘Professor contributions as a meaningful and publishers. White-Smith Music Gellhorn had recommended that, in relevant standard of ratemaking.’’ Id. at Publishing Company v. Apollo 7 order to bolster the constitutionality of 1093–94. Company, 209 U.S. 1 (1908). As Mr. the Tribunal, the Congress should, inter Resolution of this 1967 dispute Nathan explained: ‘‘[T]he Aeolian Co.[,] alia, adopt statutory standards beyond languished until 1976, when Professor had gained control of some 80 percent the vague criterion of ‘reasonableness.’ ’’ Gellhorn successfully convinced of the musical compositions and SDARS I, 73 FR at 4082 (citing Hearings Congress to adopt an itemized standard Congress . . . fear[ed] the threat of on H.R. 2223 before the Subcomm. on in the final statute. See F. Greenman & monopoly in the mechanical Courts, Civil Liberties, and the A. Deutsch, The Copyright Royalty reproduction of music.’’ Senate Hearing Administration of Justice of the House Tribunal and the Statutory Mechanical at 382–83. The Copyright Act of 1909 Comm. on the Judiciary, 94th Cong., Royalty: History and Prospect, 1 superseded the effect of White-Smith by 1922 (1975).6 After consideration of Cardozo Arts & Ent. L.J. 1, 53, 59 (1982). creating a statutory license and alternative potential statutory language, In so doing, Congress did not explicitly imposing a fixed statutory rate for Congress adopted the four-part itemized address the economic dispute between mechanical reproduction of musical factors included in section 801(b)(1) to Mr. Arnold and Mr. Nathan regarding compositions. supplement the ‘‘reasonable’’ rate the relative merits of a market-based rate In his 1967 testimony, Mr. Nathan versus a rate established in some other requirement. Id. advocated that Congress eliminate the There is additional legislative history manner. compulsory license and the statutory regarding the itemized four factors in Under the itemized section 801(b)(1) rate, and he specifically urged Congress section 801(b)(1) that aids in standard, the Judges have the discretion to resist replacing the fixed statutory fee understanding how those factors should to choose a market rate, a market-based with a regulatory standard to be be applied and informs economic rate, or a rate unrelated to market implemented by a quasi-adjudicatory analysis under these statutory evidence. Music Choice v. Copyright body. As to the latter point he explained provisions. This legislative history is Royalty Bd., 774 F.3d 1000, 1010 (D.C. to Congress: ‘‘[O]ne might ask . . . highlighted by dueling positions taken Cir. 2014) (and citations therein). Any whether the music publishing industry in Congressional testimony in 1967 by such rate would be legally appropriate has any characteristics of a public the licensors, through the National provided it was not ‘‘arbitrary, utility? I submit . . . that there is Music Publishers Association (NMPA) capricious, an abuse of discretion, or nothing in the music publishing and its economic witness, Robert R. otherwise not in accordance with law, industry which gives [it] the Nathan, and by the licensees, the or if the facts relied upon by the [Judges] characteristics or the elements of a public utility . . . .’’ Id. at 383. Mr. 6 The SDARS I Judges also noted that, in like 7 As the present record (and the record in fashion, the Register of Copyrights concluded that Nathan noted what he felt was a key Phonorecords III) demonstrates, subsequent to Mr. it would be ‘‘wise to establish, in the statute, certain distinction: Unlike traditional public Nathan’s 1967 testimony, the economic concept of criteria beyond ‘reasonableness’ that each Panel is utilities such as ‘‘railroad systems’’ or ‘‘dividing rewards for creative contributions as a to apply to its decision-making.’’ Id. (citing Second ‘‘streetcar lines,’’ the songwriting and meaningful and relevant standard of ratemaking’’ Supplementary Report of the Register of Copyrights has blossomed, with the application of Opportunity on the General Revision of the U.S. Copyright Law, publishing industry is ‘‘a creative and Cost/Efficient Component Pricing approaches, Nash Chapter XV, at 31 (1975)). nonstandardized area,’’ and Bargaining Solutions, and Shapley Value analyses.

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have no basis in the record.’’ Id. at 1007. FR 255 (Jan. 5, 2016). Seven entities asked that the Judges include the Indeed, in Music Choice, the D.C. filed petitions to participate.10 The section 112 rate in the overall rate. Circuit reaffirmed that ‘‘the Copyright Judges dismissed the petitions of Music Sirius and SoundExchange asked the Act gives the Judges of the Copyright Reports, Inc. and David Powell. Muzak Judges to determine that the value of the Royalty Board broad discretion to set LLC withdrew its petition to participate. licenses be allocated 5% to the rates and terms for compulsory licenses The parties participating in the hearing ephemeral license and 95% to the of the digital performance of sound were George Johnson d/b/a GEO Music performance license, consistent with the recordings.’’ Id. at 1016 (emphasis Group (GEO), Music Choice, Sirius XM current regulations applicable to added). Radio, Inc. (Sirius XM), and SDARS, webcasters, and new SoundExchange, Inc. (SoundExchange). C. Prior Proceedings subscription (CABSAT) services. See, The Judges presided over an e.g., Sirius XM . . . Proposed Findings This proceeding is not the first in evidentiary hearing that commenced on . . . and Conclusions at 234 (SXM which the Judges or their predecessors April 12, 2017, and ended on May 18, PFFCL); Proposed Findings . . . and have applied the section 801(b) factors 2017. Parties to the hearing presented Conclusions of SoundExchange . . . at 8 to determine royalty rates. In SDARS I, oral closing argument on July 18. The 938 (SX PFFCL); see 37 CFR 382.3(c), the Judges detailed the historical parties called 35 witnesses,11 including 382.12(b) (2016). treatment of these factors by their 15 experts.12 Of the 856 exhibits marked The parties’ positions and the Judges’ predecessors, the Copyright Royalty for identification for the hearing (not decisions concerning the ephemeral Tribunal and the Librarian in his including illustrative presentations by license regulations are detailed in administration of the Copyright various witnesses) the Judges admitted section XI.C of this Determination; the Arbitration Royalty Panel (CARP) 511 (including those admitted for regulatory language adopted by the system. See Determination of Rates and limited purpose) into evidence during Judges is attached as Appendix A. Terms . . . , 73 FR 4080, 4082–84 (Jan. the hearing.13 On June 14, the parties 24, 2008) (SDARS I). In SDARS I, the filed their respective Proposed Findings IV. PSS Performance License Judges chose to ‘‘begin with a of Fact (PFF) and Proposed Conclusions A. Background consideration and analysis of the of Law (PCL). Parties filed Reply PFF [market] benchmarks and testimony and PCL on June 29. The Act defines a PSS as ‘‘a service submitted by the parties, and then that performs sound recordings by measure the rate or rates yielded by that III. The Section 112 Ephemeral License means of noninteractive audio-only process against the [section 801(b)] The ephemeral license rates that the subscription digital audio statutory objectives’’ to reach a decision. Judges are to determine in this transmissions, which was in existence Id. at 4084. proceeding shall ‘‘most clearly represent and was making such transmissions to The precedent guiding the present the fees that would have been the public for a fee on or before July 31, panel of Judges signals an analysis in negotiated in the marketplace between a 1998 . . . .’’ 17 U.S.C. 114(j)(11). When which the Judges may weigh the willing buyer and a willing seller.’’ 17 Congress enacted that definition, there evidence presented to support the rate U.S.C. 112(e)(4). All parties to the were three PSS entities in existence. See proposals, including marketplace present proceeding agree that the value H.R. Rep. No. 105–796, at 81, 85, 89 benchmarks, apply the section 801(b) of the section 112 ephemeral license is (Oct. 8, 1998). Only two remain, and policy factors to assure the final rates linked to the value of the section 114 Music Choice was the only PSS that are consonant with those factors and, if performance license.14 Music Choice participated in this proceeding.15 the evidence permits, also establish a SoundExchange represented Copyright zone of reasonableness within which 10 Original petitioners included George Johnson Owners in the PSS portion of the the rate shall be set.9 d/b/a GEO Music Group; Music Choice; Music proceeding. George Johnson, an Reports, Inc.; Muzak LLC; Sirius XM Radio, Inc.; individual licensor, also proposed a PSS D. The Present Proceeding SoundExchange, Inc. (SoundExchange); and David Powell. SoundExchange appeared on behalf of itself rate. The Judges commenced the present and its members, the American Association of Music Choice operates a residential proceeding with publication of notice Independent Music; the American Federation of audio service that consists of 50 seeking petitions to participate. See 81 Musicians of the United States and Canada; the channels of audio programming Recording Industry Association of America; the delivered to subscribers’ televisions. 8 Screen Actors Guild and the American Federation The Copyright Royalty Tribunal (CRT) applied of Television and Radio Artists; Sony Music Written Direct Testimony of David J. Del the 801(b) factors in a section 116 (Jukebox) rate Entertainment; Universal Music Group; and Warner Beccaro, Trial Ex. 55, at 4 (Del Beccaro adjustment and a section 115 (Phonorecords) rate Music Group. WDT). Music Choice’s services are adjustment. The Librarian of Congress, as 11 administrator of a Copyright Arbitration Royalty In addition to live witnesses, participants also delivered to customers by cable designated prior testimony of witnesses in prior Panel (CARP) issued a determination for the section operators and other multichannel video 114 satellite radio license (SDARS I). In 2017, the proceedings. See 37 CFR 351.4(b)(2). Judges presided over a contested Phonorecords rate 12 GEO Music Group (GEO) presented the programming distributors (MVPDs) as hearing, the determination of which will issue after testimony of George Johnson. Mr. Johnson asked to part of customers’ digital basic cable the present determination and will involve be qualified as an expert in the music sound service. Id. application of the 801(b) policy factors to the recording business. There being no objection, the In addition to its cable TV-based Judges acknowledged his experience as a Phonorecords license. service, Music Choice makes its 50 cable 9 The U.S. Court of Appeals for the D.C. Circuit songwriter, singer, and independent record has also concluded that the Judges may apply the producer for approximately 30 years and qualified channels, plus an additional 25 ‘‘[section 801(b)] . . . objectives [to] determine a him for purposes of the present proceeding as an channels of audio programming, range of reasonable royalty rates that would serve expert in the music business. available to authenticated television 13 all these objectives adequately but to differing Immediately prior to and during the hearing in subscribers through its website and a degrees, [and] the [Judges are] free to choose among this proceeding, participants filed motions seeking those rates, and courts are without authority to set to limit or exclude opposing parties’ evidence. The aside the particular rate chosen . . . if it lies within Judges’ conclusions on those motions are issued by Statement of Sirius Radio Inc. at 1; Proposed Rates a ‘‘zone of reasonableness.’’ See Recording Indus. separate order or orders. References to evidence in and Terms of SoundExchange, Inc. and Copyright Ass’n of America v. Copyright Royalty Tribunal, this Determination are to evidence admitted to the Owner and Artist Participants at 5. 662 F.2d 1, 9 (D.C. Cir. 1981) (footnotes omitted). record. 15 The other remaining PSS entity, Muzak LLC, Thus, the Judges may establish such a zone of 14 See Music Choice Written Direct Statement at filed a Petition to Participate, but withdrew it before reasonableness, but are not required to do so. 6; Introductory Memorandum to the Written the deadline for filing Written Direct Statements.

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mobile app. Id. Music Choice describes Choice’s expert, Professor Gregory The Judges concluded that the these internet transmissions as ‘‘an Crawford.19 Based on his analysis, evidence presented by Music Choice ancillary part of its residential music Professor Crawford concluded the PRO framed the lower end of a range of business . . . .’’ Written Rebuttal rates were an appropriate benchmark for reasonable rates and that presented by Testimony of David J. Del Beccaro, Trial the sound recording license at issue. SoundExchange framed the upper end. Ex. 57, at 25 (Del Beccaro WRT). The Judges disagreed and found that 78 FR at 23059. Having rejected the the musical works benchmark lacked parties’ respective proffered benchmarks 1. PSS Rates From SDARS II comparability to the hypothetical PSS (and proposed corroborating evidence) The parties in the prior proceeding market. Id. at 23058. The Judges found for any purpose other than to frame a (SDARS II) reached agreement on the that the musical works market involved range of potential rates, the Judges were rates and terms of the section 112 different sellers (PROs versus record left with a consideration of the then- license prior to the hearing. See 78 FR companies) selling different rights prevailing royalty rate of 7.5% of gross at 23054–56.16 Therefore, the Judges’ (musical works performance rights revenues, which fell within that range. focus in that proceeding was limited to versus sound recording performance The Judges started with the then- determining the appropriate rates and rights) than those at issue in this prevailing rate and applied the Section terms for the section 114 license. The proceeding.20 801(b) factors. Consideration of the Judges began with a consideration and With regard to the Nash Framework, section 801(b) factors persuaded the analysis of the market benchmarks and the Judges noted: Judges that they should adopt that rate, testimony submitted by the parties and The Nash Framework is a theoretical but adjust it up to 8.5% based on Music then measured the rate or rates yielded concept whose goal is to evaluate how the Choice’s planned expansion of its by that process against the Section surplus from a hypothetical transaction service from 46 channels to up to 300. 801(b) statutory objectives to reach a might be divided between negotiating parties. The Judges concluded that the planned decision. 78 FR at 23055. The Judges Even assuming that the Nash Framework has expansion would result in a substantial repeat that approach in the current predictive value in some real-world contexts, increase in the number of plays of proceeding. Music Choice provided no data to support recorded music without any the theoretical approximations in the market In SDARS II, Music Choice advocated corresponding increase in adoption of the annual royalties it pays for any intellectual property rights, much less those that the Judges are charged with compensation. 78 FR at 23059–60. to performing rights societies (PROs) evaluating. Therefore, the Judges find that the Nevertheless, the Judges acknowledged (i.e., ASCAP, BMI, and SESAC) for the Nash Framework is not useful corroborating that the upward adjustment of the right to perform musical works to evidence. benchmark rate was based on projected subscribers of its residential audio 78 FR at 23058.21 usage that was likely to occur during the service as a precedential benchmark. rate period. The Judges noted that Indeed, Music Choice asserted that the For its part, SoundExchange offered certain marketplace agreements ‘‘[s]hould Music Choice alter its Judges were required to rely on that anticipated usage under the statutory musical works rate. The Judges rejected executed by interactive music streaming services as a benchmark. The Judges license in the future, such evidence can that contention but analyzed whether be taken into account in a future rate the rates that Music Choice paid the also rejected this proposed benchmark on comparability grounds. 78 FR at proceeding. . . .’’ Id. at 23061. PROs were a useful benchmark. 78 FR 22 at 23056. Music Choice contended that 23058. 2. Standard for PSS Royalty Rates two pieces of evidence corroborated use When the Judges determine a section 19 Professor Crawford’s Nash Framework from of the musical works rates as a SDARS II (as well as the Judges’ reasons for 114 rate for PSS, they generally begin benchmark: (1) Decisions from Canada rejecting it) is described at length in the with an appropriate rate (or range of and the United Kingdom concluding determination and need not be repeated here. See rates) and adjust it, as appropriate, in that royalty rates for sound recordings SDARS II, 78 FR at 23056–57, 23058. As discussed accordance with the section 801(b)(1) below, in the current proceeding Music Choice does and musical compositions have not premise its Nash-based model (or any other statutory factors. By contrast, the section equivalent value 17 and (2) results of an model) on an asserted equivalency between the 112 ephemeral license requires the economic model called the Asymmetric value of sound recordings and musical works, in Judges, among other things, to Nash Bargaining Framework (Nash light of the Judges’ rejection of that argument on the ‘‘establish rates that most clearly record presented in SDARS II. Nonetheless, 18 Framework) offered by Music Professor Crawford’s Nash Framework in the instant represent the fees that would have been proceeding is strikingly similar to his Nash negotiated between a willing buyer and 16 In the SDARS II proceeding, SoundExchange Framework in SDARS II. a willing seller.’’ 17 U.S.C. 112(e)(4).23 and Music Choice submitted a joint stipulation with 20 The Judges acknowledged that musical works respect to the Section 112(e) ephemeral license, and performance rights and sound recording noted that the buyers are different from the target the Judges adopted the proposal based on the performance rights are likely perfect complements, PSS market. Thus, the key characteristic of a good stipulation. 78 FR at 23055–56. The provision but concluded that, based on the record, such benchmark—comparability—was not present. 78 FR addressing the Section 112(e) license appears in complementarity had not been shown to inform the at 23058. The Judges noted that the bundling of current CRB Rule 382.3(c). It states that ‘‘[t]he decision regarding relative value of the rights. Music Choice’s services with multiple channels of royalty payable under 17 U.S.C. 112(e) for the 21 The Judge who dissented from the majority video and other non-music programming making of phonorecords used by the Licensee solely decision offered what the majority characterized as significantly dim the possibility of market to facilitate transmissions for which it pays a ‘‘more spirited rejection of the probative value of comparators. The Judges concluded that ‘‘in the royalties as and when provided in this subpart shall the Nash Framework as proffered in this context.’’ absence of some rational, reasoned adjustment to be included within, and constitute 5% of, the total The majority concurred with this assessment but make the music agreements data more comparable royalties payable under 17 U.S.C. 112(e) and 114.’’ concluded that ‘‘as a threshold matter, [the] Nash to the PSS market, the Judges find its probative 17 The Judges dismissed Music Choice’s reliance Framework, without real-world data to support its value in this proceeding of only marginal value.’’ on foreign jurisdictions because of a lack of proof predictive capacity, is unworthy of further Id. of comparability between foreign markets and U.S. consideration. 78 FR at 23058, n.17. 23 Section 112(e)(4) also directs the Judges to base markets. Further, Music Choice failed to convince 22 The markets that the proffered agreements their decision on such factors as (1) whether use of the Judges that the governing laws were sufficiently covered were subscription interactive webcasting, the service may substitute for or promote the sale similar to U.S. law to offer even analogous ringtones/ringbacks, and digital downloads. The of phonorecords or otherwise interferes with or reasoning. See 78 FR at 23058. Judges concluded that these markets involve the enhances the copyright owner’s traditional streams 18 The Nash Framework, as presented in the licensing of products and rights separate and apart of revenue and (2) the relative roles of the copyright instant proceeding, is discussed in greater detail from the right to publicly perform sound recordings owner and the transmitting organization in the infra, section IV.C.1.a. in the context of the PSS proceeding. The Judges Continued

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The ephemeral license also requires a reasonableness within which to set an the current rate by [REDACTED] %, minimum fee for each type of service appropriate rate for the upcoming rate assuming no increase in subscribers.29 offered by a transmitting organization.24 period (as they did in SDARS II).26 SoundExchange also proposed a Consistent with this process, in separate rate for internet transmissions determining the appropriate rate for the B. The Parties’ Rate Proposals by a PSS, leading to a dispute between PSS market for the upcoming rate 1. Music Choice’s Proposal the parties over whether a PSS’s internet period, the Judges must first identify a Since 1998, the PSS have paid a fee transmissions are included in the PSS starting point for applying the Section based on a percentage of gross revenues, license and subject to the PSS rate 801(b) policy factors. A marketplace as that term is defined by standard. The Judges referred the benchmark, if available, can be a useful regulation.27 See SDARS II, 78 FR 23054, question of categorization of Music starting point for applying the Section 23056; 63 FR 25394, 25413 (May 8, Choice’s streaming service to the 801(b) factors. See SDARS II, 78 FR at 1998). Music Choice has proposed Register of Copyrights (Register) for a 23056. A key component of a continuing that rate structure but seeks legal opinion. Analysis of the Register’s marketplace benchmark is that the at least a 34% reduction in the current opinion follows in Section IV.D.2. market it purports to represent is rate of 8.5% of gross revenues, to a rate 3. GEO’s Rate Proposal comparable to the hypothetical target no higher than 5.6% of gross revenues. George Johnson, d/b/a GEO Music market in the proceeding. See SDARS I, MC PFF ¶ 30. 73 FR at 4088 (‘‘ ‘comparability’ is a key Group (GEO) proposed that PSS pay a issue in gauging the relevance of any 2. SoundExchange’s Proposal per-subscriber rate of $0.10 in 2018 proffered benchmarks.’’). In determining SoundExchange requests that the rising to $0.20 in 2022. Johnson WDT at whether a benchmark market is Judges change the PSS rate structure. 14. He also proposed a percentage-of- comparable, the Judges consider such Rather than the percentage-of-revenue revenue rate of 45% of gross revenues. factors as whether it has the same formula, SoundExchange proposes that It is unclear whether he proposed that buyers and sellers as the target market PSS pay a per-subscriber fee that would PSS pay both components or that they and whether they are negotiating for the begin at $0.0190 in 2018, the first year pay them as a greater-of or lesser-of same rights. 78 FR at 23058. ‘‘Although of the new rate period, and rise to structure. Mr. Johnson did not proffer a the applicable Section 114 statutory $0.0214 in 2022, the last year of the rate benchmark or any other evidence to standard provides a broader scope for period. Amended Proposed Rates and support his rate proposals for PSS. He analyzing relevant ‘benchmark’ rates Terms of SoundExchange, Inc. and merely stated that ‘‘[t]hese are estimates than the ‘willing buyer/willing seller Copyright Owner and Artist Participants from public data and actual royalty standard’ . . . , nevertheless potential at 7. Although SoundExchange does not statements. If the Sirius XM and Music benchmarks are confined to a zone of offer a percent-of-revenue alternative to Choice would provide number of reasonableness that excludes clearly its proposed per-subscriber rates, it listeners per station and on a per-play noncomparable marketplace situations.’’ acknowledges that converting its basis, that would help GEO to better 73 FR at 4088. proposed rates to a percentage-of- establish a more reasonable rate.’’ Id. In the hypothetical PSS market the revenue rate would plausibly yield a The Judges find that there is no buyers are the PSS services, and the rate of [REDACTED] % for 2018, the evidence in the record to support the sellers are the copyright owners of the first year of the upcoming rate period. PSS rates that Mr. Johnson proposed sound recordings that are being SX PFFCL ¶ 1949; see Written Rebuttal and therefore decline to adopt them.30 transmitted (which most often means Testimony of Gregory Crawford, Trial C. Rates for Music Choice’s Cable Radio record companies). The buyers and 28 Ex. 59, ¶ 113 (Crawford WRT). The Service sellers are negotiating for the same evidence in the record supports that this bundle of rights as those granted to a conversion estimate is correct; thus the 1. Analysis of the Parties’ Proffered PSS under section 114(f)(1)(A) of the lowest rate that SoundExchange Benchmarks Copyright Act to make digital proposes ([REDACTED] %) exceeds the a. Music Choice’s Proffered Nash Model subscription transmissions of the highest rate that Music Choice proposes Music Choice, through its expert, copyrighted works. (5.6%) by [REDACTED] %; it exceeds When the parties (or the Judges) Professor Crawford, contended that in identify variances in the comparability the absence of an appropriate 26 See supra, section IV.A.1. of the hypothetical target market and the 27 Music Choice also does not propose an marketplace benchmark, the best way to proffered benchmark market, the Judges alternative per-subscriber rate should the Judges will consider reasoned adjustments that adopt such a rate structure rather than a percent- 29 Assuming that the number of subscribers that might more closely align the two of-revenue structure. Neither party has proposed to carried Music Choice’s service remained flat over markets.25 Even when a proffered combine both rate structures (e.g., in a greater-of the upcoming rate period, the annual 3% increases structure). Given that neither party has advocated SoundExchange proposes would bring the rates to benchmark is not comparable to the a hybrid rate structure nor provided sufficient [REDACTED] % for 2019, [REDACTED] % for 2020, target market, however, the Judges may evidence to support such a rate structure in the [REDACTED] % for 2021, and [REDACTED] % for use the rates derived from the proffered current proceeding, the Judges weigh the arguments 2022, or [REDACTED] % over the current rate. This benchmark as a reference point (or and evidence in the record to determine the estimate is consistent with SoundExchange’s applicable rate structure from the two structures estimate that a CABSAT service pays almost guidepost) to help frame a zone of that the parties proposed. [REDACTED] times as much on a per-subscriber 28 Music Choice’s expert, Professor Gregory basis as a PSS. SX PFFCL ¶ 1940 and evidence cited copyrighted work and the service made available to Crawford, estimates that Music Choice would pay therein. See id. ¶¶ 1934–35 (estimating that Music the public with respect to relative creative [REDACTED] % of its unadjusted residential service Choice’s PSS statutory royalty payment amounts to contribution, technological contribution, capital revenue in sound recording performance royalties [REDACTED] cents per listener per year whereas for investment, cost, and risk. 17 U.S.C. 112(e)(4). in 2018 under the CABSAT rates, the basis for a CABSAT service, the annual per-subscriber 24 The ephemeral license for both PSS and SoundExchange’s rate proposal, compared to the royalty for 2017 is 22.2 cents). SDARS is addressed in section XI.C. 8.5% it currently pays. Crawford WRT at ¶ 113, 30 Mr. Johnson also proposed requiring the PSS to 25 When the Judges are faced with proposed Table 6. This estimate appears consistent with the install a ‘‘buy button’’ on their services to promote benchmarks that are not comparable and cannot be effective rate that Stingray, a Music Choice sales of music downloads. 5/3/17 Tr. 2232, 2238 made so with reasoned adjustments, the Judges competitor, paid in 2015 under the CABSAT rates. (Johnson). Such proposal is beyond the scope of the reject the proffered benchmarks. See, e.g., SDARS SX PFFCL ¶ 1949; Trial Ex. 1017 at SoundX Section 114 and 112 licenses and therefore beyond II, 78 FR at 23058; SDARS I, 73 FR at 4089–90. 000145808. the Judges’ authority in the current proceeding.

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estimate the royalties that would arise would arise in the hypothetical market the Nash Framework.34 The Judges do in a hypothetical effectively competitive for sound recording performance rights not suggest that Professor Crawford’s market for the PSS sound recording for the PSS over the 2018–2022 rate adjustments were erroneous or rights is to use an economic model. period, Professor Crawford quantified inappropriate under the circumstances Professor Crawford chose as that model the Nash Factors based on Music but only mention them to highlight the one based upon the Nash Bargaining Choice’s costs and revenues of its level of discretion and subjectivity that Solution, developed by Nobel-prize- residential audio service as a standalone Professor Crawford employed in winning economist John Nash. Crawford business. Id. ¶ 110. developing the inputs that he fed into WDT ¶¶ 62, 64. Professor Crawford the Nash Framework. Given the extreme offered a variation of the Nash i. Joint Agreement Profits complexity of the process that Professor Framework that the Judges rejected in Because Music Choice keeps its books Crawford developed, it would be SDARS II as a means of corroborating on a consolidated basis, Professor impracticable if not impossible for the the proffered musical works benchmark. Crawford analyzed Music Choice’s costs Judges to ‘‘back out’’ one or more of the Crawford WDT ¶ 65.31 and revenues to determine how they adjustments Professor Crawford made in In his Nash Framework proposal, would have been allocated if Music developing the model if the Judges Professor Crawford modeled a single Choice operated its residential audio found they were unwarranted. The record label as the ‘‘upstream’’ firm in service as a standalone business. Id. discretion that Professor Crawford the negotiation of sound recording ¶¶ 122–149; 4/24/17 Tr. 733–38 exhibited in disaggregating Music performance rights to be licensed to a (Crawford); 5/18/17 Tr. 4549–52 (Del Choice’s costs and revenues pales, single PSS, the ‘‘downstream’’ firm in Beccaro).33 This process was conducted however, in comparison to that he the negotiation. Id. ¶ 67. The Nash not in the ordinary course of business exercised in choosing other Nash Framework is based on the assumption but to isolate Music Choice’s residential Factors, such as bargaining power and that the record label and PSS provider audio business for use in the Nash Threat Point. The great degree of each have a certain degree of market Framework and in response to the discretion in quantifying the inputs in power. Id. ¶ 71. Professor Crawford Judges’ observation in SDARS II that the the Nash Framework as proposed by asserted that this assumption is residential audio service is the Professor Crawford underscores the applicable with respect to Music Choice applicable Music Choice business line inherent weakness in the Crawford given its current product offerings and in analyzing the section 114 license. model. The Judges concerns about the established relationships with MVPDs. Crawford WDT ¶ 110. Professor model are more applicable in the Id. ¶ 73. According to Professor Crawford also asserted that isolating the current proceeding than they were in Crawford, Music Choice has negotiated residential audio service is necessary to SDARS II because Music Choice seeks to long-term contracts with the MVPDs ensure that Music Choice does not elevate the model to benchmark status and possesses a unique bundle of subsidize this business line with profits rather than as information to corroborate technology that would be costly and from other business lines, which a proffered rate as was the case in time consuming for other firms to Professor Crawford believes would be SDARS II. duplicate. Id. ¶ 73. Professor Crawford inconsistent with economic policy and Professor Crawford used the concluded that because both PSS the statutory objectives of the PSS disaggregated costs and revenues to providers and record labels have some license as he understands them to be. Id. begin the Nash Framework calculations. market power, a non-cooperative ¶ 176; 4/24/17 Tr. 787 (Crawford). The first step in that process is to create bargaining model such as the Nash It would not be fruitful to detail the the first Nash Factor—Joint Agreement Framework is an appropriate framework multistep process Professor Crawford Profits—the joint economic profits to be for analyzing market outcomes for the conducted to disaggregate costs and shared between a record label and PSS PSS sound recording performance rights revenues to derive inputs for the Nash provider in the PSS market if an in the absence of a compulsory license. Framework analysis. Nonetheless, it is agreement is reached. It is the total Id. ¶ 75. worth noting that many of the steps economic profits that the PSS provider In the Nash Framework three required judgment calls on Professor earns before payment of a sound fundamental factors determine how two Crawford’s part that undoubtedly recording performance royalty. firms would ‘‘split a pie’’ in a affected the inputs he later plugged into Crawford WDT ¶ 92. hypothetical negotiation. These ‘‘Nash Based on his analysis of Music Factors’’ are: (1) The Joint Agreement ‘‘Incremental Profits’’ which are the profits the Choice’s financial information as Profits; (2) each firm’s Threat Point; and firms could earn by reaching an agreement above discussed above, Professor Crawford (3) each firm’s bargaining power. Id. ¶ and beyond the profits they could earn in the estimated the Joint Agreement Profits in 32 absence of an agreement. Id. The profits each firm 81. To determine the royalty that receives in a bargain equals its Threat Point plus its the hypothetical market for PSS sound Bargaining Power times the Incremental Profits. Id. 31 Music Choice acknowledged that the Judges ¶ 82. Dr. Crawford communicated this formula in 34 For example, Dr. Crawford chose to exclude rejected its proposed musical works benchmark as mathematical terms as Royalty = Threat Point + certain legal costs that Music Choice incurred or a marketplace benchmark in SDARS II. Rather than Bargaining Power * Incremental Surplus. Id. at expected to incur related to the PSS III proceeding proffer a marketplace benchmark from another n.69. in 2016 and 2017 because those costs relate to market, however, Music Choice proffered Professor 33 Music Choice has three business lines: A litigating the 2018–2022 rate proceeding. Instead he Crawford’s Nash Framework, not to corroborate the residential audio service, a residential video substituted costs that Music Choice purportedly musical works benchmark rejected in SDARS II, but service, and a commercial audio service. Some of incurred during the PSS II rate period (2013–2017). as a stand-alone benchmark. Music Choice’s subscription fee revenue bundles He also chose to average certain patent litigation 32 Joint Agreement Profits are the combined residential audio and video services. Many of Music costs over an eight-year period that Music Choice profits to both the upstream and downstream firms Choice’s costs are used in the production of both incurred during 2016–2017 because, based on his in the market under study from reaching an the residential audio and video business lines. discussions with Music Choice executives, Music agreement. For the PSS this means the revenue the Crawford WDT ¶ 110. According to Professor Choice historically has incurred such patent costs PSS earns for the PSS less all non-PSS royalty costs Crawford, the residential audio service remains the every eight years. Crawford WDT ¶ 148. Of course, that they incur. Crawford WDT ¶ 81. The Threat most important in terms of revenues and company as a practical matter, no individual company can Point for each firm is the profit it would receive strategy. Professor Crawford asserted that if the know with any reasonable degree of certainty when, when no agreement is reached. Id. The difference residential audio service were to cease, Music in the future, it may be sued for patent infringement between the Joint Agreement Profits and the sum Choice would cease providing any services and or sue another that allegedly violates one of its of the firms’ Threat Points is called the would close altogether. Crawford WDT ¶ 129. patents.

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recording performance rights would catalog of any record label, then Music which the model purportedly range from [REDACTED] in 2018 to Choice’s threat point would be higher corroborated. The Judges did not opine [REDACTED] in 2022. Crawford WDT than zero, which would suggest that on how Professor Crawford should have ¶¶ 113, 171. Music Choice should pay a lower calculated the threat point for his own royalty rate under the model. Id. at 49 model because the Judges dismissed the ii. Threat Points n.149. usefulness of the model. 78 FR at 23058 Professor Crawford then calculated Outside of the threat point discussion, (‘‘without real world data to support its each party’s Threat Point, the second however, Professor Crawford asserted predictive capacity [Professor factor in the Nash Framework. A Threat that Music Choice’s residential audio Crawford’s application of the Nash Point is a theoretical construct service remains the most important in Framework] is unworthy of further representing the profit that would terms of revenues and company consideration.’’). accrue to a record label and a PSS strategy. Indeed, Professor Crawford Therefore, the Judges agree with provider if they are unable to reach an asserted that if the residential audio SoundExchange’s criticism that agreement. Each firm in a hypothetical service were to cease, Music Choice Professor Crawford incorrectly assigned negotiation will have a Threat Point. would cease providing any services and a threat point of zero to Music Choice Crawford WDT ¶ 67. Under the model, would close altogether. Id. ¶ 129. Placed when, under Professor Crawford’s own threat points can be positive, negative, in the context of the threat point testimony, Music Choice would lose or zero. Id. at 26 n.71. For a record label, discussion, this concession strongly profits from non-PSS business lines if a negative threat point could occur suggests that Music Choice deserves a Music Choice could not reach an where the record label could earn negative threat point under Professor agreement with one or more record additional profit in a non-PSS market Crawford’s model, the extent of which labels. Based on that fact alone, the (e.g., music downloads) if it reaches an would be measured by the amount of results of Professor Crawford’s model in agreement with a PSS in the PSS profits Music Choice would lose if it the current proceeding are suspect, but market. If the record label fails to reach closed its non-PSS business lines. the flaws in Professor Crawford’s the agreement with the PSS provider, it SoundExchange’s expert pointed out presentation do not end there. loses all prospective profits it would this inconsistency in Professor With respect to the threat point for a have earned in the PSS market and the Crawford’s presentation. 5/3/17 Tr. hypothetical record label, Professor profits it could have earned in the non- 2461, 2343 (Wazzan) (‘‘Dr. Crawford Crawford asserted that it would be zero PSS market. Id. ¶ 85. concedes that Music Choice would go in the PSS market. As for the label’s The profit each firm earns in a bargain out of business altogether without the threat point in the non-PSS market (e.g., equals its threat point plus its residential music business. So they sales of CDs and downloads), Professor bargaining power (discussed below) would lose their commercial and video Crawford asserted that the analysis was times incremental profits. Id. ¶ 82. revenue streams. And if you look at the more ‘‘nuanced.’’ Crawford WDT ¶¶ 94– Incremental profits are the difference financials, we know that Music Choice 95, 174–175. Due to an alleged between the joint agreement profits and is forecasting significant profits in its promotional effect that the PSS has on the sum of the firms’ threat points. Id. non-PSS lines of business.’’). the label in the non-PSS market, ¶ 81. Professor Crawford determined Music Choice’s responses to this Professor Crawford concluded that the that Music Choice’s threat point would disconnect between Professor record label’s threat point could be be zero because, in the absence of an Crawford’s threat point assessment and negative. Professor Crawford has no way agreement between Music Choice and a his statements about the primacy of of estimating the purported promotional theoretical record label, Music Choice Music Choice’s residential audio effect of Music Choice’s services in the would not be able to offer a viable business are unavailing. For example, non-PSS market so he assigned a zero Music Choice contended that the threat point to the hypothetical record residential audio service and therefore SDARS II decision is precedent for label. Id. ¶¶ 175–176. We concur with would have economic profits of zero. Id. treatment of the threat point analysis Professor Crawford’s decision not to ¶ 173. Professor Crawford asserted that that Professor Crawford employed. attempt to assign any promotional value assigning a zero threat point to Music Music Choice Reply to SE PFF 2044 at to Music Choice’s service in the non- Choice is conservative because it is 817–18. The passage from SDARS II that PSS market. The evidence he cited to based on an assumption that Music Music Choice referred to pertained to an support such an effect is either dated Choice could not offer a viable service analysis of Factor B in Section 801(b)(1), (i.e., from a 1998 CARP decision) or in the absence of an agreement with a regarding the setting of a rate that anecdotal (i.e., record labels provide single label.35 If Music Choice could provides a fair return (for the service) Music Choice with ‘‘promotional offer such a service in the absence of the and a fair income (for the copyright copies’’ of new singles or albums). Id. owners) under existing market ¶¶ 97–104. The Judges do not doubt that 35 Rather than postulate the hypothetical PSS market as a negotiation between a single PSS and conditions. The Judges were concerned record labels seek exposure for the a single record label Professor Crawford could have in that context that Music Choice was artists they promote, and digital constructed the model as a negotiation between a making claims of unprofitability of its platforms like Music Choice may single PSS and a group of record labels. Under this business as a whole to support a provide meaningful exposure to the scenario, the PSS might reach agreements with some labels but not others. The failure of an downward adjustment in the rates artists that appear on its PSS service. agreement with certain labels (i.e., smaller labels) under the Section 801(b) factors. The The Judges find no evidence in the might not preclude the PSS from offering a service Judges pointed out that the subject of record in this proceeding that they can whereas the failure of the PSS to reach an the section 114 license was Music use to quantify what impact, if any, agreement with any of the larger labels might preclude the PSS from offering any type of service Choice’s residential audio business promotional activities on Music (i.e., PSS service or non-PSS service). Under this rather than its entire business, which Choice’s platform would have on artists scenario, the assignment to the PSS of a negative included non-PSS lines. 78 FR at 23059. (and the labels that sign them) in non- threat point might be more appropriate than By that point in the determination, the PSS markets. assigning a zero threat point because if Music Choice failed to reach an agreement with one major Judges had already discounted the use The Judges are less sanguine, label then it might be precluded from offering any of the Crawford model and the proffered however, about Professor Crawford’s service. musical works benchmark the results of assignment of a zero threat point to the

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first portion of a record label’s threat asserted promotional effect, however, labels have much greater bargaining point (i.e., that dealing with the PSS such an effect is impossible to estimate power than Music Choice (or a similarly market). It is not at all clear that a record with any accuracy. The Judges do not situated PSS in the hypothetical label’s failure to reach an agreement conclude from this discussion that zero market). with Music Choice would mean a loss is the correct threat point for the Mr. Del Beccaro, Music Choice’s of all record company profits in the PSS hypothetical record label but rather President and CEO testified about a market if that market includes all confirm the lack of usefulness of the history of ‘‘inequality in bargaining providers of residential audio services. Crawford model because critical power’’ between Music Choice and the There is evidence in the record that at components of the model, at least as record labels that forced Music Choice least one Music Choice competitor, presented by Dr. Crawford in the current to accept rates that were higher than it Stingray Music, provides a service that proceeding, allow a broad level of would have otherwise. See, e.g., Del is comparable to the residential audio discretion and subjectivity, which Beccaro WDT at 10 (‘‘Music Choice had service that Music Choice provides, but undermines the credibility of the no choice but to accept a rate increase pays a much higher royalty rate than results. to 7 percent for 2002 to 2003 and 7.5 Music Choice pays.36 Although that percent for 2004 through 2007’’); id. at competitor, which is a recent entrant to iii. Relative Bargaining Power 11 (‘‘[d]espite repeated efforts by Music the U.S. market, has not sought a royalty Professor Crawford’s assignment of Choice to engage in settlement rate closer to that which Music Choice the parties’ respective bargaining negotiations, when the royalty rate came pays, it certainly could in the future, powers (the last element of the Nash up for adjustment for the next rate perhaps using the lower rate paid by Framework) was also based on faulty period, SoundExchange did not Music Choice as a comparable to reasoning. Under the Nash Framework, negotiate a settlement until directed to support its own rate reduction. In other each firm’s bargaining power is a by the Judges during the direct trial words, the lower rate that Music Choice number between 0 and 1, which opening statements of the SDARS I pays as a PSS could put downward measures the strength of that firm in the proceeding in June 2007’’); id. at 12 pressure on the rates that competing negotiation. Crawford WDT ¶ 81. The (‘‘[In SDARS III] Music Choice reached services pay to record labels. sum of the two parties’ bargaining out to SoundExchange yet again, in By contrast, if Music Choice and the powers equals 1. Id. Professor Crawford January 2016, to attempt settlement theoretical record label were unable to related each firm’s bargaining power to solely to avoid the costs of litigation. reach an agreement, the rate that Music each party’s patience in a negotiation. SoundExchange once again failed to Choice pays could no longer be used by The party with greater patience also has negotiate, and did not even respond to providers of comparable services to greater bargaining power. Professor Music Choice’s offer until July.’’). justify lower royalty rates. Under that Crawford contended that that Professor Crawford contended that scenario, a record label could actually comparison is consistent with the ‘‘there is no direct evidence on the benefit from the loss of Music Choice to nature of bargaining between Music relative bargaining power of either a the extent that the rate it pays could be Choice and the copyright owners. record label or Music Choice in a shown to be below a market rate, which According to Professor Crawford, hypothetical market for sound recording would result in a positive threat point performance rights for PSSs.’’ Crawford [b]oth record labels and Music Choice have 37 WDT ¶ 177. But he needed look no for the record label. As with the a history of successful negotiations, so there is nothing a priori to suggest that in the further than Mr. Del Beccaro’s 36 Stingray Music is a Canadian digital pay hypothetical marketplace, one would be statements about Music Choice’s efforts television audio service owned and operated by more or less patient than the other. to negotiate settlements with Stingray Digital. It has about 50 music channels that SoundExchange. These statements are available to television service subscribers of Furthermore, estimating Bargaining several cable and IPTV providers in the U.S. Like Parameters of firms in marketplace settings is strongly suggest that Music Choice has Music Choice, Stingray also has a business service a challenging undertaking at the frontier of very little if any bargaining power in its and streams to individuals who subscribe to economic research.... I will therefore negotiations with the labels. The greater television services that provide Stingray Music. assume that a range of Bargaining Powers is the bargaining power by the record Wazzan WDT ¶ 62. The PSS and services such as possible. As I think it unreasonable to believe labels, the higher the rates that Music Stingray, which SoundExchange refers to as that either a record label or a PSS provider CABSAT (cable/satellite) services compete for the could extract all the profits from a bargain, Choice would be required to pay. same MVPD wholesale buyers. Stingray bought I choose a range of bargaining powers for Crawford WDT at 73, Ex. B.3. Therefore, Music Choice’s European affiliate, which it operates the Judges find no support in the record as Music Choice International. In the U.S., Music each party between 0.2 and 0.8. to suggest that Music Choice or a Choice and Stingray are direct competitors. Id. Crawford WDT ¶ 105. The Judges ¶ 62(g), (h). similarly situated PSS would enjoy interpret Professor Crawford’s statement 37 See Wazzan WRT ¶ 57 (‘‘there is considerable anything but minimal bargaining power regarding relative bargaining power as reason to believe that the existence of Music Choice in negotiations with the labels, imposes significant opportunity costs on record saying he has no way to quantify what particularly any of the major labels. As companies in today’s market [in that] record labels the relative bargaining powers are a result, even under the fundamentally receive substantially higher revenues from between Music Choice and the record interactive and non-interactive music services than flawed Crawford model, nothing but the from the PSS’’). SoundExchange’s expert, Dr. labels. Ultimately, the Judges believe highest projected rate of 5.6% would Wazzan, attempted to correct this error and others that this is an accurate statement that in Professor Crawford’s model and derived a range even be considered to fall within a zone further undermines the usefulness of the of reasonableness. Given the inherent of rates that are several times greater than those Nash Framework in the proceeding. Professor Crawford’s estimated. Wazzan WRT ¶ 48. subjectivity of the model, however, the SX PFFCL ¶ 2046 (comparing Crawford’s range of That being said, what evidence there is Judges continue to conclude that it 1.4% to 5.6% to Wazzan’s ‘‘Corrected’’ range of in the record regarding the relative provides no useful information 9.0% to 36%). If the Judges were to rely to some bargaining power of Music Choice and extent on the Crawford model, the evidence in the regarding the royalty rates that a PSS record does not support a rate outside of this wide the record labels suggests that the record should pay, other than perhaps to range of 1.4% to 36% of gross revenues. After eliminate from a potential zone of reviewing each party’s evidence regarding the Nevertheless, the many flaws in Professor Crawford model, however, the Judges do not have Crawford’s model suggest that the lower end of the reasonableness all rates at or below a high level of confidence regarding where within range of rates that the Crawford model yields is 5.6%. Therefore, the Judges reject, for that broad range a reasonable rate might lie. likely outside the zone of reasonableness. the second time in two consecutive PSS

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proceedings, the usefulness of Professor CABSAT rates are ‘‘a market-like rate.’’ upcoming PSS rate period. See Bender Crawford’s presentation of the Nash See Crawford WDT ¶ 58. WDT at 29–31. Framework as a model for determining SoundExchange argued that the two Under SoundExchange’s proposal, the reasonable royalty rates for the PSS. services that use the statutory PSS rate for PSSs’ residential audio services license (i.e., Music Choice and Muzak’s would be a monthly per-subscriber rate b. SoundExchange’s Proffered CABSAT Dish CD service) ‘‘are in all important Rate of $0.0190 for 2018, $0.0196 for 2019, respects functionally equivalent to the $0.0202 for 2020, $0.0208 for 2021, and i. The CABSAT Benchmark three services ‘‘that use the statutory $0.0214 for 2020. SX Amended Rate SoundExchange asserted that there is CABSAT license.’’ See SX PFFCL at Proposal at 7, 10. These rates would no applicable marketplace benchmark xxiv. SoundExchange asserted that both cover the PSSs’ royalty obligations suitable for the PSS market, even with services are cable radio services that are under the section 114 and 112(e) a comparability adjustment. See Wazzan delivered to consumers through MVPDs; licenses. Id. CWDT ¶ 12. According to both provide a similar number of For PSSs’ webcasting activities,40 SoundExchange ‘‘nobody has identified channels and similar genres of music; SoundExchange proposed that the PSS any agreements relating exclusively to a both would negotiate in the pay the same rates that apply to PSS, or even relating in material part to hypothetical market for the same rights commercial webcasters providing a a PSS.’’ Id. ¶¶ 45, 47.38 SoundExchange from the same entities; and PSSs would subscription service under 37 CFR observed that even if such agreements meet every element of the regulatory 380.10. Through 2020, that rate would existed, one would expect the rates definition of a CABSAT service. be a per-performance rate of $0.0022, under those agreements to be influenced SoundExchange argued that PSSs and adjusted for inflation. For PSSs that are by the statutory license. Id. ¶ 44. CABSAT services compete head-to-head unable to measure performances, the Rather, SoundExchange proffered as for carriage on MVPDs. In short, rate would be based on the average according to SoundExchange, the only its benchmark a royalty rate developed number of recordings on the service material difference between the two in a settlement under section 114 of the played per hour multiplied by the types of services is the date on which Act and applicable to certain ‘‘new Aggregate Tuning Hours. SX Amended they commenced operation. See, e.g., subscription services’’ that offer digital Rate Proposal at 8. music transmissions to cable or satellite Wazzan CWDT ¶¶ 59, 60, 66; Crawford WDT ¶ 50; 5/3/17 Tr. at 2305–06 In advocating for the CABSAT television subscribers.39 benchmark, SoundExchange also SoundExchange referred to these new (Wazzan); 4/24/17 Tr. at 714 (Crawford); Written Direct Testimony of Jonathan stressed the importance of changing the subscription services’ rates as current rate structure from a percent-of- ‘‘CABSAT’’ rates. The Judges adopted Bender, Trial Ex. 29, at 29 (Bender WDT). For that reason and ‘‘because revenue to a per-subscriber structure, the ‘‘CABSAT’’ rates in a separate because CABSAT rates are calculated proceeding under a statutory provision setting relatively lower rates for the PSS would distort the market in their favor’’ per-subscriber. SX PFFCL ¶ 1949. that prescribes a rate-setting standard SoundExchange acknowledged that one different from the one at issue in the SoundExchange asserted: ‘‘the CABSAT rates present an appropriate benchmark could convert the proffered CABSAT- present proceeding. See Written Direct in the absence of any clearly- based rates to a percentage rate. Testimony of Paul Wazzan, Trial Ex. 27, appropriate unregulated marketplace SoundExchange estimated that in 2015, ¶ 11 (Wazzan WDT). Stingray paid an effective percentage SoundExchange asserted that the benchmark.’’ Id. According to SoundExchange, Music royalty rate of ‘‘just under [REDACTED] CABSAT rates are set in a ‘‘hybrid’’ Choice considers Stingray, one of the %’’ of its revenues. SX PFFCL ¶ 1949. market in which negotiations occur in a CABSAT services, to be its primary This converted CABSAT rate compares marketplace setting but, in the case of competitor. 5/18/17 Tr. 4641–42 (Del to Professor Crawford’s estimate that an impasse, either party can appeal to Beccaro). SoundExchange Music Choice would pay between a judicial or regulatory body for a rate acknowledged that the CABSAT rates, [REDACTED] % and [REDACTED] % of determination. SoundExchange which are statutory rates set in the its unadjusted residential audio service contended this ‘‘hybrid’’ environment context of a CRB rate proceeding, are revenue under SoundExchange’s rate makes CABSAT rates an appropriate not unregulated marketplace rates. proposal. See Crawford WRT ¶ 113. benchmark if the parties have similar Nevertheless, SoundExchange asserted Given this perceived equivalence, stakes in the benchmark and target that the CABSAT rates represent the SoundExchange perceived no reason to markets. See Crawford WDT ¶ 50; ‘‘best available benchmark for the PSS adopt a percent-of-revenue rate Wazzan CWRT ¶ 20. SoundExchange rates.’’ SX PFFCL at xlv. structure for PSS in the current concluded that while no party has SoundExchange acknowledged that the proceeding. Id. identified a suitable marketplace statutory rate standard for CABSATs is SoundExchange contended that a per- benchmark for the PSS that is not a willing buyer/willing seller standard. subscriber rate structure is preferable constrained by regulation, the statutory Nonetheless, SoundExchange contended because Music Choice is paid under that no adjustment would be required to such a structure by its MVPD customers. 38 SoundExchange acknowledged that the record the CABSAT rates under the Section includes evidence of two Muzak agreements that Id. ¶ 1950. SoundExchange also argued address Muzak’s PSS service, but SoundExchange 801(b) factors before applying them to that a per-subscriber rate is easier to asserted that these agreements are concerned the PSS services. See Wazzan CWDT apply and more transparent than a primarily with Muzak’s business establishment ¶ 18. The extant CABSAT rates only percentage-of-revenue rate. See Orszag service. Trial Exs. 401, 402. In any case, apply for three of the five years of the SoundExchange asserted that there are a number of AWDT ¶ 27; Crawford WDT ¶¶ 147– reasons why these agreements would not make current PSS rate period (2018–2020), suitable benchmarks. See Wazzan CWDT ¶ 45. therefore SoundExchange proposed that 40 This proposed rate would apply to ‘‘all licensed 39 See 37 CFR part 383. Three services currently the Judges apply a 3% per year rate transmissions and related ephemeral recordings offer residential audio services through cable and increase (the size of the CABSAT rate through an internet streaming service qualifying as satellite television providers and pay royalties a PSS (or any similar service capable of tracking the under part 383 regulations as New Subscription increases in 2018–2020) to the 2020 individual sound recordings received by any Services: Stingray, Sirius XM, and Muzak’s legacy CABSAT rate to derive the rates for particular consumer).’’ SX Amended Rate Proposal DMX. 2021 and 2022, the last two years of the at 8.

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148; Bender WRT at 13.41 Of particular 5/24/17 Tr. at 695–96 (Crawford). Music because the underlying CABSAT market concern to SoundExchange was the Choice contended that the proffered is neither competitive nor stable. See perception that a revenue-based CABSAT benchmark fails on both Del Beccaro WRT at 5–6. According to structure gives Music Choice the accounts because the CABSAT rates and Music Choice, ‘‘[t]here has never been a flexibility to reduce the amount of terms were set by a settlement between CABSAT licensee that has proven able royalties it pays by charging its affiliated SoundExchange and Sirius XM. to operate a long-term profitable owners discounted prices. According to Crawford WDT ¶¶ 55–56. According to business from its CABSAT operations, SoundExchange, Music Choice is Music Choice, the settlement did not nor have the majority of participants in partially owned by cable companies, reflect any sort of competitive the CABSAT market actively or including Comcast, Time Warner Cable, marketplace. Id. successfully sought new affiliates or and Cox, and charges lower prices to its Music Choice asserted that Sirius XM competed in the marketplace.’’ Id. MVPD owners than it charges to other is not an active participant in the Music Choice asserted that Stingray is MVPDs. See Wazzan CWDT ¶ 90. CABSAT market, providing its CABSAT the ‘‘only active CABSAT.’’ Id.43 SoundExchange argued that ‘‘the Judges service to only one affiliate (DISH According to Music Choice, after six should be suspicious of commercial Network). Music Choice contended that years in the CABSAT market Stingray arrangements between Music Choice Sirius XM’s CABSAT service is merely has captured only 6% of the MVPD and its MVPD partners.’’ Id. ¶ 1979. a promotional vehicle to drive market and, until recently, all of its SoundExchange disputed Music subscriptions to its primary business, affiliates were small cable operators that Choice’s attestations that its MVPD the satellite radio service. See Crawford pay high rates, which have sustained partner affiliate fees are a function of the WRT ¶ 43. In support of this argument, Stingray. See Del Beccaro WRT at 10. relative size of affiliated MVPDs vis-a` - Music Choice noted that Sirius XM’s Music Choice projected that if it left the vis non-affiliates. See Del Beccaro WDT CABSAT service generates only market, Stingray could not replace it at 22–23; but see Wazzan WDT ¶ 91. [REDACTED] % of Sirius XM’s because Stingray would have to reach SoundExchange contended that revenues. Given that the CABSAT agreements with larger MVPDs at lower evidence in the record shows that all service generates such a miniscule rates while still paying the high per- affiliates received discounted rates from percentage of Sirius XM’s revenues, subscriber CABSAT rates. Id. Over time Music Choice, regardless of the number Music Choice argued that Sirius XM had under this market dynamic Music of subscribers they had at the time. SX no real incentive to vigorously negotiate Choice contended Stingray would be PFFCL ¶ 1990; Trial Ex. 410, Music the CABSAT settlement let alone incur forced to exit the CABSAT market. Id. Choice Partner Affiliation Agreement, the costs of a rate proceeding.42 Id. ¶¶ Music Choice also faulted Sch. B at MC0012247–48; 5/3/17 Tr. 55–56. By contrast, Music Choice has a SoundExchange for glossing over the 2333 (Wazzan). SoundExchange far different stake because the PSS legislative history of the PSS license and contended that this purported affiliate service is its primary business. Crawford the Section 801(b) policy standard, discount, which remains in effect, WDT ¶ 129 (Music Choice’s residential which, Music Choice contended, represents a [REDACTED] % discount to audio service remains its most reflects Congressional intent to ‘‘protect fees that non-affiliated MVPDs are important business in terms of revenues the unique business expectancies of the required to pay. 5/3/17 Tr. 2333–37 and company strategy). PSS, even against later market entrants, (Wazzan). SoundExchange represented In Music Choice’s estimation, the which is inapplicable to other statutory that Music Choice’s non-partners with proffered CABSAT benchmark lacks a licensees and must inform any the largest number of subscribers are key indicator of comparability—similar interpretation or application of the expected to pay $[REDACTED] or stakes—which Music Choice asserted 801(b)(1) policy standard to the PSS.’’ $[REDACTED] per subscriber per month must be present when using a MC Reply to SX PFFCL at 66. Music in 2018, while the partners are expected benchmark from a hybrid market (i.e., a Choice noted that ‘‘Congress to pay $[REDACTED] per subscriber per market in which negotiations occur in a ‘grandfathered’ the three PSS, Music month, about one third as much. See marketplace setting but, in the case of Choice, DMX and Muzak, which were Wazzan CWRT, App. C. at 43–44. an impasse, either party can appeal to already in operation at the time a judicial or regulatory body for a rate Congress passed the Digital Millennium ii. Music Choice’s Opposition to the determination). See Crawford WRT Copyright Act (DMCA) 44 allowing the CABSAT Benchmark and Per-Subscriber ¶¶ 55–56. Music Choice also argued that PSS to continue operating under the Rate Structure the ‘‘sellers’’ in the proffered CABSAT 801(b)(1) policy-based rate standard Music Choice opposed market and the hypothetical PSS market rather than be subjected to the new SoundExchange’s proffered CABSAT are not comparable because in the [willing buyer/willing seller] benchmark and proposed per-subscriber CABSAT market SoundExchange marketplace standard.’’ Id. at 65. Thus, rate structure. As a preliminary matter, represents the entire record industry as Music Choice concluded, ‘‘the mere fact Music Choice contended that opposed to individual record companies that non-comparable services pay SoundExchange’s identification of the which purportedly would reflect the different rates provides no useful data necessary components of a comparable sellers in the hypothetical PSS market. for setting the PSS rates.’’ Id. at 66. market for benchmarking purposes Id. Music Choice agreed with omits two key requirements, namely Music Choice also argued that the SoundExchange (and Dr. Wazzan) that that the benchmark represent a proffered CABSAT benchmark is flawed workably competitive market and that 43 According to Music Choice, the only the buyers and sellers in both the target 42 Music Choice argued that the ‘‘bargaining and companies ever to enter the CABSAT market are market and the benchmark market have market dynamics that led to the settlement from MTV, DMX, Sirius XM, and Stingray. Music Choice which the current CABSAT rates and terms are represented that MTV and DMX have since exited similar stakes. See Crawford WDT ¶ 50; derived also make clear that those rates are not the CABSAT market. According to Music Choice, market rates, or even market-like . . .’’ MC Reply Sirius XM has only one affiliate, which it 41 SoundExchange acknowledged that although to SoundExchange’s PFFCL at 68. According to purportedly uses as a promotion tool, and is not allocation disputes can arise under a percent-of- Music Choice, Sirius XM had no rational business competing for new business. MC Reply to SX revenue structure, ‘‘such disputes have not incentive to litigate the last CABSAT proceeding, so PFFCL at 71–72 (and evidence cited therein). materialized between SoundExchange and Music it had little choice but to settle. Id. at 69–70 (and 44 Public Law 105–304, 112 Stat. 2860 (Oct. 28, Choice in recent memory.’’ SXPFFCL at ¶ 1952. evidence cited therein). 1998).

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there are no types of licensed music sense. MC PFF ¶¶ 283, 285–288; Del application of the willing buyer/willing services comparable to the PSS. Id. at Beccaro WRT at 16, 19–20. seller standard intended to approximate 67. Music Choice disagreed, however, Music Choice asserted that any a market rate.51 The intent of the carve- that the current PSS rate is below preferential pricing it offers is the result out was to acknowledge the pioneering market. In fact, it contended that the of the size of the cable company, status of the PSS, which invested in a current PSS rate is an above-market rate, although factors such as long-term new type of digital audio service (i.e., given that it is the result of settlements commitment to the Music Choice transmission of noninteractive audio to that Music Choice had little choice but service may also play a role. Del Beccaro the television) in reliance on the to accept to avoid litigation costs. Id. WRT at 16–17. Indeed, Music Choice existing 801(b) rate standard and to (MC Reply to SX PFFCL ¶ 1789). represented that at times its cable protect their prior investments.52 The Music Choice contended that, despite affiliates have made concessions on PSS took the risks and received the SoundExchange’s claims to the contrary, price just to help Music Choice survive. benefits, one of which was a statutory the reason Music Choice has not sought MC PFF ¶ 299; 5/18/17 Tr. 4593–94 (Del exception from the rate-setting direct licenses is not because it would Beccaro); 4/24/17 Tr. 804–05 provisions in the DMCA that were not get a better rate than the statutory (Crawford). designed to ‘‘move the industry to market rates.’’ 53 SoundExchange now rate but because the cost of direct iii. Judges’ Analysis of SoundExchange’s license negotiations would be too high. argues, however, that the Judges should Proffered CABSAT Benchmark and adopt the proffered CABSAT rate Id. Music Choice also noted that since Proposed Per-Subscriber Rate Structure the current statutory rate does not benchmark as a market-like rate. The exclude revenues from direct licenses In determining whether a proffered Judges decline. for PSS, Music Choice would still have marketplace benchmark is comparable Notwithstanding the similarities in to pay a share of revenues attributed to to the hypothetical target market the PSS and CABSAT service offerings that SoundExchange noted, the Judges do the sound recordings from the direct Judges have looked at the comparability not find the proffered CABSAT rate licenses in addition to the royalties of the buyers, sellers, and rights over 46 benchmark is a useful starting point required by those direct licenses. Id. at which the parties negotiated. When from which to apply the Section 801(b) 67–68. According to Music Choice, the two markets were comparable (i.e., the buyers, sellers, and rights are the factors. direct licensing would only make sense First, it is not at all clear to the Judges if it could directly license 100% of its same), the Judges have found that the rate that the buyers and sellers have that the proffered CABSAT benchmark music. Id. at 68 (Reply to SX PFFCL market and the hypothetical PSS market ¶ 1789). negotiated in the market can provide useful guidance in determining the rate offer the same rights. As discussed Music Choice acknowledged that PSS 47 below in reference to the Register’s providers and CABSAT services both for the target market. In the present proceeding, SoundExchange conceded Memorandum Opinion regarding the sell cable radio to MVPDs but scope of the PSS market, the rights that contended that material differences in that ‘‘[t]he CABSAT benchmark is not a marketplace benchmark. It is instead a the PSS can exercise while maintaining quality, programming, on-screen the grandfathered rate-setting displays and other features set the PSS regulated rate.’’ SX PFFCL ¶ 1847 (and evidence cited therein). The prevailing methodology are limited to PSS entities’ (or at least Music Choice’s) service apart existing service offerings and expanded from that of the CABSATs. Id. at 77. CABSAT rates were agreed to by SoundExchange and Sirius XM, the only service offerings, as the Register defines Music Choice contended that its screen those terms. Services that a PSS entity displays provide significantly more remaining participants, in a CRB rate- setting proceeding. See, e.g., Crawford provides outside the scope of the promotional impact than those of any 48 grandfathered categories constitute CABSAT service. Id. at 78–79.45 WRT ¶ 33. As a threshold matter, the Judges note different service offerings, i.e., rights Music Choice also opposed the per- that in setting a statutory rate for PSS outside those offered in the hypothetical subscriber rate structure that they are not required to approximate a PSS market. Although the types of SoundExchange proposed. Music market rate.49 Rather, the Judges’ activities that PSS and CABSAT entities Choice contended that the proposal is mandate is to set a reasonable rate perform may overlap in certain respects, based on the false premise that Music consistent with the Section 801(b) for purposes of determining Choice provides unfairly advantageous factors.50 In enacting the DMCA, comparability of the hypothetical discounts to cable providers with which Congress carved-out the PSS from market to the target market, the relevant Music Choice is affiliated. MC PFF service bundle is limited to those ¶ 279; Wazzan WDT at 37–38; 5/3/17 Tr. 46 See, e.g., SDARS I, 73 FR 4080, 4088 (Jan. 24, activities that the hypothetical PSS 2330 (Wazzan). Music Choice 2008). entity may provide consistent with the represented that a supermajority interest 47 See id. (‘‘ ‘comparability’ is a key issue in grandfathered rate methodology. in Music Choice is owned by non-cable gauging the relevance of any proffered benchmarks PSS entities, such as Music Choice, . . . potential benchmarks are confined to a zone and CABSAT entities may (and do, companies, including some affiliated of reasonableness that excludes clearly with record companies, which would be noncomparable marketplace situations’’). subject to an appropriate royalty rate) harmed if Music Choice gave below- 48 The rates that the participants agreed to and the provide services outside the scope of the market rates to its cable affiliates. Judges adopted based on that agreement were PSS license (e.g., internet-based and Therefore, according to Music Choice, monthly per subscriber payments of: 2016: $0.0179; mobile application-based services that 2017: $0.0185; 2018: $0.0190; 2019: $0.0196; and 54 doing so would make no economic 2020: $0.0202. 80 FR at 36928 (37 CFR 383.3(a)(1)). are consumed outside the home). 49 Music Choice v. CRB, 774 F.3d. 1000, 1012 51 45 Music Choice cited the fact that it bundles its (‘‘nothing in the statute requires the Judges to rely SoundExchange v. Muzak, 854 F.3d 713, 714– residential PSS with its video offerings as ‘‘critical on market rates or agreements when setting Section 15 (D.C. Cir. 2017). and relevant, because those bundled offerings 114 rates’’). 52 See Id. at 719. provide a value proposition that is appealing to 50 78 FR at 23055; Music Choice v. CRB, 774 F.3d 53 Id. MVPD providers and allows [Music Choice] to at 1013 (‘‘The Copyright Act does not ‘clearly 54 Dr. Wazzan referenced some of the differences compete effectively against the Stingray and Sirius require[ ] the use of ‘market rates’. [I]nstead, he perceived between the services that PSS and XM’s CABSAT services.’’ MC Reply to SXPFFCL at ‘reasonable rates’ are those that are calculated with CABSAT entities provide. Wazzan WDT ¶¶ 67–72. 85. reference to the four statutory criteria.’’). For example, he noted that Music Choice provides

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These different services, however, are SoundExchange attempted to conflate benchmark that yielded such rates. See not included within the bundle of rights what the PSS services and CABSAT 78 FR at 23066. The Judges have the that PSS entities would negotiate for in services do (as represented by same concerns about the rates derived the hypothetical market. Although it is SoundExchange) with what they have from the proffered CABSAT benchmark theoretically possible to adjust the the right to do either in the hypothetical and find that the wide gap strongly proffered CABSAT benchmark to PSS market or in the CABSAT market. suggests that the buyers in the CABSAT accommodate for the difference in the SX PFFCL ¶ 1794 (‘‘the same rights are market lack comparability with those in bundle of rights that the CABSAT and conveyed, because both create audio the theoretical PSS market. This PSS services negotiate for, music channels incorporating the difference in comparability of buyers is SoundExchange acknowledged no such licensed sound recordings and sell them supported by SoundExchange’s own difference and, consequently, offered no to MVPDs, who in turn resell those admission that Sirius XM, which adjustment in the current proceeding to channels to consumers as part of negotiated the CABSAT rates with account for the difference. The Judges subscription bundles.’’); see 5/3/17 Tr. SoundExchange, ‘‘is first and foremost can find no persuasive evidence in the at 2305–06 (Wazzan); see also SX PFFCL the provider of an SDARS’’ that ‘‘also record that would allow the Judges to ¶¶ 1797–1799 (‘‘CABSAT Services And provides a CABSAT service.’’ SX PFFCL develop such an adjustment sua PSS Are Functionally Equivalent Cable ¶ 1838. The PSS in the theoretical sponte.55 Radio Services And So Implicate the market are buyers negotiating for rights Same Rights’’). Similarities in service to operate their core business and ‘‘internet simulcasts of its channels to subscribers offerings do not necessarily equate to therefore will have a greater stake in of the MVPDs that distribute Music Choice’’ but comparability of rights that each of the negotiating the most favorable rate. On took no position on whether such streaming is part of its PSS. Id. ¶¶ 67–68. He continued that ‘‘the service types is authorized to exercise. the other hand, a buyer negotiating for CABSAT rates in Part 383 are quite clearly limited SoundExchange’s attempted direct rights for a non-core service might be to a service ‘transmitted to residential subscribers compare-and-contrast of the various more willing to settle for an acceptable of a television service’ through an MVPD using ‘a activities in which the two types of rate rather than the best possible rate. technology that is incapable of tracking the entities engage also ignores the individual sound recordings received by any Significant differences in the stakes of particular consumer.’’ Id. ¶ 70. According to Dr. fundamental, statutory difference the respective buyers between the PSS Wazzan, ‘‘internet streaming is something else, between PSS and CABSAT: Legislative and the CABSAT services suggest a lack because streams are typically transmitted to devices intent that PSS and non-PSS be treated of comparability between the two for other than televisions, over the public internet.’’ Id. differently with respect to the way in Dr. Wazzan noted that Sirius XM and Stingray both benchmarking purposes. provide internet streaming services but do so under which their respective royalty rates are The Judges conclude that the a different rate structure than that applicable to the determined. By SoundExchange’s own CABSAT benchmark as proposed in the CABSAT service. Id. ¶ 72. In finding that the rights admission, the CABSAT rates were current proceeding is not sufficiently conveyed to the CABSAT services are not comparable, for benchmarking purposes, to those based on a settlement agreement comparable to the hypothetical PSS for which a theoretical PSS would negotiate, the negotiated in the context of a target market and that the CABSAT rates Judges do not take a position on whether the rights proceeding in which the applicable rate are outside of the zone of conveyed to the theoretical PSS entities are broader standard was a willing buyer/willing reasonableness for determining PSS or narrower than those conveyed to the CABSAT services. They could be broader in some senses and seller standard. In adopting the DMCA, rates for the upcoming rate period. The narrower in others, but the evidence in the record Congress expressly carved-out the PSS only useful information that the shows that there are meaningful differences. All from that standard. The Judges conclude proffered CABSAT benchmark provides differences could affect the value of the underlying that applying the CABSAT rate is to identify a rate ceiling that any license and therefore are relevant in assessing the comparability of the proffered benchmark market benchmark as proffered by reasonable PSS rates must remain and the target market. Ultimately, a detailed SoundExchange in the current below. In other words, a reasonable PSS analysis might support a finding that, on balance, proceeding would effectively subject the rate for the upcoming rate period must the differences are a wash, which would support a PSS to the willing buyer/willing seller be lower than the lowest rate proposed finding that, notwithstanding the differences in the standard, which, in the Judges’ view, by SoundExchange based on the rights granted, no comparability adjustment was necessary. Based on the record in the current would be inconsistent with Congress’s CABSAT benchmark (i.e., $0.0190 per proceeding, however, the Judges are not in a intent in adopting the PSS rate-setting subscriber or [REDACTED] % of gross position to make such an assessment and therefore methodology in the DMCA. revenues). are left with a record that shows a lack of The proffered CABSAT benchmark By rejecting the proffered CABSAT comparability of rights with no adjustment to sufficiently align the markets. also raises concerns because of the benchmark, the Judges also reject one of 55 Although the Register’s Memorandum Opinion enormous difference between the SoundExchange’s arguments in support was issued after the record was closed in the current PSS statutory rate of 8.5% of of abandoning the current percent-of- current proceeding, the D.C. Circuit’s Muzak gross revenues and the rates proposed revenue rate structure in favor of a per- decision, which highlighted the limitations in the under the CABSAT benchmark subscriber rate structure. See SX PFFCL rights that a PSS could exercise consistent with the grandfathered rate methodology, was issued during (converting to approximately ¶ 1949. The Judges find the proceeding. As a party to the case, [REDACTED] % of revenue in the first SoundExchange’s other reasons in SoundExchange advocated for the restrictions on year). In SDARS II, the Judges support of a per-subscriber rate the PSS license that the D.C. Circuit found. characterized a difference between the structure equally unpersuasive. Even SoundExchange certainly could reasonably anticipate the impact that the Muzak decision prevailing statutory rate of 8% and a reviewing the evidence SoundExchange would have on the rights that other PSS entities proposed rate as high as 32.5% (for presents in a light most favorable to could exercise consistent with the grandfathered SDARS services) as a ‘‘yawning gap’’ SoundExchange, the Judges do not find rate-setting methodology. Indeed, one of that raised concerns about the that Music Choice’s arrangements with SoundExchange’s witnesses referenced the decision and the limitations it placed on the rights that a PSS reasonableness of the proffered its affiliated MVPD customers support a entity could exercise consistent with the change in the rate structure to a per- grandfathering provision. SX PFFCL ¶ 1807; 5/10/ rights that a hypothetical PSS entity could exercise subscriber structure. In this regard, the 17 Tr. 3205 (Bender); see SX PFFCL ¶ 1807 consistent with the grandfathering provision were Judges accept as credible the evidence (‘‘[d]uring the hearing in this case, the Court of limited to providing the types of services (i.e., Appeals for the D.C. Circuit held that Muzak’s PSS existing and expanded service offerings) that the that Music Choice presented that status is limited to its historic DishCD service.’’) Register set forth in her Memorandum Opinion historically it has charged and currently Therefore, SoundExchange had notice that the addressing the scope of the PSS license. charges similarly situated non-partner

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affiliates rates that are the same as or Both parties’ disdain for the current SDARS II to account for Music Choice’s lower than those charged to its partners. statutory rate appears to stem primarily projected increase in usage of sound MC Reply to SX PFFCL at 188 (Reply to from the fact that in the first proceeding recordings. Music Choice argued that SX PFFCL ¶ 1960) (and evidence cited to set a rate for the PSS, which occurred the PSS license is not a general ‘‘usage’’ therein); see, e.g., 5/18/17 Tr. 4582, about twenty years ago, the CARP license (in that making more channels 4593–94 (Del Beccaro); Del Beccaro looked to the musical works royalty rate available does not necessarily lead to a WRT at 18. to help determine what the rate should greater number of performances), and If SoundExchange and Music Choice be for the PSS. See, e.g., SX PFFCL ¶¶ that listeners can only listen to one were to agree to a per-subscriber rate 1894–1900. Since then, the parties have channel at a time, regardless of how structure, that structure would not, on either agreed to a royalty rate or, as many channels are available for them to its face, be inconsistent with the occurred in SDARS II, the Judges choose from. Del Beccaro WDT at 16.58 Copyright Act. Without a persuasive selected a rate after fully reviewing the The Judges find this claim somewhat argument, supported by the evidentiary evidence in the record. The Judges and peculiar. Music Choice appears to record, however, the Judges are their predecessors each chose a rate that assume that all members of a household reluctant to change the existing rate they viewed as reasonable and are transfixed to the same television set structure, which has thus far seemingly supported by the evidence before them as they might have been at the dawn of operated effectively. The arguments and at the time. The fact that once upon a the television age. Modern viewing record in the current proceeding do not time one decision-maker relied on a habits, however, are far different. support such a change. Therefore, the type of evidence that the Judges do not Televisions and other comparable Judges reject SoundExchange’s request find persuasive in the current electronic devices abound in modern to change the rate structure to a per- proceeding on the current record is households. It is not unreasonable to subscriber structure. irrelevant in the current proceeding. assume that each individual in a After reviewing and dismissing both Unlike Music Choice and modern household could have access to proffered benchmarks, the Judges are SoundExchange, the Judges are not his or her own viewing or listening left with the broad parameters of a zone convinced that the specter of the device, any one of which might be of reasonableness that must be higher musical works rate on the prevailing capable of viewing or listening to the than 5.6% of gross revenues 56 and PSS rate is so great as to preclude the Music Choice service. lower than [REDACTED] % of gross Judges from using the current PSS rate In SDARS II, the Judges found revenues (or $0.0190 per subscriber). as the starting point for applying the evidence of Music Choice’s then current The current rate of 8.5% of gross Section 801(b)(1) factors. intention to increase the number of revenues falls within that range, albeit The Judges must continue to have the Music Channels offered from 46 to 300. toward the lower end. In SDARS II, the flexibility to rely on the best evidence 78 FR at 23059. Music Choice does not Judges could endorse no proffered they have available on the record before dispute that intention. Del Beccaro WDT benchmark as an appropriate starting them in selecting reasonable rates and at 15. A greater variety of channels point for application of the Section terms for the upcoming rate period. At could reasonably be expected to attract 801(b)(1) factors. See 78 FR at 23059. this time, in this proceeding, on this its own audience.59 The Judges may rely Therefore, the Judges looked to the record, the best available evidence is the on a party’s present intentions as to prevailing statutory rate to begin the prevailing statutory rate, which falls future actions. Of course, present analysis of the Section 801(b)(1) factors. within the broad parameters of the zone intentions of future actions do not Id. of reasonableness indicated by the ensure that the latter will come to Notwithstanding that no party evidence that the parties presented. fruition. In this instance, the Judges’ advocated using the statutory rate as the Therefore, the Judges look to the finding was based on the evidence in starting point of the Section 801(b)(1) prevailing statutory rate of 8.5% as the the record before them. Music Choice analysis and that the rate was negotiated starting point for the Section 801(b) represented in the current proceeding in the shadow of the statutory license, analysis. that in actuality, the expansion of its the Judges found in SDARS II that the 2. Application of the 801(b)(1) Factors service was far more limited than it had current rate was neither too high, too anticipated in the last rate period. Del low, nor otherwise inappropriate. Id. The digital performance license The Judges reach the same conclusion requires that the rates (but not the 58 Music Choice contended that had there been in the current proceeding. As was the terms) be determined to achieve the any increase in revenues due to the increase in the case in SDARS II, neither party has statutory objectives detailed above. See number of channels that Music Choice offered, that 17 U.S.C. 801(b)(1). SoundExchange SoundExchange would have reaped the benefits proposed using the current statutory through increased royalties under as a percentage rate as the starting point for applying asserted that if the Judges use the of revenues. In SDARS II, the Judges found no the Section 801(b)(1) factors. SX PFFCL prevailing statutory rate as the starting evidence to support a projected increase in ¶ 1889; 4/25/17 Tr. 848 (Crawford). point of the section 801(b) factor revenues. 78 FR at 23060 (‘‘Music Choice provided analysis then they should adjust the no evidence, however, to suggest that the planned Music Choice contended that the expansion in usage would result in increased current rate is too high and rates upward to provide copyright revenues to which the statutory royalty rate is to be SoundExchange contended that it is too owners a fair return (Factor 2), to reflect applied’’.) Indeed, Music Choice represented that low. The parties do not contend that the their greater contributions to the even though it added 25 channels to its app and product made available to the public internet platforms during the current rate period, its previous PSS proceeding was listenership remained flat while its revenues ‘‘necessarily’’ wrongly decided, only (Factor 3), and to avoid further actually decreased. Del Beccaro WDT at 16, 18. that the Judges now must look disruption of the industries involved 59 Mr. Del Beccaro suggested that the Judges elsewhere to find a reasonable rate. See (Factor 4). SX PFFCL ¶ 2112. should follow the principle that PSS royalties 5/3/17 Tr. 2305 (Wazzan).57 Music Choice contended that the should only be payable based on actual Judges should not have adjusted the performances, which occur when a song is actually received by a listener as is the case with respect to 56 See supra, section IV.C.1.a. prevailing statutory rate upward in webcasters. He quickly cautioned, however, that 57 As discussed below, Music Choice did fault the Music Choice is not able to track the actual number Judges’ decision to make an upward adjustment to Choice’s anticipated increase in the number of of performances to enable such a per-performance the prevailing statutory rate to account for Music channels it offered. rate. Del Beccaro WDT at 16–17 and n.2.

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Beccaro WDT at 18. Consequently, the royalty rate it pays. Written Direct According to Music Choice, the Music Choice contended that it has been Testimony of Damon Williams, Trial Ex. current rate has not provided the service overpaying for the past rate period 56, at 32–33 (Williams WDT). Indeed, a fair income under existing economic because the rate should have been kept since the royalty is currently based on conditions. MC PFF ¶ 395. Music at 7.5% of gross revenues. Del Beccaro a percent of revenue, a decrease in Choice asserted that, due to changes in WDT at 18. Indeed, Music Choice revenues would actually result in a Music Choice’s downstream MVPD argued that this alleged ‘‘overpayment decrease in the royalties Music Choice market, it anticipates losing money on justifies a rate reduction in the next rate pays. Nevertheless, Music Choice its residential audio business over the period’’ below the previous period’s provided no quantification of the next two years under the current rate. 7.5% rate. Crawford WDT ¶ 214. promotional effects, if any, its service Id. ¶¶ 395–396. Music Choice’s main While Music Choice chose not to has on the artists it promotes. Moreover, contention was that a hyper-competitive expand its channel offerings as it had it provided no persuasive evidence to market for its services is making it more anticipated, it had the right to do so connect the current statutory rate with difficult for it to remain profitable and consistent with the statutory license, any decrease in such artist services. provide the same level of services to and the rate that the Judges adopted Given the record before them, the Judges copyright owners under current market reflected Music Choice’s stated do not find that the evidence supports conditions. Nevertheless, all of the intention regarding that projected a decrease from the current rate based conditions that Music Choice cited to expansion. A licensee has no general on this section 801(b) factor. support a downward adjustment are statutory or regulatory right to a rebate SoundExchange limited its discussion already incorporated into the current in a subsequent proceeding. regarding this factor to arguments in statutory rate. Music Choice provided Nevertheless, the Judges specifically support of adoption of the CABSAT rate no evidence that any new threat is on noted in SDARS II that if Music Choice’s and arguments against lowering the the horizon that might warrant a projected increase in channels did not current PSS rate. The Judges do not downward adjustment from the current materialize the Judges could take that adopt the CABSAT rates and find no statutory rate going forward. Moreover, fact into account in a future proceeding. persuasive evidence in the record to as SoundExchange correctly noted, no 78 FR at 23061. In SDARS II, the Judges support a lower rate based on the first copyright user, not even a PSS, is found the increase from 7.5% to 8.5% section 801(b) factor. guaranteed any level of profitability. was consistent with the second section Music Choice argued that a decrease 801(b) factor (fair return to copyright b. Factor B: Afford Fair Return and Fair from the current rate would not have a owners).60 In this proceeding, the Judges Income material effect on the copyright owners examine again whether the basis for that and artists. MC PFF ¶ 409. The second section 801(b) factor increase continues to exist in the SoundExchange contended that the PSS requires the Judges to assess whether present market. pay lower royalty rates than any other the rate (or rates) they have chosen to music service and that these rates have a. Factor A: Maximize Creative Works to begin the section 801(b) analysis affords a negative effect on copyright owners the Public the copyright owner a fair return for his and artists who receive these low rates. or her creative work and the copyright Music Choice contends that the PSS See 5/18/17 Tr. at 4621–23 (Del user a fair income under existing services are favored under this factor Beccaro) (PSS pay lower rates than other because the PSS (and Music Choice in economic conditions. 17 U.S.C. music services); Harrison WDT ¶ 29 particular) generate original content 801(b)(1)(B). (record companies would not agree to (such as on-screen displays and curated As discussed above, in SDARS II the current PSS rates). SoundExchange channels) in providing the PSS service. Judges found that an increase from the contended that the PSS rate is so far MC PFF ¶ 334–335. Music Choice then-prevailing statutory rate was below a market rate that it would be contends that this original creative warranted because Music Choice ‘‘foolish’’ for any record company to content has great promotional impact on anticipated greatly expanding the attempt to directly license their sound the sound recordings they play on the number of channels of music it would recordings at rates near the current rate. service, which is illustrated by the fact offer without any anticipated increase in SX PFFCL ¶ 2131 (and evidence cited that record labels lobby to get their revenues that would adequately therein). SoundExchange also asserted sound recordings played on the service. compensate copyright owners for this that a higher rate for PSS would not be Id. ¶¶ 352–362. The Judges do not doubt increase. 78 FR at 23060. In actuality, unfair because Music Choice could that Music Choice expends resources Music Choice’s expansion was far more continue to operate; it would only make promoting the artists that appear on the modest than it had anticipated. Del less money doing so, and the Copyright service and that such exposure can be Beccaro WDT at 18; 5/18/17 Tr. 4521 Act does not guarantee a copyright user promotional to the artists and their (Del Beccaro); Del Beccaro WDT at 4 a certain minimum level of profits. Id. record labels. These efforts are already (Music Choice currently provides 50 ¶ 2134. incorporated into the current statutory television-accessible music channels). The Judges do not mean to discount rate and therefore no downward Given that the basis for the Judges’ the fact that the market for providing adjustment is justified to the extent increase in the royalty rate after the content to cable and satellite providers Music Choice promotes artists. SDARS II hearing was a projected is competitive and perhaps likely to Music Choice contended that the expansion of music channels that did grow more competitive in the future. current rate is actually hindering it in not materialize, the Judges find that, all Nevertheless, nothing in section 114 of providing the types of promotional things being equal, a downward the Copyright Act would authorize the services that help artists and labels. Del adjustment to the PSS rate from 8.5% Judges to shield PSS services from Beccaro WDT at 17–18. By Music back to 7.5% is most supported by the market forces and the Judges see no Choice’s own admission, however, evidence and by SDARS II. See 17 reason to do so in the absence of such much of the decline is due as much to U.S.C. 803(a)(1) (‘‘The . . . Judges shall a mandate. Music Choice’s argument Music Choice’s declining revenues as to act in accordance with . . . prior that a rate reduction would not determinations . . . of . . . the materially affect the return that record 60 78 FR at 23059. Judges . . . .’’). labels receive for the sound recordings

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they put into the marketplace is also c. Factor C: Reflect Relative Roles Music Choice service is substitutional. misplaced. The relevant market for The third section 801(b) factor See 5/16/17 Tr. 4076–77 (Harrison); 5/ determining whether an adjustment is requires the Judges to assess whether 15/17 Tr. 3882 (Walker). Finally, Music warranted is the market for PSS the rate they have chosen to begin the Choice argued that it contributed more services, not the sound recordings section 801(b) analysis reflects the to the opening of new markets for market as a whole. As a percentage of relative roles of the copyright owner and creative expression and new media for total royalties, the amount copyright the copyright user in the product made its communication than the record owners receive from the PSS services available to the public with respect to companies. For all of these reasons may be low. Nevertheless, all revenue relative creative contribution, Music Choice believes that this factor sources are important for those that technological contribution, capital warrants a downward adjustment. MC PFF ¶¶ 500–501. have earned them, and the rate charged investment, cost, risk, and contribution Not surprisingly, SoundExchange for the use of sound recordings by the to the opening of new markets for argued that no downward adjustment is PSS must ensure that the copyright creative expression and media for their owners receive a fair return. Therefore, warranted under this factor. communication. 17 U.S.C. 801(b)(1)(C). SoundExchange believes that ‘‘Music no additional downward adjustment is Music Choice contended that with Choice’s wholesale distribution model warranted. respect to this factor it has made a much seems to be relatively inexpensive to SoundExchange claimed that the PSS stronger evidentiary showing than pay the lowest royalty rates of any type operate.’’ See Wazzan CWDT ¶ 80. By SoundExchange and therefore a lower comparison, record companies spend far of music service. Even if true, those rate should be warranted. MC PFF comparative rates are already reflected more on artists, repertoire, and ¶ 426. For example, Music Choice noted marketing. Id. SoundExchange in the current statutory rate. Section 114 that it makes significant creative is clear that the PSS that qualify for the countered Music Choice’s argument that contributions in terms of original the record companies’ expenditures are grandfathered rate methodology are sui programming, curation, and generis. At the time the grandfathered not PSS-centered, arguing that without promotional content that increases the record companies’ expenditures the provision was adopted the number of subscribers’ engagement with the music qualifying services was very limited and PSS would have no sound recordings to and increases the promotional impact of use for their services. Id. ¶ 80. has become more limited over time. the Music Choice service. Williams Only two companies qualify for the SoundExchange further disputed Music WDT at 56; 5/18/17 Tr. at 4693 Choice’s contentions that past grandfathered rate methodology and (Williams). Music Choice noted that it only for portions of their respective expenditures by investors in Music expends substantial resources on Choice warrant a rate reduction. businesses. Therefore, consistent with improving its service offerings but that the section 114 grandfathering According to SoundExchange, these declining revenues over the past rate capital costs were invested long ago and provision, the correct question to ask is period have forced Music Choice to cut not whether the current statutory rate the investors have made no investments staff that are used to provide these in the last eighteen years. See SX PFFCL (or whatever rate the Judges choose to services. Williams WDT at 7. Music begin analysis of the section 801(b) ¶ 2141; but see Del Beccaro WDT at 20. Choice discounted the record labels’ SoundExchange contended that these factors) offers copyright owners a fair contributions in this regard, arguing that income vis-a`-vis the rate they would investors have realized returns on their they apply only to the sound recordings investments and that those investments earn from non-PSS music services but and not specifically to the PSS service. have helped fuel Music Choice’s non- whether the current statutory rate offers See MC PFF ¶ 447. Music Choice also statutory video service line of business. copyright owners an unfairly low return noted that historically it has had to See SX PFFCL ¶ 2141; but see 5/18/17 that warrants an upward adjustment to invent the technology necessary to get Tr. at 4630–31 (Del Beccaro). ensure that copyright owners receive a high-quality digital music programming With the exception of Music Choice’s fair return in the upcoming rate period. to subscribers, but that the current rate assertion that market conditions have Admittedly, it is a difficult standard to has limited its ability to continue deteriorated recently, neither party meet, but SoundExchange has not investing in improving its technology. made a persuasive argument that a provided sufficient persuasive evidence Id. ¶¶ 450–52. further change in the current statutory to support such an upward Music Choice asserted that the risks it rate is warranted, in either direction. 61 adjustment. faces are increasing relative to those Virtually all of the evidence that the After reviewing the evidence faced by the record companies. Music parties present reflects conditions that provided by both parties, the Judges Choice also contended that it (and other have occurred under the current conclude that (outside of a 1 percentage PSSs) has fewer opportunities for statutory rate. Therefore, all of the point reduction due to the anticipated profitability. Del Beccaro WDT at 20. relative contributions of expansion of the number of music Music Choice noted that its residential SoundExchange and Music Choice are channels that did not materialize) business has still not become profitable already incorporated into that rate and neither party has provided sufficient on a standalone basis. Id. at 19–20. no adjustment is warranted. The small evidence to support a change from the Music Choice pointed to consolidation rate reduction from the current statutory current rate based on the second Section among MVPDs and shrinking margins in rate that the Judges found warranted 801(b) factor. the cable industry combined with under the second section 801(b) factor competitive pressures that have led to a does not change the Judges’ assessment. 61 Having determined that a downward rapid deterioration of Music Choice’s As for the negative change in market adjustment is justified by the second section 801(b) factor, the Judges have reassessed the first section subscriber fees. Id. at 21. Music Choice conditions, Music Choice only noted a 801(b) factor and determined that no further represented that this changing MVPD decline in the resources it spends and adjustment is warranted notwithstanding the rate market has fundamentally changed the the staff it intends to employ to improve decrease supported by the second factor. The Judges financial outlook for Music Choice’s the service. If anything, a decrease in review the evidence with respect to the third and fourth factors with the assumption that a rate residential audio service. Id. at 24–25. the resources it spends on the service, reduction is already supported based on the second Music Choice disputed if quantifiable, would militate against a factor. 78 FR 31842, 31843 (May 28, 2013). SoundExchange’s assertions that the rate reduction. At this time, it is unclear

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how market conditions will affect Music Beccaro). SoundExchange asserted that adjustment to the current statutory rate Choice’s business in the upcoming rate such a subsidy ‘‘fosters Music Choice’s (other than that discussed with respect period. Conceivably, persuasive inefficient operation and risks to the second section 801(b) factor), is evidence of dramatically deteriorating disrupting the market for residential warranted under the fourth Section conditions in the market for PSS service audio services.’’ Wazzan CWDT ¶ 84. 801(b) factor. Therefore, the Judges might militate against an upward rate From SoundExchange’s perspective, the determine that the appropriate rate for adjustment if such adjustment could be PSS rates are already artificially low and PSS services in the upcoming rate deemed disruptive but any such merely serve to insulate Music Choice period shall be 7.5%. This rate shall adjustment would be warranted under from market forces at the record apply to the gross revenues that the PSS the fourth section 801(b) factor rather companies’ expense. See Wazzan CWRT services earn for all ‘‘existing service than the third. At this point, on the ¶81, n. 112; 4/25/17 Tr. at 933–34 offerings’’ in addition to all ‘‘expanded current record, the Judges find no (Crawford). SoundExchange argued that service offerings’’ as those terms are persuasive evidence to support an the current statutory rate is disruptive defined and used at pages 15–16 of the adjustment from the current statutory because it provides Music Choice a Register of Copyright’s (Register’s) rate in either direction under the third significant barrier to entry in the market Memorandum Opinion On Novel factor. for non-PSS (CABSAT) services. 5/3/17 Material Questions of Law Tr. at 2318 (Wazzan); SX PFFCL ¶ 2147. d. Factor D: Minimize Disruptive Impact (Memorandum Opinion) (Nov. 20, SoundExchange did not accept that a 2017). Based on the limited evidence in The fourth and final section 801(b) higher rate (even one as high as the record, the Judges find no factor requires the Judges to assess SoundExchange proposes) would be justification for applying a different rate whether the rate (or rates) they have disruptive to the PSS market. Rather it methodology to these two types of chosen to begin the Section 801(b) contended that an upward adjustment services at this time. analysis minimizes any disruptive would introduce a needed element of The Judges accept as credible Music impact on the structure of the industries competition. See 4/25/17 Tr. at 902–03 involved and on generally prevailing Choice’s evidence that additional (Crawford); Wazzan CWRT at 76, 83. channels that might conceivably fall industry practices. 17 U.S.C. The Judges find that neither party within the expanded service category 801(b)(1)(D). A royalty rate may be provided persuasive evidence to currently constitute a marginal portion considered disruptive ‘‘if it directly warrant any further adjustment of the of Music Choice’s PSS service in terms produces an adverse impact that is current statutory rate (other than that substantial, immediate and irreversible warranted by the second 801(b) factor) of music usage. See Del Beccaro WDT at in the short-run because there is in either direction. Music Choice argued 16. While those types of services may insufficient time for [the parties affected that the ‘‘significant deterioration of its increase over time, at this point the by the rate] adequately to adapt to the financial condition’’ is due in part to the Judges do not find that the service changed circumstances produced by the current statutory rate but the only offerings that fall within this category rate change and, as a consequence, such evidence it cited deals with the effects are sufficiently distinct from the adverse impacts threaten the viability of of market competition. See Del Beccaro existing service offerings to justify the the music delivery service currently WDT at 21. The competitive pressures creation of a separate rate methodology. offered to consumers under this that Music Choice faces were not caused Nevertheless, the Judges acknowledge license.’’ SDARS I, 73 FR 4080, 4097 by the current statutory rate. While the SoundExchange’s assertion that PSS (Jan. 24, 2008). rate increase that the Judges approved in services that might fall within the Music Choice argued that the current SDARS II may have negatively affected expanded service category have recently statutory rate has had a disruptive effect Music Choice’s margins, the Judges increased and may warrant a different on the PSS market. As support for this addressed any potential disruptive rate methodology in the future. See Del premise, Music Choice noted the effect of that increase by phasing it in Beccaro WRT at 25; 5/18/17 Tr. 4658– previously discussed deterioration of over the first two years of the rate 59, 4661 (Del Beccaro). Music Choice’s financial condition, period. The grandfathered rate D. Music Choice’s Internet Streaming which it contended is due, in part, to calculation methodology was not Service the fact that the rate was increased in intended to shield Music Choice from SDARS II. MC PFF ¶ 503. Music Choice all negative impacts arising from For the first time, in the present did not argue that profits from Music competitive pressures. The reversal of proceeding, SoundExchange proposed a Choice’s other business lines should be that increase that the Judges find separate rate for PSS that stream their considered in determining the possible warranted under the second section services over the internet. For all disruptive effect of the PSS rate. Id. 801(b) factor only makes Music Choice’s licensed transmissions and related ¶ 506. arguments on this point less compelling. ephemeral recordings through an SoundExchange contended that if The reality of the marketplace internet streaming service qualifying as Music Choice and other PSSs cannot contradicts SoundExchange’s a PSS (or any similar service capable of continue to operate then the market will contention that the current rate is tracking the individual sound adjust by allowing other competitors to disruptive. As SoundExchange pointed recordings received by any particular take their place. See Wazzan CWRT ¶¶ out, Music Choice faces stiff consumer), SoundExchange requested 83, 86. From SoundExchange’s competition in the market. SX PFFCL that the per-performance royalty fee for perspective, Music Choice’s quest for a ¶ 1879. The modest decrease in the a commercial webcaster set forth in 37 lower rate is motivated by increased statutory rate that the Judges find CFR 380.10 apply.62 Music Choice competition from Stingray. According to warranted under the section 801(b)(1)(B) SoundExchange, Music Choice seeks a factor does not change the Judges’ 62 If a PSS does not have the technological lower rate that would serve as a subsidy assessment on this point. capability to track individual performances, that would allow Music Choice to On balance, the Judges find that SoundExchange proposes that the PSS estimate its performances by multiplying its Aggregate Tuning maintain its unfair advantage and its neither party has provided persuasive Hours by the average number of recordings played market share over non-PSS competitors. evidence to support a finding that, per hour across its service. SX Amended Proposed See 5/18/17 Tr. at 4532–37 (Del under current market conditions, an Rates and Terms at 8.

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contended that its streaming activity is to section 114 of the Copyright Act were Memorandum Opinion at 16. already included within the PSS designed to move the industry to market The Register noted that ‘‘an existing statutory license and the royalty rate rates. Id. at 23. Nevertheless, the service offering can grow and expand that PSSs pay already includes this Register noted that ‘‘Congress intended significantly within the same service. See Del Beccaro WRT at 27. As for PSS entities to be able to expand transmission medium while remaining a a result, Music Choice contended that their service offerings to some limited PSS offering.’’ Id at 19. Consistent with no additional royalty payment should extent and still have those service this understanding, the Register noted apply for internet streaming of the PSS offerings be considered PSS offerings.’’ that service. Id. Id. at 14. According to the Register, the [t]he user interface can be updated, certain 1. Referral to the Register of Copyrights functionality can be changed, the number of ultimate question is ‘‘whether a subscribers can grow, and channels can be The Judges concluded that the particular program offering by a PSS added, subtracted, or otherwise changed. The threshold issue of whether the entity qualifies as a PSS offering within only restriction is that the existing service streaming activities of a PSS were the meaning of section 114(j)(11), and is offering as it is today must be fundamentally included within the scope of the PSS therefore subject to the grandfathered the same type of offering that it was on July license was a novel material question of rate standard under section 114(f)(1).’’ 31, 1998—i.e., it must be a non-interactive, copyright law that the Judges must refer Id. at 15. residential, cable or satellite digital audio to the Register of Copyrights (Register). The Register distinguished among transmission subscription service. 17 U.S.C. 802(f)(1)(B). Hence, the Judges three different types of service offerings: Id. at 19–20 (internal footnotes omitted). referred the issue to the Register, asking: (1) A service offering identified by With respect to the second category of (1) Are a preexisting subscription service’s Congress as being a PSS offering as of July offerings (i.e., expanded service transmissions of multiple, unique channels 31, 1998, that is still offered today in the offerings) ‘‘a [PSS] does not lose its of music that are accessible through that same transmission medium identified by designation as such in the event the entity’s website and through a mobile Congress in 1998. (The Register refers to this service decides to utilize a new application ‘‘subscription transmissions by type of offering as an ‘‘existing service transmission medium, provided that the preexisting subscription services’’ for which offering’’). According to the Register, an subscription transmissions are similar.’’ the Judges are required to determine rates existing service offering would be entitled to Id. at 20 n.72.64 and terms of royalty payments under Section both a rate established under the 114(f)(1)(A) of the Copyright Act? grandfathered rate standard under section In assessing whether a service offering (2) If yes, what conditions, if any, must the 114(f)(1) and the grandfathered license is an expanded service offering and thus PSS meet with regard to streaming channels requirements in section 114(d)(2)(B). Id. qualifies as a PSS offering, the Judges to qualify for a license under Section (2) A service offering identified by must compare the service offering in 114(f)(1)(A)? For example, must the streamed Congress as being a PSS offering as of July question to the existing service offering stations be identical to counterpart stations 31, 1998, that is still offered today, but in a as it exists at the time of the comparison made available through cable television? Is different transmission medium than the one (rather than as it existed on July 31, there a limitation on the number of channels identified by Congress in 1998, where only 1998). Id. at 21. To aid the Judges in this that the PSS may stream? Is there a limitation transmissions similar to the existing service on the number or type of customers that may offering are provided. (The Register refers to comparison, the Register offers a non- access the website or the mobile application? this type of offering as an ‘‘expanded service exhaustive list of factors: Order Referring Novel Material Question of offering’’). According to the Register, an (1) Whether the service offering has a Substantive Law and Setting Briefing expanded service offering would be entitled similar effect on displacing or promoting Schedule at 3–4 (Oct. 5, 2017). to a rate established under the grandfathered sales of phonorecords. rate standard in section 114(f)(1), but would (2) Whether the quantity and nature of the 2. Register’s Conclusions not be able to take advantage of the use of sound recordings by the service The Register concluded that grandfathered license requirements in section offering is similar. 114(d)(2)(B). A PSS that offered this type of (3) Whether the service offering provides transmissions by a PSS entity that are service would be required to comply with the similar content to similar user groups. accessible to a cable or satellite television more detailed license requirements in section (4) Whether the service offering is subscriber through that entity’s website and 114(d)(2)(C). Memorandum Opinion at 15– consumed in a similar manner, provides a through a mobile application can be 16. similar user experience, and has similar ‘‘subscription transmissions by preexisting (3) A service offering that is not an existing form, feel, and functionality. subscription services’’ for which the CRJs service offering or an expanded service (5) Whether and to what degree the service must determine rates and terms of royalty offering. (The Register refers to this type of offering relates to the pre-July 31, 1998 payments under section 114(f)(1)(A), but only offering as a ‘‘different service offering’’). A investments Congress sought to protect. if such transmissions are sufficiently similar ‘‘different service offering’’ is insufficiently (6) Whether and to what degree the service to the transmissions made to those similar to an ‘‘existing service offering’’ to be offering takes advantage of the capabilities of subscribers via the entity’s preexisting considered an ‘‘expanded service offering’’ the medium through which it is transmitted residential cable or satellite music service. and would not be entitled to either a rate (i.e., whether and the extent to which Memorandum Opinion at 12. established under the grandfathered rate differences between the service offerings are As a preliminary matter, ‘‘the standard under section 114(f)(1) or the due to limitations in the existing service preexisting services must be limited to grandfathered license requirements in section 114(d)(2)(B). Instead, the royalty rate for a or section 114(f)(2). If a PSS entity began offering the three named entities in the [DMCA] different service offering would be set under an interactive service, for example, that service Conference Report, i.e., DMX (operated the willing buyer/willing seller standard in offering would not fall into one of the categories by TCI Music), Music Choice (operated section 114(f)(2). A PSS marketing a different and would not be eligible for the statutory license. by Digital Cable Radio Associates), and service offering would be required to comply Memorandum Opinion at 16–17. 64 [DiSHCD] (operated by Muzak).’’ Id. at with the license requirements in section For a service offering to qualify as an expanded 63 service offering, the PSS entity must continue to 14, internal footnotes omitted. 114(d)(2)(C). operate its existing service offering. According to Moreover, the Register noted that ‘‘not the Register, ‘‘[a] service offering that is not an every subscription transmission made 63 The Register’s categorizations of service types existing service offering can only be subject to the presumes that a service offering is eligible for the grandfathering provision if it provides by a PSS entity is subject to section section 114 license. The categorization is meant to transmissions similar to their existing service.’’ 114(f)(1).’’ Id. at 13. The Register delineate whether the rate for a license-eligible Memorandum Opinion at 20, internal quotes observed that the DMCA’s amendments service is determined pursuant to section 114(f)(1) omitted.

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offering’s transmission medium that are not long as the service offering, as a factual rate-setting methodology, the Judges present in the other service offering’s matter . . . is sufficiently similar to the PSS still have the authority under section transmission medium). entity’s existing cable or satellite service 114(f)(1)(A) to distinguish among the Id. at 21–22.65 offering. different types of digital audio Id. at 25. A ‘‘different service offering’’ (the transmission services in operation. If third category the Register identified) In assessing whether an internet- material differences between an existing can never qualify as a PSS offering based service offering is sufficiently service offering and an expanded because it would not be one of the similar to a PSS entity’s existing cable service offering exist, the Judges may set specifically identified pre-July 31, 1998 or satellite service offering, the Judges separate rates based on those difference, business operations (i.e., the three PSS should consider ‘‘the degree to which using the section 801(b)(1) standard. Id. offerings) Congress sought to protect making the existing service offering at 27–28. when it enacted the DMCA. This is true accessible outside the home of the regardless of whether the service subscriber constitutes a fundamental 3. Application of Register’s Conclusions offering is developed internally or change to the offering.’’ Id. to Current Proceeding acquired. Id. at 22. When a PSS entity According to the Register: Music Choice provides 50 channels of expands its operations and provides At least in the cable television market, there additional transmissions to subscribers appears to be a distinction drawn between audio music programming delivered to to a different service, this is an entirely accessing content within the home and subscribers’ televisions (the Cable Radio new investment and is not a PSS accessing that same content outside of it. To Service). It also makes these 50 offering. Id. at 23. be clear, this distinction is one based on the channels, plus an additional 25 internet- The Register offered guidance location where the PSS offering is consumed, only channels, available to not the type of device on which the service authenticated television subscribers regarding applications of the above is accessed. If the service offering is available categorization of service offerings. First, through an internet-connected smartphone or through its website and a mobile app in accordance with the principles of narrow tablet, but is designed so that the service (the internet Service). Del Beccaro WDT construction afforded to grandfathering offering will only work when accessed at 4.67 provisions, the Register finds that, as a matter within the confines of the subscriber’s The Register has determined, as a residence, then it would be within the home of law, it is irrelevant whether or not Music matter of law, that Music Choice’s Choice or another PSS entity, to some limited and more similar to the PSS entity’s existing 68 degree, was making transmissions via a cable or satellite service offering. internet Service is not an ‘‘existing different medium than those specified in the Id. at 26 (internal footnote omitted). service offering.’’ Memorandum legislative history on July 31, 1998, such as Opinion at 19. Consequently, the With respect to the impact that the the internet. If such a service was in fact internet Service is either an ‘‘expanded number and type of channels offered by doing so, it would not be as part of an service offering’’ (i.e., qualifying for a service has in determining its existing service offering—any such grandfathered royalty determination transmissions today would be considered categorization for rate-setting purposes, either an expanded service offering or a the Register identified examples of under the Section 801(b) factors but different service offering.... factors the Judges could consider, such subject to the expanded license Id. at 19. as how many additional or fewer requirements under section 114(d)(2)(C)) or a ‘‘different service The Judges must determine a royalty channels there are, how many channels offer different programming, and how offering’’ outside the scope of the PSS rate for the former type of service (i.e., license. expanded service offering) in the different that programming is from that current proceeding. The latter type of offered by the existing service offering. By reference to the Register’s six- service (i.e., different service offering) is Id. The Register also notes that the factor list of criteria to differentiate an outside the scope of the current Judges should consider the reasons why expanded service offering from a proceeding; a royalty rate for any any such differences exist. If the service different service offering, the Judges different service offering by a PSS (if offering has more channels because of find that an internet-based service that any) must be determined by reference to some benefit the internet provides (e.g., allows subscribers to access music existing rate regulations covering that greater bandwidth or different outside their residences is a ‘‘different type of service offering, in a separate, contractual arrangements with cable service offering’’ and is not eligible for future proceeding under the willing operators), then the PSS entity could be grandfathered PSS rate structures or buyer/willing seller standard, or taking advantage of the capabilities of license requirements applicable to PSS. through voluntary negotiations. the internet as a transmission medium, The regulations in Appendix A, The Register observed that which could tend to disqualify that therefore, exclude internet-based service offering from the grandfathered the mere fact that a service offering is transmissions to the extent they are royalty calculation method. Id. at 26–27. available outside a subscriber’s transmitted to cable or satellite television A similar analysis could be conducted subscribers over the internet does not residence. automatically disqualify the service offering with respect to the number and type of 66 from being an expanded service offering customers. Id. at 27. The Register noted that if a service 67 See also Wazzan CWDT at ¶ 62(e) (‘‘Music subject to the grandfathered rate standard, so Choice provides 75 audio channels through various offering qualifies for the grandfathered MVPDs, . . . and streaming to subscribers of the 65 Even if a service offering is found to be an cable services that carry its channels, through a expanded service offering (rather than an existing 66 Differences in a service offering that directly family of apps and a web portal.’’) (internal service offering) qualifying for the section 114(f)(1) and solely result from the imposition of the section footnotes omitted). grandfathering provision for purposes of rate 114(d)(2)(C) requirements that do not apply to the 68 Neither party asked the Judges to determine calculation, it would still not be eligible for the existing service offering (which is subject to section whether Music Choice’s Cable Radio Service, as it section 114(d)(2)(B) grandfathering provision 114(d)(2)(B)) should not alone disqualify the service exists today, constitutes an ‘‘existing service (regarding license requirements) because it uses a from the grandfathered royalty calculation offering’’ or and ‘‘expanded service offering’’ by a different transmission medium than the existing methodology necessitated by the change in PSS. As the Judges have already determined that service offering. Such an offering would be subject medium, nor should minor differences in the user the PSS rate covers both types of offerings, the to the license requirements in section 114(d)(2)(C). interface or in the visual presentation. question is moot and the Judges need not address Memorandum Opinion at 22. Memorandum Opinion at 27. it.

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V. SDARS Performance License—Rate he advocated either a percent-of- greater-of rate structure, advantageous to Structure revenue rate structure or a per licensors through the shifting risks, may subscriber structure, and that he did not well represent an example of what A. Rate Structure Arguments testify in support of a structure licensors can and would obtain when 1. Maintaining the Current Rate incorporating those two approaches in a they exploit their ‘‘must have’’ status for Structure single greater-of approach. SXM PFF ¶ a special competitive advantage. The Sirius XM emphasized that the Judges 251. In response, SoundExchange did Judges do not find it persuasive that have utilized a percent-of-revenue rate not identify any testimony that interactive streaming services and structure for ten years, and that absent explicitly or adequately endorsed the record companies adopt the greater-of any new and sufficient factual bases to use of a greater-of formula from an structure in their negotiated licenses. economic point of view. deviate from that history, the Judges d. Impact on Royalty Disputes should continue to adopt this rate The Judges are troubled by the lack of a cogent explanation from the licensors’ structure. SXMRPFF ¶ 384 (and record SoundExchange argued at length that economic witnesses as to the merits, on citations therein). Moreover, it noted a greater-of rate structure that contains balance, of a greater-of rate formula. The that SoundExchange itself proposed a a per-subscriber prong will eliminate absence of such evidence could be percent-of-revenue rate structure, not a disputes regarding the definition of overcome by explanations derived from ‘‘greater-of’’ structure, as recently as in revenue under the percent-of-revenue other evidence or testimony. Not having the SDARS II proceeding. SXMPFF ¶ approach. SEPFF ¶¶ 1646–1650 (and that further evidence, the Judges find it 253 (and record citations therein). record citations therein). However, SoundExchange did not take issue significant that no economist has Sirius XM convincingly countered that sufficiently explained the benefits of with the historical bona fides of the a greater-of formula will not eliminate this greater-of approach. current rate structure. However, the issues of revenue definition and SoundExchange noted that it urged the b. Impact on the Parties’ Risks and identification, because the issue of Judges to adopt what it describes as a Rewards which prong creates the ‘‘greater’’ royalty will itself be dependent on the simpler percent-of-revenue approach in SoundExchange maintained that its SDARS II, but the Judges refused, opting definition, identification, and proposed greater-of approach is calculation of the revenue-based royalty instead for a more complicated structure warranted because it allows record that led to substantial disputes. SERPFF prong. SXM PFF ¶ 386. companies to share in the growth of The Judges agree with Sirius XM. If ¶ 253. Sirius XM’s revenue, while offering The Judges are not convinced by SoundExchange had proposed a per- protection to the record companies on subscriber rate only, then the issues Sirius XM’s argument that the rate the downside if revenues are too low. structure should be maintained merely surrounding the percent-of-revenue rate SEPFF ¶ 252 (and record citations would be eliminated. But because it has been in place over the therein). Sirius XM argued, in essence, past two rate periods. The Judges are SoundExchange did not proposed a that this approach smacks of a heads I pure per-subscriber rate; nor did Sirius charged with setting rates and terms de win, tails you lose approach, whereby novo for each period. If there are XM. Thus, the problems regarding the record companies share the upside of revenue-based royalty would continue sufficient valid reasons why the rate Sirius XM’s success, but have protection structure should be changed, then the to be present (albeit perhaps less often in the form of a default to the per than under a pure revenue-based rate). Judges will adopt those changes. subscriber rate if the upside does not Accordingly, the Judges consider the materialize. SXM PFF ¶ 252. e. The Greater-Of Rate Structure and issues to determine whether to change Trial Subscriptions the existing rate structure. c. Benchmarks Include a Greater-Of Rate Structure SoundExchange argued that its 2. Factors Relating to a Change in greater-of proposal helps to obviate the SoundExchange emphasized that Structure dispute between the parties regarding many interactive license agreements the length of free trials offered to a. Lack of Expert Support utilize the greater-of approach that potential subscribers by new owners of SoundExchange advocated a SoundExchange advocates here, automobiles. SoundExchange noted that deviation from the percent-of-revenue demonstrating the market’s adoption of interactive services are generally rate structure that has existed this approach. SEPFF ¶¶ 164–165 (and required to pay royalties for any free throughout the SDARS I and SDARS II record citations therein). However, trial that exceeds [REDACTED]. Orszag rate periods. SoundExchange asked the Sirius XM noted that these interactive AWDT ¶ 85.69 By contrast, Sirius XM Judges to establish a ‘‘greater of’’ agreements were all negotiated in a typically offers free trials to new and structure, by which the royalty rate is market characterized by the lack of used car purchasers that last three to calculated ‘‘on a calendar year basis,’’ effective competition, and that the lack twelve months.70 Id. ¶ 81. but payable monthly, as the greater-of a of competition would affect the SoundExchange argued that ‘‘there is no specified percentage of revenue or a structure as well as the level of rates. specified per subscriber dollar value. SXMPFF ¶ 385 (and record citations 69 The benchmark interactive services agreements See Amended Proposed Rates and therein). address free trials longer than [REDACTED] by Terms of SoundExchange, Inc. and The Judges find Sirius XM’s effective imposing a [REDACTED] royalty. See Orszag AWDT Copyright Owner and Artist Participants competition point well-taken in this ¶ 89. App. A at 14–15. (Jun. 14, 2017). context. Given that SoundExchange’s 70 Some paid promotions (where the automobile expert economic witnesses Original Equipment Manufacturer pays a reduced Sirius XM noted that no economist subscription fee to Sirius XM during the free (to the appearing in this proceeding endorsed acknowledged the need for rates that consumer) trial period) may last longer than the use of a greater-of formula. SXM reflect an effectively competitive [REDACTED] months. See Trial Ex. 322 at 14, 15 RPFF ¶ 383. Moreover, Sirius XM market, it is no surprise that none of ([REDACTED]-month free trial for purchasers of their economists touted the greater-of certain high-end luxury cars ([REDACTED])). Under pointed out that Mr. Orszag, an a percentage revenue rate structure Sirius XM pays economic witness appearing for structure as a reflection of effective a royalty on this discounted subscription revenue. SoundExchange, expressly testified that competition. The Judges find that the See Orszag AWDT ¶ 82.

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sound economic basis for the present companies are aligned in their interest Orszag and Professor Robert Willig. Mr. disparate treatment, under which Sirius to minimize the time period for unpaid Orszag used a ‘‘ratio equivalency’’ XM is permitted to offer the repertoires trials and trials paid by OEMs at less analysis, which he applied through two of rights owners for durations greater than the full subscription rate. separate approaches. Professor Willig than one month without the payment of Moreover, because Sirius XM is in the considered several economic models: (1) royalties,’’ id. at ¶ 85, and proposed to business of recruiting and interacting An ‘‘Opportunity Cost’’ analysis; 75 (2) a eliminate that disparate treatment by with potential subscribers, it would be ‘‘Ramsey Pricing’’ analysis; 76 and (3) a classifying trial users as ‘‘subscribers’’ less efficient for the licensors (or the ‘‘Nash Bargaining Solution’’ approach.77 for royalty purposes, and setting a per- Judges) to second-guess Sirius XM’s Professor Willig also discussed a fourth subscriber rate that varies depending on downstream (retail) business model as it model—the Efficient Component Pricing how long the user has been in the free relates to the optimal period of trial use. Rule (ECPR), which he noted in his oral trial period.71 Thus, it would be Although it would appear from a testimony as analytically analogous to irrelevant to the licensors if the free trial cursory analysis that artists and record his ‘‘Opportunity Cost’’ analysis, and generated no revenue or lower revenue companies suffer from the use of their yielded the same rate.78 from automobile Original Equipment recordings without recompense (or A. Professor Willig’s Opportunity Cost Manufacturers (OEMs) during the sufficient recompense) during trial Model period offered free to the listener. periods, the fuller view, given Sirius SEPFF ¶¶ 1657–1665. XM’s aligned economic incentive to 1. ‘‘Walk-Away’’ Opportunity Cost Sirius XM argued that trials, both paid maximize revenues, demonstrates that SoundExchange called Professor and unpaid, provide value to licensors the length and terms of trial periods are Robert Willig in support of its proposed to the extent they entice new likely consonant with the interests of rates. Professor Willig approached the subscribers whose subscription revenue the licensors. This record evinces no rate determination using an opportunity is then shared by the licensors. Sirius evidence to the contrary.73 cost model. As Professor Willig testified, XM described the trials as a ‘‘joint B. Conclusion Regarding the Rate opportunity costs are incurred when effort’’ by Sirius XM and the record Structure ‘‘sales through one distribution channel companies to attract more Sirius XM reduce (i.e., substitute for, or subscribers and produce future For the foregoing reasons, the Judges ‘‘cannibalize’’) sales through other subscription revenues that inure to their adopt a percent-of-revenue rate distribution channels (thereby reducing mutual benefit. Corrected Written structure in this proceeding for the compensation earned by content Rebuttal Testimony of Carl Shapiro, 2018–2022 rate period. creators from those other channels . . . Trial Ex. 9, at 55 (Shapiro CWRT). Sirius VI. SDARS Performance License: ).’’ Written Rebuttal Testimony of Robert XM further argued that it is in the best SoundExchange Proposal Willig, Trial Ex. 46, ¶ 20 (Willig WRT); position to determine the most see also Written Direct Testimony of SoundExchange proposed a royalty beneficial length of the trial period, and Carl Shapiro, Trial Ex. 8, at 19 (Shapiro fee that is the greater-of a per-subscriber that requiring Sirius XM to pay per- WDT) (sellers incur opportunity cost rate and a percent-of-revenue rate. With subscriber royalties without recompense when sales in one market diminish sales regard to the percent-of-revenue prong, from the trial users would act as a in other markets). Based upon his SoundExchange requested a rate equal disincentive to Sirius XM to utilize interpretation of survey evidence, to 23% of Sirius XM’s ‘‘Gross what it otherwise understood to be the Professor Willig established a walk- Revenues,’’ as that quoted term shall be optimal trial period. SXMRPFF ¶ 388.72 away opportunity cost of $2.55 per defined in the forthcoming regulations. The Judges agree with Sirius XM. subscriber, which he equates to See SoundExchange’s Proposed Rates Under a percent-of-revenue royalty [REDACTED]% of Sirius XM’s relevant and Terms, at 2–3.74 The per-subscriber structure, Sirius XM and the record revenue. rate proposed by SoundExchange is set SoundExchange asserted that the 71 SoundExchange’s amended rate proposal forth in the table below: appropriate opportunity cost for rate- would charge no royalties for subscribers who are setting purposes is the ‘‘walk-away’’ in the first month of their free trial. During the Free trial opportunity cost. SE PFF ¶¶ 486–95. second and third months of a free trial, Year subscribers All other SoundExchange proposes a per-subscriber royalty (months two subscribers Professor Willig defined a record label’s rate that represents a discount of approximately and three) walk-away opportunity cost as 42% off SoundExchange’s proposed full per- ‘‘compensation that it would earn from subscriber rate. The full per-subscriber rate would 2018 ...... $1.45 $2.48 other sources of distribution,’’ if a label apply to all free trials after three months. See 2019 ...... 1.49 2.55 were ‘‘to literally walk away from a Amended Proposed Rates and Terms of 2020 ...... 1.54 2.63 SoundExchange, Inc. and Copyright Owner and 2021 ...... 1.58 2.71 distributor.’’ 5/2/17 Tr. 2014–15 Artist Participants, at 3 (Jun. 14, 2017). 2022 ...... 1.63 2.79 (Willig). Professor Willig referred to the 72 Sirius XM also argued that the record opportunity cost as ‘‘creator companies have a higher benefit/cost ratio from compensation cannibalization,’’ 79 and trial subscriptions than Sirius XM, and would thus For affirmative economic support of agree in an unregulated market to waive royalties its rate proposal, SoundExchange relied observed that ‘‘the need to cover ‘‘for as long as Sirius XM would choose to run principally on the expert opinions of opportunity cost is part of what assures unpaid trials.’’ Shapiro CWRT at 55–56. two economic witnesses, Mr. Jonathan efficiency in the ultimate choice of the SoundExchange rejected this argument because Professor Shapiro assumed, in computing his 75 See infra, sections VI.A–VI.C. benefit/cost ratio, that no record company is a 73 For example, there is no credible evidence that 76 ‘‘must have’’ for Sirius XM. SEPFF ¶ 1619; see 4/ Sirius XM is interested in growing market share See infra, section VI.G. 24/17 Tr. 562 (Shapiro). As a result of this irrespective of revenue growth, in order to compete 77 See infra, section VI.F. assumption, Professor Shapiro’s benefit/cost for the market (rather than merely in the market). 78 See infra, section 0. calculation relied on a much lower record company This is unsurprising, because Sirius XM has already 79 Sirius XM’s rebuttal economic expert, Professor opportunity cost than that adopted by the Judges. captured the satellite radio market. See infra, text Farrell, concurred with the substance of this See infra, section VI.B.3. The Judges do not rely on following note 116. definition, agreeing that walk-away opportunity this Sirius XM argument, therefore, in rejecting 74 The definition of ‘‘Gross Revenues’’ for the cost ‘‘is the profit that a label would realize SoundExchange’s proposal with regard to trial forthcoming rate period is discussed infra, section elsewhere’’ if it did not license to Sirius XM. 4/24/ subscriptions. XI.A.2. 17 Tr. 607 (Farrell).

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balance of . . . varieties of modes of 2137 (Willig); 83 see also SEPFF 502 at ¶ if a single entity (or a fully functioning cartel) distribution.’’ 5/2/17 Tr. 2019–20 502. Professor Willig’s opportunity cost controls the rights to all sound recordings. (Willig). In an unregulated market, a calculation thus measures what a must- Shapiro CWRT at 34. Moreover, Sirius supplier (record label or copyright have single record label would earn XM claimed Professor Willig owner) will not sell (license) to a service elsewhere, and proposes it as an acknowledged that his opportunity cost unless the supplier is compensated at or industry-wide measure, even if that calculation was identical to the above its walk-away opportunity cost. single record label is the only label that opportunity cost that would apply ‘‘if See id. at 2019. In this regulated market, declines to license. On this theoretical there were a single monopoly seller of however, the creators do not have the point, Professor Farrell, one of Sirius sound recordings. . . .’’ 5/2/17 Tr. at option to walk away; the licenses are XM’s economic experts was in basic 2140 (Willig); see also Farrell WRT ¶¶ compulsory. Id. at 2015. Professor agreement. See, e.g., 4/24/17 Tr. 665–66 67–71 (Willig’s calculation is ‘‘extreme’’ Willig thus perceived the role of the (Farrell) (for label to recover pro rata and leads to inflated opportunity costs). Judges to ‘‘redress that imbalance walk-away opportunity cost, industry- According to Sirius XM, Professor created by the statutory license.’’ 80 Id. at wide royalty rate would have to be at Willig’s opportunity cost approach 2017. least equal to industry-wide opportunity ignores the goal of determining a As a matter of economic principle, cost). statutory rate reflective of an effectively Sirius XM did not dispute the use of an Further, Professor Willig opined that competitive marketplace (as tempered opportunity cost approach as individual labels would bargain with an by the enumerated section 801(b)(1) appropriate in identifying a market- understanding that a royalty factors). See 4/20/17 Tr. 418 (Shapiro) based SDARS royalty rate. See SX RPFF unacceptable to that label is likely also (‘‘he is measuring the wrong thing by ¶ 109. However, Sirius XM disagreed unacceptable to other labels. As a result, looking at the monopoly opportunity with Professor Willig’s use of ‘‘walk- a label inclined to reject a proposed cost.’’). Thus, Professors Shapiro and away opportunity cost,’’ as he defined royalty will expect that other labels will Farrell both opined that a rate based on that phrase. Id. do the same, with the result that each this industry-wide opportunity cost The Judges summarize the parties’ label’s opportunity cost will equate to would be inconsistent with the opportunity cost dispute as: Whether, in an industry-wide opportunity cost. See economic concept of ‘‘workable a hypothetical market with freely 5/2/17 Tr. at 2030 (Willig). competition.’’ 85 See Shapiro CWRT at negotiated rates, opportunity cost 37; Farrell WRT ¶¶ 27–29. should (1) include the value of each 2. Sirius XM’s Criticism of Willig’s Use of ‘‘Walk-Away’’ Opportunity Cost Sirius XM candidly admitted that its Major’s ‘‘must-have’’ status which gives criticism of Professor Willig’s walk- each Major the theoretical ability to put Sirius XM disputed the notion that away opportunity cost analysis is Sirius XM out of business by refusing to opportunity costs should be defined and premised on the assumption that a grant it a license at a royalty less than calculated on an industry-wide basis; single label ‘‘does not have the ‘must- opportunity cost; or (2) exclude this rather, it asserted that the appropriate have’ monopoly power to effectively value—a complementary oligopoly calculation must be undertaken in a shut-down Sirius XM’s music offering power—by which each Major ‘‘label specific’’ manner. Sirius XM . . . .’’ SXM PFFCL ¶ 367 (and record hypothetically could put Sirius XM out asserted an essential and disqualifying citations therein). Having made this of business.81 premise: The opportunity cost Professor assumption, Sirius XM’s witnesses Professor Willig asserted that the Willig calculated is the opportunity cost explained what they characterize as a walk-away opportunity cost for a ‘‘must- of ‘‘either a single monopoly record fairly simple intuition grounded on have’’ label is effectively the same as the label or a fully effective cartel.’’ 84 their economic modeling in the record: label’s pro rata share of the industry- Farrell WRT ¶ 27; see also id. ¶ 31. As ‘‘[A] change in Sirius XM’s music mix 82 wide opportunity cost. See 5/2/17 Tr. Professor Shapiro noted: (i.e., something less dramatic than Most fundamentally, Professor Willig is losing access to all music) is likely to 80 Opportunity costs are more than a theoretical asking the wrong question. Rather than concept. For example, UMG recognizes that on- result in only some relatively modest attempting to calculate the opportunity cost loss in subscribers, if any—not, as demand subscription services may substitute for to an individual label of having its sound sales of digital downloads. See Written Direct Professor Willig models, every Sirius Testimony of Aaron Harrison, Trial Ex. 32, at ¶ 17 recordings performed on Sirius XM, Professor Willig calculates the opportunity XM subscriber seeking music elsewhere. (Harrison WDT). Accordingly, when UMG licenses 86 fully interactive streaming services, it [REDACTED]. cost to the entire recorded music industry, as See Farrell WRT ¶ 67. Because the direct marginal costs of distributing Sirius XM lodged another additional sound recordings to Sirius XM are ‘‘zero acknowledged the ‘‘must have’’ status of a Major, fundamental objection to Professor or nearly zero,’’ the principal marginal cost to a citing a steering adjustment as a method by which Willig’s opportunity cost approach. As record company of licensing to a service is its to mitigate the ‘‘must have’’ status and opportunity cost. Shapiro WDT at 19; see also Sirius XM noted, Professor Willig’s complementary oligopoly power of a Major to allow SEPFF ¶ 460 (not disputing Professor Shapiro’s $2.55 opportunity cost calculation was for an effectively competitive market. point that physical marginal cost is zero and that 83 Professor Willig did not cite any authority that the only marginal cost at issue is marginal 85 ‘‘Effective’’ competition, as used in this has previously used the phrase ‘‘walk-away opportunity cost). Determination is synonymous with the term opportunity cost.’’ Sirius XM’s economic experts 81 Professor Willig calculated walk-away ‘‘workable competition’’ that is more commonly asserted that Professor Willig’s ‘‘walk-away opportunity cost on the tautological assumption used by economists. opportunity cost’’ is actually the ‘‘monopoly’’ or that, because each Major is a ‘‘must have,’’ its 86 ‘‘cartel’’ opportunity cost. For the sole purpose of Professor Farrell’s argument ‘‘demonstrated refusal to provide a license to Sirius XM would referring to and discussing Professor Willig’s mathematically that if Sirius XM’s failure to obtain cause Sirius XM to go out of business. As discussed approach, the Judges will use his ‘‘walk-away’’ a license from a record label led to the loss of some, elsewhere in this Determination, Professors Shapiro terminology; that usage does not suggest an but not all, subscribers, then the walk-away and Farrell proposed the use of a different form of equivalence with, or distinction from, monopoly or opportunity cost for that label would be opportunity cost, one that does not assume that the cartel opportunity cost. significantly less than that label’s pro-rated share of loss of any one Major would cause Sirius XM’s the monopoly opportunity cost calculated by demise. 84 Professor Farrell testified that if a particular Professor Willig, the difference between the two 82 The evidence in this proceeding strongly label’s decision to license is based on ‘‘the profit depending on the fraction of Sirius XM subscribers demonstrates the ‘‘must have’’ status of each Major. impact on the industry as a whole, that’s what we who would cancel their subscriptions in response See SE PFF ¶¶ 517–525 (and record citations would normally describe as monopoly or cartel to the failure of Sirius XM to secure a license from therein). Indeed, Sirius XM implicitly behavior.’’ 4/24/17 Tr. 614 (Farrell). the individual label.’’ Farrell WRT ¶¶ 68, 71.

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derived by applying the royalties 3. The Judges’ Use of the Opportunity The Judges also find unhelpful Sirius alternative services pay to record Cost Model To Set the SDARS Royalty XM’s argument that Professor Willig’s companies. In Web IV, the Judges found Rate opportunity cost approach is the these rates to be inflated by the equivalent of a benchmarking approach. complementary oligopoly power of the The Judges find that Professor Willig’s To be sure, the point is correct, but its Majors. Sirius XM criticized industry-wide walk-away opportunity advancement as a criticism is wrong. cost approach is an appropriate tool, on ‘‘importing’’ that ‘‘supracompetitive’’ When properly weighted, the the present record, to apply as an rate into this statutory setting in the opportunity cost approach is interim step in crafting the statutory absence of any adjustment or allowance tantamount to a useful benchmark, rate. On the one hand, there is no for effective competition. The royalty because the weightings are quite dispute between the parties that the with the most disproportionate impact analogous to (and more precise than) the Majors would use this industry-wide ‘‘adjustments’’ the Judges consistently in this regard is the $[REDACTED]/ opportunity cost calculation to set month royalty charged to subscription make to proposed benchmarks. To the 87 royalty rates in an unrestricted market. extent the opportunity cost is infected interactive services. See Written On the other hand, the Judges find there Direct Testimony of Robert Willig, Trial by complementary oligopoly is no bona fide dispute but that these inefficiencies that increased the rates Ex. 28, ¶ 41 & Table 2 (Willig WDT). rates would partially reflect the from which that opportunity cost is Professor Farrell argued that Professor complementary oligopoly effect of derived, the Judges look to the entire Willig’s calculations are significantly Majors. record to ascertain whether and how to infected by the noncompetitive market Standing alone, the complementary account for that factor, as they have by for licenses to interactive services. See oligopoly effect within the walk-away applying Professor Willig’s ‘‘fork in the 4/24/17 Tr. 636, 640 (Farrell). Professor opportunity cost model would inflate road’’ approach. Farrell cautioned against putting ‘‘heavy the rate above the ‘‘reasonable rate’’ the weight on a rate that has been found to B. Application of the Opportunity Cost Judges must determine. However, the be supracompetitive and driven by Approach Judges may mitigate the industry-wide complementary oligopoly . . . .’’ 4/24/ walk-away opportunity cost that To apply the walk-away opportunity 17 Tr. at 641 (Farrell). Even Professor incorporates complementary oligopoly cost approach in the satellite radio Willig agreed that a lack of steering in effects, as they do in their ‘‘fork in the market, Professor Willig utilized the the interactive market could inflate the road’’ approach later in this survey conducted by Professor Ravi opportunity cost calculation for Sirius Determination. Thus, even if one could Dhar (Dhar Survey) to calculate his XM. 5/2/17 Tr. at 2037–38 (Willig). construe Professor Willig’s ‘‘walkaway’’ $2.55 per subscriber per month Further, Sirius XM chastised approach, standing alone, as opportunity cost of licensing sound Professor Willig for a claimed inconsistent with the concept of recordings to Sirius XM. Willig WDT ¶ 41. Professor Willig’s analysis is built inconsistency. Professor Willig effective competition, that inconsistency upon two principal elements: Diversion acknowledged on the one hand that can be—and is—mitigated because the ratios and creator compensation data. because the Judges have considered and benchmarks from other distribution Professor Willig derived the first channels, such as the interactive accounted for such ‘‘must have’’/ element (his ‘‘diversion ratios’’), from services benchmark, must be free of the complementary inefficiencies by also substitution data which indicate the effects of complementary oligopoly. accepting Professor Willig’s practical other sources and modes of distribution Nonetheless, he applied the rates from and reasonable ‘‘fork in the road’’ of recorded music to which Sirius XM these same distribution channels approach, discussed below. subscribers would gravitate if Sirius XM without a downward adjustment to The Judges find unhelpful were no longer available at acceptable offset the upward impact of the SoundExchange’s alternative prices. 5/2/17 Tr. 2057–58 (Willig). complementary oligopoly effect when justification for the use of walk-away More particularly, the Dhar Survey computing opportunity cost. See 5/2/17 opportunity costs in the marketplace. examined how Sirius XM subscribers Tr. 2152–54 (Willig). This alternative point simply noted that would react to a higher price for a Sirius XM also criticized Professor the major record labels, who are subscription to Sirius XM. 5/2/17 Tr. Willig for his second alternative oligopolists, would engage in some form 2057–58 (Willig). The Dhar Survey first justification for using the industry-wide of what is known as ‘‘conscious asked respondents if they would opportunity cost; that is what Sirius XM parallelism’’ when negotiating royalties. discontinue their Sirius XM service at labeled his ‘‘unilateral alignment’’ See 5/2/17 Tr. 2027 (Willig) (‘‘decision- various higher prices. Willig WDT ¶ 40. approach. See SXM PFFCOL ¶¶ 379– making is unilateral, but parallel, across Those respondents who answered these 382. Sirius XM characterized this as the the record [l]abels’’); see also SE PFF ¶ ‘‘pricing questions’’ by stating they ‘‘conscious parallelism’’ of like-minded 526. This exposition explains why would cancel their Sirius XM oligopolists, viz., a form of oligopolists would move in concert subscriptions were then asked certain anticompetitive ‘‘tacit collusion which, without engaging in explicit collusion, ‘‘switching questions.’’ The respondents even though not a violation of any but begs the question whether that were asked how they would listen to concerted price movement would antitrust laws, would nonetheless lead music, and specifically which of the incorporate walk-away opportunity cost to results that would be inconsistent alternative distribution channels ab initio. It is Professor Willig’s first with the necessity that rates be presented in the survey question they point—that each Major’s knowledge of consistent with the principles of would select. Willig WDT ¶ 40 its ‘‘must have’’ status imbues it with effective (workable) competition.’’ Id. ¶ (summarizing relevant aspects of Dhar individual market power to walk- 381 (and record citations therein). Survey); Corrected Written Direct away—that is sufficient to demonstrate Testimony of Ravi Dhar, Trial Ex. 22, ¶¶ the market logic of the industry’s 58–60 & App. D at 69–70 (Dhar CWDT). 87 Based upon Professor Dhar’s survey, interactive collective exploitation of walk-away With the foregoing information in services’ diversion ratio of 31% comprises 70% of Professor Willig’s $2.55 opportunity cost. The opportunity cost. See 5/2/17 Tr. 2031– hand, Professor Willig needed to assign Judges examine the survey data infra, section VI.B. 34 (Willig). monetary values to the diversion ratios.

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

OPPORTUNITY COST BASED ON DHAR SURVEY RESPONSES—SUMMARY OF RESULTS

Unit creator Wghtd creator Distribution across alternative modes Alt. mode mix comp comp (%) $/Sub-Mo. $/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. Sirius XM subscribers who would ‘‘switching questions.’’ The pricing As his tabular data demonstrate, choose to cancel their Sirius XM questions measured the preferences of Professor Willig calculated the full subscriptions at a given price. Dhar Sirius XM subscribers who would opportunity cost across all alternative CWDT ¶ 10; 5/8/17 Tr. 2728 (Dhar). The choose to cancel their subscriptions at modes of distribution as totaling $2.55 survey respondents consisted of current given prices. The Dhar Survey results per subscriber per month. Willig WDT paid Sirius XM subscribers who stated demonstrated that 76% of Sirius XM at ¶ 41. This opportunity cost they have the Sirius Select package, as subscribers would cancel their calculation is consistent with well as current users of a free trial subscriptions to Sirius XM at various SoundExchange’s proposed per- subscription to Sirius XM (typically prices between $11.49 and $20.49 per subscriber royalty range of $2.48 in 2018 available with certain new or used month. to $2.79 in 2022. Given Sirius XM’s vehicle purchases). Dhar CWDT ¶ 10. The first of the ‘‘switching questions’’ ARPU of $[REDACTED] per month, Accordingly, the potential population of asked the 76% who said they would Professor Willig’s $2.55 per subscriber survey respondents excluded those who cancel their Sirius XM subscription (at rate is equivalent to [REDACTED] % of understood (correctly or incorrectly) any of the price levels examined) to revenue.89 Thus, Professor Willig’s that they subscribed to any other Sirius identify the type of music distribution conclusion is consistent with XM package, such as ‘‘XM Select,’’ channel to which they would subscribe. SoundExchange’s 23%-of-revenue rate ‘‘Mostly Music,’’ or ‘‘All Access.’’ The results showed that 28% of Sirius proposal covering all five years in the Professor Dhar directed and XM subscribers said they would switch forthcoming rate period. conducted the survey between to a paid on-demand (i.e., interactive) September 14 and September 22, 2016. music streaming service and 14% said 1. Survey Data Underlying To ensure the reliability and validity of they would switch to a paid not-on- ‘‘Opportunity Cost’’ Approach his online survey results, Professor Dhar demand (i.e., noninteractive) music Professor Willig’s opportunity cost designed and administered the survey streaming service. 5/8/17 Tr. 2761–62 approach is dependent upon the by applying principles of survey (Dhar).91 In offering survey respondents weights he placed on various research applicable to online surveys. In distribution channels. The Judges, total, 2,602 respondents completed the 91 The percentages of respondents selecting an alternative service are stated as a portion of the 90 therefore, test the underlying survey survey. Dhar CWDT ¶¶ 18–19. entire population of the Sirius XM respondents in data on which he relied to assess their As noted above, the Dhar Survey the survey, rather than as a portion of those who reliability or, more specifically, their consisted of two broad types of would choose to cancel their Sirius XM strength in supporting Professor Willig’s questions: ‘‘pricing questions’’ and subscription. There were 388 respondents who stated they would cancel their Sirius XM conclusions. subscription at various price points, which is the The Dhar Survey was conducted as an 90 An online survey obtains respondents from denominator Professor Dhar used in his trial online survey. The purpose was to existing panels of individuals who have expressed testimony to arrive at the 28% and 14% figures. measure, inter alia, the preferences of a willingness to participate. Thus, the respondents Dhar CWDT ¶ 92. Professor Willig’s percentages are not randomly selected from a statistical were higher because he excluded 33 respondents perspective and, accordingly, no margin of error or who answered ‘‘Don’t Know/Unsure’’ to the 88 Professor Willig detailed how he derived the confidence interval can be applied to the results. switching question. Professor Willig thus creator compensation data for each line item in his However, Professor Dhar used what is known as a determined that 31% (not 28%) of the relevant table. See Willig WDT ¶¶ 477–485. (The calculation ‘‘bootstrapping procedure,’’ by which a sampling of universe would switch to a paid on-demand service methods are not in dispute.) the survey respondents is itself randomly selected and 15% (not 14%) to a paid not-on-demand 89 ARPU is the industry acronym for ‘‘Average and thereby created a confidence interval around service. Willig WDT, App. B at B–2. Sirius XM’s Revenue per User.’’ See also infra note 142 each of the reported survey results. Dhar CWDT ¶ witness, Professor Farrell, did not dispute that the regarding the quantification of ARPU. 90. relevant denominator is the number of respondents

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alternative subscription services, the John Hauser, Trial Ex. 11, ¶¶ 66–69 the respondents already paid to Dhar survey specified a cost of $9.99 per (Hauser WRT). subscribe. Hauser WRT ¶¶ 65–70.93 He month for interactive services and $4.99 As a preliminary matter, Sirius XM described the terrestrial radio option as per month for noninteractive services. and Professor Hauser asserted that buried because, for a Dhar Survey Respondents were prompted to choose Professor Dhar’s tilt toward paid respondent to select terrestrial radio as only ‘‘a new subscription . . . not . . . subscription services was the a choice, he or she would first need to a music service that you currently consequence of his understanding that indicate an unwillingness to subscribe subscribe to.’’ Dhar CWDT App. D at 69. the relevant inquiry was ‘‘if to a paid music service in place of Sirius The Dhar Survey also explored [respondents] cancelled their [Sirius XM. Only then would the respondent be preferences of respondents who XM] subscription, what would they shown the undifferentiated choice of indicated they would not subscribe to a subscribe to.’’ 5/8/17 Tr. 2886–87 listening to ‘‘free music.’’ Even then, the paid music service. Respondents were (Dhar). Accordingly, Sirius XM asserted respondent would need to indicate that permitted to choose more than one that the Dhar Survey was tainted from he or she would ‘‘listen to free music,’’ alternative music source from among: the inception because it presented and still would not be offered the (1) Purchased physical or digital tracks respondents only with definitions for explicit choices of listening to terrestrial or albums, (2) free music, (3) other, (4) three types of services: Satellite radio, radio or to increase listening to a none of the above, and (5) ‘‘don’t know/ on-demand services, and non-on- streaming service to which he or she unsure.’’ The follow-on question to demand services. Dhar CWDT at 66 already subscribed or listened. Only if those respondents who chose ‘‘free (Question 200), 69 (Question 200 and the survey respondent selected the ‘‘free music’’ asked them to identify all of the 210). According to Professor Hauser, music’’ option would he or she be free music sources they would choose. putting only these three types of presented—for the first time—with Dhar CWDT at 59–60. The free music services in respondents’ minds terrestrial radio as an optional answer. options listed included, inter alia, (1) immediately prior to asking the See SXM PFF ¶ 390 (citing Dhar CWDT free not-on demand (including AM/FM switching questions ‘‘emphasize[d] both at 69; 5/8/17 Tr. 2916–20 (Dhar)). radio over the internet), (2) free (ad- on-demand and not on-demand In addition to critiquing the Dhar supported) on-demand music services, services.’’ 5/9/17 Tr. 3034–35 (Hauser). Survey’s switching questions, Professor (3) borrowed recordings, (4) recordings Professor Hauser contended that the Hauser created and implemented a the respondent already owns, and (5) Dhar survey ‘‘provided no cues to aid in ‘‘Modified Dhar Survey.’’ In the AM/FM or AM/FM HD broadcast radio. the recall of other music options (e.g., Modified Dhar Survey, he essentially terrestrial radio) to which respondents Id. repeated Professor Dhar’s pricing could switch.’’ Hauser WRT ¶ 68. As questions, but attempted to reformulate Professor Willig used the results of Professor Hauser explained, ‘‘[b]y aiding this Dhar Survey to identify the the switching questions in order to in the recall of paid music services, but provide respondents with the ‘‘Alternative Mode Mix’’ in his relying on unaided recall for other Opportunity Cost analysis, and immediate and explicit choices of music options (including free music replacing Sirius XM with either presented his results in the previous options), Professor Dhar biase[d] his table. terrestrial radio or increased listening to results in favor of switching to paid streaming services to which they 2. Professor Hauser’s Criticisms of the music services.’’ Id. already subscribed.94 Dhar Survey According to Professor Hauser, this In the Modified Dhar Survey, phrasing and choice selection inevitably Professor Hauser first moved the option Sirius XM called Professor John skewed responses in a way that did not Hauser as a rebuttal expert witness on of listening to terrestrial radio forward reflect real-world behavior. Specifically, in the survey. 5/9/17 Tr. 3049–50 survey design and methodology. In his he opined that the non-subscription written and oral testimony, Professor (Hauser). He also added additional option that Professor Dhar provided as alternative responses to the options of Hauser leveled a number of criticisms at a potential response (‘‘No, I would not the Dhar Survey. In particular, he subscribe to a paid music service’’) was 93 Confirming the importance of this criticism, criticized the switching questions and not nearly specific enough to capture a Professor Willig criticized the survey by Joseph accompanying response choices in the wide range of non-paid music options Lenski, on behalf of Sirius XM, for the same failure Dhar Survey. Professor Hauser testified that respondents might consider, to offer the alternative of more intense listening to that the Dhar Survey was constructed in an existing subscription service. Willig WRT ¶ 48. including terrestrial radio. He further This is an important failure, according to Professor a manner that biased its results because testified that, if Professor Dhar had Willig, because a survey that does not offer it: (1) Over-emphasized paid interactive ‘‘provided a list of non-paid alternatives respondents the option of listening more to an and paid noninteractive subscriptions in or existing paid subscriptions to which existing subscription ‘‘cannot provide the a biased and artificial manner; (2) information needed to assess the relevant effect, respondents might reasonably switch, namely, the impact on creator compensation.’’ ‘‘buried’’ the choice of free music, such respondents may have been more likely Willig WRT ¶ 46. 92 as terrestrial radio as an alternative to to select non-paid alternatives or 94 Professor Hauser also criticized the ‘‘pricing’’ Sirius XM; and (3) failed to give existing paid subscriptions and less questions in the Dhar Survey for listing from ‘‘low respondents the option of replacing a likely to select new paid subscriptions.’’ to high’’ the choice of prices at which Sirius XM subscribers would not renew their subscriptions, Sirius XM subscription with increased Hauser WRT ¶ 69; see also 5/9/17 Tr. rather than also randomly reversing the order to listening to an existing (as opposed to a 3034–35 (Hauser) (discussing ‘‘high to low’’ for 50% of the surveys. He also found new) paid interactive or non-interactive ‘‘availability heuristic’’ and how ‘‘when fault with the overall Dhar Survey because it only subscription. Rebuttal Expert Report of you show people something, it becomes permitted participation by individuals who thought they were subscribers to Sirius Select. Only about available in memory and they’re much 27% of all Sirius XM subscribers subscribe to the who would choose to cancel their Sirius XM more likely . . . to choose it’’). Sirius Select package, and it was unclear whether subscription. He used the same adjustment in his Accordingly, Professor Hauser subscribers knew the name of the Sirius XM rebuttal opportunity cost analysis, as explained concluded that the Dhar Survey wrongly product to which they subscribed. Hauser WRT ¶ elsewhere in this Determination. 124 & Figure 13; see also 5/8/17 Tr. 2858–2859 92 In this Determination, ‘‘terrestrial radio’’ refers buried other switching options such as (Dhar). However, Professor Hauser essentially to free, over-the-air AM/FM and AM/FM HD radio, listening to terrestrial radio and omitted utilized the same predicates to the ‘‘switching’’ but not to AM/FM radio streamed over the internet. altogether listening to services to which questions in his Modified Dhar Survey.

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choosing ‘‘new CDS and/or music Professor Dhar testified that the Second, as the Lenski Survey 95 made downloads,’’ the respondent’s ‘‘existing purpose of the study, as explained to clear, 62% of Sirius XM subscribers had collection of CD and/or music him by the SoundExchange economic listened primarily to terrestrial radio downloads,’’ and ‘‘other free music expert witnesses, was to estimate the before switching to Sirius XM. Written option(s) (e.g., free, ad-supported number of cancelling Sirius XM Direct Testimony of Joe Lenski, Trial Ex. Pandora or Spotify, AM/FM radio over subscribers who would then subscribe 7, at 8 (Lenski WDT). Notwithstanding the internet, and YouTube.)’’ Hauser to an on-demand or a ‘‘not-on-demand’’ any problems in the Lenski Survey, it is WRT ¶ 79; id. App. I at 10. Professor music streaming service. He explained not disputed that a substantial portion Hauser then added yet more response that he did not make alternative free of the Sirius XM listener base migrated options to allow respondents to choose choices more prominent and explicit from listening to terrestrial radio. Sirius explicitly to switch to existing music because the ‘‘marketplace context’’ that XM also presented testimony that the service subscriptions. Hauser WRT ¶¶ ‘‘the [SoundExchange] economists . . . ‘‘vast majority’’ of Sirius XM listening, 79, 88, App. I at 10; 5/9/17 Tr. 3061 were really interested in’’ was the occurs in the automobile, and most (Hauser). subscription streaming context. Tr. 5/ listeners in automobiles still utilize When Professor Hauser administered 18/17 2752 (Dhar); see also id. at 2751, terrestrial radio as their primary music his Modified Dhar Survey to a group of 2752, 2754, 2810, 2889, 2921 (multiple source. See Written Direct Testimony of on-line survey respondents, he obtained instances of justifying the original James Meyer, Trial Ex. 1, ¶ 21 (Meyer results significantly different from those formulation by reference to WDT). Simply put, the marketplace is Professor Dhar reported. Specifically, ‘‘marketplace context’’). The Judges find suffused with evidence of the Professor Hauser’s modifications led to this testimony to be credible, and it substantial past and present use of a material drop in the percentage of suggests that Professor Dhar was not terrestrial radio. Sirius Select respondents who indicated engaged to prepare a study that would These data underscore the Judges’ that they would replace their Sirius XM give equal prominence to the potential finding that the Dhar Survey’s burying subscription with a new paid on- alternative that Sirius XM subscribers of the terrestrial radio alternative fails to demand service: From 28% of might choose free alternatives. Thus, the depict the marketplace reality. Indeed, it respondents in Professor Dhar’s survey Judges agree with Sirius XM that, by his is surprising that Professor Dhar (and (31% as measured by Professor Willig) own admission, Professor Dhar did not anyone who directed him regarding the to only 15% in the Modified Dhar comprehensively measure what Sirius purpose of his survey) would repeatedly Survey. See Hauser WRT Table 1 & ¶¶ XM subscribers would do if they rely on the ‘‘marketplace context’’ 101, 104; 5/9/17 Tr. 3056 (Hauser). stopped using Sirius XM. By focusing rationale to justify the construction of In addition, when Professor Hauser myopically on what he (misleadingly) the switching questions in the Dhar provided respondents the terrestrial was told was the ‘‘marketplace context’’ Survey and the results those questions radio option early and explicitly, of subscription streaming, the Dhar elicited. The failure of the Dhar Survey approximately 78% of Sirius Select Survey essentially assumed its explicitly to offer to a respondent, in respondents indicated they would conclusion. This is a crucial defect, any set of responses to any questions, switch to terrestrial radio. Hauser WRT given that the use for which the Dhar the choice of increased listening to a Figure 11–A; 5/9/17 Tr. 3059 (Hauser). Survey was intended was to weight streaming service to which the This result was in stark contrast to the ‘‘opportunity costs’’ in a manner that respondent has an existing subscription results from the original Dhar Survey, expressly included at least one free is especially problematic. From an which indicated that only 29% of the alternative, i.e., the substitution of economic perspective increased total Sirius Select respondents would terrestrial radio. It is disingenuous for listening by a respondent to a service to replace Sirius XM with terrestrial radio. SoundExchange to argue, through which a respondent already subscribes Hauser WRT Fig 10–B; Dhar CWDT ¶ Professor Dhar, that its intention was is marginally ‘‘free,’’ because there is no 52, Table 1. Sirius XM notes that not to identify the percent of Sirius XM increase in cost to access an existing Professor Dhar himself was unsurprised listeners who would choose terrestrial monthly ‘‘all-you-can-eat’’ subscription by these results. He testified at the radio (or any other free alternative), to a music service in the car. More hearing that he anticipated that, if he given that the Dhar Survey actually did egregiously, the Dhar Survey explicitly had explicitly offered respondents the solicit such responses, albeit in a instructs respondents before presenting choice of free music or AM/FM radio fashion that reduced the frequency of the first switching question: from the outset, he would have expected that response, particularly in contrast Keeping in mind all other music services the number of people who chose those with the results of the Modified Dhar Survey. you subscribe to would you or would you not options to be higher. 5/8/17 Tr. 2920– subscribe to a paid music service in place of 22 (Dhar). The switching questions in the Sirius? This would only include a new The Judges find the original Dhar original Dhar survey are problematic for subscription, and would not include a music Survey to be seriously flawed. The Dhar additional reasons. First, the power of a service that you currently subscribe to. Survey failed to make prominent to ‘‘free’’ alternative is well-understood. respondents the option of selecting See C. Anderson, Free: The Future of a Dhar CWDT, at 69, App. D. Thus, not terrestrial radio as an alternative source Radical Price 4, 2 (2009) (‘‘Free is both only did the Dhar Survey fail to provide of music if they made a price-based a familiar concept and a deeply respondents with an explicit choice to decision not to renew their Sirius XM mysterious one.... ‘Free-to-air’ radio utilize a music streaming service to subscriptions. Equally problematic are . . . created the mass market.’’); D. which they had an existing the absences from the Dhar Survey of Ariely, Predictably Irrational at 51–52 subscription, it explicitly primed them any choice for a respondent to state that (2009) (when offered a Lindt Truffle for to think specifically of such services he or she would either increase listening 26 cents and a Hershey’s Kiss for 1 cent, to a streaming service to which he or she 40% opted for each choice; when price 95 Sirius XM commissioned a listener survey to already subscribed, or to increase of each decreased by one cent (making determine the sources of Sirius XM listeners and the Kiss free), 90% opted for free the destinations to which they would migrate if listening to downloads or CDs that the Sirius XM were not available. The Lenski survey is respondent already owned. chocolate). discussed infra, section VII.D.

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and then to consciously NOT select that anomaly materially affected the survey compared with the defects in the service as an alternative. results: If one were to re-categorize original Dhar survey. The Modified The Judges’ foregoing critique should those 24 responses as having stated that Dhar Survey came closer to the core of not be understood as a finding that they would subscribe to a new on- the issue at hand: Distinguishing among Professor Hauser’s Modified Dhar demand service, the percentage of the alternative distribution channels to Survey is without defects. Professor respondents who would switch to a new which erstwhile Sirius XM subscribers Hauser altered the composition of the interactive service would increase from would migrate if the Sirius subscription survey population by excluding 15% to 19%. 5/8/17 Tr. 2822–23 price became so high as to dissuade respondents who had recently taken a (Dhar).98 The Judges adopt Professor renewal. music survey (in an attempt, he Dhar’s re-categorization to correct this 3. Re-Weighting Opportunity Cost claimed, to eliminate respondents who anomaly in the Modified Dhar Survey. participated in the original Dhar Finally, Professor Hauser did not Calculation With Modified Dhar Survey Survey). Hauser WRT ¶ 96. Professor identify confidence intervals around his Professor Farrell took Professor Hauser’s different population renders survey results which could have been Hauser’s data from the Modified Dhar the Modified Dhar Survey less than estimated by use of the ‘‘bootstrap’’ Survey and plugged them into Professor perfectly analogous to the original Dhar method. Such a subsequent sub- Willig’s opportunity cost calculations. Survey. The record does not reflect that sampling and calculation would have In so doing, Professor Farrell this alteration of the survey population bolstered Professor Hauser’s weighting persuasively demonstrated that biased the results; nor is there any based on the Modified Dhar Survey. Cf. Professor Willig’s opportunity cost fell evidence that the change was in any Dhar CWDT ¶ 90. There is no significantly below the $2.55 per way material. Consequently, the Judges evidentiary requirement that an on-line subscriber per month level, and thus do not find this defect to render the survey that, by its non-random nature, below the [REDACTED]% royalty rate Modified Dhar Survey unreliable. fails to produce a statistical random Professor Willig found to be implied by In addition, 24 participants in the sample must be subjected to a that $2.55 figure.99 See 4/24/17 Tr. 636– Modified Dhar survey said they would bootstrapping approach to carry 37 (Farrell); Farrell WRT ¶¶ 62–66. listen to an on-demand service to which evidentiary weight. Indeed, the Professor Farrell noted that the they already subscribe, even though requirements for precise statistical Modified Dhar Survey had 498 they had answered the ‘‘pricing reliability that exist in the academic respondents who self-identified as paid question’’ by stating that they were not world should not constrain Judges from Sirius XM subscribers. Among these 498 then subscribing to such a service.96 See accepting and relying on evidence that respondents, 13 answered the survey’s 5/8/17 Tr. 2822 (Dhar); Trial Ex. 293, at is otherwise probative when considered pricing questions by stating that they 1. In his defense, Professor Hauser in the context of the entire evidentiary would continue to subscribe to Sirius explained that he used Professor Dhar’s record. See, e.g., Matrixx Initiatives, Inc. XM at any price. Therefore, like non-switching (i.e., pricing) questions v. Siracusano, 563 U.S. 27, 44 (2011) Professor Willig, Professor Farrell verbatim in order to tease out any (demonstration of ‘‘statistical excluded these 13 from the pool used to differences arising from the switching significance’’ not required to weight the opportunity cost calculation. questions, and that the non-switching demonstrate reliable causal relationship Another 22 respondents to the Modified questions listed only Spotify and Apple when relationship demonstrated Dhar Survey answered ‘‘Don’t know/ Music as interactive services, and through ‘‘content and context’’ unsure’’ to whether they would cancel Pandora, then a noninteractive service. evidence). Moreover, the standard- at various hypothetical Sirius XM See Dhar CWDT, App. D at 61, 63. setting organization for survey work, the subscription prices. Again, consistent Professor Hauser testified that, in his American Association for Public with Professor Willig’s treatment of opinion, the anomaly could be Opinion Research (AAPOR), upon respondents who answered in this explained by the fact that respondents which Professor Dhar relied to use a manner, Professor Farrell excluded who used other interactive streaming bootstrapping approach, is by its these 22 respondents from the pool used services, such as those offered by express language a ‘‘nonbinding to weight the opportunity cost Amazon or Google, might have thought document,’’ and thus does not require calculation. The remaining 463 the ‘‘pricing’’ question about existing the use of the bootstrapping technique respondents were then asked what subscriptions to interactive services was through which statistical significance source of music they would switch to in limited to Apple Music and Spotify. could be ascertained. See Dhar WDT, lieu of listening to Sirius XM. Farrell Thus the respondents indicated they did Ex. G, at 1(AAPOR Guidance on WRT, App. F at F–1. not subscribe to either of them, but Reporting Precision for Nonprobability Professor Farrell presented in tabular could respond affirmatively that they Samples). form (1) the options from which the 463 would listen to another On-Demand On balance, the Judges find the respondents in the Modified Dhar service to which they subscribed. 5/9/17 Modified Dhar Survey (corrected by Survey could choose; (2) the counts of Tr. 3104–05 (Hauser). While that Professor Dhar, as noted supra) to be respondents who chose each option; (3) explanation is plausible, it is more probative than the original Dhar the ratio by which the respondents unsupported by record evidence.97 As Survey. Once corrected to account for would divert to each option; and (4) the Professor Dhar demonstrated, this the anomalous responses described creator compensation for each option. above, the potential deficiencies in His calculations are detailed on the 96 Professor Dhar identified a potential similar Professor Hauser’s Modified Dhar following table. problem with regard to respondents who indicated Survey appear to the Judges to be of they would switch to an existing noninteractive relatively marginal significance when 99 To be clear, Professor Farrell did not agree with service, but had previously indicated they did not the opportunity cost values that Professor Willig subscribe to such a service. However, he did not calculated, because Professor Farrell described make any adjustments to correct this problem. 98 Professor Hauser also conceded that he checked them as monopoly-based opportunity costs (as 97 Professor Dhar posited a different explanation all the numbers in Trial Ex. 293 (in which Professor noted, supra, Professor Willig called them walk- for this anomaly. See 5/8/17 Tr. 2814–16 (Dhar). In Dhar tabulated inconsistent answers in Professor away opportunity costs). However, Professor light of Professor Hauser’s failure adequately to Hauser’s survey and listed the sources for the data), Farrell’s re-working of Professor Willig’s explain the anomaly, the Judges need not consider and Professor Hauser found them to be correct. 5/ opportunity cost analysis utilizes, arguendo, Professor Dhar’s alternative explanation. 9/17 Tr. 3143–44 (Hauser). Professor Willig’s ‘‘walk-away’’ opportunity costs.

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MODIFIED DHAR SURVEY RESPONSES—DIVERSION AND CREATOR COMPENSATION

Diversion ratio Creator comp/ Respondent choice Count (%) 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 multiple nonsubscription options. the diversion data from the Lenski Professor Farrell used the above data Professor Farrell generally matched Survey (discussed later in this to calculate the opportunity cost (i.e., Professor Willig’s approach, assuming Determination) and arrived at a similar the walk-away opportunity cost). More equal intensity of use for the multiple opportunity cost estimate of $1.43. particularly, Professor Farrell engaged options chosen by a given Farrell WRT ¶ 66.106) 103 in a nine-step calculation to compute respondent. Professor Farrell Professor Farrell used the same opportunity costs. calculated the overall intensity of use methodology for survey respondents Professor Farrell first eliminated the for a given option across all respondents who were Sirius XM free trial seven respondents who chose ‘‘Don’t who selected that option as equal to the subscribers. See id., App F at F–3–F–4. know/unsure,’’ noting that this was average intensity of use for that option equivalent to assuming that these seven However, the Judges do not find the trial across all respondents who selected that subscriber population to be an would divert to the different options in option. See Farrell WRT, App. F at F– the same proportions as the remaining appropriate universe from which to 3. Applying this foregoing approach for calculate opportunity cost because trial 456 respondents.101 He calculated the each option, Professor Farrell calculated subscribers have not demonstrated a diversion ratio for each option as the an ‘‘intensity-adjusted creator positive WTP. number of respondents who chose that compensation.’’ 104 Professor Farrell’s option divided by 456. Professor Farrell calculation generated an opportunity SoundExchange failed to raise then used the same values for ‘‘creator cost of $1.44 per subscriber per persuasive objections to Professor compensation per subscriber per month.105 (Professor Farrell also applied Farrell’s opportunity cost calculation month’’ as set forth in Table 2 of Professor Willig’s WDT, including 103 See Willig WDT at B–3 and B–4. Unlike would pay a lower royalty (because their royalty Professor Willig’s adjustments for Professor Willig, Professor Farrell assumed equal payments are based on a per-play/intensity-based 102 intensity of use percentages whenever individuals formula), but interactive service royalties would not intensity of use. See Farrell WRT, selected combined free options and paid services in be similarly reduced because of a reduction in App. F at F–2. in their multiple option choices, whereas Professor intensity of use (i.e., if they more likely to pay Professor Farrell noted that in both Willig assigned 50% to alternate CD or music royalties on a per-subscriber or percent-of-revenue the Dhar Survey and the Modified Dhar downloads, and 25% to each of the free options. basis)—his opportunity cost calculation would Survey, many respondents chose According to Professor Farrell, this difference did generate a lower opportunity cost of $1.35. See not have a large impact on the size of the Farrell WRT, App. F, at F–3. However, Professor opportunity cost. Farrell does not provide in his written or oral 100 Professor Farrell used the creator 104 Professor Farrell assumed that creator testimony a basis to make this ‘‘creator compensation figures from Table 2 in the Willig compensation for the option ‘‘Other’’ to be zero. See contribution’’ adjustment based on relative changes WDT whenever available. However, Professor Farrell WRT, App. F, at F–3. Professor Willig in intensity, and the Judges therefore do not credit Willig had not covered in his Table 2: Peer-to-peer appeared to make the same assumption. See Willig his argument that—under his reworking of file sharing or free download sites, borrowed CDs, WDT at B–8. Professor Willig’s opportunity cost calculations— vinyl or tapes from friends or a library, other free 105 Professor Farrell recognized that the value the opportunity cost can be reduced from $1.44 to services, don’t know/unsure regarding free options, (unweighted) of the monthly ‘‘unit creator $1.35. and ‘‘other.’’ Professor Farrell discounted this point, compensation $ per subscriber’’ could decrease if a 106 As explained elsewhere in this Determination, noting that (with the exception of ‘‘Don’t know/ lower intensity of use (fewer plays) among those the Lenski Survey did not provide pricing unsure’’ under free options), these other services who selected multiple options also reduced the information to respondents, making it a less not in Professor Willig’s Table 2 have zero creator overall revenue base under a per play royalty valuable tool for estimating opportunity cost. compensation value. structure as calculated under Professor Willig’s Accordingly, the Judges do not rely on Professor 101 Professor Willig adopted the same approach assumptions. The $1.44 opportunity cost set forth Farrell’s $1.43 opportunity cost calculation that is when treating ‘‘Don’t know/unsure.’’ Willig WDT at in the accompanying text assumes (in favor of the based on the Lenski Survey as an independent basis B–3. licensors) that creator compensation for paid to calculate opportunity cost, but rather consider it 102 Professor Farrell did not opine on the services and paid non-interactive services does not as confirmation that Professor Willig’s opportunity appropriateness of Professor Willig’s adjustment for decrease for decreased intensity of use. Professor cost calculation (based on the original Dhar Survey) intensity of use. Farrell WRT at F–2. Farrell opined that—if noninteractive services alone was too high.

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based on the Modified Dhar Survey. In ARPU of $[REDACTED], the percent-of- that the Judges select from one of three its PFF, SoundExchange asserts only: revenue royalty rate derived from the possible adjustments: (1) The 12% Professor Farrell also revised Professor $[REDACTED] per subscriber per month steering adjustment revealed by the 109 Willig’s opportunity cost calculations to opportunity cost is 15.5%. specific steering evidence in Web IV; (2) a [REDACTED]% steering adjustment show what the industry-wide opportunity C. Opportunity Cost Model and Effective allegedly implied by the provisions of cost would be if one used diversion ratios Competition from the Hauser and Lenski surveys. Trial Ex. ‘‘Mid-tier’’ agreements 110 between 10 at 17–21 (Farrell WRT); 4/24/17 Tr. 636:2– In Web IV, the Judges reconfirmed record companies and streaming 7 (Farrell). It is not clear what the point of that a statutory willing-buyer, willing- services, see 4/25/17 Tr. at 1053 this exercise was — neither the Lenksi nor seller royalty rate is one that would (Orszag); or (3) a [REDACTED]% the Hauser survey can reliably be used to emerge in a market that is effectively steering adjustment implied by rates in calculate opportunity costs, as Sirius XM’s competitive. See Web IV, 81 FR at own experts admit. direct licenses between Sirius XM and 26334. Both SoundExchange and Sirius certain Indies. See Written Rebuttal SEPFF561. Likewise, in its RPFF, XM acknowledged that the rate set in Testimony of Jonathan Orszag, Trial Ex. SoundExchange does not attack any this proceeding must reflect a market 43, ¶ 70 (Orszag WRT). However, in this aspect of Professor Farrell’s application with such effective competition. 4/26/17 proceeding, these proposed adjustments of the Modified Dhar Survey, but rather Tr. 1103 (Orszag) (agreeing that ‘‘the are unacceptable. renews its attack on the underlying rates to be set here by the Judges . . . The Judges cannot simply import the work of Professor Hauser: must reflect the workings of effective 12% steering adjustment from Web IV Professor Farrell’s recasting of Professor competition’’); Shapiro CWDT at 21 into the satellite market; that 12% figure Willig’s calculations using the Hauser survey (‘‘My approach here is consistent with was derived from highly specific is invalid since the Hauser survey entirely the one taken by the Judges in Web evidence presented in Web IV. There is misstated the switching question, see SE FOF IV .... I use the terms ‘workably not an adequate basis in the present ¶¶614–22, and since Professor Hauser competitive’ and ‘effectively record to support a finding that the conceded unequivocally that the economists competitive interchangeably.’’); 4/20/17 noninteractive market from which that should not rely on his survey, see SE FOF Tr. 366 (Shapiro) (‘‘prices . . . at a steering adjustment arose is sufficiently ¶619 (citing Hauser testimony). complementary oligopoly level [are] not similar to the satellite radio market to SERPFF, Response to ¶ 408 at 266. [at] a workably competitive level.’’). render reasonable an importation of the SoundExchange’s objection to the use The Judges defined an effectively 12% steering adjustment here. In of Professor Farrell’s approach is competitive market In Web IV as one particular, the record shows that Sirius dependent on its antecedent criticism of that ‘‘mitigate[s] the effect of XM does not steer in the satellite market Professor Hauser’s analysis. As complementary oligopoly on the prices despite the ability of its human discussed, however, the Judges have paid by . . . services . . . .’’ Web IV, 81 programmers (as opposed to algorithmic found the Modified Dhar Survey results FR at 26366. To obtain the rate that is programmers) to do so in order to to be more accurate and probative than effectively competitive, the Judges potentially reduce rates in exchange for the results produced by the Dhar considered the services’ ability to additional plays, which is the essence of Survey. Accordingly, SoundExchange’s ‘‘steer’’ listeners as a sufficient steering. See infra, section VII.C. criticism is without merit.107 counterweight to the Majors’ For two reasons, the Judges cannot Using Professor Dhar’s corrected complementary oligopoly power. Id. at accept the proffered [REDACTED]% calculation indicating that 19% of Sirius 26343. The Judges also noted in Web IV steering adjustment that XM subscribers would switch to a new that SoundExchange had correctly SoundExchange divined from the Mid- interactive subscription service, the per described the concept of effective tier agreements. First, there is no Sirius XM subscriber opportunity cost competition as ‘‘fuzzy’’ and that ‘‘no evidence in the record to indicate increases from $1.44 to ‘bright line’ can be drawn between whether that proposed adjustment may $[REDACTED].108 Given Sirius XM’s effectively competitive and reflect a premium that a Major may noncompetitive rates.’’ Id. As the Judges impose not to prohibit a licensee from 107 In its RPFF, SoundExchange added to its further noted, the implication of this steering away from the licensor, rather argument: ‘‘Professor Hauser conceded ‘‘fuzziness’’ was not that the principle of than a discount offered to encourage a unequivocally that the economists should not rely effective competition should be licensee to steer toward the licensor. on his survey.’’ However, Professor Hauser made this comment because he also objected to other discarded, but rather that this ‘‘fuzzy Further, the rate differentials in those aspects of the Dhar Survey, particularly with regard line’’ needs to be drawn on a case-by- agreements on which SoundExchange’s to its ‘‘pricing’’ questions, that he nonetheless case basis, from the evidence and economic expert, Mr. Orszag, relied retained in the Modified Dhar Survey. Thus, he testimony adduced at the hearing.’’ Id. appear to be the product of many other argued that these antecedent deficiencies in the Modified Dhar Survey precluded reliance on the (emphasis added). differences in those agreements in results derived from his modified ‘‘switching’’ In the present proceeding, the parties’ addition to the steering/no-steering questions in the Modified Dhar Survey. The Judges economists proposed that the Judges distinction, as Mr. Orszag candidly disagree with Professor Hauser’s characterization of once again adjust for improper market acknowledged. 4/26/17 Tr. 1155–56 the deficiencies he identified in the Dhar Survey power by applying a steering that were unrelated to the ‘‘switching’’ questions. (Orszag); see also SXM RPFF ¶¶ 85–86 Thus, the Judges can and do give considerable adjustment. SoundExchange proposed (and record citations therein). weight to the Modified Dhar Survey, which they Finally, the Judges reject any steering find sufficiently credible and probative. 109 Professor Willig attempted to corroborate adjustment based on the direct licenses 108 15.1% of the ‘‘creator contribution’’ value of Professor Dhar’s diversion ratios with a regression between Sirius XM and various Indies. $[REDACTED] equals $[REDACTED]. 19% of analysis seeking to measure relative cross- $[REDACTED] equals $[REDACTED]. The elasticities. The Judges do not apply that analysis As explained in the discussion of difference is $[REDACTED] ($[REDACTED] ¥ because: (1) The Dhar Survey results are without $[REDACTED] = $[REDACTED]). When that value (as discussed previously) and therefore 110 ‘‘Mid-tier’’ services means internet streaming $[REDACTED] is added to the $1.44 calculated by cannot be ‘‘corroborated’’; and (2) there were services that offer only limited interactivity, and Professor Farrell, the full opportunity cost based on significant disputes regarding the accuracy of thus offer a tier of service between a noninteractive the Modified Dhar Survey (as adjusted for the Professor Willig’s regression that rendered the value service and a fully interactive service. The limited foregoing anomaly in the Hauser survey answers) is of that analysis inconclusive. See Shapiro WRT at interactive functionality of the mid-tier service $[REDACTED]. 27–37. offerings includes limited caching and playbacks.

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Professor Shapiro’s reliance on these D. Professor Willig’s ‘‘Fork in the Road’’ Sirius XM did not challenge Professor direct licenses as benchmarks, the Approach and Sirius XM’s Own Market Willig’s ‘‘fork in the road’’ concept, record is clear that multiple other Power either in cross-examination or in its provisions of those direct licenses The Judges find no basis to lock post-hearing proposed findings and provided substantial consideration to themselves into a Hobson’s choice by replies to proposed findings. the Indie licensors to justify their which they must either adopt an Accordingly, the Judges find that the willingness to enter into those deals. inapplicable steering adjustment as a 15.5% opportunity-cost derived rate: (1) Moreover, the Indie direct licenses proxy for an adjustment to reflect Reflects the offsetting market forces of contain neither legal guarantees nor effective competition, or accept a rate higher complementary oligopoly rates economic incentives that would compel that is higher than an effectively and lower (zero) opportunity costs or motivate steering by Sirius XM in competitive rate.114 ‘‘Steering’’ is not attributable to listeners who otherwise favor of direct licensors. the only way the inefficient market would migrate to terrestrial radio; and Accordingly, the Judges must review power of complementary oligopoly can (2) is consistent with Professor Willig’s the record in this proceeding to identify be offset or mitigated in order to opinion regarding the need for a a means to establish rates that are consistent treatment of market forces, as consistent with effective competition. establish an effectively competitive rate. In this regard, in his hearing described in his ‘‘fork in the road’’ The Judges accept certain principles testimony, Professor Willig explained analysis. regarding the nature of effective This ‘‘fork in the road’’ approach is how and why his opportunity cost competition. ‘‘Between the extremes of also consistent with a recognition of the approach would result in a rate that is a market with ‘metaphysically perfect countervailing downstream market effectively competitive. Professor Willig competition’ and a monopoly (or power that Sirius XM, the sole SDARS described a ‘‘fork in the road’’ for the collusive oligopoly) market devoid of licensee, possesses as a monopolist in Judges as follows: competition there exists ‘[in] the real that downstream market, narrowly world . . . a mindboggling array of [T]he fork in the road is whether, in defined as the market for the sale of different markets’ . . . all of which considering the comparison between the subscriptions to satellite radio. To be possess varying characteristics of a opportunity cost and the royalty rate in the sure, this narrow definition of the ‘competitive marketplace.’ ’’ Web IV at target market, should you take the other markets as they are or should you bring in market ignores various other forms of 26333 (citing Web III Remand, 79 FR at music distribution, such as terrestrial 111 hypotheticals and make adjustments to the 23114, n.37). Economists have long opportunity cost based on . . . changes in radio and all other alternative understood that the ‘‘fuzzy’’ nature of the other markets? And that to me is a very distribution channels identified in the the concept of effective competition is consequential fork in the road .... survey analyses. However, as that inescapable, yet the concept must be 5/2/17 Tr. 2040 (Willig); see id. at 2047, survey evidence makes clear, even applied, lest pragmatic economic 2153. Professor Willig opined that terrestrial radio, which is free to the analysis be straightjacketed by rigid attempts to adjust one rate downward, listener, cannot attract sufficient textbook models such as perfect such as the interactive rate, to account listeners to deprive Sirius XM of the 112 competition and simple monopoly. for the complementary oligopoly effect, substantial profits it realizes from its The D.C. Circuit has recognized this would be incomplete, because other unique position as the only supplier of conceptual fuzziness, acknowledging in distribution modes, such as terrestrial satellite radio in the market. Further, the rate-setting context the need for radio, do not generate sound recording Sirius XM is priced higher than pragmatic market analysis, establishing royalties and thus do not create a interactive (and noninteractive) rates intermediate between the positive opportunity cost. Thus, streaming services. Yet, despite their pedagogical poles of perfect competition Professor Willig described as a ‘‘morass’’ differentiated features, those services to and pure monopoly. See Intercollegiate any attempt to take the ‘‘fork-in-the- date have been unable to convince Broad. Sys., Inc. v. Copyright Royalty road’’ by which the Judges attempt to enough Sirius XM subscribers to convert Board, 574 F.3d 748, 757 (D.C. Cir. adjust every rate that fails to reflect to a new paid subscription service to 2009) (IBS) (statutory provisions ‘‘do[ ] market forces. See id. at 2057, 2048. reduce the revenues and profits realized not require that the market assumed by Rather, he recommends that the Judges by Sirius XM. Clearly, Sirius XM’s the Judges achieve metaphysical ‘‘should take the fork in the road that uniquely differentiated service has perfection in competitiveness’’ says take those markets as they are struck a chord with music listeners— (emphasis added)).113 because that’s what drives honest-to- particularly those who listen to Sirius goodness opportunity cost.’’ Id. at 2057. XM in the car. This point was made 111 See J. M. Clark, Toward a Concept of Effective Competition, 30 a.m. Econ. Rev. 241, 243 (1940) This is precisely what the Judges clearly by Professor Shapiro, who (‘‘The specific character of competition in any given accomplish by taking the opportunity testified: case depends on a surprisingly large number of cost analysis that results in the 15.5% Sirius XM spends substantial sums of conditions . . . .’’). rate.115 The Judges further note that money on its infrastructure and satellites. In 112 See A. Kahn, Antitrust Policy, 67 Harv. L. Rev., 28, 35, (1953) (‘‘[T]here exists no generally doing so, it creates a unique differentiated accepted economic yardstick appropriate for for eligible nonsubscription services and new service. That is quite valuable to consumers. incorporation into law with which objectively to subscription services. Under the license at issue in That’s why they are willing to pay for the measure monopoly power or determine what degree the present case, the D.C. Circuit has not required service and, of course, most of the listening is compatible with workable competition.’’); J. the Judges to adopt market rates. However, to the is in the car. extent that the Judges choose to use market rates as Markham, An Alternative Approach to the Concept 116 of Workable Competition 349, 361 (1950) (The an input for the development of rates under section 5/4/17 Tr. 2550 (Shapiro). concepts of ‘‘market performance and workable 801(b)(1) (as they do here), the quoted language competition are essentially pragmatic’’); G. from IBS is instructive. they disagree with Professor Willig’s opportunity Stocking, Economic Change and the Sherman Act: 114 A third possibility would be to utilize an cost approach. Some Reflections on ‘‘Workable Competition,’’ 44 otherwise appropriate market benchmark rate that 116 Sirius XM is both a monopolist, in the sale of Va. L. Rev. 537, 553 (1958) (‘‘the economists’ is effectively competitive. However, the Judges satellite radio subscriptions, and a competitor concept of workable competition . . . is vague cannot identify such a rate in the present record. among the various distribution channels more . . . .). 115 The Judges’ rate is less than the rate proposed broadly. This is not an inconsistency. Since 1933, 113 The quoted language refers to section by Professor Willig, because the Judges give less economists have recognized that a firm may be a 114(f)(2)(B), which governs the compulsory license probative weight to the Dhar Survey, not because ‘‘monopolistic competitor,’’ with the power of a

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Correspondingly, Sirius XM bears all listeners who otherwise would listen to with the Judges, Professor Willig the hallmarks of a ‘‘natural monopoly.’’ free terrestrial radio; and (2) the acknowledged that his ‘‘opportunity A natural monopoly develops when ‘‘it entrepreneurial ability by which Sirius cost’’ model constituted an application is cheaper for [an] entrepreneur to XM has harnessed the natural monopoly of the ECPR model.119 produce q units than it is to have those structure of satellite radio delivery to its Professor Willig testified that he was units produced by two [or more] smaller financial benefit. reluctant to rely solely on the ECPR firms . . . .’’ A. Schotter, The Judges find from this record that approach because it is intended to Microeconomics: A Modern Approach the hypothetical upstream market establish rates that correct for the case 416 (2009); see also W. Baumol and R. negotiations between such economically in which an owner of an upstream Willig, Fixed Costs, Sunk Costs, Entry powerful entities would resemble a essential (‘‘must have’’) input also Barriers, and Sustainability of bilateral monopoly. Thus, as Professor competes downstream in the retail Monopoly, 96 Q.J.Econ. 405, 409, 418 Willig testified, the record companies market (i.e., a vertically-integrated firm) (1981) (‘‘[A]n industry has been called would be expected to recover their but refuses to make the essential input a natural monopoly if . . . industry opportunity costs (inclusive of any available to would-be competitors (i.e., outputs can be produced more cheaply complementary oligopoly profits). the upstream firm engages in what is by a single firm than by any Through its own market power, Sirius known as ‘‘foreclosure’’). combination of several firms. These per XM could afford to pay those The Judges find the Opportunity Cost/ unit costs arise from relatively large opportunity costs because, as Professor ECPR approach to be more applicable sunk costs (compared to marginal costs) Lys explained,117 it earns sufficient here than Professor Willig suggested. and those sunk costs act as ‘‘barriers to profits to pay those opportunity costs Although the Judges do not constitute entry [that] . . . impede the and still earn a significant profit. an ‘‘antitrust court,’’ the parties establishment of new firms [because] Thus, Professor Willig’s ‘‘fork in the acknowledge that the Judges must [t]he need to sink money into a new road’’ approach, and Sirius XM’s establish rates that are effectively enterprise, whether into physical capacity to pay the market-based competitive, i.e., that adjust or offset capital, advertising, or anything else opportunity costs, taken together or sufficiently for any complementary imposes a difference between the separately, are supportive of the 15.5% oligopoly power in the benchmark incremental cost and the incremental rate determined by the Judges. markets or in the markets from which risk that are faced by an entrant and an opportunity costs arise. Whereas an incumbent’’); H. Varian, Intermediate E. The ‘‘Efficient Component Pricing ‘‘antitrust court’’ would seek to remedy, Economics: A Modern Approach at 453 Rule’’ ex post, pricing that was in excess of an (‘‘When there are large fixed costs and Professor Willig identified another ECPR-derived price, the Judges here are small marginal costs, [that] situation is approach to rate-setting: The Efficient charged with setting a rate, ex ante, that referred to as a natural monopoly.’’). As Component Pricing Rule (ECPR). As he reflects an effectively competitive rate. a natural monopolist in the satellite described this approach: There is no reason why an ECPR rate radio market, Sirius XM can, and does, The ECPR rates would be calculated by could not accommodate ex ante rate- realize substantial profits, as adding on to the direct cost of providing setting as well provide an ex post demonstrated in fine detail by Professor access the opportunity cost of the remedy.120 Lys. The history of Sirius XM bears out competitive entry; i.e. the margin on the Moreover, a particular limitation of this point. When there were only two competitive business that the copyright the Opportunity Cost/ECPR approach is satellite firms—Sirius and XM—both owners would lose if the entrant won that expressly accounted for in the present were on the brink of bankruptcy. See business away. In short, ECPR prescribes statutory and regulatory structure. That SDARS II, 78 FR at 23069. After they rates for access equal to direct plus is, some economists have questioned competitive opportunity costs. merged, they were transformed from whether the ECPR truly models for an two pumpkins into a single coach, as it Willig WDT ¶35. efficient and competitive price, because were, realizing profits across many Professor Willig testified that the the opportunity cost of the upstream financial measures. See Lys WDT, ECPR could be ‘‘somewhat relevant here supplier(s) that must be covered by the passim. since the statutory royalty at issue can rate has embedded within it In the hypothetical market the Judges be construed as the price of access to the supracompetitive profits that are not the construct in this proceeding, they copyrights protecting the sound consequence of more efficient identify significant power on both the recordings, and since the various modes operations. See generally C. Decker, licensor side and the licensee side. On of distribution of the sound recordings Modern Economic Regulation 151 the licensor side, that power is reflected do compete with each other to various (2015) (‘‘[T]he ECPR does not seek to in the opportunity cost analysis—the extents.’’ Willig WDT ¶14. Moreover, ‘‘creator contribution’’ values identified Professor Willig noted that ‘‘by its very first developed the ECPR approach, also known as by Professor Willig. Those values design, ECPR is arguably consistent the ‘‘parity pricing’’ principle. See W. Baumol, J. embody the complementary oligopoly Ordover, and R.D. Willig, Parity Pricing and Its with the policy objectives (a), (b), and Critics: A Necessary Condition for Efficiency in the features that flow from the ‘‘must have’’ (c) of section 801(b)(1).’’ Id. At first Provision of Bottleneck Services to Competitors, 14 nature of the Majors’ repertoires. On the blush, it is puzzling that Professor Yale J. Reg. 145, 148 n.4 (1997) (‘‘So far as we have licensee side, there are profits that flow Willig did not include in his written been able to determine, the ECPR proposal stems from two sources: (1) The highly from Willig’s work. Robert D. Willig, The Theory of testimony an explicit application of the Network Access Pricing, in Issues in Public Utility 118 differentiated nature of Sirius XM’s ECPR model. However, in a colloquy Regulation 109 (1979).’’). offerings that permits it to attract 119 See 5/2/17 Tr. at 2107. 117 Professor Lys’s detailed examination of Sirius 120 One of Professor Willig’s colleagues and monopoly (as reflected in the downward sloping XM’s profitability is discussed later in this frequent co-authors, and a developer of the ECPR demand curve it faces) but the restraints of Determination. approach, the late Professor William Baumol, competition (making that demand curve relatively 118 The absence of a more explicit application of explicitly noted the appropriateness of applying the elastic compared to the demand curve for the the ECPR approach by Professor Willig in his ECPR approach to the setting of royalties for product of a full-fledged monopolist). See E. Written Direct Testimony is also somewhat licenses in the music industry. W. Baumol, The Chamberlin, The Theory of Monopolistic surprising because Professor Willig has been Socially Desirable Size of Copyright Fees, 1 Rev. Competition (1933). identified by his colleagues as the economist who Econ. Res. on Copyright Issues 83 (2004).

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address concerns about monopoly buyer and one seller, in which each is equivalent to a percent-of-revenue pricing .... [T]he ECPR approach party will refuse to accept a value below rate of [REDACTED]%. effectively guarantees the pre-entry that which it would receive absent an Based on this alternative approach, profits of the incumbent, including any agreement (referred to as its ‘‘threat,’’ SoundExchange concluded that inefficiency associated with its historic ‘‘disagreement,’’ or ‘‘fallback’’ point), ‘‘Professor Willig’s Nash Bargaining activities.’’).121 In rate-setting and each party uses its ‘‘bargaining Solution therefore appropriately proceedings, when presented with power’’ to negotiate for itself the greatest suggests a rate above the copyright sufficient evidence, the Judges can and share of any surplus value (i.e., value in owners’ opportunity costs.’’ SEPFF ¶725 do expressly adjust or offset excess of the sum of both parties’ (emphasis added). As such, marketplace rates in order to reduce the ‘‘threat/disagreement’’ point values). SoundExchange argued that this royalty to a level that better reflects See id. Under this model, the surplus approach confirms the reasonableness of effective competition, rather than that can be created may be split evenly its even lower $2.55 per month simply allowing the rate to incorporate between the parties. 5/2/17 Tr. 2116–18 subscriber royalty and the equivalent (without a downward adjustment or (Willig). A 50:50 split of the surplus 23%-of-revenue rate implied by that offset) the full complementary oligopoly assumes the parties have equal per-subscriber proposal. effect baked into the opportunity cost. bargaining power and means the parties Sirius XM leveled two basic criticisms On balance, the Judges find Professor benefit equally by executing the at Professor Willig’s Nash Bargaining Willig’s discussion of the ECPR agreement.123 5/2/17 Tr. 2110 (Willig). Solution model. First, it asserted that approach to be persuasive confirmation Professor Willig’s Nash Bargaining of the Judges’ finding that his In this model a record label’s fallback Solution posited a monopoly seller of Opportunity Cost approach provides an point would be its walk-away sound recording performance licenses, appropriate basis for setting a opportunity cost, which Professor Willig which is antithetical to the requirement reasonable rate when the proper survey calculated to be $2.55 per subscriber per that the statutory rate must represent the data are used as inputs.122 month. Willig WDT ¶48; 5/2/17 Tr. product of a hypothetical market that is 2110–11 (Willig). Sirius XM’s fallback F. Professor Willig’s Nash Bargaining effectively competitive. SXMRPFF ¶196 point would be its projected ARPU in 126 Solution Approach (and record citations therein). the absence of music programming, less Second, Sirius XM noted that Professor Willig asserted that the variable costs (i.e., its earnings in a SoundExchange’s proposal that the walk-away opportunity cost he world absent an agreement with the Nash surplus be deemed split 50/50 calculated, $2.55 per subscriber per single seller (record company) in this (rather than in favor of a record month, represented only the minimum model).124 Professor Willig computed company) is irrelevant, because the that each label would accept in this amount to be $[REDACTED] per opportunity cost figure of $2.55 is unregulated negotiations with Sirius subscriber per month. See Willig WDT already inflated by the complementary XM. As he further explained, in an ¶48. oligopoly effect in that opportunity cost unregulated market, even after receiving Professor Willig calculated the total figure. See id. ¶197 (and record citations the full walk-away opportunity cost, the earnings created by Sirius XM’s therein). label would still negotiate with Sirius compulsory license (Sirius XM’s ARPU As the Judges have held previously, a XM for a portion of the surplus value less variable costs exclusive of royalties) significant problem with a Nashian (revenue over costs) that remained. In as $[REDACTED] per subscriber per analysis is that the bargaining power of order to quantify this surplus, and to month. This resulted in a surplus from the respective parties is speculative and calculate and then add the label’s share the agreement of $2.78 per subscriber thus the outcome of the bargain is of the surplus to the label’s walk-away 125 indeterminate. See SDARS I, 74 FR at opportunity cost, Professor Willig per month. Assuming that the parties 23058; see also id. at 23083 (dissenting applied what is known in game theory would divide the surplus equally, opinion) (concurring on the and in economics as the ‘‘Nash Professor Willig opined that the record indeterminacy of a ‘‘surplus-splitting’’ Bargaining Solution,’’ which he labels would earn from the agreement analysis). In the present case, the Nash described as a type of price discovery their opportunity cost of $2.55 plus one- Bargaining Solution again was not engaged in by an ‘‘unregulated profit- half of the surplus ($1.39) for a total of developed sufficiently in the record for maximizing firm.’’ Willig WDT ¶38. The $3.94 per subscriber per month. See id. the Judges to rely on that approach as Nash Bargaining Solution is an analytic ¶49. Given a Sirius XM ARPU of an independent useful tool for setting approach that identifies a price agreed $[REDACTED], this per subscriber rate to in a bilateral negotiation between one the statutory rate. 123 Importantly, this does not mean each party G. Professor Willig’s ‘‘Ramsey Pricing’’ enjoys equal profit. The parties may not profit 121 The inefficiently high downstream price is set equally ‘‘because their fallback values (opportunity Approach when, in the usual situation, the vertically- costs) may have been different.’’ 5/2/17 Tr. 2110 integrated supplier sells at a monopoly retail price. In another pricing approach, Professor In the present context, the Majors, as (Willig). Even if parties do not possess equal bargaining power, and even if that disparity in Willig applied the economic concept of complementary oligopolists, price their sound ‘‘Ramsey Pricing.’’ This approach is recordings in the unregulated interactive market bargaining power is incorporated into a Nash above even the monopoly level and the retail model, neither party would be compelled by the interactive services must cover their input costs assumptions of the model to accept less than its 126 Sirius XM also relies on Professor Farrell’s through retail prices higher than they would be in fallback value, i.e., its opportunity cost. Id. at 2110– ‘‘Nash-in-Nash’’ model, as a counterpoint to the absence of such inefficiently high input prices. 11 (Willig). Professor Willig’s Nash Bargaining Solution. See Web IV, 81 FR at 26343. 124 Professor Willig based his projection on the Professor Farrell injects a second record company 122 As discussed in connection with Factor C in finding in the Boedeker Survey that 70% of Sirius to the Nash approach, as contrasted with the single the itemized 801(b)(1) factors, Sirius XM’s subscribers would leave in the absence of music record company assumed by Professor Willig. development of a differentiated product through its programming. See Willig WDT ¶48 & n.22. He However, Sirius XM acknowledged that Professor satellite-based network constitutes a form of computed variable costs as [REDACTED]% of Farrell’s ‘‘Nash-in-Nash’’ approach was not product differentiation that creates value and ARPU, based on Professor Lys’s testimony. See id. intended to provide a separate rate proposal, but profits that, under Factor C (and under an ¶48 & n.21. rather to demonstrate the fact that the absence of appropriate consideration of the ECPR approach) 125 Professor Willig computed the surplus as the competition would inflate the rate above an should continue to inure to the benefit of Sirius total earnings from the agreement less the sum of effectively competitive rate. Id. ¶¶198–200 (and XM, net of the licensors’ opportunity costs. the parties’ fallback points. See Willig WDT ¶48. record citations therein).

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designed to address the economic issue Professor Willig identified that financial much revenue is actually necessary to of ‘‘[h]ow to price various products or target as equal to the monetary value of fund the recording industry’s services whose supply draws on download sales lost by the labels due to investment in sound recordings’’).129 common assets in a fashion that the increase in streaming. Willig WDT Second, Sirius XM asserted that maximizes consumer welfare while also ¶31. To identify his Ramsey target, Professor Willig did not identify all providing enough net revenue to meet Professor Willig measured the amount users of the common assets and set an overall financial target.’’ Willig WDT of creator compensation lost as a result prices for each that collectively would ¶13.127 In the context of this proceeding of the movement toward streaming and meet the Ramsey financial target, i.e., the ‘‘common assets’’ are the sound away from paid downloads since 2010. cover record industry costs while recordings supplied by the record Willig WDT ¶22. Based on his maximizing consumer welfare. Professor labels. Professor Willig did not look to econometric analysis, he concluded that Willig concedes this point. See 5/2/17 the Ramsey Pricing approach to substitution of streaming services for Tr. 2172 (Willig) (did not ‘‘analyze[ ] all recommend an SDARS royalty rate; downloads has cost the recording the different modes of distribution that rather, he used the Ramsey Pricing industry about $800 million per year use sound recordings and determine[ ] approach as ‘‘directional’’ guidance to from 2010 through 2016. Willig WDT the Ramsey prices that would result’’); substantiate his conclusion that the ¶¶22–28, & App. B. Professor Willig id. at 2177–78 (Willig) (‘‘I have not done SDARS royalty rate should be higher concluded that the Ramsey Pricing a formal financial analysis of impacts of than the current statutory rate. 5/2/17 across distribution channels must be royalty rates on either creation or what Tr. 2086 (Willig). sufficient to offset these shortfalls, and you just called availability.’’). Ramsey pricing requires that for that, specifically, SDARS royalties must In addition, Sirius XM noted that the different modes of distribution of sound be increased. analysis takes as its starting point the recordings, price-cost margins should be Professor Willig then estimated the same measure of opportunity cost used inversely proportional to each relevant upstream elasticity of Sirius in all of Professor Willig’s approaches, distributor’s own price elasticity of XM’s demand for sound recordings, the improper $2.55 opportunity cost demand. See Willig WDT ¶32; 5/2/17 factoring in both downstream and inflated by complementary oligopoly Tr. 2094 (Willig). In setting prices to upstream effects. He opined that, at effects. See Farrell WRT ¶¶90–94; see meet the Ramsey financial target, ‘‘the current royalty rates, Sirius XM’s also 4/24/17 Tr. 653–54 (Farrell). Services that should contribute upstream demand for sound recordings The Judges find Professor Willig’s relatively more, relative to their cost, on is much more inelastic than the implementation of the Ramsey pricing a percentage basis are the Services with upstream demand of interactive approach unhelpful. Professor Willig the relatively low own price elasticities services. Given this finding, Professor ultimately neither derived nor proposed of demand.’’ 5/2/17 Tr. 2095 (Willig).128 Willig concluded that ‘‘even at royalty a royalty rate from this analysis.130 Nor When demand for a music service is rates proposed by SoundExchange, the could he do so, given that his analysis relatively less sensitive to price, that music input would still be a does not establish a revenue target, and suggests that the service is relatively significantly smaller percentage of the does not factor in the contribution of more valuable to its users. Willig WDT downstream price for Sirius, meaning other users of the common assets. To the ¶33. Accordingly, it follows that that upstream [price] elasticity is not extent Professor Willig’s assertion that Ramsey prices should be relatively going to be bigger, probably lower than his Ramsey approach has value in this higher for users of that service, to allow the upstream elasticities for the other proceeding because it provides for greater contributions toward Services that we’re talking about.’’ 5/2/ ‘‘directional’’ evidence has any validity, compensation to the producers of the 17 Tr. 2099–2100 (Willig). Thus, the Judges note that the adoption of the recorded music (i.e., the common asset Professor Willig estimated that Sirius 15.5% rate derived from his opportunity used by all distribution channels). XM could pay a royalty of cost analysis is consistent with this Willig WDT ¶32. Services with $[REDACTED] per subscriber per month directional guidance. relatively lower elasticities of demand and still achieve the same margin as the interactive streaming services. Willig H. Mr. Orszag’s Ratio Equivalency will lose relatively less downstream Model revenue, so higher royalties, even if WDT ¶50. According to Professor Willig passed on to subscribers or advertisers, the upshot of that conclusion is that SoundExchange also presented expert will have less impact on usage decisions Ramsey pricing principles suggest that testimony from Mr. Jonathan Orszag. made by those distribution modes and Sirius XM should pay a substantially Mr. Orszag’s approach to determining their consumers, as compared to higher royalty in order to contribute services with higher elasticities of appropriately (under his Ramsey 129 While (as noted in the text, supra) Professor approach) to meet the Ramsey revenue Willig did offer a regression analysis purporting to demand. See Willig WDT ¶¶32–33. identify $800 million in annual losses to the record Ramsey pricing reasonably assumes target. Willig WDT ¶50. industry over the past several years caused by there is a target amount of money that Sirius XM noted the facial ‘‘streaming’’ (not simply satellite radio), Willig the producers of the common assets ‘‘theoretical attractions’’ of an WDT ¶¶22–27, he acknowledged that the figure need to realize. In the present context, appropriately specified Ramsey pricing played no direct role in any of his calculations, approach, but finds Professor Willig’s including his ‘‘Ramsey’’ analysis. 5/2/17 Tr. 2167:24–2169:18 (Willig). 127 Ramsey pricing is frequently employed as an approach not to constitute an actual 130 Professor Willig stated that one reason he analytic framework for such applications as sales Ramsey pricing analysis. Sirius XM declined to propose the $[REDACTED] monthly per taxes levied to raise sufficient revenue to meet a found two essential elements of the subscriber royalty (which the Judges understand to government financial target, prices for various Ramsey pricing approach missing from be equivalent to [REDACTED]% of revenue) is that telecommunications services that all are enabled by he could not evaluate how such a substantial the same underlying electronic network, and prices Professor Willig’s analysis. First, he did increase in the royalty rate would increase for various railroad services that all make use of the not identify a financial target sufficient subscription rates and create a loss of subscribers same track infrastructure. Willig WDT ¶13 n.4. to provide for the creation of the sound and subscriber revenue. In economic terms, he 128 Shorn of economic jargon: For certain recordings. See 5/2/17 Tr. 2171–72 could not opine as to whether, assuming that Sirius distribution channels, subscribers will be relatively XM passed through to subscribers such a higher less likely to cancel their subscriptions if their (Willig); 4/24/17 Tr. 652 (Farrell); see royalty rate, the downstream elasticity at that price subscription charge increases, as compared with also 5/2/17 Tr. 2176–77 (Willig) point would be so high as to actually reduce Sirius other distribution channels. (acknowledging no analysis of ‘‘how XM’s revenue.

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SDARS rates was based upon ratio 1. Mr. Orszag’s Benchmark ‘‘Approach similarly indispensable inputs in the equivalencies. Specifically, he opined One’’: Ratio Equivalency With the upstream market for both interactive that the royalties in the target market Interactive Market streaming services and Sirius XM. From (i.e., those paid by an SDARS) should be Applying these considerations, Mr. an economic perspective, he explains set at a rate that makes the ratio between Orszag identified the market for the that the upstream demand for sound royalties and revenues in that target licensing of sound recordings by record recording rights is what economists call market equal to the ratio between companies to interactive streaming a ‘‘derived demand,’’ i.e., upstream royalties and revenues in a benchmark subscription services as the best demand is derivative of downstream market. Mr. Orszag noted that the Judges available benchmark category for consumer demand. Mr. Orszag further ‘‘found this assumption to be warranted satellite radio, due to what he believed opined that, because of this as a matter of economic theory’’ in Web to be ‘‘the comparability of the two indispensability, sound recording IV. Amended Written Direct Testimony types of service along key dimensions copyright holders should receive a of Jonathan Orszag, Trial Ex. 26, and the availability of reasonable ¶37(Orszag AWDT). material portion of the overall value of methodologies with which to adjust for satellite radio service, as reflected in the Mr. Orszag began his analysis by pertinent differences.’’ Orszag AWDT opining that in this case ‘‘[i]t is . . . prices paid by subscribers, just as they ¶29. More particularly, Mr. Orszag do for interactive music services. Orszag appropriate to use current marketplace identified the following alleged AWDT ¶31. agreements in evaluating the range of comparable qualities in the reasonable rates for the upcoming ‘‘downstream market’’ 131 between the To determine the rates actually paid licensing period.’’ 4/25/17 Tr. 953 target and benchmark markets: by subscription interactive services, Mr. (Orszag) (emphasis added). Marketplace • Both categories of services offer a full Orszag reviewed the monthly royalty rates are the appropriate starting points, rates and royalty payments set in 27 according to Mr. Orszag, because ‘‘a repertoire of music; • both categories of services offer current license agreements between standard way in which economists subscription-based models, thereby three major record labels 133 and nine estimate a reasonable royalty rate for the demonstrating that their listeners’ have a interactive streaming services,134 from blanket license under consideration in positive willingness to pay; January 2014 through June 2016. Orszag this proceeding is by examining • both categories of services face similar comparable rates generated through downstream elasticities of demand; AWDT ¶45; see 4/25/17 Tr. 985 (Orszag) arm’s length negotiations outside the • both categories of services offer products (‘‘So I got the royalty statements from that compete with each other; each of the . . . Services for each of the purview of the compulsory license • regime for which satellite radio consumers in both categories of services labels by month, and I went to what receive music digitally; qualifies,’’ i.e., ‘‘[r]ates yielded through • they actually were being paid, which consumers in both categories of services 135 . . . unfettered negotiations . . . .’’ obtain unlimited usage; prong was governing.’’). Orszag AWDT ¶12. Accordingly, Mr. • both categories of services offer mobile The table below presents the actual Orszag utilized a marketplace functionality, Sirius XM principally through monthly per-subscriber royalty benchmarking approach. in-vehicle receivers and interactive streaming payments made by the subscription through smartphones and other mobile Mr. Orszag’s first step was to identify interactive services to each of the what he found to be comparable devices; and • Majors. These data produce an average benchmark rates that he could adjust, if interactive streaming services increasingly offer a ‘‘lean-back’’ 132 monthly per-subscriber payment of and as warranted, to determine the rates functionality (akin to the functionality of that would apply in the target market $[REDACTED], weighted by the number Sirius XM listening) through playlists of subscribers per service. Orszag (SDARS) if it were unregulated. Orszag generated by the services, third parties, and AWDT ¶13. He looked first at royalty subscribers, as well as algorithmic streams. AWDT ¶46. rates in the interactive music streaming 4/25/17 Tr. 968 (Orszag); Orszag AWDT ¶32. services for data. Then, he analyzed 133 Sony Music Entertainment (Sony), Universal Mr. Orszag further opined that sound retail price data for both the interactive Music Group (UMG), and Warner Music Group recording performance rights are and noninteractive music streaming (WMG) are the three major record labels (together, services. In selecting his benchmarks, the Majors). 131 The ‘‘downstream market’’ is the market in 134 Mr. Orszag looked for agreements The nine services are listed in the table that which licensees of sound recordings offer their follows in the text, infra. entered into by record companies with services to subscribers or other end users/ 135 The agreements Mr. Orszag studied contain consumers. The ‘‘upstream market’’ is the market in streaming services that in his opinion royalty rate provisions that require the services to are comparable to satellite radio across which record companies (a/k/a/labels), as licensors, license their repertoires to services, as licensees, for calculate royalty obligations under separate pertinent dimensions. Additionally, he ultimate dissemination in the downstream market. ‘‘prongs’’: a [REDACTED] metric and a considered whether the benchmark See Web IV, 81 FR at 26332 n.69. [REDACTED] metric, and in some cases a evidence permitted him to account for 132 Functionally noninteractive services are [REDACTED] metric, and then pay each label its pro material differences, if any, between the generally described in the industry as ‘‘lean-back’’ rata share of [REDACTED]. A label’s pro rata share services, as contrasted with ‘‘lean forward’’ services benchmarks and the target market. of the royalty is based on the share of the total that have varying degrees of interactivity. See Web performances on the service accounted for by sound IV, 81 FR at 26336 n.75. Orszag AWDT ¶28. recordings controlled by that label. Orszag AWDT ¶45.

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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. Mr. Orszag utilized the concept of He noted that in both the interactive For the nine subscription interactive ‘‘ratio equivalency’’ to compare his streaming and SDARS markets revenues services in the above table, over the benchmark rate for the interactive are derived from subscribers with a 2014–2016 period covered, individual streaming market to the target SDARS positive WTP. More particularly, subscriptions were offered to consumers market. He applied essentially the same subscribers to interactive services at $9.99 per month. At that monthly ratio equivalency approach as the typically pay $9.99 per month, Orszag price, the weighted average monthly Judges applied to the noninteractive AWDT ¶ 36, while subscribers to Sirius 137 per-subscriber payment of subscription market in Web IV. XM typically pay at least that amount. $[REDACTED] translates to a royalty Orszag AWDT ¶ 37. More specifically, Id. at ¶ 49 & n.40. With regard to the equal to approximately [REDACTED] % Mr. Orszag relied on the following second condition, Mr. Orszag cites of the services’ revenues ($9.99 × points from Web IV to identify what he record evidence of functional ‘‘lean- [REDACTED]). Orszag AWDT ¶ 47.136 considered necessary conditions for the back’’ convergence and downstream application of a ratio equivalency competition, particularly with regard to Because Mr. Orszag’s interactive data approach: the use of playlists and enhanced were limited to agreements with the mobile technology, which have allowed Majors, he also considered whether the (1) Revenues in both markets must be derived from subscription revenues and thus interactive streaming services to gain an rates paid by subscription interactive be reflective of buyers with a positive increasing share of in-car listening. See streaming services to the Indies were willingness to pay (WTP) for streamed music; 4/24/17 Tr. 605 (Farrell); Orszag AWDT lower than those paid to the Majors. He (2) Functional convergence and ¶ 39. Finally, Mr. Orszag testified that determined that, whether the Indies’ downstream competition for potential changes in the interactive market after recordings were distributed by a Major listeners must indicate a sufficiently high Web IV had obviated the need for a or a Major affiliate, or were distributed cross-elasticity of demand as between complementary oligopoly adjustment. by another entity, the terms regarding interactive and noninteractive services, Nonetheless, he provided three royalties were ‘‘highly similar’’ to the provided the noninteractive subscription rate alternative potential steering rates paid to the Majors. Consequently, is reduced to reflect the absence of the added adjustments in the event the Judges Mr. Orszag made no adjustment to his value of interactivity; and disagreed with his conclusion regarding interactive benchmark to account for the (3) The benchmark market rate must be complementary oligopoly: (1) A adjusted downward 138 to eliminate the rates paid by interactive services to [REDACTED]% steering adjustment independent record labels. Orszag ‘‘complementary oligopoly’’ effect arising from the presence of multiple ‘‘must have’’ derived from Sirius XM’s direct AWDT ¶¶ 101–105; see Written Direct suppliers, thereby establishing a rate that is licenses; (2) a 12% steering adjustment Testimony of Jeremy Sirota, Trial Ex. 36, ‘‘effectively competitive.’’ borrowed from Web IV; or (3) a at 3 (Sirota WDT). [REDACTED]% steering adjustment Id. ¶ 41 (citing Web IV, 81 FR at 26353). identified in a comparison of two ‘‘Mid- 136 Mr. Orszag did not include in his royalty Mr. Orszag posited that all three of these tier’’ services contracts, one with a calculation any non-rate consideration, such as Web IV conditions are satisfied in this prohibition on steering and the other access to the services’ user data and user email proceeding. 139 addresses; the services’ marketing and promotional without. support; and the record companies’ right to offer The interactive market benchmark exclusives to services; including the right to 137 In Web IV, the Judges stated that the ratio ratio equivalency approach is well- ‘‘window’’ certain sound recordings (i.e., to offer an equivalency concept ‘‘assume[s] equality between 140 initial, time-limited exclusivity). Because these two ratios: (1) subscription revenues to royalties in depicted in algebraic form: non-pecuniary items are not available under the the interactive market; and (2) subscription statutory license at issue in this proceeding, Mr. revenues to royalties in the noninteractive market.’’ 139 These potential steering adjustments are Orszag asserts that his omission of these non- Web IV, 81 FR at 26344. discussed in detail infra. monetary benefits renders his calculated royalty 138 In Web IV, the Judges applied a ‘‘steering 140 The ratios are sometimes expressed payment lower than it otherwise would be, thus adjustment’’ to reflect noninteractive services’ reciprocally, with royalties in the denominator and reducing the royalty rate derived from his ability to offset the complementary oligopoly power revenues in the numerator. Because royalty rates in benchmark in favor of Sirius XM. Orszag AWDT of the Majors by ‘‘steering’’ listeners to sound this proceeding are expressed as a percent-of- ¶ 106. See also SE PFF ¶¶ 119–122 (and record recordings licensed from Indies at lower royalty revenue, it is more intuitive to state the ratio as set citations therein). rates. forth in the text, supra.

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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., Additionally, SoundExchange asserted that the differences are implicit in the calculable) values for (A) and (B), Mr. that the pricing structure reflects Sirius formula and thus revealed by the Orszag was able to calculate a ratio, or XM’s understanding that its customers market. A service’s retail (subscription) percentage, that—under the ratio value music at least as much as non- revenues are a direct function of equivalency approach—he opined music content. Id. ¶ 49 & n.40 consumer subscription prices. Those would also be applicable to the target (discussing Sirius XM monthly pricing prices should reasonably reflect market. That is, the royalty payment (C) of $10.99 for News, Sports & Talk versus consumer valuation of the features and in the Target Market would be the same $12.52 for Mostly Music). Moreover, as functions of the benchmark and target percent of (D) as (A) is a percent of (B) SoundExchange noted, in the previous services, respectively. In turn, according in the Benchmark Market. SDARS proceeding, Sirius XM itself to Mr. Orszag, percentage-of-revenue In this, his ‘‘Approach One,’’ Mr. took the position that music accounts royalty rates should reflect such Orszag calculated the royalty payments for more than 55% of Sirius XM’s differences, because the sound of interactive subscription services as a content value. SDARS II, 78 FR at recordings performed by the services in percentage of their subscription 23064–65 (Sirius XM’s expert Roger the benchmark and target markets are revenues by dividing the effective Noll attributed 55% of value to music identical. Id. ¶ 55. monthly per-subscriber royalty payment content). Both parties and the Judges As noted, SoundExchange is by the monthly consumer subscription agreed on this issue. See id. at 23063, proposing a greater-of statutory rate price of the benchmark services. Orszag 23088 (noting SoundExchange’s expert with a per-subscriber prong as well as AWDT at ¶ 43. Applying the theory of Dr. Ordover conservatively assumed a percent-of-revenue prong. To obtain ratio equivalency, Mr. Orszag then music accounts for at least 50%); id. at what Mr. Orszag described as an proposed that the record companies 23065, 23089 (Judges finding ‘‘the equivalent per-subscriber rate, he receive the same percentage of Sirius success of Sirius XM is dependent upon applied the [REDACTED]% of revenue XM’s subscription revenue as they its access to music’’ citing testimony of rate (derived from his benchmark ratio receive from the interactive services. Sirius XM witnesses). The Judges take equivalency analysis) to the ARPU. Mr. See 4/25/17 Tr. 985–86 (Orszag). note that Sirius XM provided no Orszag adjusted the Sirius XM ARPU of Because Sirius XM provides listeners evidence or argument to support a $[REDACTED] (as gross revenue is with both music and non-music content, different position that might place in calculated using the statutory license Mr. Orszag opined that his Benchmark doubt Mr. Orszag’s reliance on the terms) using the same ratio he applied Market Ratio must be adjusted to be Boedeker survey. Mr. Orszag reasonably to reach a percent-of-revenue rate.142 comparable to the Target Market Ratio. and conservatively utilized an This resulted in a per-subscriber rate of Relying principally on a survey by assumption that at least 50% of the $[REDACTED] (i.e., $[REDACTED] x Stefan Boedeker, Mr. Orszag determined value of a Sirius XM subscription is [REDACTED]). See id. ¶ 54. that the music content on Sirius XM derived from music offerings. Applying constituted 50% of the value of total this assumption, Mr. Orszag divided the 2. Mr. Orszag’s ‘‘Approach Two’’: Retail content.141 Orszag AWDT ¶54. benchmark ratio result, [REDACTED]% Price Comparison of revenue, by two to arrive at a Mr. Orszag’s Approach One implicitly 141 Mr. Boedeker surveyed subscribers to Sirius proposed percentage-of-revenue rate of accounted for the different values of satellite radio packages that contain both music and [REDACTED]% for Sirius XM. Orszag interactive and noninteractive services non-music programming, (i) to measure the degree AWDT ¶ 54. to which these subscribers value the music versus by utilizing retail prices in the non-music content; (ii) to examine subscribers’ Mr. Orszag opined that a benefit of his denominators that reflected the market- willingness to accept a hypothetical Sirius XM ‘‘Approach One’’ is that it avoids the based differences in those values. In package that contains just music programming or need to account explicitly for ‘‘Approach Two,’’ Mr. Orszag applied just non-music programming; and (iii) to identify differences between the target and the discounts they would demand for such a an alternative methodology designed to hypothetical product. Written Direct Testimony of benchmark services. Rather, he stated Stefan Boedeker, Trial Ex. 21, ¶¶7, 19 (Boedeker 142 Mr. Orszag calculated ARPU using Sirius XM’s WDT); 5/8/17 Tr. 2933, 2947–49 (Boedeker). Mr. package, compared with only 10.0% of respondents regulatory revenue base for the first six months of Boedeker concluded from the survey results that would no longer subscribe to their current package 2016. See Orszag AWDT ¶¶ 58–60 and Table Three. Sirius XM subscribers value music content if non-music programming were no longer offered Professor Shapiro, on behalf of Sirius XM, initially significantly more than non-music content. (even with a discount). Boedeker WDT ¶¶83–84; identified a monthly ARPU of $[REDACTED] per Boedeker WDT at ¶¶ 14, 97; 5/8/17 Tr. 2933–34, see also 5/8/17 Tr. 2952–53 (Boedeker). In a critique subscriber, apparently using Sirius XM’s 10–Q 2963 (Boedeker). More precisely, 70.1% of all of Mr. Boedeker’s survey, Professor John Hauser, a filing with the SEC and an internal Sirius XM survey respondents said they would no longer Sirius XM expert witness, identified several planning document. See Lys WRT ¶¶ 151–152 subscribe to Sirius XM satellite radio at their inconsistencies in Mr. Boedeker’s survey results. nn.174, 177 & Fig. 18. However, the parties current subscription rates if music programming Nonetheless, it was undisputed by Sirius XM that apparently reached agreement that, under the were no longer offered, while only 32.4% said they Mr. Boedeker’s results are generally consistent with current definition of ‘‘Gross Revenues,’’ the would no longer subscribe at their current other available evidence. See SEPFF ¶¶ 252–258 appropriate monthly ARPU is $[REDACTED]. See subscription rates if non-music programming were (and record citations therein). Thus, Mr. Orszag SX RPFF ¶ 392 (‘‘That $[REDACTED] figure was no longer offered. Boedeker WDT ¶77; 5/8/17 Tr. opined that his use of the 50% figure was used directly by economists from both parties to 2951 (Boedeker). Even if discounts were offered for conservative, in the sense that it favored Sirius XM convert monthly per-subscriber fees into proposed a non-music service, 42.7% of respondents still rather than the party for whom he testified, percent-of-revenue rates.’’); see also Lys WRT would no longer subscribe to their Sirius XM SoundExchange. Orszag AWDT ¶ 54. ¶¶ 149–155.

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account explicitly for the absence of Orszag derived a percentage-of-revenue platform preference ([REDACTED]); catalog interactivity in the target SDARS rate of [REDACTED]%. See id. ¶ 60. size ([REDACTED]); and payment terms market. Orszag AWDT ¶ 56. ([REDACTED]), meaning that the withdrawal 3. Adjustment for Lack of Effective of any differentiated service from the market In Approach Two, Mr. Orszag Competition in Benchmark Market would result in customer ‘‘churn’’ that would continued to use the interactive market In his attempt to apply the Web IV negatively affect record companies as his polestar. In this approach, prerequisites for use of a ‘‘ratio financially. 5/16/17 Tr. 3942–45 (Harrison). • however, he compared the interactive equivalency’’ benchmarking approach, The lack of market evidence of: (1) retail subscription price not to the target Mr. Orszag considered whether to apply Suppression of the output of recorded music; SDARS market, but to the market for a downward adjustment to reflect any (2) supracompetitive profits achieved by the record companies; or (3) ready alternatives to noninteractive services, on the alleged lack of ‘‘effective competition’’ assumption that an SDARS functionally which downstream consumers might turn. in his benchmark interactive market. He SEPFF ¶¶ 305–322 (and record citations is a noninteractive service.143 In this acknowledged that in Web IV the Judges manner Mr. Orszag was able to isolate therein). found that the market for subscription • The inability of the Majors to act as explicitly the value of interactivity by interactive services (i.e., Mr. Orszag’s price-setters, [REDACTED]. 5/16/17 Tr. comparing the retail prices of interactive benchmark market here) was not 3926–27, 3946–47 (Harrison). and noninteractive subscription effectively competitive. The Judges, • The Majors’ agreements in the Mid-Tier services. See 4/25/17 Tr. 986 (Orszag). therefore, adjusted downward the rate limited interactivity sector to rates as low as Mr. Orszag opined that this approach is SoundExchange’s economic expert [REDACTED] % of revenue when the sensible because these two categories of calculated using an interactive services licensing agreement includes [REDACTED]. service differ only with respect to the SEPFF ¶ 356 (and record citations therein). benchmark. Web IV, 81 FR at 26344. • distinguishing feature: Interactivity. See In this proceeding, however, Mr. The agreements between Indies and id.144 Orszag concluded that the record interactive streaming services that establishes that more recently the [REDACTED]. SEPFF ¶¶ 335–340 (and record To determine the monthly retail price citations therein). in the noninteractive market, Mr. Orszag market for subscription interactive used the retail prices of three non- services has become effectively Mr. Orszag maintained that the interactive subscription services: competitive. Mr. Orszag concluded that interactive streaming rates reflect an Pandora One, Rhapsody (Napster) he need not adjust to offset a lack of ‘‘effectively competitive’’ market. He unRadio, and Slacker Radio. He effective competition. Mr. Orszag’s nonetheless offered three alternative calculated their weighted average opinion is based on: ‘‘steering adjustments’’ to apply to those monthly retail price to be $4.91. See • The presence in the market of larger benchmark rates, should the Judges find Orszag AWDT ¶ 56 & Table Two. interactive streaming services, such as the interactive market to be not Amazon, Apple, Google, and Spotify, which effectively competitive. Mr. Orszag first As noted before, the monthly retail has injected countervailing ‘‘substantial presented a [REDACTED]% steering price for interactive subscription bargaining power and leverage’’ on the adjustment, reflecting his calculation of services was $9.99. Accordingly, the licensee side of the equation, offsetting any an arguable steering effect arising from ratio of the subscription price from the relative disproportionate power that the Sirius XM’s direct licenses with certain noninteractive market to the record companies might have previously Indies.146 Next, Mr. Orszag proposed a subscription price from the interactive possessed. Written Rebuttal Testimony of Aaron Harrison, Trial Ex. 49, ¶¶3–5 12% steering adjustment, simply market was $4.91/$9.99, or 0.49. Mr. (Harrison WRT); 5/16/17 Tr. at 3953–57 adopting the adjustment the Judges Orszag then used the ratio of 0.49 to (Harrison). made in Web IV. See Web IV, 81 FR at • convert the interactive subscription The increasing importance of interactive 26404–05. Finally, he presented a services monthly per-subscriber royalty services as a revenue source to the record [REDACTED]% steering adjustment, rate of $[REDACTED] to an equivalent companies, which gives the services leverage strengthen their bargaining position in that reflects the differences in royalty per-subscriber rate for Sirius XM of rates in the mid-tier market, depending $[REDACTED] (0.49 × $[REDACTED]). negotiations for sound recording performance licenses. Written Rebuttal Testimony of upon whether the license agreement has See id. ¶ 57. David Blackburn, Trial Ex. 39, ¶¶18, 20 a [REDACTED] (and an attendant lower The final step in Mr. Orszag’s (Blackburn WRT). rate) or [REDACTED] (with an attendant • Approach Two is the calculation of a The treatment of Spotify’s licensing higher royalty rate). See 4/25/17 Tr. percentage-of-revenue rate that agreement with the Majors when it expired, 1054 (Orszag). The Table below by not [REDACTED], but rather [REDACTED]. corresponds to this $[REDACTED] per- 5/01/17 Tr. 1703–04, 1804–05 (Blackburn). summarizes Mr. Orszag’s alternative subscriber rate. Applying the same • The additional bargaining power of rates based on the absence of a steering $[REDACTED] ARPU 145 to the per- individual services because they have adjustment and on all three of the subscriber rate of $[REDACTED], Mr. differentiated their offerings, based on alternative steering adjustments.

Approach One Approach Two Steering adj % Rev. Rev. % Per sub % 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

143 A noninteractive service is one that meets the 144 Approach Two avoids the need to adjust for additional value that should reduce the statutory statutory definition and pays statutory royalties non-music content because streaming services are royalty rate. calculated under 17 U.S.C. 114(f)(2)(B). An SDARS music-only services. It also avoids any purported 145 See supra note 142 and accompanying text. service may be described as functionally a need to adjust for the separate value of a satellite 146 noninteractive service because the listener cannot network because streaming services are internet- These direct licenses are discussed in more interact with the service to select, repeat, skip, or based. See Orszag AWDT at ¶56. The Judges detail in the Judges’ consideration of Sirius XM’s cache specific sound recordings. See supra, n.73 address later the question Sirius XM raises relating reliance on these licenses as potential benchmarks. and accompanying text. to whether its satellite network creates an

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Approach One Approach Two Steering adj % Rev. Rev. % Per sub % Per sub

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

SE PFF ¶ 361 (Sirius XM did not dispute equivalency is further supported by licensees, and the Majors and Merlin, a the accuracy of this summary table agreements between record companies digital rights agency representing Indie derived from record evidence.). and Mid-tier services. These Mid-tier record companies, as licensors.147 4. The Mid-Tier Agreements as Agreements’’ are comprised of recently The Table below provides a Corroboration executed voluntary direct licenses for breakdown of rates contained in Mid- subscription mid-tier services, between According to Mr. Orszag, the tier Agreements that were admitted into Pandora and iHeart, respectively, as 148 applicability of the theory of ratio evidence in this proceeding: [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],– [REDACTED],– $[REDACTED],– [REDACTED],– $[REDACTED],– [REDACTED]. $[REDACTED]. [REDACTED]. $[REDACTED]. [REDACTED]. $[REDACTED] UMG ...... [REDACTED]– $[REDACTED]– [REDACTED]– $[REDACTED]– [REDACTED] ...... $[REDACTED] .... [REDACTED] ...... $[REDACTED] [REDACTED]. $[REDACTED]. [REDACTED]. $[REDACTED]. WMG ...... [REDACTED]– $[REDACTED]– [REDACTED], $[REDACTED]– [REDACTED],– $[REDACTED],– [REDACTED],– $[REDACTED],– [REDACTED]. $[REDACTED]. [REDACTED]. $[REDACTED]. [REDACTED]. $[REDACTED]. [REDACTED]. $[REDACTED] Merlin ...... [REDACTED] ...... $[REDACTED] .... [REDACTED], $[REDACTED],– [REDACTED],– $[REDACTED],– [REDACTED],– $[REDACTED],– [REDACTED]. $[REDACTED]. [REDACTED]. $[REDACTED]. [REDACTED]. $[REDACTED]

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

147 The agreements executed by Pandora and Pandora Premium royalty provisions); Trial Ex. Schedule 1 sec. 3.2(a)(iii) (SoundX_000107052, iHeart also covered fully interactive tiers and, in the 112–16A at Service Schedule #1 sec. 7(a) (SoundX_ 056). Trial Ex. 114–018B at 11–14 (SoundX_ case of Pandora, an ad-supported tier. See, e.g., 000107458) (iHeart Plus royalty provisions); Trial 000107127–30) (Pandora Plus and Pandora Trial Exs. 112–114. For ease of exposition, the Ex. 112–16A at Service Schedule #2 sec. 7(a) Premium royalty provisions); Trial Ex. 114–018A at _ Judges use the term ‘‘Mid-tier Agreements’’ to refer (SoundX 000107492) (iHeart All Access royalty sec. 3(a) and sec. 3(b) (SoundX_000107206–07) provisions); Trial Ex. 113–017B at Schedule 1 sec. to the portion of each agreement that relates to the (iHeart Plus and iHeart All Access provisions). Trial 3.1(a)(i)–(ii), sec. 3.2(a)(i)–(ii), sec. 4.1 and sec. 4.2 subscription service offered to consumers for $4.99 _ (SoundX_000107051–52, 056); (Pandora Plus and Ex. 243 at sec. 3(b) and sec. 3(c) (SoundX and providing limited on-demand functionality. Pandora Premium Royalty provisions); Trial Ex. 000477169–170) (Pandora Plus and Pandora 148 The agreements in the table were made a part 113–017A at Schedule 1 sec. 1.1 and sec. 1.2 Premium royalty provisions); Trial Ex. 272 at of the record. See Trial Ex. 112–16B at sec. 11 (SoundX_000106973) (iHeart Plus and iHeart All Schedule 3 (SoundX_000488916) (iHeart Plus and (SoundX_000107538–39) (Pandora Plus and Access royalty provisions). Trial Ex. 113–017B at iHeart All Access).

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rates similar to those negotiated by the functionality of interactive streaming subscription rate is reduced to reflect the Majors in its licensing agreements with through ‘‘connected cars’’ and more absence of the added value of interactivity[.] [REDACTED]. Id. Sirius XM did not complete cellular coverage allows 81 FR at 26353. In the present case, Mr. proffer any evidence that the record listeners to access streaming services in Orszag did not provide either qualitative companies leveraged their alleged the car. SE PFF ¶¶ 156–159 (and record or quantitative evidence of a sufficiently interactive market power to obtain citations therein). Thus, the Judges do high cross-elasticity. In fact, it is better terms in the mid-tier market. not agree with Sirius XM that Mr. noteworthy that even the survey results Orszag’s reliance on the interactive 5. Evaluating Orszag Ratio Equivalency reported by SoundExchange’s own services’ mobile functionality is Benchmarking Approaches survey witnesses, Professors Ravi Dhar superficial; indeed, the issue of whether and Itmar Simonson, indicated that Sirius XM asserted that Mr. Orszag their respective mobile functionalities there is no such high substitutability incorrectly emphasized an economically are substitutional for each other bears between subscribership to interactive unimportant point, i.e., that ‘‘there is no on the Opportunity Cost/ECPR analysis services and to Sirius XM. These survey difference between interactive streaming undertaken by Professor Willig. conclusions negate any complete or services and satellite radio in terms of Nonetheless, the Judges decline to overwhelming ratio equivalency Mr. the music content they deliver to adopt Mr. Orszag’s reliance on evidence Orszag has posited. Moreover, even subscribers.’’ See 4/26/17 Tr. 1190–91 he claimed suggested a ‘‘growing’’ use of Professor Willig, another (Orszag) (emphasis added). According to streaming services, including interactive SoundExchange economic expert, relied Sirius XM, similarity ‘‘at this high level services, in the car. Orszag AWDT on and adopted Professor Dhar’s survey, of generality’’ is meaningless. SXM ¶ 39(C). Although the evidence on which revealed a substitutability of RPFF ¶11. which he relied is somewhat supportive interactive services for Sirius XM at The Judges agree. Although markets of this point, it is not sufficiently significantly less than 1:1. See Willig in which sound recording performances persuasive. The Judges are reluctant to are licensed (upstream) and delivered WDT ¶ 41. adopt or extrapolate from potential Sirius XM also challenged (downstream) to subscribers may be market trends or rates of change and use SoundExchange’s predicate that there is considered as potential benchmarks for them as a basis for a fixed five-year rate. ‘‘increasing convergence of the each other, that broad brush of As the Judges have noted on other interactive services and Sirius XM’’ comparability does not indicate whether occasions, the adoption of market because of ‘‘some ‘lean back’ the benchmark is suitable on the whole. predictions is a fraught exercise. More functionality’’ offered by the interactive Mr. Orszag was correct that the probative in the Judges’ opinion are the services (in the form of pre-programmed benchmarking approach can commence results from the survey experts who at a high level of generality, even though playlists). Sirius XM noted that Mr. have appeared for both parties. These Orszag acknowledged on cross- that basic level of comparison is by no experts have attempted to measure 149 examination that, if the rate-setting means probative or dispositive. Not present intentions regarding the every market in which sound recording exercise were based solely on his substitutability of interactive services posited convergence, any increased use performances are licensed could serve (and other services) for Sirius XM. as a benchmark for every other sound of playlists by interactive services While their surveys yield starkly would suggest that interactive services recording performance market. different results when attempting to Sirius XM argued that the common were becoming more like noninteractive elicit whether Sirius XM listeners use of digital transmissions and the services, rather than vice versa. If any would switch to interactive services if allowance of unlimited usage by purported convergence is in the Sirius XM were nonexistent or too listeners are not illuminating direction of lean-back service, then expensive, none shows anything close similarities. SXM PFF ¶ 12. Once again, interactive services’ rates should be to a 1:1 substitutability of interactive falling in an effectively competitive the Judges agree; these basic points are 151 not probative of the usefulness of the services for Sirius XM. market, rather than noninteractive or The survey results highlight a related interactive market as a benchmark. satellite services’ rates increasing. 4/26/ criticism by Sirius XM of Mr. Orszag’s Nonetheless, Mr. Orszag’s reliance on 17 Tr. 1191–92 (Orszag). ratio equivalency approaches. Sirius XM such common elements is helpful in Sirius XM’s criticism in this regard is correctly argued that the economic identifying and then narrowing the well-taken. There is insufficient rationale that supports a ratio range of potential benchmarks. evidence in the record to show that Sirius XM criticized as superficial Mr. equivalency approach requires interactive services’ royalty rates have Orszag’s assertion that the target and ‘‘significant competition, or a high fallen in response to any asserted benchmark markets are similar because cross-elasticity of demand, between increase in listener use of playlists. each offers ‘‘mobile functionality.’’ SXM Sirius XM and subscription Indeed, as Sirius XM correctly noted, RPFF at 19; Orszag AWDT ¶ 32. The services.... [A] limited degree of [REDACTED]. See, e.g., 5/16/17 Tr. at Judges find this criticism to be without head-to-head competition . . . will not 3939 (Harrison); 5/15/17 Tr. at 3836 merit.150 The majority of Sirius XM suffice.’’ Shapiro CWRT at 12; see also (Walker).152 listening occurs in the car, Meyer WDT Web IV, 81 FR at 26353; 4/26/17 Tr. Ultimately, the Judges place no ¶ 21 n.5, and the improved mobile 1198 (Orszag). weight on the alleged corroboration of In Web IV, the Judges stated that the the Mid-tier Agreements identified by ratio equivalency approach might be 149 In fact, a market in which some product other Mr. Orszag, for several reasons. First, as than music is delivered could be a useful appropriate if the record reflected that benchmark market if it is otherwise comparable in functional convergence and downstream 152 Playlists could engender price competition. As terms of economic structure. For example, patents, competition for potential listeners indicate a the Judges noted in Web IV, services could lower as a form of intellectual property, may be found to sufficiently high cross-elasticity of demand royalty rates with playlist steering. Further, the have similar economic characteristics as copyrights, as between interactive and noninteractive possibility of steering could result in lower rendering relevant information from the market for industrywide rates without any actual steering patent licenses. services, provided the noninteractive taking place. See Web IV, 81 FR at 26367. In the 150 The Judges address the value of Sirius XM present case, there is no evidence of any such price mobile functionality elsewhere in this 151 The Judges analyze these survey results in competition through playlist-based steering in the Determination. detail, supra, sections VI.B.1–VI.B.2. fully interactive market.

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a SoundExchange industry witness A. Current Rates overall profits would be irrelevant to the testified, UMG requires [REDACTED]. Professor Shapiro noted that the negotiation. Shapiro WRT at 51–52. He Harrison WDT ¶ 20 (‘‘Even if mid-tier current statutory rate is 11% of ‘‘Gross opined that, in an effectively subscription services succeed in Revenues,’’ as defined by the relevant competitive market, the negotiating drawing some consumers away from regulations. See 37 CFR part 382, parties would look only to the licensee’s poorly-monetized free ad-supported subpart B. The Judges configured the ‘‘contribution margin’’; that is, ‘‘the streaming services, there is also a danger SDARS rates for the period 2013 to 2017 percentage of Sirius XM’s receipts from that they could to a degree cannibalize to increase from 9% to 11% over the a subscriber . . . that drops to their the premium on-demand subscription five-year period. Before recommending bottom line.’’ Id. This contribution services. [REDACTED]. adoption of the extant rate for the margin is the measure of sales revenue Second, the mid-tier services include ensuing rate period, Professor Shapiro available for fixed costs and profit after interactive features which the record analyzed the state of the music industry paying variable costs. See Lys WDT companies recognize are valuable to to determine whether any changes in ¶ 83. According to Professor Lys, Sirius subscribers. Id. Absent evidence in this the marketplace might warrant a XM includes in variable costs record of an interactivity adjustment deviation from the current rate. See [REDACTED]. Id. ¶ 85. Professor specifically related to the valuable but Shapiro WDT at 27. Evidence in this Shapiro and Professor Lys agree that limited interactive functionality of the proceeding overwhelmingly supports a Sirius XM’s contribution margin has mid-tier services, the probative value of finding of increased use of streaming, remained ‘‘remarkably consistent’’ over the mid-tier rates in this proceeding is both interactive and noninteractive, as time. See id. ¶ 87; Shapiro WRT at 5. compromised. the preferred method of ‘‘consuming’’ Professor Shapiro focused on the In sum, the Judges agree with Sirius music. Professor Shapiro’s testimony stability of the Sirius XM contribution XM that the record does not provide was no exception. Id. at 28. As Professor margin to argue for a like stability in sufficient evidence to support Mr. Shapiro noted, in 2012, streaming royalty rates. Countering that Orszag’s ratio equivalency approaches accounted for approximately 12% of proposition, Professor Lys looked at an to rate-setting in this proceeding.153 record industry revenues; whereas in economic bargaining model and the first half of 2016, streaming concluded that with greater overall VII. SDARS Performance License— profitability, Sirius XM and any licensor Sirius XM Proposal accounted for 43% of record industry revenues.155 Id. Analogously, Sirius would negotiate to divide those overall In its specific proposed rate XM’s subscribership grew from profits, which would result in a higher regulations, Sirius XM advocated a approximately 24.9 million subscribers percentage royalty rate. Neither expert’s opinion in this single royalty fee—8.1% of ‘‘Gross in 2014 to 28.3 million subscribers in Revenues.’’ See Second Amended 2015. Id. at 29.156 This growth in regard, however, is persuasive. Professor Proposed Rates and Terms of Sirius XM subscribers increased satellite radio’s Lys may well be correct that record . . . at § 382.12(a) (2d APR). However, share of music industry revenues during companies, given their ‘‘must have’’ more broadly, Sirius XM proposed a rate the period from [REDACTED]% to status, i.e., in the absence of effective range of 8.1% to 11% of relevant [REDACTED]%. Id. at 28, Fig. 5. competition, would seek in unregulated revenue, which it claims is consistent Professor Shapiro proposed market negotiations to appropriate a with the evidence. 2d APR at 1. The continuing the current percent-of- portion of the additional profits existing rate, for 2017, is 11%. revenue rate structure. He concluded (through a rate increase in addition to Sirius XM’s expert witness, Professor that, when using percent-of-revenue the automatic increase from a larger Carl Shapiro, analyzed three possible rates, any increase in Sirius XM’s pool of revenue), notwithstanding that starting points for setting the relevant revenue would redound to the the profits accrued via Sirius XM’s scale performance royalty rates in this benefit of the record companies and growth rather than through an proceeding. Professor Shapiro began obviating a need to change the rate. See increase in the contribution margin. On with an analysis of the existing rates. He Shapiro WDT at 29–30. the other hand, as discussed elsewhere also analyzed two potential He further argued that the relevant in this Determination, the growth of benchmarks: Direct licenses negotiated starting consideration for the Judges Sirius XM’s profits allows it to between Sirius XM and 498 Indie record would be the rate that would emerge in compensate the record companies for labels and the rates determined by the an effectively competitive marketplace. the opportunity costs the latter incur Judges for noninteractive digital 5/3/17 Tr. 2479–80 (Shapiro). Professor when licensing to Sirius XM. But performances over the internet Shapiro asserted that Sirius XM’s neither of these factors is relevant to the (webcasting).154 appropriateness of adopting the extant of that rate as a ‘‘benchmark.’’ That is, he is urging rate in the forthcoming rate period. 153 Therefore, Mr. Orszag’s attempted steering a similarity between: (1) The description of the SoundExchange opposed reliance on adjustments are moot with regard to his approaches. SDARS market as it was presented to the Judges in the current, SDARS II royalty rates, The applicability of those adjustments, vel non, is SDARS II in 2012, and the rates that were set in that asserting that the current rates do not addressed in connection with the establishment of Determination (the de facto benchmark); and (2) the effectively competitive rates elsewhere in this description of the SDARS market (the target market) capture the effect of the expansion of Determination. Also, because Mr. Orszag did not as it has been presented to the Judges in this 2017 music streaming on the labels’ present the mid-tier royalties as benchmarks in proceeding. opportunity cost. SoundExchange their own right, but rather as corroborative evidence 155 Professor Shapiro defined revenue from contended that Professor Shapiro’s supporting his (now rejected) ratio equivalency streaming services as that derived from subscription approach, the Judges do not accept Mr. Orszag’s use and on-demand services as well as webcasting. analysis of current rates fails to of mid-tier royalties as corroborative or probative. Music industry revenues included those streaming acknowledge or address changes (1) in 154 Professor Shapiro did not label the existing services, physical sound recording sales, digital opportunity cost, (2) in Sirius XM’s rate as a ‘‘benchmark’’ per se. Rather, he opined that downloads, synchronization royalties, and satellite financial performance, (3) in the the existing ‘‘11 percent of revenue rate that Sirius radio. Shapiro WDT at 28. 156 upstream market for digital sound XM will pay in 2017 can be viewed as an upper Sirius XM predicts [REDACTED] during the 157 bound on the reasonable royalty level for the 2018– upcoming rate period from an estimated recording rights, and (4) in current 2022 period.’’ Shapiro WDT at 34. The Judges [REDACTED] million subscribers in 2018 to consider Professor Shapiro’s use of the existing rate [REDACTED] million subscribers in 2021. Shapiro 157 For this third point of criticism, as an ‘‘upper bound’’ is functionally similar to a use WDT at 29. SoundExchange focused on the direct licenses

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circumstances as opposed to those record much less robust than the record Sirius XM receives the same rights it prevailing at the time of the SDARS II in this proceeding. The participants in would under the statutory license and determination. this proceeding have presented additional benefits, such as a relaxation SoundExchange’s arguments sufficient facts and analysis to inform of the statutory performance regarding opportunity cost relied on the the Judges and to lessen the value of the complement rule, allowing Sirius XM to assumption that Sirius XM and current rates as a desired starting point rely more heavily on the (lower priced) streaming services are closely for analysis in these changed directly-licensed tracks. Id. at 35–36. substitutable for one another. However, circumstances. Licensors also benefit from consideration negotiated in direct that assumed close substitutability is B. Current Direct Licenses Negotiated by licenses that is not available under a contradicted by the survey results as Sirius XM analyzed by the Judges, supra, in statutory license. Licensors might connection with Professor Willig’s Professor Shapiro proposed a receive more exposure for their opportunity cost analysis. benchmark derived from direct licenses recordings, might benefit from direct SoundExchange also does not take into Sirius XM has negotiated in the market payment of both recording and artist account Sirius XM’s unique position of at issue in this proceeding, i.e., the royalties, and could avoid the being the only satellite radio provider— satellite radio music streaming SoundExchange administrative fee. No resulting in a remarkable growth in (upstream) market. In 2012, when the expert in this (or any similar) subscribers—as well as the fact that Judges established rates for the 2013 proceeding has attempted to value the changes in Sirius XM revenues have through 2017 rate period, direct considerations behind the headline resulted from additional factors, i.e., licensing was in its infancy, with percent-of-revenue rates in direct lower non-music content costs and approximately 100 direct licenses licenses, let alone determine which lower royalty rates in negotiated direct executed at the time of the party enjoys the net benefit. licenses.158 Thus, to the extent determination. Shapiro WDT at 34. By Looking at the upstream market discussed above, changes in the overall 2016, Sirius XM had negotiated almost (record labels to streaming services), market do militate against using current 500 direct licenses with record labels. Professor Shapiro anticipated more rates as an appropriate starting point. Id. at 35. Because of its direct license negotiation of direct licenses influenced Moreover, the current rates as set in effort, Sirius XM has access to by the noninteractive streaming SDARS II were a function of the approximately 23,000 music catalogs services’ ability to ‘‘steer’’ listeners to a containing as many as 5 million tracks, deficiencies in the proffered evidence in particular catalog of music. Id. at 30. As or 6.4% of the tracks on the Sirius XM that proceeding, evidence that, by Professor Shapiro noted, in the playlists. Shapiro WDT at 35 (citing comparison, made the then extant rates webcasting market, the availability of White WDT). Professor Shapiro a relatively superior guide to an steering resulted in negotiation of direct promoted the direct licenses as ideal appropriate rate. The Judges were licenses with headline rates below the benchmarks, asserting that they dissatisfied with a benchmark derived statutory rates based on the potential represent market outcomes involving from licenses in the interactive benefits of greater streaming frequency the same sellers (record labels), the streaming business. Further, the Judges of the labels’ music. Id. at 30. same buyer (Sirius XM), and the same SoundExchange was critical of found it necessary to allow for a rights (digital performance of sound Professor Shapiro’s reliance on direct downward adjustment (within the zone recordings) and effectively competitive licenses primarily because more recent of reasonableness) to account for the conditions for the negotiations. Id. at 37. direct license agreements have omitted enormity of Sirius XM’s satellite launch Professor Shapiro reasoned that these steering incentives or have included and replacement costs. See SDARS II, 78 negotiations reflect an effectively anti-steering alternatives that recognize FR at 23069. SoundExchange argued competitive marketplace because Sirius the prospect of steering but muddy the that the ‘‘incredible financial success’’ XM controls such a small share of the analytical waters with regard to the enjoyed by Sirius XM during the current record industry’s overall revenues effect steering might have on their license period obviates the need for (approximately [REDACTED]%). See negotiated rates. Even Professor Shapiro consideration of Sirius XM’s costs of Shapiro WDT at 37. Measuring Sirius conceded that he could not ‘‘quantify doing business for the license period at XM’s royalties against the entirety of the value of steering.’’ 4/20/17 Tr. 488 issue in this proceeding. See Lys WRT music industry revenues, however, (Shapiro). Furthermore, the direct ¶ 56. The Judges agree; in fact, that ignores the fact that Sirius XM licenses involve exchanges of financial success is a basis for dominates the market for paid services consideration apart from the headline increasing the royalty rate in this that listeners use in a vehicle. As the royalty rate that no party has attempted proceeding, as indicated above. primary alternative to (non-royalty to value.159 For the reasons highlighted by paying) terrestrial radio in cars, Sirius The Judges do not accept Sirius XM’s SoundExchange and its experts, the XM in fact wields tremendous direct licenses as sufficiently probative Judges will not use the extant rates as bargaining power, which would tend to of the relevant market to accept them as a starting point (or benchmark or upper drive down the negotiated rates. a meaningful benchmark. Direct licenses bound) for determination of appropriate Professor Shapiro contended that, in cover only a small portion of the sound rates for the period 2018 through 2022. fact, direct license rates negotiated in an recordings on Sirius XM’s playlists. The SDARS II rates were derived on a unregulated market would be lower because based on recent trends, he 159 The record labels also derive benefit from the Sirius XM negotiated with Indie labels. The believes the statutory license rates act as direct licenses. See Shapiro WDT at 36. Notably, criticism is better directed at the direct license Sirius XM is able to distribute both the label’s share benchmark and the Judges will discuss it in that a ‘‘magnet’’ to pull directly negotiated and the artists’ share of performance royalties portion of the Determination, section VII.B. rates up to the statutory rates. Id. at 45. directly to the contracting label. Sirius XM provides 158 The Judges do acknowledge Sirius XM’s Professor Shapiro’s endorsement of administration of the royalties without charging the increased profitability in a different context, i.e., direct licenses as a benchmark ignored fee that would be payable to SoundExchange under whether Sirius XM should contribute to the the statutory scheme. Under the direct license legitimate opportunity costs incurred by the record the difficulties inherent in determining agreements with Sirius XM, some licensors also companies without disruption that would threaten the effective royalty rates the parties benefit from a more generous methodology for the viability of Sirius XM. See infra, section X.D. negotiated. With the direct licenses, calculating the label’s royalty pool. Id.

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They are uninformative of any effect of both dimensions.’’ Shapiro WDT at 50. contributed to a dramatic drop in steering on royalty rates because none of When he combined the favorable creator compensation, meaning the them contain steering guarantees or comparison of satellite radio and opportunity cost to artists and labels of economic incentives to promote (or webcasting with the fact that the sellers streaming is significant. Id. ¶ 30. avoid) steering. There is no basis for the in both markets are the same, the rights Mr. Orszag likewise disputed Judges to segregate consideration in at issue are the same, and that the Web Professor Shapiro’s reasoning relating to these licenses that is properly attributed IV benchmark accounts for the forces of the relative ability to steer in satellite to elements that are unavailable under competition, ‘‘it becomes clear that the radio and webcasting. As Mr. Orszag the compulsory license. Web IV benchmark is a very good reasoned, the Judges relied on direct benchmark for rate setting in this licenses and their steering provisions to C. Web IV Rates proceeding.’’ Id. make an adjustment to bring the Professor Shapiro offered as a final Sirius XM witness, Steven Blatter, webcasters’ marketplace in line with a benchmark the rates established by the detailed anecdotal evidence of the hypothetical effectively competitive Judges in Web IV. The Judges used promotional effects of sound recording market. See Orszag WDT ¶¶ 64–66. benchmarks in Web IV, including direct plays on Sirius XM. See Written Direct Direct licenses negotiated by Sirius XM licenses,160 and considered interactive Testimony of Steven Blatter, Trial Ex. 5, are [REDACTED], however. Id. ¶ 67. Nor market (non-statutory) negotiated direct passim (Blatter WDT). Mr. Blatter touted is there any record evidence of any license rates to determine the Web IV Sirius XM’s subscription model as actual steering by Sirius XM. As the rates. See Shapiro WDT at 49. Professor supportive of its ability to broaden the Judges noted elsewhere in this Shapiro converted the Web IV per- listening (and presumably consumption) Determination, [REDACTED]. performance rate of $0.0022 to derive a habits of its subscribers. Freed of the The most salient criticism of Professor percentage-of-revenue rate applicable in commercial demands of ad-supported Shapiro’s Web IV benchmark came from this proceeding of 8.1%. Id. at 55. radio, Mr. Blatter contended, Sirius XM Professor Willig. Professor Willig Professor Shapiro used a figure of 469 can cultivate a broader audience than discounted use of the Web IV rates, performances per subscriber per month the ‘‘Top-40’’ stations. Listeners to specifically the Pandora noninteractive for his conversion. Id. at 54.161 Sirius XM’s curated playlists and niche rates, for various reasons, but the most Anticipating questions regarding channels thus discover music that might telling was his uncontradicted assertion whether webcasting and satellite radio otherwise have gone unnoticed. Id. ¶ 2. that not even [REDACTED] uses the are too different to warrant this Mr. Blatter recited ‘‘thank-you’’ letters statutory rates. After the Web IV benchmark, Professor Shapiro analyzed from artists and labels, trade publication determination, [REDACTED] negotiated the Web IV benchmark to resolve the reporting and analysis, and sales direct licenses with [REDACTED]. Using differences. According to Professor statistics on selected titles as evidence the renegotiated rates as a benchmark, Shapiro, there are two key differences to of Sirius XM’s promotional value to Professor Willig calculated the SDARS examine. First is the possible difference licensors. In addition to artist rate resulting from Professor Shapiro’s between a label’s full marginal cost of a testimonials and press coverage, Mr. methodology would be [REDACTED]% Sirius XM satellite performance and a Blatter noted that ‘‘many musicians and of revenue, approximately [REDACTED] webcast performance. Specifically, record labels’’ grant Sirius XM waivers the 8.1% of revenue proposed by Professor Shapiro defined the marginal of statutory limitations relating to Professor Shapiro. See Willig WRT ¶ 57. cost difference, if any, as one of relative frequency of play under a statutory The Judges are troubled by the promotional or substitutional effects. license (i.e., the ‘‘sound recording implicit assumption in Professor Second, Professor Shapiro looked at performance complement’’) in order to Shapiro’s use of the Web IV per play differences in the ability to steer as enjoy the benefits of promotion on rate, given that Sirius XM, as opposed between Sirius XM and a webcaster. Sirius XM. Id. ¶ 36. to noninteractive streaming, is listened Noting that Sirius XM relies on human Countering Mr. Blatter’s assertions, to predominantly in the car. As Mr. programmers while webcasters rely SoundExchange expert, Dr. George Ford, Orszag testified, any per play analysis more heavily on algorithms, Professor opined that promotional effects of a implicitly starts with the questionable Shapiro felt Sirius XM might be more particular platform are irrelevant to the assumption that each play has an able to steer without losing listeners. On Judges’ task in this proceeding. See equivalent value in both distribution the other hand, he noted that webcasters Written Direct Testimony of George S. channels. Orszag WRT ¶ 53. Further (using Pandora as an example) have the Ford, Trial Ex. 23, at 3–4 (Ford WDT). diminishing the value of a per play ability to and the practice of allowing Dr. Ford pointed out most notably that analogy, the Judges note that the parties’ listeners to create individualized no ‘‘broad inter-platform analysis’’ of use of a percent-of-revenue form of ‘‘stations’’ giving Pandora greater promotion and substitution is in royalty is inconsistent with the idea that flexibility to steer without alienating evidence. Id. Further, he asserted there is a single per play value that cuts listeners. See Shapiro WDT at 56–57. promotional effect is meaningless unless across all distribution channels In the end, Professor Shapiro it is net of substitutional effects. In the Further, the Judges agree with Mr. concluded that Sirius XM and current music marketplace, Dr. Ford Orszag that there is no valid reason— webcasters are ‘‘quite comparable along asserted, given the dramatic decline in and certainly no proof in the record— sales of permanent music media, a that would permit the Judges to 160 Professor Shapiro opined that the direct streaming service’s promotion of CD conclude or presume an equal per play licenses, such as the Pandora/Merlin agreement, sales and downloads is outdated. Id. at value for a Sirius XM play—usually in ‘‘reflected the forces of competition at work,’’ 4. Professor Willig actually performed the car—and a play of a noninteractive namely the leveling power of steering. Shapiro WDT at 49. econometric analyses looking at all song. In fact, the Judges find that, as a 161 In a similar exercise, Professor Willig used a streaming services (including Sirius matter of common sense, there is likely weighted average figure of [REDACTED] XM) and found a net substitutional greater utility in a sound recording performances per subscriber in his calculation of effect when compared to permanent played in an automobile. A driver (in creator compensation cannibalization (opportunity cost). The higher opportunity cost would result in sales. Willig WDT ¶¶ 24–27. According particular) has a limited set of options a higher percentage-of-revenue rate. See Willig to Professor Willig, the substitution of for entertainment, given his or her need WDT at B–7. streaming for permanent sales to remain attentive to the road and to

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traffic. In the car, therefore, radio XM and Pandora) separate sets of equally with CDs and downloads, listening is a scarce form of questions. Respondents identifying as interactive streaming services, and entertainment and therefore more listeners to both Sirius XM and Pandora terrestrial radio. Professor Shapiro valuable product than it is elsewhere, answered both sets of questions. applied these conclusions to support his where it competes with all other forms A large majority—62%—of Sirius XM assertion that Sirius XM is mostly of utility and diversion (market and listeners responded that they migrated substitutional for terrestrial, non-royalty non-market).162 from terrestrial radio, with 20% of paying, radio. See Shapiro WRT at 14. The participants have not provided respondents answering that before In other words, Sirius XM is not evidence sufficient for the Judges to Sirius XM they listened to ‘‘CDs or your cannibalizing creator compensation reach any conclusions regarding a own music downloads.’’ See id. at 5. from other sources; it is augmenting conversion of the Web IV per-play rates Online streaming services, AM/FM creator compensation with an alternate to a Sirius XM percent-of-revenue rate. stations streaming on the internet, and source of royalties. Id. at 37. Professor Even if the parties had provided interactive streaming services in the Shapiro pointed out that, using the sufficient evidence to make the aggregate accounted for 7% of Sirius Modified Dhar Survey, Professor Farrell conversion, the Judges are unconvinced XM’s current listeners. Id. As for calculated a much lower opportunity that the characteristics of webcasting alternatives to Sirius XM, survey cost than Professor Willig, viz., $1.35 and satellite radio are sufficiently respondents indicated they would turn per subscriber per month as compared similar to transfer, without adjustment, to terrestrial radio (74%), CDs or music with $2.55 per subscriber per month. the royalty rate from one platform to the downloads (65%), online streaming See id. The Farrell conclusions, he other. services (49%) and interactive streaming testified are ‘‘notably closer’’ to the 164 D. Lenski Survey Data services (32%). Id. Once survey results Professor Shapiro obtained using respondents identified all possible the Lenski Survey. Id. Sirius XM engaged Mr. Joe Lenski of alternatives to Sirius XM, the surveyors Professor Dhar criticized the Lenski Edison Research to collect empirical asked respondents to distribute their Survey as having ‘‘no scientific value.’’ data regarding the sources of Sirius XM possible alternatives by frequency. In Dhar WRT ¶ 9. Professor Dhar criticized satellite radio listeners and to evaluate this cut, a plurality of respondents’ the methodology, the response order, where those listeners might turn for listening time, 40.8%, would be to and the word choices in the Lenski music consumption if Sirius XM were terrestrial radio. Id. at 6. CDs and digital Survey. See Dhar WRT passim. In unavailable. See Written Direct downloads would capture 23.1% of essence, Professor Dhar concluded the Testimony of Joe Lenski, Trial Ex. 7, 2 former Sirius XM listening time. In the Lenski Survey could not be of any value (Lenski WDT). Sirius XM also asked Mr. aggregate, 22.1% of listening time in reflecting ‘‘marketplace reality.’’ See, Lenski to develop similar data for would be to noninteractive (14.3%) and e.g., id. ¶ 16. The thrust of the Dhar 163 Pandora listeners. See id. Mr. Lenski interactive (7.8%) streaming services. criticisms revealed the differences in the conducted a national random digit dial By contrast, Pandora listeners assignments the parties gave their telephone survey, using both landline reported migrating slightly more survey experts. Sirius XM asked and cellular telephone contacts (Lenski frequently from ‘‘CDs or your own Professor Lenski to gather listener Survey). He employed a survey music’’ (35%) than from terrestrial radio preference information, whereas methodology ‘‘widely recognized as the (33%).165 As alternatives, if Pandora SoundExchange tasked Professor Dhar most reliable form of survey research were no longer available, survey with looking at a defined, limited and . . . used by most major polling respondents chose CDs or music marketplace. organizations. . . .’’ Id. at 3. The survey downloads (67%), terrestrial radio Professor Willig acknowledged that queried 983 Sirius XM listeners and (59%), interactive streaming services the ‘‘the structures of these two surveys 1,323 Pandora listeners. Of the total (47%), noninteractive streaming [Dhar and Lenski] are fundamentally respondents, 350 identified themselves services (46%), and Sirius XM (23%).166 different: they ask fundamentally as listeners to both Sirius XM and When asked to allocate their time different questions.’’ Willig WRT ¶ 41. Pandora. The surveyors asked among the alternatives, Pandora Professor Willig also criticized the respondents in the two groups (Sirius listeners allocated their listening time to Lenski Survey because it purported to measure listeners’ assessments of their 162 CDs or music downloads (26.3%), Sirius XM asserted that Mr. Orszag did not terrestrial radio (24.4%), interactive use of time whereas the Dhar Survey undertake any empirical analysis in support of this measures listeners’ assessment of their argument. SXM RPFF ¶¶ 273–274. However, Mr. streaming services (16.6%) and other Orszag explained sufficiently that this value is a noninteractive streaming services spending, or more precisely, their particular form of ‘‘access’’ value, whereby the (11.7%). Id. at 7. willingness to pay. See Willig WRT ¶¶ driver knows he or she has the option of listening These survey results showed that 13, 46. Professor Willig asserted that the to music on Sirius XM in the car, a particular value latter would be a more appropriate given the limited alternatives for entertainment and Sirius XM competes most directly with diversion behind the wheel. See SE PFF ¶¶ 1228– terrestrial radio, whereas Pandora’s measure to determine creator 1229 (and record citations therein). Moreover, the noninteractive service competes almost compensation cannibalization. Id. limited nature of alternatives for entertainment and Professor Willig, at bottom, criticized diversion for a driver are matters of common Professor Shapiro’s reliance on the knowledge, and that point is not dependent upon 164 At this juncture, listeners could choose more expert testimony. Further, because Sirius XM than one potential alternative to Sirius XM; hence Lenski Survey data to evaluate relative advanced the argument that the per play values are the percentages exceed 100%. Notably, 28% of substitutional effects of webcasting and equivalent across these two distribution channels, survey respondents answered they would listen to satellite radio because the Lenski it should have proffered evidence to support the less audio overall if Sirius XM were unavailable. Survey did not give Professor Shapiro a assertion that consumers value access and per play See Lenski WDT at 5. values provided by Sirius XM the same as they 165 Sixteen percent of Pandora respondents basis to quantify the effects. Professor value such benefits when provided by a answered that their Pandora listening was new Shapiro testified in response to that noninteractive service, given the greater use of listening time, not diverted from other sources. criticism that, nonetheless, ‘‘switching Sirius XM in the car. Lenski WDT at 6–7. behavior that’s not price-based is quite 163 At the time of the Lenski Survey, Pandora had 166 As they did with Sirius XM, the surveyors first not yet launched its fully interactive subscription established all alternatives (adding to more than useful in terms of how [economists] . . . service. It operated only lean-back or Mid-tier 100%) before having respondents allocate their time see things,’’ yet he cautioned that ‘‘I services that were not fully interactive. by preference. Id. at 6. would accept that because Mr. Lenski is

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asking about where would you move The solutions GEO proposed stored sound recording, or (3) a your listening, that could give a appeared to arise from a per-work permanent download to a purchased different answer than what would you formula.168 He began his analysis with content locker or paid locker service.170 subscribe to if Sirius XM were more reference to the history of ‘‘mechanical’’ GEO proposed a royalty range of $1.00 expensive.’’ 4/20/17 Tr. 3765–76 royalties paid to license musical in 2018 to $2.50 in 2022 per purchase. (Shapiro). works.169 Mechanical royalties for Id. at 15. The Judges accept that the Lenski physical phonorecords and permanent The economic underpinnings of Mr. Survey and the Dhar Survey (and even digital downloads have and continue to Johnson’s proposals are that streaming the Modified Dhar Survey) were not be structured on a per-unit basis. To and broadcasting music, i.e., the access aimed at establishing the same capture a value he considered models of music consumption, have empirical evidence. The Judges do not equivalent to a per-unit royalty for substituted for (‘‘cannibalized’’) music agree with Professor Dhar’s criticism of streaming services, Mr. Johnson sales. With this shift in music the Lenski Survey methodology. proposed four different rate structures: consumption, Mr. Johnson opined, users Without parsing every question in the A per-subscriber rate, a percentage of and exploiters of the artists’ work have Lenski Survey for ambiguity or order revenue rate, a per-play rate, and a continued to prosper as the artists’ bias, the Judges also accept that both the permanent download rate. revenue streams have declined. See Lenski Survey and the Dhar Survey GEO proposed a per-subscriber Johnson CWDT at 36–40. were faulty. Those surveys are, SDARS rate ranging from $ 4.96 per Sirius XM did not rebut directly the however, sources of empirical evidence subscriber per month in 2018 to $ 5.58 GEO proposals, but filed replies to available in this proceeding. The per subscriber per month in 2022. GEO GEO’s proposed findings and Modified Dhar Survey resulted in would have this rate apply to all conclusions. See generally Sirius XM adjustment of Professor Willig’s subscribers except those that receive . . . Reply to George Johnson’s analyses and conclusions. The Lenski channels with no, or incidental, music Proposed Findings . . . (Sirius XM Survey supported Professor Shapiro’s content and free trial period subscribers Reply to GEO). With one exception,171 analyses and conclusions. But in (limited to 30 days royalty free). Sirius XM disputed all of GEO’s addition, the Judges understand the Proposed Rates and Terms of George D. proposed findings and conclusions. Lenski Survey to be of limited use in Johnson . . . at 10 (GEO Rates). GEO With respect to all other proposed comparing the opportunity cost analyses proposed PSS per-subscriber rates findings and conclusions, Sirius XM did conducted by Professors Willig and ranging from $ 0.10 in 2018 to $ 0.20 in not uniformly dispute the content of Farrell, as discussed supra. 2022. Id. at 14. GEO’s cited material, but argued that the GEO proposed a SDARS percentage of citations were inapposite or irrelevant to VIII. GEO Music Rate Proposals for PSS revenue rate within a ‘‘current the SDARS/PSS rate proceeding or and SDARS marketplace’’ range of 25% to 40% of without factual or legal support. Id., A. Rate Structures and Proposals ‘‘Gross Revenues.’’ He proposed passim. Sirius XM argued that GEO’s defining ‘‘gross revenues’’ in a manner Mr. George D. Johnson testified 167 on proposals conflated with SDARS the similar to the current regulations, but to rate configurations for different licenses, behalf of GEO Music and proposed that include payments or payments in kind the Judges bridge what he described as e.g., Phonorecords and Webcasters, to key executives or shareholders. See without regard for the differences in rate a ‘‘gap’’ in creator compensation. See 5/ id. at 12. For PSS, GEO proposed using 2/17 Tr. at 2203, 2209–10 (Johnson). setting standards for those the same definition of ‘‘gross revenues’’ configurations and without The premise upon which GEO relied is and calculating the royalty rate at 45% that each performance of a copyrighted acknowledging the separateness of the of gross revenues. record evidence supporting those work should be compensated. See For per-play rates for SDARS, GEO (Corrected) Testimony of George D. different rates. relied on ‘‘anonymous, but actual’’ Music Choice addressed directly the Johnson (GEO), Trial Ex. 60, at 24–25 Sirius XM royalty rates and adjusted GEO proposals. Mr. David Del Beccaro, (Johnson CWDT). GEO acknowledged, those rates by varying the percent-of- President and CEO of Music Choice, however, that for some digital services, revenue target. Id. at 13. testified that he could not parse the GEO including the two services seeking As an additional revenue stream for proposals. See Del Beccaro WRT at 65. licenses in this proceeding, both the services and the copyright Mr. Del Beccaro pointed out that the measurement of individual owners, GEO proposed requiring both GEO rate proposals lacked explanation, performances might not be possible. Sirius XM and Music Choice to create ‘‘benchmark, model, or any other Consequently, GEO sought rate a ‘‘BUY button.’’ In this proposal, GEO evidence . . . .’’ Id. at 66. structures that could provide envisioned listeners acquiring (1) a Further, Mr. Del Beccaro took issue a livable music royalty rate . . . [with which permanent download to the listener’s with the GEO proposal that Music creators] can be sure in our royalty payments, device of choice, (2) a ‘‘cloud locker’’ real payments, that are guaranteed, at a rate Choice be required to offer a digital download service. As Mr. Del Beccaro we would get if there were no ‘shadow’ of a 168 compulsory license .... Mr. Johnson has advocated in each of his appearances before the CRB a holistic approach to observed, the digital performance sound Id. at 5; see id. at 14 (‘‘to know that they licensing music performances. See id. at 2209. In recording license at issue in this are secure in their royalty income his approach he asked the Judges to take into proceeding does not extend to sales of account royalties for all uses of musical works sound recordings—physical or digital. . . . .’’). embodied in sound recordings: Royalties for the publishers, songwriters, record companies, and Id. Music Choice has not licensed the 167 As adjuncts to his testimony, Mr. Johnson artists. proffered numerous exhibits. Sirius XM and Music 169 Section 115 of the Copyright Act creates the 170 GEO did not clarify how a paid locker service Choice filed objections to GEO’s exhibits, citing compulsory license to make and distribute or purchased content locker service might be lack of foundation, hearsay, and relevance phonorecords of musical works. See 17 U.S.C. 115; different from a ‘‘cloud locker.’’ objections. The Judges grant those objections in 106(1) and (3) (exclusive right to reproduce in 171 Sirius XM did not dispute GEO’s Proposed their entirety. The GEO exhibits are not admitted copies or phonorecords and to distribute Conclusion of Law number 24, to wit: ‘‘George D. for the truth of the matters asserted therein, but are reproductions of musical works). The definition of Johnson is an individual pro se singer/songwriter, nonetheless permitted to remain in the record as phonorecords has evolved to include digital music publisher and independent sound recording illustrative of Mr. Johnson’s testimony. reproductions of embodied musical works. creator.’’ Sirius XM Reply to GEO at 27.

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rights necessary to sell phonorecords. Notwithstanding the import of Mr. Accordingly, the Judges do not adjust Further, Music Choice provided retail Johnson’s (and other’s) evidence of the rates they establish in this sales of physical phonorecords (CDs), a economic imbalances in the present-day proceeding to reflect any hypothetical, business that did not require a license music industry, nothing in the absolute or relative promotional effects from record companies. Ultimately, Constitution or the Copyright Act arising from performances on Sirius Music Choice abandoned that service empowers the Judges to create new law XM.173 because it was not profitable. Id. at 66– or fill in legislative ‘‘gaps’’ arising by the Further, as discussed elsewhere in 67. course of commerce. Only Congress has this Determination, the substitution The Judges agree with Sirius XM that that power. effects arising from record company GEO’s proposed rates and terms are licensing of sound recordings to Sirius IX. Adjustment for Promotional or unsupported by record evidence. The XM is a lynchpin for the setting of the Substitutional Effect Judges also agree with the Music Choice rate in this proceeding. criticisms of GEO’s presentations. GEO’s Neither SoundExchange nor Sirius arguments are primarily policy XM proposed an adjustment to the rates X. The Itemized Section 801(b) Policy arguments beyond the scope of this that they advocated to account for any Considerations proceeding. The GEO proposed promotional effect. Compare Shapiro As detailed in this Determination, the findings, conclusions, and rate WDT at 56 (‘‘good reason’’ to conclude Judges find that the 15.5% of revenue proposals are inadequately supported in promotional value from performances rate arising from the Opportunity Cost the record. on Sirius XM greater than promotional approach represents a market-based rate value of performances by webcasters, ‘‘I that, in its entirety, mitigates the B. Statutory and Constitutional am not able to precisely quantify just complementary oligopoly effects of Considerations how much lower the royalty rate would certain positive opportunity costs GEO referred to the constitutional be, so I make no downward adjustment embedded within it and reflects the provision giving Congress the power to to the rate) with Orszag AWDT ¶¶ 97– parties’ existing market power. Further, provide for copyrights.172 He 100 (considered whether adjustment the record in this proceeding does not acknowledged that Congress provided was required between target market support any adjustment to the resulting for certain ‘‘exclusive rights’’ for (Sirius XM) and benchmark market rate to account for performances on copyright holders in section 106 of the (interactive services) with respect to Sirius having a promotional or Act. He argued unconvincingly, promotion and concluded no substitutional effect. Accordingly, the however, that the statutory licenses adjustment necessary). Judges find this 15.5% of revenue rate inappropriately infringe on the Additionally, as the Judges explained to be an effectively competitive rate, and exclusive rights Congress created. He in Web IV: therefore a ‘‘reasonable rate’’ under 17 also questioned whether the Judges, or To the extent that the Judges adopt a rate U.S.C. 801(b)(1) before consideration of their predecessors whose precedent the based on benchmark evidence, it is not the policy factors within that statutory Judges consider, were at worst necessary to make additional adjustments to section. confiscating, or at best marginalizing, benchmarks to reflect the promotion and The Judges now analyze each of the copyright owners’ rights by failing to substitution factors. The Judges hold in this itemized 801(b)(1) policy considerations provide for fair compensation. See determination, as they have held consistently to determine whether they should make Johnson CWDT at 6, 13. GEO asserted in the past, that the use of benchmarks ‘‘bakes-in’’ the contracting parties’ any upward or downward adjustment in that current statutory royalty rates are this proceeding and, if so, the ‘‘extremely low below-market’’ rates. Id. expectations regarding the promotional and substitutional effects of the agreement. magnitude of any such adjustment. In at 13. Web IV, 81 FR at 26326 this and prior proceedings, the Judges GEO made much of the ‘‘full have concluded that these four factors The Judges have also repeatedly independence’’ of the Judges. See, e.g., cannot necessarily be considered Johnson CWDT at 7; 5/3/17 Tr. at 2244 found that relative promotion, not separately from one another. See, e.g., (Johnson). Mr. Johnson appeared to absolute promotion/substitution, is the SDARS I, 73 FR at 4094. Moreover, in equate judicial independence for the relevant factor in their consideration of the process of identifying the Copyright Royalty Judges with statutory rates. See SDARS II, 78 FR at ‘‘reasonable rate’’ before specifically disconnection from the dictates of the 23066–67 (‘‘Because only the relative applying these four itemized factors, the law. His arguments failed to analyze the difference between the benchmark Judges may have already considered separate licenses created by Congress or market and the hypothetical target issues that overlap with the four factors, the differing standards by which the market would necessitate an such that any further application of the Judges must set those rates. By focusing adjustment, the absence of solid same considerations would constitute unduly on ‘‘fair market’’ considerations, empirical evidence of such a difference improper double-counting of those Mr. Johnson ignores the policy factors obviates the need for such further considerations. Congress established for certain licenses adjustment’’). Testimony from a SoundExchange argued that the first in section 801(b)(1) of the Act. Further, SoundExchange economic expert in the three statutory objectives promote in every rate setting or rate adjustment present proceeding re-confirmed the policies that are generally advanced proceeding, the Judges hear testimony logic of these conclusions in more through market transactions. According from economists and other market formal economic terms. See 5/1/17 Tr. to its economic expert, Mr. Orszag, experts to determine a fair rate for each 1827 (Ford); see generally Ford WDT; ‘‘market-based rates are consistent with license under the circumstances extant Written Rebuttal Testimony of George at each license period. Ford, Trial Ex. 41 (Ford WRT). In the 173 There is anecdotal evidence in the record present case, the parties’ position is regarding promotional effect. The Judges have 172 Article I, Section 8, clause 8 of the consistent with these pronouncements previously noted the insufficiency of anecdotal Constitution gives Congress the power ‘‘to promote regarding relative promotion, in that evidence to support a rate adjustment. In this the progress of science and useful arts, by securing proceeding, however, they find that issue to be for limited times to authors and inventors the they do not propose a rate adjustment moot given that the parties’ respective experts have exclusive right to their respective writings and on the basis of any relative promotional not proposed a rate adjustment to reflect discoveries.’’ U.S. Const., Art. I, sec. 8, cl. 8. differences. promotional effect.

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the first three of the 801(b) factors.’’ 4/ Before embarking on an analysis of Willig did not identify a proposed rate 25/17 Tr. 954 (Orszag). If that were true, the parties’ separate factor arguments, under his Ramsey pricing approach, the then any attempt by the Judges to adjust the Judges note an overarching theme in Judges do not find that this approach a market-based rate would be improper many of those discrete arguments. The compels a Factor A adjustment. or, to the extent the Judges had already parties argue broadly that their costs Nevertheless, Professor Willig did considered market principles, a form of and investments are significant (Factor indicate that his Ramsey Pricing double-counting, were they to use those C issues) and that they are entitled to a approach generally demonstrated that factors again to adjust the rate. ‘‘fair’’ income or return (Factor B issues) the statutory rate should increase from By contrast, Sirius XM asserted that, that is not disruptive of their businesses the present rate of 11%. Because the as a matter of law, ‘‘it is well established (Factor D issues), in order to maximize reasonable market-based rate identified that reasonable 801(b)(1) rates need not the distribution of sound recordings to by the Judges of 15.5% is 41% higher correspond to market rates.’’ SXPFF ¶ the public (Factor A issues). These than the present rate, the Judges see no 87 (citing SoundExchange v. Librarian arguments echo the historical ambiguity need to make an additional increase in of Congress, 571 F.3d 1220, 1224 (D.C. in the creation of the itemized section order to be consonant with Professor Cir. 2009) (any ‘‘claim that [section 801(b)(1) factors and the debate between Willig’s directional recommendation 801(b)] clearly requires the use of Messrs. Nathan and Arnold prior to the arising from his Ramsey pricing market rates is simply wrong’’); adoption of those factors, as discussed approach. 175 Recording Indus. Ass’n of Am. v. supra. Because the historic SoundExchange’s other economic Librarian of Congress, 176 F.3d 528, 533 antecedent of the factors is the expert, Mr. Orszag, provided a separate (D.C. Cir. 1999) (same). traditional public utility rate-setting reason why SoundExchange’s rate process, the Judges cannot easily apply Thus, Sirius XM further asserted that proposal was consistent with the Factor the factors to a determination of rates in a proceeding governed by the section A principles. He stated that rates that that is not based on a rate of return that are ‘‘market-based’’ meet the Factor A 801(b)(1) rate standard, ‘‘market- accounts for specified costs, invested approximating rates’’ must be further criteria because they cause rates to be capital, a delineated rate base and a ‘‘sufficiently high to incentivize evaluated against the Section 801(b)(1) return on invested capital. Rather, the policy objectives in order to arrive at copyright holders to create content, as arguments in this context are by reflected in content distributors’ ‘‘reasonable rates’’ that comport with necessity more directional in nature. the statutory command. Id. The Judges [licensees’]—and by extension With this caveat, the Judges examine the consumers’—willingness to pay for do not agree that this construction of parties’ evidence regarding the need for their statutory charge is legally sound recordings.’’ Orszag WDT ¶ 15. In any adjustment pursuant to the four addition, Mr. Orszag opined that the mandated or otherwise necessary. The itemized factors in section 801(b)(1). Judges understand that they may presence of streaming services operating establish ‘‘reasonable rates,’’ and only A. Factor A: Maximizing the Availability under market-based rates demonstrates thereafter decide whether or how to of Creative Works to the Public that those ‘‘market-based rates are not so apply the four itemized factors. If the SoundExchange construed Factor A as high as to prevent content distributors Judges find that a market-based rate 174 calling for royalty rates that are from earning economic returns is consistent with a ‘‘reasonable rate,’’ sufficiently high to foster the creation of sufficiently attractive to induce the they may adopt that rate and apply the new content, but not so high as to investments required to transmit four factors to that rate. And, if the jeopardize the ongoing viability of a content to consumers, to broaden their record does not support a further licensee-service ‘‘that has gained distribution networks, and to develop adjustment based on an application of acceptance among consumers in the quality enhancements and a richer the four itemized factors, or any of them marketplace.’’ SE PFF ¶1435. Based on menu of features and functionality.’’ Id. individually, then the Judges may allow this understanding of Factor A, Thus, he concluded that ‘‘market-based their market-based reasonable rate to SoundExchange asserts that the market- rates will produce rates that are high stand as the new statutory rate. based rates it has proposed do not enough to incent artists and labels to As the foregoing analysis of the require adjustment to satisfy the create their product,’’ and ‘‘are high parties’ proposals makes clear, the objectives of Factor A. enough for the content distributors to Judges have found that the 15.5% rate In support of this point, earn sufficiently high returns that they is a ‘‘reasonable rate’’ derived from a SoundExchange first relied on an will want to distribute that content.’’ 4/ combination of market-based explanation by Professor Willig as to 25/17 Tr. 956–57 (Orszag). opportunity costs, survey evidence and why Factor A is consistent with his In support of this argument, countervailing considerations. Thus, the Ramsey Pricing approach. Willig WDT ¶ SoundExchange noted the many specific Judges do not consider the four itemized 13 (‘‘The defining objective of Ramsey costly ways in which labels must invest factors in section 801(b)(1) as bearing pricing is the maximization of consumer in their businesses, incurring repeated upon the reasonableness of the market- welfare, and this is an economic ‘‘sunk costs,’’ in order to provide a based rate they have already identified concept fully consistent with the continuing flow of recorded music. As as ‘‘reasonable.’’ Rather, in this case, the portion[ ] of the Section 801(b)(1) SoundExchange noted, the testimony Judges consider whether these four criteria that call[s] for the maximization and evidence highlight these specific factors, separately or in combination, of the availability of creative works to risky and costly investments incurred to require any policy-based adjustments of the public.’’); see also 5/2/17 Tr. 1981 sign artists, create and produce the 15.5% rate and whether the Judges (Willig) (‘‘Ramsey pricing by definition recordings, manufacture product, have already incorporated those factors . . . says the price has got to be high market and distribute the music, build into the analysis that led them to enough to be financially sustainable on an audience and fan base, and license identify the 15.5% rate. the supply side, but balanced across the copyrighted content to services such uses in a way that maximizes consumer as Sirius XM for listening by end users. 174 Although the Judges are not required to utilize welfare.’’). However, because Professor See, e.g., Written Direct Testimony of market-based rates, they surely are not prohibited Jason Gallien, Trial Ex. 30, at 2 (Gallien from doing so, as discussed supra. 175 See supra, section II.B WDT).

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In opposition, Sirius XM correctly incentives to both the creators of sound 957 (Orszag) (‘‘Fairness is not a well- argued that Mr. Orszag ‘‘merely offers recordings and to Sirius XM to make the defined term in the economics truisms,’’ such as that higher revenue necessary investments to ‘‘maximize the literature.’’). Economics can, however, encourages record companies to make availability of creative works to the provide a framework for a fair process. sound recordings available to the public’’ is the extent to which plays on Id. at 958 (‘‘Market-based rates are fair public. However, Sirius XM noted that Sirius XM’s satellite radio service in the sense of, as long as they are being SoundExchange does not go beyond this promote or substitute for other record determined in a workably competitive truism to ‘‘elucidate how properly label revenue streams. Shapiro WDT at environment, they are going to produce determined market rates fail to ensure 57–58. The Judges find this argument to outcomes that are efficient.’’). Thus, the that record companies are fairly be as much a ‘‘truism’’ as Judges analyze the Factor B issues with compensated.’’ SXRPFF ¶ 340. SoundExchange’s argument an understanding of the inherent The mere (and obvious) fact that emphasizing the incentivizing effect of subjectivity of the endeavor, and an record companies incur substantial higher royalty rates, and thus equally appreciation for the nuanced distinction costs is not illuminating, because that unavailing. Moreover, the Judges have between a ‘‘fair outcome’’ and a ‘‘fair fact simply begs the question whether already incorporated into their rate process.’’ rates are sufficient in light of those analysis survey evidence that Equating the market rate with a rate costs. Moreover, the Judges do not demonstrates the substitution patterns that provides a fair return, acknowledge that SoundExchange’s between Sirius XM and other SoundExchange argued that the current position even rises to the level of a distribution channels. In that analysis, rate does not afford a fair return to ‘‘truism.’’ An increase in the royalty rate the Judges relied on an evidentiary copyright owners because it is lower will not necessarily result in an increase roadmap provided to them by Sirius than a market rate. Exacerbating this in revenue, if the increase causes a XM, through Professors Hauser and problem, according to SoundExchange, downstream retail percentage reduction Farrell, for the identification and is the decline in sales of downloads and in quantity demanded that is greater valuation of the substitutability of other physical products, which have made than a percentage increase in distribution channels for Sirius XM. royalty revenues from Sirius XM (and subscription prices. Finally with regard to Sirius XM’s other services that offer ‘‘access’’ rather The Judges find that a rate properly argument, although Professor Shapiro than ‘‘ownership’’) even more important crafted to reflect an effectively asserted that a downward adjustment is than in the past. See Gallien WDT at 3– competitive market rate will maximize warranted because Sirius XM is more 6. To the extent this argument is simply the availability of creative works to the promotional and less substitutional than a plea by SoundExchange for rates that public by providing appropriate market non-interactive webcasters for other subsidize declining business segments, incentives. Lower rates, ceteris paribus, record label revenue streams, he found it is rejected. As the Judges have said would result in increased distribution it too difficult to measure the magnitude previously with regard to services’ but less incentive to produce sound of such an adjustment. Id. at 58 & App. business models, rates are not set recordings. Higher rates, ceteris paribus, D. Accordingly, he declined to propose merely to support a particular business would encourage increased production such an adjustment. Shapiro WDT at 58. model. See Web IV, 81 FR at 26329 (the of sound recordings but discourage The Judges, therefore, have no statute ‘‘neither requires nor permits the distribution. Nothing in the record evidentiary basis to make such a Judges to protect any given business indicates that, on balance, either an downward adjustment, even if they had model proposed or adopted by a market increase or a decrease in the reasonable found that a reduction was warranted. participant’’). Likewise in this rate of 15.5% would increase the The Judges interpret the ‘‘maximize’’ proceeding, the Judges are not obliged to availability to the public of sound directive more broadly than either party offset, mitigate, or subsidize a decline in recordings. to this proceeding. SoundExchange physical or download sales by setting Further, because the 15.5% rate interpreted maximization as an higher royalty rates for satellite radio. identified by the Judges is market-based, upstream supply issue while Sirius XM Moreover, as Sirius XM correctly the Judges are advancing the general interpreted maximization as a argued, in this proceeding there is no proposition asserted by SoundExchange, downstream distribution issue. The record evidence that the decline in that the market, properly construed, will Judges must look at both steps in the revenues from other distribution balance the interests of producers process. Aside from the economic issues channels can be laid at the doorstep of (licensors) and distributors (licensees), the parties argued, there is also simply Sirius XM and, further, any such without an increase in that rate under no record evidence that indicates a decline cannot automatically mean that Factor A. See 5/2/17 Tr. 1956–57 shortfall in the overall production of the current level of income received by (Willig) (from economic perspective, sound recordings, or in the the record companies is not ‘‘fair.’’ See factor will ‘‘require rates, royalty rates dissemination of sound recordings SXM RPFF ¶ 344. and terms generally that perform the through Sirius XM or other distribution SoundExchange refined its argument economic function of motivating the channels. For all these reasons, the by reformulating its substitution/cross- record companies and the artists to Judges find no basis in the record for a elasticity argument as a basis to raise create desirable sound recordings . . . policy adjustment to the 15.5% rates pursuant to Factor B. More [and] at the same time, . . . those rates ‘‘reasonable rate’’ based on Factor A. particularly, noting the self-evident fact and those terms should motivate . . . that consumers have a limited amount the distribution Services, to distribute B. Factor B: Fair Income/Fair Return of time to listen to music, those recordings to the public in a way Under Existing Market Conditions SoundExchange pointed out that, when that reflects consumer preferences.’’). Factor B requires the Judges to subscribers tune in to Sirius XM, they Sirius XM suggested that the record balance fair return to licensors and fair forego other direct revenue generating supports a reduction in the royalty rate income to licensees. There is an services, like Apple Music or Spotify, below the present 11% rate. In support inherent tension within this factor. and that may also diminish their of that point, it relied on the testimony Further, economic analysis cannot purchases of physical product and of Professor Shapiro, who noted that an identify royalty rates or a division of downloads because they spend their element of providing proper economic revenue that is ‘‘fair.’’ See 4/25/17 Tr. music-listening time tuned in to Sirius

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XM. Gallien WDT at 7. The Judges reject acquisition costs, and general and 55. Cumulatively, from 2006–2015, Sirius this argument as a basis to adjust the administrative costs.177 Id. ¶ 45. XM earned $5.9 billion in operating cash rates pursuant to Factor B. In setting the (d) Sirius XM’s variable operating costs flows. Id. ¶ 90. (i.e., costs that do vary with subscriber (i) Sirius XM’s executives trumpet the ‘‘reasonable rate’’ of 15.5% for an revenue) are small in comparison, and effectively competitive market, the company’s more recent performance as ‘‘one include royalties, customer service, and cost of the best growth stories in media,’’ and Judges examined the survey evidence of equipment. See id ¶ 46; see also id. ¶ 46 conclude that its ‘‘business is thriving’’—a that demonstrated the relevant n.17 (citation omitted). claim confirmed by Professor Lys’s analysis. substitution patterns. The Judges cannot (e) Because of its largely fixed cost Id. ¶ 52 & nn.24–25. gainfully pursue that same issue a structure and its post-merger market share (j) In the 2009–2015 post-merger period, second time by reconfiguring it as a growth, Sirius XM’s profits increased Sirius XM earned a total of $5.6 billion in dramatically once its sales reached its basis for making adjustments under EBIT.179 Similarly, in the period since the ‘‘break-even point,’’ i.e., the point at which merger, Sirius XM has generated over $7 Factor B. its fixed costs are covered. Id. ¶ 47. Approaching the Factor B issue from (f) This growth in profits is reflected in billion in adjusted EBITDA, an increase from the other side of the ledger, so to speak, Sirius XM’s high contribution margin (i.e., negative $690 million in 2006 to positive SoundExchange argued that ‘‘Sirius XM the fraction of each additional revenue dollar $1.66 billion in 2015. Lys CWDT ¶ 54. earns far more than a fair income under that covers fixed costs or increases profits). (k) Turning from financial to volume the current 11% rate, and will continue Specifically, by 2015, Sirius XM achieved a metrics, over the past decade, Sirius XM has to do so under SoundExchange’s rate contribution margin of [REDACTED] %, substantially increased its number of subscribers, even as it has increased the proposal.’’ SE PFF at 605. In support of meaning that each additional dollar of revenue increases pre-tax net income and prices and fees it charges. Lys CWDT ¶ 57; this conclusion SoundExchange pointed cash flows by $[REDACTED]. Id. see also 4/26/17 Tr. 1323 (Lys) (Sirius XM’s to several facts proffered by Professor (g) Sirius XM’s ‘‘free cash flow’’ (FCF) (a historic revenue base). Specifically, over the Lys that demonstrate how and why metric commonly used to assess a company’s past decade Sirius XM’s subscriber base has Sirius XM has realized substantial and performance and value), captures the amount grown on average [REDACTED]% per year, profitable growth: 176 of cash that is available, after necessary more than doubling from [REDACTED] business investment (including satellite million subscribers in 2006 to [REDACTED] (a) At the time of SDARS I, Sirius and XM investments), that can be used to pay million subscribers at the end of 2015. Lys were two separate companies competing for dividends and repurchase shares. In 2012, subscribers based on price, and likewise CWDT ¶ 59. As of March 2016, Sirius XM Sirius XM’s FCF was [REDACTED]% of had over 30 million subscribers. Id. ¶ 58 & engaged in price competition for non-music EBITDA,178 a higher percentage than other content such as sports leagues and talk show n.34. large entertainment-media companies. That (l) Sirius XM’s total revenue has grown personalities. However, in July 2008, Sirius is, Sirius XM can distribute [REDACTED]% even faster than the growth in the number of and XM merged, and the merged entity, of its EBITDA to its shareholders without its subscribers—from $1.57 billion in 2006 to Sirius XM, became the sole provider of affecting its operations. satellite radio in the United States, holding (h) Looking at FCF over a longer period, $4.57 billion in 2015—a 12.6 percent a monopoly in this market segment. Lys over the past decade Sirius XM has generated compounded annual growth rate (CAGR). Lys CWDT ¶ 43. $2.6 billion in such FCF. Since the merger, CWDT ¶ 65. This higher revenue growth (b) The merger eliminated price starting in 2009 Sirius XM has recorded resulted from Sirius XM’s increase in its competition between the two pre-merger seven straight years of positive FCF and has subscription prices and fee charges that satellite radio services for subscribers and for over that seven-year period generated $4.91 occurred contemporaneous with the growth non-music content, and also allowed the billion of FCF. Lys CWDT ¶¶ 91–92. Sirius of its subscriber base, allowing Sirius XM to combined company to take advantage of the XM’s FCF has increased from a deficit of realize a 15.8% increase in its ARPU between economies of scale that are central to its $1.23 billion in 2006 (meaning that the 2008 and 2015, corresponding to a business model. Lys CWDT ¶ 44. company was not generating sufficient cash compounded annual growth rate of 1.6%. See (c) Sirius XM’s operating costs are and needed to rely on external funding id. ¶ 66, Fig. 11. The table below presents the predominantly fixed with respect to sources for its operations and investments) to increase in the total effective monthly cost of subscriber revenue. These fixed costs include a positive $1.32 billion in 2015. This means subscribing to Sirius XM’s most popular programming and content, satellite and that after it satisfied its investment needs, its subscription package, the ‘‘Select’’ package), transmission, sales and marketing, operations generated $1.32 billion in cash i.e., combining the subscription fee and the engineering and design, subscriber that it could distribute to its investors. Id. ¶ 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

176 The summary of Professor Lys’s exhaustive a form of return that Professor Willig acknowledged 178 EBITDA means earnings before interest, taxes, analysis of Sirius XM’s financial success lays out to be appropriate, while allowing Sirius XM to depreciation and amortization. SoundExchange’s Factor B analysis and also realize ongoing profits. 179 EBIT means earnings before interest and taxes. demonstrates that the 15.5% rate set by the Judges 177 Alternatively, these costs are the same cannot be construed as ‘‘unfair.’’ The rate provides whether one person is listening to a Sirius XM the record companies with their opportunity costs, broadcast, or millions.

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Id. ¶ 70, Fig. 12; see also Summary of consumers without causing a loss of Sirius XM also pointed out that its U.S. Music Royalty Fees by Package, subscribers. Lys CWDT ¶ 74.181 non-music content costs have declined, Trial Ex. 321 (excerpt from Sirius XM Sirius XM did not challenge the demonstrating that there is no positive website). As this figure shows, Sirius wealth of evidence demonstrating its correlation between its profitability and XM’s pricing on its Select subscription economic, market, and financial its content costs. See Shapiro CWDT at package has increased by 41% over the success. Rather, Sirius XM contended 52–53 & Fig. 4. past decade, from $12.95 in 2006 to that these measures of Sirius XM’s In sum, Sirius XM concluded that its $18.21 as of April 2016, corresponding economic position are ‘‘entirely potential ability to pay higher royalties to a total increase of $5.26 or a irrelevant to the rate-setting task at out of increasing profits is simply compounded annual increase of 3.5%. hand.’’ Shapiro CWRT at 5. More irrelevant to the question whether it is Lys CWDT ¶ 71. specifically, Sirius XM argued that receiving a ‘‘fair return’’ pursuant to ‘‘Professor Shapiro has demonstrated’’ Factor B. According to Professor Lys, Sirius The Judges find that Sirius XM’s XM’s pricing increases appear to have through his direct and rebuttal testimony ‘‘that Sirius XM’s overall increased profitability does not provide had little effect on demand for its an independent basis to adjust the services, as evidenced by the essentially profitability would not be among the variables impacting the outcome of a 15.5% identified by the Judges. Sirius non-existent impact of the price XM earns sufficient profits, as the only increases on subscriber ‘‘churn’’ license negotiation in a workably competitive market.’’ See Shapiro satellite radio provider, to allow it to (defined by Sirius XM as ‘‘the monthly pay the opportunity costs of its service average of self-pay deactivations for the CWRT, App. D. & 24–26. Professor Shapiro explained that, in to the record companies. Those period divided by the average number of his opinion, it is not the overall profits opportunity costs, properly weighted, self-pay subscribers for the period’’). that are relevant in a Factor B analysis, constitute the building blocks for the Sirius XM Holdings, Inc., Proxy but ‘‘the incremental profit f[rom] 15.5% rate. The evidence, again, as Statement & 2015 Annual Report, Trial additional Sirius XM customers, as detailed by Professor Lys, makes it Ex. 372, at 21 (Sirius XM 2015 Annual measured by the contribution margin abundantly clear that Sirius XM, Report).180 (which takes into account only variable through its monopoly of the satellite Sirius XM’s most recent annual costs) that enters the analysis. Shapiro radio distribution channel, has the performance has been consistent with CWRT at 52 (emphasis added). Sirius financial capacity to pay higher rates its past post-merger growth and XM noted that its ‘‘contribution margin’’ and still maintain a high level of profitability, as evidenced by the has been essentially unchanged over profitability. following points. time, and that even Professor Lys The Judges find no inconsistency with In 2016 Sirius XM set records for acknowledged that the contribution regard to Professor Lys’s Web IV subscribers, revenue, adjusted EBITDA, and margin had ‘‘remained remarkably testimony and his testimony in this free cash flow, beating its guidance on all of consistent over time.’’ See Lys WDT proceeding. If a service were operating those metrics. 5/15/17 Tr. 3759–60 (Meyer). ¶ 87) (emphasis added). at a loss rather than a profit, the record In 2016, Sirius XM added more than 1.7 Sirius XM sought to impeach companies would not consider that fact million net subscribers, outperforming Professor Lys with excerpts from his relevant, especially if the service did not expectations. It added 1.66 million ‘‘self-pay testimony in Web IV: add new (i.e., non-cannibalizing) net subscribers,’’ also exceeding expectations listeners who could be monetized by (Sirius XM’s original guidance was 1.4 From the standpoint of economics, a subscription or advertising revenues. million). Trial Ex. 25, Figs. 43 at 56. company’s ability to pay royalties, while still However, when a service is profitable, In 2016, Sirius XM’s subscriber level remaining profitable, and the ‘‘willing buyer/ increased by 6%, raising its subscribership willing seller’’ standard are two very distinct in an unregulated market, the record level to 31.346 million. Lys WRT ¶ 164. concepts. companies, empowered by their ‘‘must In 2016, Sirius XM’s 2016 revenue grew by See 4/27/17 Tr. 1592–93 (Lys). have’’ status, can and will seek to 10% compared to 2015, to more than $5 It ‘‘is wrong to suggest that [a service’s] acquire as much of the surplus (profits) billion; EBITDA grew by 13% to $1.9 billion; current or past profitability should be used as they can through the bargaining FCF per share grew 26% to $0.30; and net to determine the royalty rate a willing buyer process. As explained in this income grew 46% to $746 million. Lys WRT and a willing seller would agree upon.’’ determination (and in Web IV), though, ¶ 166. See 4/27/17 Tr. 1593 (Lys). the Judges reject a division of profits based on the ‘‘must have’’ power of the In sum, SoundExchange argued that It was ‘‘incorrect’’ to ‘‘suggest[ ] that record companies, absent application of there is abundant and undisputed Pandora’s current profitability and financial performance determine its ability to pay an appropriate offsetting factor, such as evidence that Sirius XM’s profitability royalties, and that Pandora’s ability to pay identified in the steering analysis in has grown dramatically—and determines the rates the Judges should Web IV or in the opportunity cost significantly faster than its revenue— adopt.’’ analysis in this determination. indicating an improved ability to See 4/27/17 Tr. 1592 (Lys). Beyond Professor Lys’s financial monetize the operational gains and analysis, SoundExchange made scale. 181 Professor Lys also opined that Sirius XM will additional arguments with regard to Accordingly, SoundExchange’s continue to grow across these metrics for all of 2017 and into the foreseeable future. See Lys CWDT Factor B that do not aid in the Judges’ critical conclusion from Professor Lys’s ¶¶ 152–198. As the Judges have stated previously, analysis. SoundExchange argued exhaustive analysis was this: Sirius XM they are less than sanguine about projections and essentially that a fair allocation of the has been facing a relatively inelastic forecasts given the inherent speculative nature of revenue attributable to satellite radio demand, enabling it to increase prices to such a process. However, as Professor Lys pointed out, his projections in SDARS II regarding the future will arise either from: (1) A Ramsey financial performance of Sirius XM were accurate, pricing approach as described by 180 The only noticeable bump is an increase in and prior financial forecasts, as well as Sirius XM’s Professor Willig; or (2) arm’s-length churn from 1.8% to 2.0% in 2009 when Sirius XM own internal forecasts, [REDACTED]. See id. These negotiations in a benchmark market introduced the U.S. Music Royalty Fee, resulting in facts suggest that there is no present reason to the largest percentage increase in the effective project a scenario in which Sirius XM’s current such as the interactive market suggested subscription price, and coinciding with the 2008– level of profitability will fall or will not be by Mr. Orszag. Neither of these points 09 recession. Lys CWDT ¶ 73. maintained. supports a Factor B analysis. First,

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Professor Willig did not identify a rate Repertoire (A&R) representatives from As to marketing costs, Mr. Kushner pursuant to his Ramsey pricing labels go to clubs and concerts testified that for Atlantic Records, the approach, and he argued that this worldwide, listen to thousands of typical initial U.S. marketing budget for approach counseled generally for an demonstration (demo) recordings, and an album cycle for a new artist is in the increase in the existing rate (which the search the internet to identify emerging range of $[REDACTED] to Judges have found to be appropriate and undiscovered artists. According to $[REDACTED]. Id. ¶ 68. In fiscal year pursuant to their reasonable rate SoundExchange, these tasks are labor- 2015, UMG alone spent $[REDACTED] analysis). Mr. Orszag’s assertion that intensive, because finding musical specifically on gross marketing costs, as arm’s length negotiations in the talent requires people with sufficient well as $[REDACTED] in overhead costs interactive market demonstrate a fair industry knowledge and experience. for its various departments that also process (if not necessarily a fair Gallien WDT at 8. SoundExchange provided marketing services. For UMG, outcome) is belied by the fact that: (1) pointed to a 2015 RIAA study that marketing costs included over The survey results reached by all survey found the major labels spent $13.4 $[REDACTED] in advertising, experts demonstrates the inapposite billion between 2003 and 2012 to find $[REDACTED] in artists’ press and TV nature of the interactive benchmark; and new artists and help them reach an appearances, over $[REDACTED] in (2) the interactive benchmark is tainted audience. Written Direct Testimony of internet marketing & advertising, over by a complementary oligopoly effect Michael Kushner, Trial Ex. 34, ¶ 77 $[REDACTED] in radio promotion, and that cannot be mitigated, on the present (Kushner WDT). over $[REDACTED] in video production record, by a fact-based steering SoundExchange noted that after costs. With specific reference to adjustment. record companies incur the foregoing streaming and playlisting efforts, UMG SoundExchange, again relying on Mr. costs, they must also incur costs to has also invested in the setup costs and Orszag, cautioned that the Judges shape the artists’ music and image in personnel to establish a team dedicated should not apply Factor B so as to order to maximize their commercial to streaming marketing and playlisting provide an unjustified ceiling on the appeal. Those investments can include efforts. Gallien WDT at 13–14. royalty rate, which could constitute a the costs of dance and vocal lessons, Regarding recording companies’ subsidy to Sirius XM. The Judges’ personal stylists, makeup artists, manufacturing and distribution costs, 15.5% reasonable rate does not trainers, and media training. Many of they remain substantial in spite of the constitute an arbitrary ceiling or a those investments do not yield a industry’s transition away from physical subsidy, because it is derived pursuant financial return. See 5/11/17 Tr. 3542– media. Because of declining physical product sales, physical manufacturing to the ‘‘opportunity cost’’ approach that, 43 (Kushner) (‘‘[I]f you look at the has been declining, but it still carries according to Professor Willig, resulted totality of the number of artists we sign 182 high costs. UMG reported that its in a reasonable rate. and the numbers that are successful, manufacturing costs for physical Sirius XM found no basis under clearly the unsuccessful ones outweigh records, including costs they advance Factor B to change its proposed rate. the successful ones’’). Shapiro WDT at 58. Of course, the for pressing and distribution deals, were SoundExchange further noted that Judges’ 15.5% rate is above Sirius XM’s $[REDACTED] in fiscal year 2015. Id. at recording companies incur substantial proposed rate range that extends to 11% 14. Digital distribution has been additional costs to create recorded (the current rate). However, Sirius XM increasing, and there is misperception works, and to market, manufacture, and made no arguments that would support that it is costless to the record distribute recorded music.183 a reduction of the 15.5% rate pursuant companies. The reality is that digital to Factor B. See Shapiro WDT at 58. SoundExchange avers, for example, that distribution is highly complex and Sirius XM limited its Factor B analysis in 2015 alone, UMG spent requires expensive investments. UMG to the bald assertion that its $[REDACTED] million on recording reported that since the early 2000s, it benchmarking analysis (rejected by the costs, mastering costs, producer and has invested over $[REDACTED] in IT Judges) led to a fair return for copyright sampling fees, royalty advances, and infrastructure and operating costs, as owners and a fair income for copyright overhead funding to contracting parties well as the professionals that today users. who provide A&R services. Gallien distribute the thousands of digital files WDT at 8. Mr. Kushner testified for it provides to hundreds of music C. Factor C: Relative Roles of the Parties Atlantic Records that, on an album services and to handle the processing of SoundExchange asserted that, basis, the recording costs for a maiden billions of micro transactions related to pursuant to Factor C, the statutory rate album from a new artist typically range recognizing digital revenues and should be above its proffered from $[REDACTED] to $[REDACTED]— calculating the associated royalty benchmark, or at least at the high end and can exceed $[REDACTED] for an obligations. Id. at 14. And in 2016 and of its benchmark range. In support of established artist. Kushner WDT ¶ 36. If throughout 2017, UMG will be investing this argument, SoundExchange pointed the record companies cannot recoup in its 3rd generation of digital supply to testimony that record companies and these expenditures and advances from systems and digital revenue processing artists make substantial contributions sales revenue, they—not the artists or systems at an estimated cost of over through their search for artistic talent, a the music services—bear the $[REDACTED]. Id. at 15–16.185 process that is long, competitive, and unrecouped cost and foregone profits.184 often unsuccessful. See 5/11/17 Tr. at of investments in established artists, net of 3542–43 (Kushner). More particularly, 183 These costs typically may include the recoveries. Gallien WDT at 10. additional expense of a producer’s salary, studio 185 Indies’ costs differ in magnitude from those of SoundExchange explained that Artist & rental, hiring a sound engineer, paying musicians the Majors, but the categories are similar, according to play with the featured artist, and preparing a to SoundExchange. Mr. Iglauer provided qualitative 182 To be sure, Professor Willig calculated a master recording. See Written Direct Testimony of testimony stating that his Indie label, Alligator higher rate because he used the diversion ratios in Bruce Iglauer, Trial Ex. 33, at 10–11 (Iglauer WDT); Records, spends substantial time seeking out the Dhar Survey, but the Modified Dhar Survey (as Kushner WDT at ¶¶ 48–50. recording artists to sign—listening to demos, corrected), with its superior diversion ratios, 184 For example, SoundExchange proffered attending shows and music festivals, reading the applies the same opportunity cost approach UMG’s 2015 income statement, which reflects music press, and taking referrals from other bands, advocated by Professor Willig, and even applied his $[REDACTED] in (1) advances and recording costs labels, managers, and booking agents. It also ‘‘Creator Contribution’’ walk-away values. for new unproven artist signings and (2) write offs devotes significant resources to promoting the

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In sum, SoundExchange asserted that of the service.’’ 4/20/17 Tr. 398–99 then there would be no justification for major labels spend billions of dollars (Shapiro) (emphasis added).186 Sirius XM to obtain any recompense for finding and developing new artists, In response, SoundExchange, through its investments, either through an helping them reach an audience, and Mr. Orszag, asserted that Sirius XM’s adjustment to the revenue (royalty) base creating and marketing recorded music. ‘‘delivery platform’’ does not add or to the royalty rate. As the Judges Sirius XM gave short shrift to these separate value, because any value noted previously, a party is not entitled lengthy descriptions of the record created by that platform flows to a rate simply to preserve its particular companies’ various expenses. First, principally to Sirius XM; that is, even business model. See, e.g., Web IV, 81 FR Sirius XM claimed that under the SoundExchange proposal the at 26329 (‘‘the statute neither requires SoundExchange’s request for an upward record companies receive only 23% of nor permits the Judges to protect any adjustment pursuant to Factor C is Sirius XM’s revenue. Therefore, he given business model proposed or inconsistent with the latter’s prior broad noted, most of the gains flow to Sirius, adopted by a market participant.’’). If proclamation that the first three ‘‘but there is a portion that goes to the Sirius XM’s unique and expensive itemized 801(b)(1) factors are satisfied labels which [provide] a necessary inputs have marketplace value, those by market rates. Second, Sirius XM input,’’ 4/25/17 Tr. 1034 (Orszag), inputs will differentiate its service in an noted that the categories of costs that which is ‘‘consistent with sound attractive manner, resulting in relatively SoundExchange has itemized ‘‘have economics.’’ Id. at 1034–35 (Orszag) low cross-elasticities and own- long prevailed in the recording (emphasis added). elasticities, lower opportunity costs for industry,’’ and that nothing set forth in In reply, Sirius XM argued that Mr. the labels in licensing to Sirius XM, and SoundExchange’s Factor C argument Orszag’s justification for the labels’ higher profits for Sirius XM. It is provided specific reasons to suggest that sharing of any value added (via revenue) through this economic transmission those costs have changed in a manner to from Sirius XM’s unique inputs begs the mechanism that Sirius XM may extract support an adjustment upward in the question as to ‘‘what the split should value from its unique inputs—not from statutory rate. Third, Sirius XM noted be,’’ and fails to ‘‘address whether an a separate valuation of the inputs. that SoundExchange did not measure adjustment to the [interactive] This argument does not fully address ‘‘the investments made by the record benchmark is warranted to account for Mr. Orszag’s point that the labels, as companies’’ against ‘‘Sirius XM’s Sirius XM’s independent contributions providers of a ‘‘necessary input’’ would, investments ‘‘and thus did not perform to the value of its service offerings.’’ in an unregulated market, command a the ‘‘relative’’ analysis of costs, risks, SXM RPFF ¶ 62. portion of the value created by these and other factors expressly required by The Judges agree with Sirius XM that unique Sirius XM inputs. Again, Mr. the statutory language. In this criticism, the value of its unique inputs (relative Orszag concluded that such ‘‘sharing’’ is Sirius XM also noted parenthetically to interactive and other services), such simply ‘‘sound economics.’’ However, that SoundExchange did not explain as its expensive satellite and ancillary that reasoning is ‘‘sound’’ only to the 187 how or why particular portions of the technical equipment and its use of extent the Judges would find it record industry’s costs should be live ‘‘on-air’’ talent and other appropriate to reject Professor Willig’s 188 allocable to Sirius XM, rather than other specialized personnel, are intended opportunity cost approach and adopt distribution channels. to—and do—create a product that is instead his Nash Bargaining Solution differentiated from interactive services. Additionally, relying on Professor model. For the reasons set forth at However, SoundExchange is correct that Shapiro’s testimony, Sirius XM argued length supra, the Judges have done inputs do not have independent value that when the emphasis is placed precisely the opposite: Accepting his per se.189 properly on the ‘‘relative’’ contributions opportunity cost approach and rejecting Rather, Sirius XM incurs the cost of of the parties, the record companies’ his Nash Bargaining Solution these inputs to create a differentiated 190 cost of creating sound recordings, ‘‘is approach. and thus more profitable service. If it almost certainly significantly less than succeeds, the benefits will be evidenced D. Factor D: Minimizing Disruptive the contribution that Sirius XM plans to by higher revenues (in excess of those Impact on Structure of the Industries make over the 2018–2022 license input costs) and will, therefore, result in Involved and Generally Prevailing period,’’ including the launching of two higher profits. A separate accounting of Industry Practices new satellites and improving its the costs of the Sirius XM satellite radio repeater network.’’ Shapiro WDT at 58. The Judges’ long-standing test for platform would constitute a clear Although he concluded that this relative whether a rate is ‘‘disruptive’’ pursuant double-counting of value. difference points toward reducing the to Factor D provides that a rate change By contrast, if the cost of Sirius XM’s would be disruptive if it ‘‘directly statutory rate, the relative balancing investments in its unique inputs failed ‘‘does not readily lend itself to to differentiate its output (i.e., its 190 The Judges’ finding appears consistent with quantifying’’ an appropriate downward service) from, say, interactive services, Sirius XM’s position: ‘‘SoundExchange’s attempt to adjustment. Id. expropriate a portion of the value that Sirius XM alone creates is entirely at odds with the section Sirius XM also claimed that it 186 Sirius XM did not address its contribution of 801(b) factors.’’ SXM RPFF ¶ 64. However, Sirius contributes additional value through its this additional network value in its Factor C XM’s claim of expropriation is hyperbolic. By its ‘‘delivery network.’’ As Professor argument. However, the Judges find that this issue logic, Sirius XM’s use of the labels’ music likewise is best considered in the context of Factor C, which would constitute expropriation—of the sound Shapiro argued: ‘‘[B]y combining music, broadly addresses relative contributions. non-music, curation, and a delivery recording value that the labels created. The difficult 187 See, e.g., Written Direct Testimony of James E. issue is the application of the statutory and platform all into one bundle, Sirius XM Meyer, ¶ 12 (Meyer WDT); Written Direct economic factors to allocate the value of the output is creating significant value for Testimony of Bridget Neville, passim (Neville created by a production function (containing sound consumers, with each piece of the WDT); Written Direct Testimony of Terrence Smith, recordings and a delivery network) that utilizes passim (Smith WDT). bundle contributing to the overall value these separate inputs in combination, to cover all 188 See Blatter WDT ¶¶ 9–10. costs (including opportunity costs) while rewarding 189 As Professor Orszag asserted, David Frear, the investment in technology that leads to music and touring of artists they have signed, Sirius XM’s CFO, conceded this point during the innovative product differentiation. The Judges’ including the payment of recording costs and SDARS II proceeding: [REDACTED] See Orszag 15.5% rate addresses these various and competing advances. Iglauer WDT at 9. WRT ¶ 53 n.65. factors in a reasonable manner.

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produce[s] an adverse impact that is Lys CWDT ¶¶ 132–42 & Fig. 33; see 4/ that pay higher royalty rates.’’ SE PFF substantial, immediate, and irreversible 26/17 Tr. 1321–22 (Lys). ¶ 1584; see Lys CWDT ¶¶ 117–124. in the short-run because there is Professor Lys also analyzed Sirius To provide yet another perspective on insufficient time for either the SDARS XM’s forecasted performance, again the financial success of Sirius XM, or the copyright owners to adequately assuming arguendo that the Judges set Professor Lys calculated how its adapt to the changed circumstances the statutory rate at 24% of revenue. His performance would have changed in produced by the rate change and, as a analysis shows that, at that rate, the 2015 if the statutory rate had been consequence, such adverse impacts incremental after-tax impact on Sirius increased above the 10% applicable in threaten the viability of the music XM would range between that year. His calculations demonstrated delivery service currently offered to $[REDACTED] million in 2018 and that: consumers under this license.’’ SDARS $[REDACTED] million in 2021. Sirius XM could have afforded to have its II, 78 FR at 23069 (quoting SDARS I, 73 Professor Lys noted that Sirius XM is 2015 statutory royalty rate increased from FR at 4097). Accordingly, the Judges expecting to perform so well in the 10.0% to up to 41.9%, 35.9% or 31.4% and apply this standard to the 15.5% rate future that it could easily absorb this still earned an average EBITDA level of they have found to be reasonable in this higher rate for the SDARS III period, $735.7 million ..., $909.5 million ..., or proceeding to determine whether the 2018 through 2022. Lys WRT ¶ 219. $1.037 billion ..., respectively. While this 15.5% rate would be disruptive.191 More particularly, under this scenario, level of the royalty rate would have reduced SoundExchange relied on the Professor Lys testified that Sirius XM: Sirius XM’s EBITDA profitability by $921 million, $747 million, and $620 million, testimony of Professor Lys, who Would earn between $[REDACTED] and demonstrated that Sirius XM would still respectively (from the actual $1,657 million), $[REDACTED] in EBITDA in every year of would have only equated Sirius XM’s earn substantial returns (compared to the forecast, and would continue growing. Id. performance with its industry peers’ EBITDA other companies in closely-related ¶ 220. profitability levels. Would earn over $[REDACTED] in net industry sectors), even if the Judges Lys CWDT ¶ 136. were to increase the statutory royalty income each year of the forecast, and would continue growing. Id. ¶ 221. Sirius XM could afford to have its 2015 rate to 24%. See 4/26/16 Tr. 1321–23 statutory royalty rate increased from 10.0% (Lys).192 First, Professor Lys calculated Would generate over $[REDACTED] in free cash flow almost every year of the forecast to 65.1% and still earn a free cash flow level that the pre-tax incremental impact of and would continue growing. Id. ¶ 222. commensurate with SIC 483 of $278.8 even a 24% royalty payment (based on million. Professor Lys further noted that, even 2015 figures available to him when Id. ¶ 138. preparing his direct testimony) was under Sirius XM’s own internal forecasts, with a royalty rate of 24%, it Sirius XM could afford to have its 2015 $[REDACTED] million and the net after- statutory royalty rate increased from the tax impact would be $[REDACTED] would remain extremely profitable actual 10.0% to 35.0% and still earn an million. Lys CWDT ¶¶ 129–30. At those throughout the SDARS III term (2018– average SIC 483-level (in terms of return on levels, Sirius XM would obtain the 22), earning $[REDACTED] in EBITDA, assets) net income level of $39.6 million. following financial results: $[REDACTED] in net income, and Id. ¶ 142. $[REDACTED] in free cash flow. Id. In sum, SoundExchange made a SIRIUS XM 2015 PERFORMANCE ¶ 223. Additionally, Sirius XM’s 2016 [REDACTED] indicates that, at the end compelling case that an increase in rates METRICS UNDER 24% ROYALTY far greater than the 15.5% identified as RATE VS. SIC 483 of the forecasted period (2022), it would have a strong balance sheet, with a reasonable rate by the Judges would be Average $[REDACTED] in cash and equivalents, easily sustainable for Sirius XM, and for therefore not disruptive under the Performance SXM SIC 483 total assets of $[REDACTED], and (@24% shareholder equity of $[REDACTED]. Id. Factor D standard as quoted supra. metric royalty) broadcast radio/TV ¶ 224.193 Moreover, Sirius XM did not provide (%) For these reasons, SoundExchange any evidence sufficient to question Return on Assets ...... 5.5 3.0 argued that Sirius XM can comfortably Professor Lys’s analysis, which EBITDA Margin ...... 27.4 19.9 afford a rate increase from the current indicated that Sirius XM could afford a Free Cash Flow Margin ...... 23.0 6.1 11% to its proposed 23% of revenue. As much larger rate increase. Accordingly, Professor Lys colorfully and the Judges find that, a fortiori, Professor 191 Nothing in the record indicates that the emphatically opined: [REDACTED]. Lys’s analysis indicates that Sirius XM reasonable rate of 15.5% identified by the Judges (a 4/27/17 Tr. 1391–92 (Lys). could also afford a smaller increase, to 41% rate increase from 11% to 15.5%) would be Professor Lys also examined in great the 15.5% rate determined by the disruptive to the record companies, even though it Judges.194 is below the 23% rate sought by SoundExchange. detail Sirius XM’s growth in equity See Shapiro WDT at Fig. 5 and p. 59 (noting value compared to broader market XI. Terms industry data showing that Sirius XM accounted for metrics such as the S&P 500 and the only about 4% of overall record industry revenue Dow Jones Industrial Average, and Besides seeking a revision of the in 2016). Given the 4% figure identified by royalty rates for the 2018–22 rate period, Professor Shapiro, 23% of that percentage equals noted that Sirius XM far outpaces those .9%, and 15% of that 4% equals .6%. The indices. He further noted that Sirius XM the participants proposed certain difference in revenue to SoundExchange between outperforms other firms in the additional changes to the extant its percent-of-revenue proposal and the rate set in noninteractive markets. From these regulations. The final regulations this Determination therefore is approximately .3% appended to this determination reflect of overall record industry revenue, and thus not facts, Professor Lys concluded that disruptive within the applicable standard. Sirius XM enjoys an ‘‘unfair advantage Accordingly, the Judges focus on whether this 194 SoundExchange also asserts that Sirius XM increase would be disruptive for Sirius XM. over competing digital music services has paid less than an appropriate rate in previous 192 The Judges provide this detailed summary of rate terms. See SEPFF ¶¶ 1598–1606 (and record Professor Lys’s exhaustive analysis of Sirius XM’s 193 The Judges place much less emphasis on citations therein). However, the Judges do not financial picture not only to demonstrate the proper projections compared with current facts, absent conclude that, as a matter of law, they can set rates application of an itemized factor, but also to additional proof that the entity making the for a forthcoming period that reimburse a licensor underscore that Sirius XM can easily afford to pay projection has a track record that makes its for any alleged underpayments caused by a the market-based reasonable rate of 15.5% crafted projection credible. However, the Judges note that purported error in the statutory rate for a past rate by the Judges. these projections are consistent with [REDACTED]. period.

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the Judges’ decisions on points that Choice asserted that the language relates’’ or ‘‘the date payment [was] were in controversy. For the reasons SoundExchange and Music Choice due.’’ The Judges adopt the definitive detailed below,195 the Judges adopted stipulated to in SDARS II should be date for choosing GAAP principles as some of the proposed changes and adopted and SoundExchange provided the date payment was due. declined to adopt others, as indicated in no rationale for retaining the current b. Qualified Auditor the final regulatory language. language. MC PFF ¶¶ 556–57. SoundExchange did not appear to A. Generally Applicable Terms In prior iterations of royalty rate dispute Music Choice’s assessment that regulations relating to various licenses, 1. Advance Payment and Minimum Fee the extant recoupment provision differs the Judges noted the repetition of the SoundExchange did not propose any from what the parties had stipulated to phrase ‘‘independent and qualified substantive change to the current and has not provided a compelling auditor.’’ In their Web IV determination, ephemeral royalty minimum fee of reason to retain the current offset the Judges cut the verbiage by 50% by $100,000 per year, which is creditable to provision for PSSs. See, e.g., 5/10/17 Tr. defining a Qualified Auditor to be one ephemeral royalty payments for the 3308–13 (Bender). Therefore, the Judges that is independent. In this proceeding, relevant year (37 CFR 382.3(b)). SE PFF adopt the minimum fee language Music the parties have proposed language to 85. SoundExchange sought to designate Choice proposes. assure both the qualification and the the $100,000 annual advance payment It would seem incongruous to require independence of any auditor working to as the minimum fee for use of the an advance payment for section 114 and verify royalty payment and distribution. section 112 royalties in the aggregate but section 112 Ephemeral License by In a slight departure from the Web IV SDARS and PSS. Under to require the entirety of that payment to be applied as a ‘‘minimum fee’’ for language, the Judges eliminate the Web SoundExchange’s proposal, the advance IV requirement for an auditor to be payment would be applied first to the ephemeral license. No participant objects to the $100,000 advance royalty licensed in the state in which the audit section 112 royalties due, and the is conducted. In this proceeding, the balance, if any, would be nonrefundable payment. The Judges have no basis upon which they could allocate 100% of Judges accept that Certified Public and not applicable to a subsequent Accountants are governed by a code of year’s license. Music Choice argued that payment to the ephemeral license. To comply with the statutory ethics that permits them the ‘‘mobility’’ rightly that section 114 does not provide requirement that they set a minimum to practice across state lines. To remove for a minimum fee for SDARS or PSS. fee for use of the section 112 ephemeral any doubt, the Judges refer to the Code Compare 17 U.S.C. 114 (f)(1)(A) with of Professional Conduct adopted by the section 114(f)(2)(A).196 Section 112 license by transmission services, viz., SDARS and PSS, the Judges set the American Institute of Certified Public does, however, require the Judges to set Accountants. a minimum fee for ‘‘each type of service section 112 minimum fee at five percent offered by transmitting organizations’’ of the advance payment, or $5,000, for c. Additional Definitions using the ephemeral license. See 17 each type of SDARS or PSS service for U.S.C. 112(e)(3). which the Judges establish a different On their own motion, the Judges By agreement of the parties and in section 114 performance royalty. added ‘‘Payor’’ and ‘‘Verifying Entity’’ conformity with prior rate periods, the SoundExchange must, thereafter, apply as defined terms. These terms were section 112 ephemeral license royalty the remaining amount of the advance added during the revamping of fee is set at a five percent portion of the payment, after application of $5,000 per regulations following the Web IV total bundled royalty for both section type of service to ephemeral licenses, to proceeding because they clarified that 112 and section 114 and is included in section 114 royalties. auditing rights did not reside that bundled royalty payment. Music 2. Definitions exclusively in the Collective. In this iteration, the Judges clarify the terms Choice contended that in SDARS II, Music Choice objected to the SoundExchange and Music Choice they added to convey this reciprocal placement of ‘‘Definitions’’ at the end of audit right. stipulated to advance payment language each subpart of the regulations. The The Judges also amended that would have allowed the full Judges agree with Music Choice that the SoundExchange’s proposed definition of advance payment to be creditable to the placement seems counterintuitive. ‘‘Licensee’’ for clarity. PSS’s entire royalty payment, rather Definitions will migrate to the beginning than to its ephemeral payment only. of each subpart. In addition, Gross 3. Regulatory Terms MC PFF ¶ 554. According to Music Revenues calculations will migrate from Choice, the stipulated language was a. Section 382.3(a) 197—Payment to the the Definitions section to the services’ Collective changed in the final rule (i.e., the respective subparts. advance payment is creditable only to the ephemeral royalty payment) with no a. GAAP In general, any due date in federal explanation or justification. Music litigation that falls on a Saturday, The parties were in essential Sunday, or federal holiday is tolled agreement regarding imposing a U.S. until the next following business day. 195 The Judges do not provide narrative geographical limitation in the definition discussion about every detail of the regulatory The Judges regulations currently adopt changes; rather, they concentrate on the areas of of GAAP. Sirius XM asked the Judges to this convention as a general procedural legally significant controversy. apply a temporal element to the rule when discussing litigation filing 196 The extant regulation setting the PSS advance definition requiring application of the deadlines. See 37 CFR 350.5. The Judges payment does not mention a ‘‘minimum fee’’ but it version of GAAP in effect ‘‘during the does limit application of the advance payment to see no reason not to adopt the ephemeral license royalties and prohibit rollover of month when the performances giving suggestion of Sirius XM to enunciate the any portion of the advance payment to subsequent rise to a Licensee’s royalty payment same rule when referring to royalty royalty years. See 37 CFR 382.3(b) (2016). obligation were transmitted.’’ payment due dates. Perversely, the current regulation establishing the SoundExchange countered that a more $100,000 advance payment by SDARS is entitled ‘‘Ephemeral Recordings Minimum Fee.’’ See 37 CFR definite time limit would be preferable, 197 Section references are to the new numbering 382.12(c) (2016). Nothing in the subsection viz., ‘‘on the last day of the accounting system that results from reorganizing the mentions a minimum fee, however. Id. period to which the subject payment regulations in part 382.

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b. Section 382.4(a)(3)—Signature sensitive information ‘‘in the ordinary i. Section 382.7(g)—Interest on In updating the royalty regulations course of their work’’ is too broad. The Underpayments Discovered by Audit Judges will not grant that privilege. after the Web IV proceeding, the Judges The current regulations do not clarified the capacity of signers of Outside counsel has express authority to see confidential information when provide for a specific interest accrual on Statements of Account. Music Choice underpayments discovered by audit. acting on behalf of the Collective for objected to reconfiguration of the Web Sirius XM requested that the Judges add ‘‘verification of a . . . statement of IV language suggested by a provision setting interest on account’’ or on behalf of a Copyright SoundExchange. The Judges agree with underpayments discovered by audit at Owner or Performer for purposes of Music Choice that the language in the the federal post-judgment rate in 28 Web IV regulation is more appropriate ‘‘verification of royalty U.S.C. 1961. SoundExchange urged for these participants.198 distributions . . . .’’ This permission is applying the late payment interest rate 199 c. Section 382.5(a)(2)—Best Efforts sufficient. of 1.5% per month, compounded SoundExchange is obliged to use f. Section 382.7(c)—Notice of Intent To monthly. Sirius XM requested that the ‘‘best efforts’’ to locate Copyright Audit federal post-judgment rate that it seeks Owners and Performers entitled to to be applied to late payments also be receive a distribution of royalty SoundExchange requested that the applied to underpayments and payments. The Judges’ regulations need Judges change the requirement that a overpayments discovered by audit. not specify the specifics of those ‘‘best Verifying Entity ‘‘deliver’’ a copy of its However, Sirius XM opposed as efforts.’’ filed Notice of Intent to Audit to the punitive the use of SoundExchange’s Payor to a requirement that the proposed 1.5% per month interest rate, d. Section 382.5(b)—Unclaimed Funds Verifying Entity ‘‘send’’ the notice. noting that audits may be delayed by up At the conclusion of the Web IV Music Choice defended the term to three years, while interest accrues. proceeding, the Judges adopted ‘‘delivery’’ because it provides Barry WDT ¶ 8. language proposed by one of the ‘‘protections’’ to the PSS. See MCRFF at The proposed regulations the Judges Licensees directing SoundExchange to 323. The Judges conclude that this adopt in this proceeding utilize the treat unclaimed funds in accordance language issue is a solution in search of federal post-judgment rate rather than with federal, state, or state common law. a problem. The language will remain the more punitive 1.5% per month rate. SoundExchange argued against this unchanged. Audits can uncover good faith errors as provision seeking to retain permission well as bad faith manipulations, and the to apply unclaimed funds to g. Section 382.7(d)—The Audit Judges do not find that a punitive administrative expenses. The Judges interest rate, spanning up to three years conclude that governance of applicable Music Choice and SoundExchange disagreed regarding language on underpayments, is appropriate in law will provide more transparency such a circumstance. regarding the disposition of unclaimed SoundExchange sought to add to the funds. provision that permits a licensee to j. Section 382.7(h)—Cost Shifting perform its own, independent audit.200 e. Section 382.6(c)(3)—Outside Counsel SoundExchange asked the Judges to add Current SDARS/PSS regulations SoundExchange proposed a change to the qualifier ‘‘with respect to the provide that the Verifying Entity bears the rule regarding dissemination and information that is within the scope of the cost of an audit, unless the auditor use of confidential information relating the audit’’ to describe an acceptable finds an underpayment of sufficient to royalty collection and distribution. ‘‘defensive audit.’’ This qualifying magnitude to justify shifting Music Choice objected to the additional language is in the current regulation responsibility for payment to the Payor. language SoundExchange proposed and relating to audits of SDARS and For PSS, the underpayment that triggers the Judges agree with Music Choice. webcasters. The Judges see no reason cost-shifting currently is 5%. For SDARS, the underpayment that triggers SoundExchange is required to use and not to make it equally applicable to PSS. cost-shifting is 10%.201 Music Choice analyze sensitive business information A report of a Qualified Auditor will sought to equalize the cost-shifting in its administration of royalty include a description of the scope of the threshold, making all services liable if collection and distribution. On audit and if the scope of the defensive an audit discrepancy reaches 10%. occasion, SoundExchange might employ audit is too narrow to meet the specific consultants or experts to assist in that SoundExchange argued that cost- needs of SoundExchange, then shifting should occur when an auditor effort or in the auditing of the SoundExchange should be permitted to administrative systems. discovers underpayment of 5% for PSS round out the findings with its own SoundExchange sought to allow or SDARS. The rationale is that the outside counsel access to confidential audit, limited to the points omitted from absolute value of SDARS royalty information ‘‘for the purpose of the scope of the defensive audit. payments justifies reducing the trigger. performing their duties during the h. Section 382.7(f)—Issuance of Audit The Judges are unconvinced that ordinary course of their work.’’ This Report absolute payment amounts are a dissemination of confidential sufficient basis to change the cost- information is not sufficiently On their own motion, the Judges shifting trigger. Further, the Judges can constrained to limit it to collection and change the word ‘‘rendering’’ to the find no evidentiary basis to change the distribution of royalty payments. The word ‘‘issuing’’ for clarity. cost-shifting threshold when all notion of outside counsel obtaining the participants in this proceeding indicate 199 Further, in a litigated rate proceeding, outside that cost-shifting has yet to occur at the 198 The Judges are not swayed by Music Choice’s counsel are entitled to obtain confidential current thresholds. plaint that it could not have an authorized signer information without signing a non-disclosure because Music Choice is a partnership made up of agreement pursuant to a Protective Order specific corporations. Music Choice’s sophisticated to each proceeding. 201 For Webcasters, the costs of the audit shift to representatives can figure out how the partnership 200 Music Choice uses the term ‘‘defensive audit’’ the Payor when an underpayment equals 10% or may designate an authorized signer. for this procedure. more.

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k. Sections 382.23(a) and (b) authority to overrule a statutory SoundExchange proposed to amend SoundExchange proposed changes to provision by regulation. the definition of ‘‘Gross Revenues’’ The Judges see no reason to establish the methodology for Sirius XM to currently found in 37 CFR 382.11 to a statute of limitations in the context of calculate the direct license share and confirm that revenue from non-music rate setting proceedings where the Act the pre-1972 license share. Besides offerings ‘‘offered for a separate charge’’ does not provide for one. Further, any shall be excludable only when those inserting language relating to Aggregate pursuit of remedies relating to audit offerings are ‘‘provided on a standalone Tuning Hours (ATH) data, findings would be outside the Judges’ basis.’’ Bender WDT at 22. SoundExchange sought to impose a jurisdiction and the Judges would be SoundExchange did not view this new requirement on Sirius XM to report that overstepping to attempt to impose a proposed language as a substantive usage data for every eligible track it limitation of actions over which they deviation from the existing regulations, claims as a directly licensed or pre-1972 have no authority. but rather made the proposal ‘‘[p]urely sound recording for which Sirius XM [as] a clarification to language that we seeks a royalty adjustment. Sirius XM B. Gross Revenues had previously thought was sufficient.’’ contended that current reporting In this proceeding, SoundExchange 5/10/17 Tr. 3184 (Bender). requirements, based on Reference proposed a per-subscriber rate structure SoundExchange recounted that, since Channel metrics are sufficient to for PSS and proffered PSS regulations SDARS I, it has consistently understood support the royalty adjustments it takes consistent with its proposed rate that the references to a ‘‘separate for these exempt sound recordings. structure. Accordingly, SoundExchange charge’’ in current paragraph (3)(vi)(A) As the Judges decline to adopt the proposed to place its definition of and (B) were unambiguous. See SDARS additional ATH language requested by ‘‘Gross Revenues’’ only in ‘‘Subpart C,’’ I, 73 FR at 4087 (explaining that the SoundExchange, they see no basis to the subpart regarding SDARS. The ‘‘gross revenues’’ definition ‘‘excludes impose the additional reporting Judges have determined that PSS rates monies attributable to premium requirements on Sirius XM at this time. shall continue to be calculated on a channels of nonmusic programming that l. Proposed Section—Distribution of percent-of-revenue basis. Because the are offered for a charge separate from SDARS Royalties business models of SDARS and PSS are the general subscription charge for the different, however, the Judges maintain service.’’). See id. at 4081 (noting that, SoundExchange proposed a new separate elements for the calculation of with regard to ‘‘data services,’’ the section 382.22 adding language to the the respective Gross Revenues bases for ‘‘separate charge’’ language was added regulations that would permit it to PSS and SDARS. by the Judges ‘‘to make clear that this adjust its distribution model by Neither Music Choice nor portion of the definition dealing with reference to ATH if and when Sirius XM SoundExchange proposed a change to data services does not contemplate an becomes able to track listener usage of the current definition of Gross Revenues exclusion of revenues from such data its satellite radio service. Sirius XM applicable to PSS. The Judges adopt that services, where such data services are countered that it anticipates offering term to describe the method of not offered for a separate charge from next-generation technology within the calculating PSS royalties for the 2018 to the basic subscription product’s rate period at issue, but that this 2022 period. revenues.’’). Additionally, developing technology will not be Sirius XM and SoundExchange SoundExchange pointed out that, in sufficiently reliable or have sufficient proposed essentially the same definition SDARS II, the Judges reiterated the market saturation to make any reports of to establish the SDARS base for Gross necessity of a ‘‘separate charge,’’ its usage reliable. See 5/17/17 Tr. 4358 Revenues. Their substantive differences ‘‘stress[ing] that the exclusion is (Barry). arose in the nature and explication of available only to the extent that the Given the contingent nature of both permissible exclusions from that channels, programming, products and/ the launch and the saturation of Sirius 202 base. In adopting the definition or other services are offered for a XM’s anticipated technological applicable to the license period at issue separate charge.’’ SDARS II, 78 FR at advances, the Judges decline to adopt in this proceeding, the Judges modified 23072 n.45.204 contingency regulations at this time. SoundExchange’s proposed language to Subsequent to the filing of direct m. Proposed Section—Finality of Audit eliminate ambiguity 203 and to effect the cases in this proceeding, the Judges Results decisions detailed below. decided that ‘‘the language in the revenue exclusion described in Sirius XM proposed an additional 202 Both SoundExchange and Sirius XM presented subsection for the audit provisions to subsection (vi)(B) did not permit Sirius proposals to resolve long-standing controversies XM to exclude from the Gross Revenues establish the finality of disputed audit that were brought into focus by the primary reports. Sirius XM sought to establish a jurisdiction referral of the questions from the D.C. District Court. The need for the referral arose in otherwise included’’ in the definition of the base. two-year statute of limitations for SoundExchange v. Sirius XM, 65 F. Supp. 3d 150 The result is in the nature of a double-negative disputed audit findings after which the (D.D.C. 2014). In September 2017, the Judges issued configuration. For example, equipment sales Licensee’s calculations would be their amended ruling on the referred questions. See income is NOT included in the revenue base, but deemed binding and final, unless the Amended Restricted Ruling on Regulatory the exclusion of equipment sales revenues would Interpretation Referred by the United States District apply only ‘‘to the extent [those equipment sales Collective initiated a legal action before Court for the District of Columbia, No. 2006–1 CRB revenues were] otherwise included’’ in the base. the running of that proposed limitations DSTRA (20017–12) (Sept. 11, 2017). (Ruling on The better approach is to retain the current period. Referred Questions). The Judges resolve the same regulatory language, which states simply, ‘‘Gross SoundExchange objected to the controversies in this proceeding in conformity with Revenues shall exclude . . . .’’ that Ruling. 204 SoundExchange asserted that its auditor creation of this statute of limitations, 203 In constructing its proposed definition of alerted it to the fact that, throughout the SDARS I asserting that the change Sirius XM Gross Revenues, SoundExchange began with a period (at least), Sirius XM was [REDACTED]. Trial requests would have the effect of limited definition of what to include in the base: Ex. 101 at 5–6, Schedule 3. As of the time overriding the three-year statute of Subscription revenues and ad revenues including SoundExchange filed its direct case in the present those categories of revenues if they were paid to a proceeding, Sirius XM continued to assert that the limitations provided for in the parent, subsidiary, or division of the Licensee. ‘‘separate charge’’ language permitted deduction of Copyright Act. As SoundExchange SoundExchange then listed types of revenue that an allocated part of its Premiere package. Ruling on argued, the Judges do not have the should be excluded from the base ‘‘to the extent Referred Questions at 17.

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royalty base the price difference, i.e., the businesses. Barry WRT ¶¶ 12–18 & n.6. SoundExchange’s request for a change Upcharge, between the Premier package The Judges recognize the importance of in that definitional language is rejected and the Basic package.’’ Amended product bundling as described by Mr. as moot. Restricted Ruling on Regulatory Barry, both for Sirius XM and numerous Finally, Sirius XM proposed a change Interpretation Referred by the United retailers of multiple products. As the to the prefatory language in the States District Court for the District of Judges explained at length in the Ruling exclusion from ‘‘Revenues recognized Columbia at 17, No. 2006–1 CRB on Referred Questions, such bundling is by Licensee for the provision of’’ to the DSTRA (2007–12) (Ruling on Referred a common form of price discrimination simpler ‘‘Licensee revenues for the Questions). Given that decision, that increases revenue. That is, sellers provision of.’’ (That language is set forth SoundExchange noted that its proposed can induce buyers/subscribers to reveal in forthcoming § 382.22(b)(7)). As Mr. clarification may be unnecessary. their Willingness to Pay (WTP) and pay Barry explained, this is not meant to Nonetheless, in the interest of clarity, more through bundling. imply that Sirius XM can exclude SoundExchange urged the Judges to In a context in which the retailers pay revenues that have not been recognized. ‘‘confirm again’’ their position as to the for their inputs on a per unit basis, Rather, it is merely intended to avoid meaning of the regulatory language bundled retail pricing is benign, because SoundExchange’s perpetuating the concerning exclusions to gross input suppliers would be indifferent to argument (as addressed and rejected by revenues. Bender WDT at 22. downstream pricing and bundling. the Judges in the recent litigation Sirius XM, conversely, criticized the However, when the input suppler, as regarding the SDARS I period) that current regulatory language that limits here, is paid as a percent of retail Sirius XM could not exclude revenue the exclusion to revenue recognized for revenue, and the bundled revenue for portions of a bundle because those the provision of data services and non- consists of some revenue attributable to items were not separate units of music channels, programming, products the royalty base and other revenue accounting under GAAP (and the and/or other services to those instances excluded from the royalty base, the revenue for those items therefore was in which the subject programming is economic indeterminacy of the revenue not ‘‘recognized’’). Barry WRT ¶ 20 n.8. offered for a ‘‘separate charge.’’ Sirius attributable to each bucket creates a SoundExchange argued that there is XM proposed to strike the longstanding measurement problem, absent further no reason to delete the reference to ‘‘separate charge’’ requirement and add information regarding the WTP of ‘‘[r]evenues recognized’’ in the new language to the Gross Revenues buyers/subscribers to the bundle. preamble, and some risk in doing so. SE definition allowing allocation of all Nonetheless, Sirius XM urged that the Response to SXM PFF ¶ 442. However, bundle revenue regardless of whether ‘‘practical benefits’’ of its proposal SoundExchange did not cite to the the components of the bundle are outweigh such economic indeterminacy. record for this assertion of risk, nor did offered for a separate charge. That The Judges disagree and reaffirm their it identify that alleged risk. proposed language specifies that the conclusions in the Ruling on Referred SoundExchange also noted that, at the exclusion to be taken in the case of any Questions arising from the SDARS I hearing, Mr. Barry acknowledged his bundle is ‘‘the difference between: (a) proceeding. As Mr. Barry made clear, understanding that revenue would need the stated sale price of the bundle, such bundling was undertaken to to be ‘‘recognized’’ to be excluded. 5/17/ minus (b) the stated sale price of the increase Sirius XM’s revenues and it 17 Tr. 4401–02 (Barry). Thus, bundle multiplied by a fraction, the would be reasonable to assume that SoundExchange concluded that deleting numerator of which is the publicly Sirius XM has information relevant to the reference to revenue recognition stated retail price of the standard music/ the economic allocation of the bundled would create the implication that that is non-music package when sold on a revenue. However, Sirius XM presented not the case. standalone and undiscounted basis, and no such evidence at the hearing. Sirius The Judges find that these differences the denominator of which is the XM must bear the burden of providing can be bridged. The language at publicly stated retail price of the bundle evidence that might mitigate the 382.22(b)(7) will read, ‘‘Revenues when sold on a standalone and acknowledged ‘‘economic recognized by Licensee (or otherwise undiscounted basis.’’ Sirius XM First indeterminacy’’ problem inherent in received by Licensee if no GAAP Amended Proposed Rates and Terms at bundling, because any such evidence ‘‘recognition’’ principles are applicable) 3 (Feb. 17, 2017); 5/17/17 Tr. 4342–48 would be in its possession, not in the for the provision of . . . .’’ possession of SoundExchange or the (Barry); Barry WRT ¶ 21. C. Ephemeral License Terms Sirius XM had no choice but to record companies. If Sirius XM lacks acknowledge that its proposal fails to allocation information and prices its The participants in the present address the ‘‘economic indeterminacy’’ bundles without that data, it cannot proceeding raised two issues relating to of its bundling approach. In the Ruling assert ‘‘practical benefits’’ as grounds for the section 112 Ephemeral Recordings on Referred Questions, the Judges held subjecting licensors to the license. The first issue was raised by that—to use Sirius XM’s own words— acknowledged economic indeterminacy Music Choice regarding the valuation of ‘‘the difference between the larger of the revenue split. the ephemeral license. The second bundle price and the Select package For all of the reasons stated, and controversy between SoundExchange price may not in all cases reliably based upon the Judges’ analysis in the and Music Choice came to light in measure the economic value of the Ruling on Referred Questions, the response to SoundExchange’s proposed additional programming to consumers, Judges reject Sirius XM’s attempts to revisions to §§ 382.3(b) and 382.12(c) at least absent some objective evidence rewrite the regulations to reach a regarding advance payments and of the market value of that additional contrary result. Because the Judges are minimum payments and is discussed programming.’’ SXM PFF ¶ 440. reaffirming here their Ruling on supra, section XI.A.1. SoundExchange Sirius XM sought to minimize the Referred Questions, which confirmed contended that the record in the importance of this acknowledged the meaning of the present regulatory proceeding ‘‘unanimously’’ supports economic indeterminacy by noting the definition of Gross Revenues, they find SoundExchange’s proposal of a bundled importance of bundling to Sirius XM’s (as SoundExchange itself anticipated) rate for both the Section 112(e) and 114 business model and by pointing out the no need to amend the text of the rights, 5% of which should be allocated ubiquity of bundling by many major regulatory definition. Accordingly, as the Section 112(e) royalty for the

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making of ephemeral copies and the Dr. George Ford from the Web III The Judges find SoundExchange’s remaining 95% of which should be proceeding. See generally Ford Web III proposals concerning the bundling of allocated as the Section 114 WDT; see also Web III, 76 FR at 13042 performance and ephemeral Royalties, performance royalty. SoundExchange (‘‘The testimony offered by as well as the 95%/5% allocation of stated that ‘‘[t]he parties agree in SoundExchange supports this proposal royalties between the two licenses, to be substance concerning this matter.’’ SX and we adopt it.’’). According to Dr. reasonable and supported by the PFFCL ¶ 2369. SoundExchange Ford, ‘‘ephemeral copies have economic evidence, and therefore adopt them for contended that ‘‘it appears that both value to services that publicly perform both PSS and SDARS. SoundExchange and Music Choice agree sound recordings because these services XII. Conclusion that the Judges should set some kind of cannot as a practical matter properly an overall royalty payment and allocate function without those copies.’’ Ford For all of the foregoing reasons, the it 95%/5%.’’ SX PFFCL ¶ 2373. Web III WDT at 9. Dr. Ford noted that Judges issue this Determination of Rates Sirius XM mirrored SoundExchange’s ‘‘marketplace benchmarks show that the and Terms in the captioned proceeding. proposal. See SXM PFFCL at 1. Music royalty rate for ephemeral copies, if The Register of Copyrights may review Choice argued, however, that directly established, is almost always the Judges’ Determination for legal error SoundExchange did not demonstrate expressed as a percentage of the overall in resolving a material issue of that ephemeral copies have any royalty rate for combined activities substantive copyright law. The Librarian independent value. See Del Beccaro under Section 112 and 114.’’ Id. at 9–10. shall cause the Judges’ Determination, WDT at 46–47 (‘‘I am unaware of any As to the specific allocation between and any correction thereto by the marketplace context in which the record the two licenses, Dr. Ford noted that it Register, to be published in the Federal labels seek, or get, a separate payment is not the services, but the ‘‘[r]ecord Register no later than the conclusion of just for ephemeral copies.’’). companies and artists [who] care about the 60-day review period. Nevertheless, Music Choice what portion of royalty payments are Dated: October 11, 2018. acknowledged that the ephemeral allocated to ephemerals because the Corrected: October 15, 2018. license has been and can be bundled higher the portion allocated to with the sound recording performance Suzanne M. Barnett, ephemerals, the lower the portion paid Chief Copyright Royalty Judge. license, and took no position on directly to artists per the terms of the SoundExchange’s proposal to continue Jesse M. Feder, Section 114 license.’’ Id. at 4. Dr. Ford Copyright Royalty Judge. the current apportionment between the concluded that, in light of the purported David R. Strickler, performance and ephemeral copying disinterest by the willing buyer (or Copyright Royalty Judge. license. MC PFF ¶551. licensee) in the allocation between the SoundExchange, Sirius XM, and List of Subjects in 37 CFR Part 382 Section 112(e) and 114 licenses, an Music Choice agreed that a portion of Copyright, Digital audio the overall PSS royalties should be agreement between the artists and the copyright owners (i.e., the licensors) is transmissions, Performance right, Sound attributed to the ephemeral copying recordings. license. None of them suggested that the the best measure of how a willing buyer overall PSS royalty rate should be and willing seller would allocate Final Regulations royalties between the performance and increased to account for ephemeral For the reasons set forth in the ephemeral licenses. Id. at 10. As copying royalties. SoundExchange and preamble, the Copyright Royalty Judges evidence of such an agreement, Dr. Ford Sirius XM proposed that the current 5% revise 37 CFR part 382 to read as was informed that ‘‘the recording artists allocation of overall royalties to the follows: section 112(e) license should continue and the record companies have reached in the upcoming rate period, and Music an agreement that five percent (5%) of PART 382—RATES AND TERMS FOR Choice took no position on the the payments for activities under TRANSMISSIONS OF SOUND allocation. The only apparent issue Section 112(e) and 114 should be RECORDINGS BY PREEXISTING concerning the ephemeral reproduction allocated to Section 112(e) activities.’’ SUBSCRIPTION SERVICES AND license is that Music Choice asserted Id. at 15. He concluded that ‘‘that PREEXISTING SATELLITE DIGITAL that that license has no ‘‘independent appears to be a reasonable proposal.’’ Id. AUDIO RADIO SERVICES AND FOR value,’’ MC PFF at ¶550 (emphasis Upon examination in Web III, Dr. Ford THE MAKING OF EPHEMERAL added), while SoundExchange clarified that he was informed by REPRODUCTIONS TO FACILITATE contended that ephemeral copies do counsel for SoundExchange that the THOSE TRANSMISSIONS ‘‘have economic value . . . .’’ SoundExchange board, which includes Designated Web III Written Direct representatives from record labels and Subpart A—Regulations of General Testimony of Dr. George S. Ford, Trial artists, had approved a recommendation Application Ex. 51, at 9 (Ford Web III WDT). Music that 5% of royalties should be allocated Sec. Choice did not contend that the to the ephemeral license. Designated 382.1 Definitions. Hearing Testimony of George S. Ford, 382.2 Scope and compliance. ephemeral copies have no economic 382.3 Making payment of royalty fees. value—only that the ephemeral copies Trial Ex. 51, at 434 (Ford Web III Hrg. 205 382.4 Delivering statements of account. have no economic value independent of Test.). 382.5 Distributing royalty fees. the Section 114 license. Music Choice’s 382.6 Handling Confidential Information. position was inconsistent with neither 205 Dr. Ford represented that he reviewed the 382.7 Auditing payments and distributions. SoundExchange’s contention that the minutes of the board meeting that referenced the agreement, and it appears that the Judges in Web Subpart B—Preexisting Subscription ephemeral copying does have economic III admitted the board minutes into evidence. Ford Services (PSS) value, nor a bundled rate allocated Web III Hrg. Test. at 434, 438. Those minutes were 382.10 Royalty fees for the digital not introduced into evidence in the current between the two licenses. performance of sound recordings and the To support both the bundled rate and proceeding, rendering hearsay Dr. Ford’s testimony concerning the agreement between artists and making of ephemeral recordings by the proposed 5% allocation to the record companies. The Judges exercise their preexisting subscription services. ephemeral license, SoundExchange discretion under 37 CFR 351.10(a) to admit 382.11 Calculation of gross revenues for relied on the designated testimony of Professor Ford’s hearsay testimony. PSS.

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Subpart C—Preexisting Satellite Digital Qualified Auditor means a Certified (c) Minimum payments. A Licensee Audio Radio Services (SDARS) Public Accountant independent within must make any minimum annual 382.20 Definitions. the meaning of the American Institute payment due under subpart B or C of 382.21 Royalty fees for the public Certified Public Accountants Code of this part by January 31 of the applicable performance of sound recordings and the Professional Conduct. license year. making of ephemeral recordings by Satellite Digital Audio Radio Service (d) Monthly payments. A Licensee SDARS. (SDARS) means the preexisting satellite must make royalty payments on a 382.22 Calculation of Gross Revenues for digital audio radio services as defined in monthly basis. Payments are due on or SDARS. 382.23 Adjustments to royalty fee. 17 U.S.C. 114(j)(10). before the 45th day after the end of the Transmission has the same meaning month in which the Licensee made Authority: 17 U.S.C. 112(e), 114 and as in 17 U.S.C. 114(j)(15). Eligible Transmissions. 801(b)(1). Verifying Entity means the party (e) Late fees. A Licensee must pay a Subpart A—Regulations of General requesting an audit and giving notice of late fee for each payment and each Application intent to audit. For audits of SDARS and Statement of Account that the Collective PSS, the Verifying Entity is receives after the due date. The late fee § 382.1 Definitions. SoundExchange, Inc. For audits of is 1.5% (or the highest lawful rate, In this subpart: SoundExchange, Inc. the Verifying whichever is lower) of the late payment Collective means the collection and Entity is any Copyright Owner or its amount per month. The late fee for a distribution organization that is authorized representative. late Statement of Account is 1.5% of the payment amount associated with the designated by the Copyright Royalty § 382.2 Scope and compliance. Judges. Statement of Account. Late fees accrue (a) Scope. This part codifies rates and Copyright Owners means sound from the due date until the date that the terms of royalty payments for the public recording copyright owners who are Collective receives the late payment or performance of sound recordings in entitled to royalty payments made late Statement of Account. certain Digital Audio Transmissions by under part 382 pursuant to the statutory (1) Waiver of late fees. The Collective certain Licensees in accordance with licenses under 17 U.S.C. 112(e) and 114. may waive or lower late fees for applicable provisions of 17 U.S.C. 114 Digital Audio Transmission has the immaterial or inadvertent failures of a and for the making of Ephemeral same meaning as in 17 U.S.C. 114(j)(5). Licensee to make a timely payment or Recordings by those Licensees in Eligible Transmission means a Digital submit a timely Statement of Account. accordance with the provisions of 17 Audio Transmission made by a Licensee (2) Notice regarding noncompliant U.S.C. 112(e), during the period January that is subject to licensing under 17 Statements of Account. If it is 1, 2018, through December 31, 2027. U.S.C. 114(d)(2) and the payment of reasonably evident to the Collective that (b) Legal compliance. Licensees a timely-provided Statement of Account royalties under 37 CFR part 382. relying upon the statutory licenses set Ephemeral Recording has the same is materially noncompliant, the forth in 17 U.S.C. 112(e) and 114 must Collective must notify the Licensee meaning as in 17 U.S.C. 112. comply with the requirements of 17 GAAP means generally accepted within 90 days of discovery of the U.S.C. 112(e) and 114, this part and any noncompliance. accounting principles in effect in the other applicable regulations. United States on the date payment is (c) Voluntary agreements. § 382.4 Delivering statements of account. due. Notwithstanding the royalty rates and (a) Statements of Account. Any Licensee means the provider of an terms established in any subparts of this payment due under this part must be Satellite Digital Audio Radio Service part, the rates and terms of any license accompanied by a corresponding (SDARS) or Preexisting Subscription agreements entered into by Copyright Statement of Account that must contain Service (PSS) that has obtained a license Owners and Licensees may apply in lieu the following information: under 17 U.S.C. 114 to make eligible of these rates and terms. (1) Information as is necessary to transmissions and a license under 17 calculate the accompanying royalty U.S.C. 112(e) to make Ephemeral § 382.3 Making payment of royalty fees. payment; Recordings to facilitate those Eligible (a) Payment to the Collective. A (2) The name, address, business title, Transmissions. Licensee must make the royalty telephone number, facsimile number (if Payor means the entity required to payments due under subparts B and C any), electronic mail address (if any) make royalty payments to the Collective of this part to SoundExchange, Inc., and other contact information of the or the entity required to distribute which is the Collective designated by person to be contacted for information royalty fees collected, depending on the Copyright Royalty Board to collect or questions concerning the content of context. The Payor is: and distribute royalties under this part. the Statement of Account; (1) A Licensee, in relation to the If any payment due date is a weekend (3) The signature of: Collective; and or a federal holiday, then the payment (i) The Licensee or a duly authorized (2) The Collective in relation to a is due on the first business day agent of the Licensee; Copyright Owner or Performer. thereafter. (ii) A partner or delegate if the Performers means the independent (b) Advance payment. Licensees must Licensee is a partnership; or administrators identified in 17 U.S.C. pay the Collective an annual advance (iii) An officer of the corporation if 114(g)(2)(B) and (C) and the parties payment of $100,000 by January 31 of the Licensee is a corporation; identified in 17 U.S.C. 114(g)(2)(D). each year. The Collective must credit (4) The printed or typewritten name Preexisting Subscription Service (PSS) 5% of the advance payment as payment of the person signing the Statement of has the same meaning as in 17 U.S.C. of the minimum fee for Ephemeral Account; 114(j)(11). A service’s offering on the Recordings and credit the remaining (5) If the Licensee is a partnership or internet that is available to a subscriber 95% to section 114 royalties. The funds corporation, the title or official position outside the subscriber’s residence is not are nonrefundable. Any uncredited held in the partnership or corporation a Preexisting Subscription Service for portion of the funds shall not carry over by the person signing the Statement of purposes of this part. into a subsequent year. Account;

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(6) A certification of the capacity of three years from the date of the first is a matter of public knowledge shall the person signing; distribution of royalties from the have the burden of proving to the (7) The date of signature; and relevant payment by a Licensee. No Collective that the requested (8) An attestation to the following claim to distribution shall be valid after information is in the public domain. effect: the expiration of the three-year period. (b) Use of Confidential Information. I, the undersigned owner/officer/ After expiration of this period, the The Collective may not use any partner/agent of the Licensee have Collective must handle unclaimed funds Confidential Information for any examined this Statement of Account in accordance with applicable federal, purpose other than royalty collection and hereby state that it is true, accurate, state, or common law. and distribution and activities related and complete to my knowledge after (c) Retention of records. Licensees directly thereto. reasonable due diligence and that it and the Collective shall keep books and (c) Disclosure of Confidential fairly presents, in all material respects, records relating to payments and Information. The Collective shall limit the liabilities of the Licensee pursuant distributions of royalties for a period of access to Confidential Information to: to 17 U.S.C. 112(e) and 114 and not less than the prior three calendar (1) Employees, agents, consultants, applicable regulations adopted under years. and independent contractors of the those sections. (d) Designation of the Collective. (1) Collective, subject to an appropriate (b) Certification. Licensee’s Chief The Judges designate SoundExchange, written confidentiality agreement, who Financial Officer or, if Licensee does not Inc., as the Collective to receive are engaged in the collection and have a Chief Financial Officer, a person Statements of Account and royalty distribution of royalty payments authorized to sign Statements of payments from Licensees and to hereunder and activities related directly Account for the Licensee, must submit distribute royalty payments to each thereto who require access to the a signed certification on an annual basis Copyright Owner and Performer (or Confidential Information for the attesting that Licensee’s royalty their respective designated agents) purpose of performing their duties statements for the prior year represent a entitled to receive royalties under 17 during the ordinary course of their true and accurate determination of the U.S.C. 112(e) or 114(g). work; royalties due and that any method of (2) If SoundExchange, Inc. should (2) A Qualified Auditor or outside allocation employed by Licensee was dissolve or cease to be governed by a counsel who is authorized to act on applied in good faith and in accordance board consisting of equal numbers of behalf of: with U.S. GAAP. representatives of Copyright Owners (i) The Collective with respect to and Performers, it shall be replaced for verification of a Licensee’s statement of § 382.5 Distributing royalty fees. the applicable royalty period by a account pursuant to this part; or (a) Distribution of royalties. (1) The successor Collective according to the (ii) A Copyright Owner or Performer Collective must promptly distribute following procedure: royalties received from Licensees to (i) The nine Copyright Owner with respect to the verification of Copyright Owners and Performers that representatives and the nine Performer royalty distributions pursuant to this are entitled thereto, or to their representatives on the SoundExchange part; designated agents. The Collective shall board as of the last day preceding (3) Copyright Owners and Performers, only be responsible for making SoundExchange’s cessation or including their designated agents, distributions to those who provide the dissolution shall vote by a majority to whose works a Licensee used under the Collective with information necessary to recommend that the Copyright Royalty statutory licenses set forth in 17 U.S.C. identify and pay the correct recipient. Judges designate a successor and must 112(e) and 114 by the Licensee whose The Collective must distribute royalties file a petition with the Copyright Confidential Information is being on a basis that values all performances Royalty Judges requesting that the supplied, subject to an appropriate by a Licensee equally based upon the Judges designate the named successor written confidentiality agreement, and information provided under the Reports and setting forth the reasons therefor. including those employees, agents, of Use requirements for Licensees (ii) Within 30 days of receiving the consultants, and independent pursuant to § 370.3 or § 370.4 of this petition, the Copyright Royalty Judges contractors of such Copyright Owners chapter, as applicable, and pursuant to must issue an order designating the and Performers and their designated this part. recommended Collective, unless the agents, subject to an appropriate written (2) Identification of Copyright Judges find good cause not to make and confidentiality agreement, who require Owners. The Collective must use its best publish the designation in the Federal access to the Confidential Information to efforts to identify and locate copyright Register. perform their duties during the ordinary owners and featured artists to distribute course of their work; royalties payable to them under section § 382.6 Handling Confidential Information. (4) Attorneys and other authorized 112(e) or 114(d)(2) of title 17, United (a) Definition. For purposes of this agents of parties to proceedings under States Code, or both. Such efforts must part, ‘‘Confidential Information’’ means 17 U.S.C. 112 or 114, acting under an include, but are not limited to, searches the Statements of Account and any appropriate protective order. in Copyright Office public records and information contained therein, (d) Safeguarding Confidential published directories of sound including the amount of royalty Information. The Collective and any recording copyright owners when payments and any information person authorized to receive consulting those records and directories pertaining to the Statements of Account Confidential Information from the is likely to be helpful. reasonably designated as confidential by Collective must implement procedures (b) Unclaimed funds. If the Collective the party submitting the statement. to safeguard against unauthorized access is unable to identify or locate a Confidential Information does not to or dissemination of Confidential Copyright Owner or Performer who is include documents or information that Information using a reasonable standard entitled to receive a royalty distribution at the time of delivery to the Collective of care, but no less than the same degree under this part, the Collective must is public knowledge. The party seeking of security that the recipient uses to retain the required payment in a information from the Collective based protect its own Confidential Information segregated trust account for a period of on a claim that the information sought or similarly sensitive information.

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§ 382.7 Auditing payments and written findings of the audit with the makes that are necessary and distributions. appropriate agent or employee of the commercially reasonable for making (a) General. This section prescribes Payor in order to remedy any factual noninteractive Digital Audio procedures by which any entity entitled errors and clarify any issues relating to Transmission as a PSS are included in to receive payment or distribution of the audit; provided that an appropriate the 5%. royalties may verify those payments or agent or employee of the Payor (2) The minimum fee is $5,000 per distributions with an independent reasonably cooperates with the auditor year. audit. The Collective may audit a to remedy promptly any factual error[s] Licensee’s payments of royalties to the or clarify any issue raised by the audit. § 382.11 Calculation of gross revenues for Collective and a Copyright Owner or The auditor must include in the written PSS. Performer may audit the Collective’s report information concerning the (a) Gross revenues are monies derived distributions of royalties to the cooperation or the lack thereof of the from the operation of the programming Copyright Owners or Performers. employee or agent. service of the Licensee and are Nothing in this section shall preclude a (g) Audit results; underpayment or comprised of the following: Verifying Entity and the Payor under overpayment of royalties. If the auditor (1) Monies received by Licensee from audit from agreeing to verification determines the Payor underpaid Licensee’s carriers and directly from methods in addition to or different from royalties, the Payor shall remit the those set forth in this section. residential U.S. subscribers for amount of any underpayment Licensee’s programming service; (b) Frequency of auditing. A Verifying determined by the auditor to the Entity may conduct an audit of each Verifying Entity, together with interest (2) Licensee’s advertising revenues (as Payor only once a year and the audit at the post-judgment rate specified in 28 billed), or other monies received from may cover any or all of the prior three U.S.C. 1961, accrued from and after the sponsors, if any, less advertising agency calendar years. A Verifying Entity may date the payment was originally due. In commissions not to exceed 15% of those not audit records for any calendar year the absence of mutually-agreed payment fees incurred to a recognized advertising more than once. terms, which may, but need not, include agency not owned or controlled by (c) Notice of intent to audit. The installment payments, the Payor shall Licensee; Verifying Entity must file with the remit promptly to the Verifying Entity (3) Monies received for the provision Copyright Royalty Judges a notice of the entire amount of the underpayment of time on the programming service to intent to audit the Payor, which notice determined by the auditor. If the auditor any third party; the Judges must publish in the Federal determines the Payor overpaid royalties, (4) Monies received from the sale of Register within 30 days of the filing of however, the Verifying Entity shall not time to providers of paid programming the notice. Simultaneously with the be required to remit the amount of any such as infomercials; filing of the notice, the Verifying Entity overpayment to the Payor, and the Payor must send a copy to the Payor. (5) Where merchandise, service, or (d) The audit. The audit must be shall not seek by any means to recoup, anything of value is received by conducted during regular business offset, or take a credit for the Licensee in lieu of cash consideration hours by a Qualified Auditor who is not overpayment, unless the Payor and the for the use of Licensee’s programming retained on a contingency fee basis and Verifying Entity have agreed otherwise. service, the fair market value thereof or is identified in the notice. The auditor (h) Paying the costs of the audit. The Licensee’s prevailing published rate, shall determine the accuracy of royalty Verifying Entity must pay the cost of the whichever is less; payments or distributions, including audit, unless the auditor determines that (6) Monies or other consideration whether the Payor made an there was an underpayment of 10% or received by Licensee from Licensee’s underpayment or overpayment of more, in which case the Payor must bear carriers, but not including monies royalties. An audit of books and records, the reasonable costs of the audit, in received by Licensee’s carriers from including underlying paperwork, addition to paying or distributing the others and not accounted for by performed in the ordinary course of amount of any underpayment. Licensee’s carriers to Licensee, for the business according to generally (i) Retention of audit report. The provision of hardware by anyone and accepted auditing standards by a Verifying Entity must retain the report used in connection with the Qualified Auditor, shall serve as an of the audit for a period of not less than programming service; three years from the date of issuance. acceptable verification procedure for all (7) Monies or other consideration parties with respect to the information Subpart B—Preexisting Subscription received for any references to or that is within the scope of the audit. Services (PSS) inclusion of any product or service on (e) Access to third-party records for the programming service; and audit purposes. The Payor under audit § 382.10 Royalty fees for the digital (8) Bad debts recovered regarding must use commercially reasonable performance of sound recordings and the paragraphs (a)(1) through (7) of this efforts to obtain or to provide access to making of ephemeral recordings by section. any relevant books and records preexisting subscription services. maintained by third parties for the (a) Royalty fees. Commencing January (9) Revenues described in paragraphs purpose of the audit. 1, 2018, and continuing through (a)(1) through (8) of this section to (f) Duty of auditor to consult. The December 31, 2027, Licensees must pay which Licensee is entitled but which are auditor must produce a written report to royalty fees for all Eligible paid to a parent, subsidiary, division, or the Verifying Entity. Before issuing the Transmissions of sound recordings at affiliate of Licensee, in lieu of payment report, unless the auditor has a the rate of 7.5 percent of Gross to Licensee but not including payments reasonable basis to suspect fraud on the Revenues. to Licensee’s carriers for the part of the Payor, the disclosure of (b) Ephemeral recordings royalty fee. programming service. which would, in the reasonable opinion (1) The fee for all Ephemeral Recordings (b) Gross Revenues exclude affiliate of the auditor, prejudice any is part of the total fee payable under this revenue returned during the reporting investigation of the suspected fraud. section and constitutes 5% of it. All period and bad debts actually written The auditor must review tentative Ephemeral Recordings that a Licensee off during reporting period.

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Subpart C—Preexisting Satellite Digital (b) Gross Revenues exclude: for the relevant payment under Audio Radio Services (SDARS) (1) Monies or other consideration § 382.3(d), a list of each Copyright attributable to the sale and/or license of Owner from which the Licensee claims § 382.20 Definitions. equipment and/or other technology, to have a direct license of rights to In this subpart: including but not limited to bandwidth, Directly-Licensed Recordings that is in Directly-Licensed Recording means a sales of devices that receive the effect for the month for which the sound recording for which the Licensee Licensee’s SDARS and any shipping and payment is made and of each sound has previously obtained a license of all handling fees therefor; recording for which the Licensee takes relevant rights from the sound recording (2) Royalties paid to Licensee for the reduction, identified by featured Copyright Owner. intellectual property rights; artist name, sound recording title, and Pre-1972 Recording means a sound (3) Monies or other consideration International Standard Recording Code recording fixed before February 15, received by Licensee from the sale of (ISRC) number or, alternatively to the 1972, that is not a restored work as phonorecords and digital phonorecord ISRC, album title and copyright owner defined in 17 U.S.C. 104A(h)(6) or deliveries; name. Notwithstanding § 382.6, the otherwise subject to protection under (4) Sales and use taxes; Collective may disclose such title 17, United States Code. (5) Credit card, invoice, activation, information as reasonably necessary for Reference Channels means internet swap and early termination fees charged it to confirm whether a claimed direct webcast channels offered by the to subscribers and reasonably related to license exists and claimed sound Licensee that directly correspond to the Licensee’s expenses to which they recordings are properly excludable. channels offered on the Licensee’s pertain; (2) To arrive at the percentage SDARS that are capable of being (6) Bad debt expense; and allocable to the Direct License Share for received on all models of Sirius radio, (7) Revenues recognized by Licensee each month, the Licensee shall divide all models of XM radio or both, and on (or otherwise received by Licensee if no the internet Performances of Directly- which the programming consists GAAP ‘‘recognition’’ principles are Licensed Recordings on the Reference primarily of music. applicable) for the provision of: Channels by the total number of internet (i) Current and future data services Performances of all sound recordings on § 382.21 Royalty fees for the public offered for a separate charge (e.g., the Reference Channels. In no event performance of sound recordings and the weather, traffic, destination information, shall the Direct License Share be an making of ephemeral recordings by SDARS. messaging, sports scores, stock ticker amount greater than the result of (a) Royalty fees. Commencing January information, extended program dividing the number of plays of 1, 2018, and continuing through associated data, video and photographic Directly-Licensed Recordings on the December 31, 2027, Licensees must pay images, and such other telematics and/ SDARS by the total number of plays of royalty fees for all Eligible or data services as may exist from time all sound recordings on the SDARS. Transmissions of sound recordings at to time); (3) The Licensee may not credit use of the rate of 15.5% of Gross Revenues. (ii) Channels, programming, products a Directly-Licensed Recording under (b) Ephemeral recordings royalty fees. and/or other services offered for a this paragraph if that use is credited as (1) The fee for all Ephemeral Recordings separate charge where such channels a use of a Pre-1972 Sound Recording for is part of the total fee payable under this use only incidental performances of purposes of claiming the Pre-1972 section and constitutes 5% of it. All sound recordings; Recording Share reduction to the royalty Ephemeral Recordings that a Licensee (iii) Channels, programming, products fee. makes that are necessary and and/or other services provided outside (b) Reduction for Pre-1972 Recording commercially reasonable for making of the United States; and Share. The royalty fee specified in noninteractive Digital Audio (iv) Channels, programming, products § 382.21(a) may be reduced by the Transmissions as an SDARS are and/or other services for which the percentage of Eligible Transmissions included in the 5%. performance of sound recordings and/or comprising the Pre-1972 Recording (2) The minimum fee is $5,000 per the making of Ephemeral Recordings is Share. year. exempt from any license requirement or (1) A Pre-1972 Recording Share is separately licensed, including by a reduction is available to a Licensee only § 382.22 Calculation of Gross Revenues if— for SDARS. statutory license and, for the avoidance of doubt, webcasting, audio services (i) The Reference Channels constitute (a) Gross Revenues are: bundled with television programming, a large majority of and are generally (1) Revenue recognized by the interactive services, and transmissions representative of the music channels Licensee in accordance with GAAP from to business establishments. offered on the Licensee’s SDARS; and the operation of an SDARS and (ii) The Licensee provides to the comprised of the following: § 382.23 Adjustments to royalty fee. Collective, by no later than the due date (i) Subscription revenue recognized (a) Reduction for Direct License Share. for the relevant payment under by Licensee directly from U.S. The royalty fee specified in § 382.21(a) § 382.3(d), a list of Pre-1972 Recordings subscribers for licensee’s SDARS; and may be reduced by the percentage of for which the Licensee takes the (ii) Licensee’s advertising revenues, or Eligible Transmissions comprising the reduction, identified by featured artist other monies received from sponsors, if Direct License Share. name, sound recording title, and any, attributable to advertising on (1) The Direct License Share International Standard Recording Code channels other than those that use only reduction is available to a Licensee only (ISRC) number or, alternatively to the incidental performances of sound if— ISRC, album title and copyright owner recordings, less advertising agency and (i) The Reference Channels constitute name. sales commissions. a large majority of and are generally (2) To arrive at the percentage (2) Revenues set forth above to which representative of the music channels allocable to the Pre-1972 Recording Licensee is entitled but which are paid offered on the Licensee’s SDARS; and Share for each month, the Licensee shall to a parent, wholly-owned subsidiary, or (ii) The Licensee provides the divide the internet Performances of Pre- division of Licensee. Collective, by no later than the due date 1972 Sound Recordings on the

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Reference Channels by the total number to a listener within the United States by thirty seconds (as in the case of a sound of internet Performances of all sound means of a Digital Audio Transmission recording used as a theme song), except recordings on the Reference Channels. is not a Performance if it both: for ambient music that is background at (c) Definition of Performance. For (i) Makes no more than incidental use a public event. purposes of this section, Performance of sound recordings including, but not means: limited to, brief musical transitions in Suzanne M. Barnett, (1) Except as discussed in paragraph and out of commercials or program Chief Copyright Royalty Judge. (c)(2) of this section, a Performance is an segments, brief use during news, talk Jesse M. Feder, instance in which any portion of a and sports programming, brief Copyright Royalty Judge. sound recording is publicly performed background use during disk jockey David R. Strickler, to a listener within the United States by announcements, brief use during Copyright Royalty Judge. means of a Digital Audio Transmission commercials of sixty seconds or less in Approved by: (e.g., the delivery of any portion of a duration, or brief use during sporting or single track from a compact disc to one other public events; and Carla D. Hayden, listener). (ii) Does not contain an entire sound Librarian of Congress. (2) An instance in which a portion of recording and does not feature a [FR Doc. 2018–26922 Filed 12–18–18; 8:45 am] a sound recording is publicly performed particular sound recording of more than BILLING CODE 1410–72–P

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