Electronically Filed PUBLIC VERSION Docket: 19-CRB-0005-WR (2021-2025) Filing Date: 01/28/2020 10:51:09 PM EST
Before the UNITED STATES COPYRIGHT ROYALTY BOARD LIBRARY OF CONGRESS Washington, D.C.
In the Matter of:
Determination of Rates and Terms for Docket No. 19-CRB-0005-WR Digital Performance of Sound Recordings (2021-2025) and Making of Ephemeral Copies to Facilitate those Performances (Web V)
CORRECTED WRITTEN REBUTTAL STATEMENT OF THE NATIONAL ASSOCIATION OF BROADCASTERS Volume 1 of 5
Sarang Vijay Damle (D.C. Bar No. 1619619) [email protected] 555 Eleventh Street, NW, Suite 1000 Washington, D.C. 20004-1304 T: (202) 637-2200 F: (202) 637-2201 Joseph R. Wetzel (CA Bar No. 238008) [email protected] Andrew M. Gass (CA Bar No. 259694) [email protected] 505 Montgomery Street, Suite 2000 San Francisco, CA 94111-6538 T: (415) 391-0600 F: (415) 395-8095
Counsel for the National Association of Broadcasters
January 28, 2020 Table of Contents for the Corrected Written Rebuttal Statement of The National Association of Broadcasters
Volume 1: Documents and Witness Testimony
A. Introductory Memorandum to the Written Rebuttal Statement
B. Index of Rebuttal Witness Testimony
C. Rebuttal Index of Exhibits
D. Corrected Written Rebuttal Testimony of Gregory K. Leonard and Appendices
E. Written Rebuttal Testimony of John R. Hauser and Appendices
F. Written Rebuttal Testimony of Joseph Ritz
G. Confidentiality Declaration and Certification
H. Certificate of Service
Volume 2: NAB Exhibits 78-90
Volume 3: NAB Exhibits 91-105
Volume 4: NAB Exhibits 106-123
Volume 5: NAB Exhibits 124-146
NAB Written Rebuttal Statement Dkt. No. 19-CRB-0005-WR (2021-25) TAB A
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Before the UNITED STATES COPYRIGHT ROYALTY BOARD LIBRARY OF CONGRESS Washington, D.C.
In the Matter of:
Determination of Rates and Terms for Digital Performance of Sound Recordings Docket No. 19-CRB-0005-WR and Making of Ephemeral Copies to (2021-2025) Facilitate those Performances (Web V)
INTRODUCTORY MEMORANDUM TO THE WRITTEN REBUTTAL STATEMENT OF THE NATIONAL ASSOCIATION OF BROADCASTERS
The National Association of Broadcasters (“NAB”) presented evidence and expert opinion in its written direct case that digital simulcasts of over-the-air radio broadcasts are fundamentally different from other non-interactive services, and as a result, the Judges should establish a lower royalty rate for simulcasts. It should not have come as a surprise to SoundExchange that NAB would present such a case; NAB proposed just such a differential in Web IV, and SoundExchange’s own members have entered into numerous direct licenses applying materially different economic terms to simulcasts than to custom radio offerings. SoundExchange had every opportunity in its written direct case to demonstrate why simulcast transmissions should be treated the same as custom radio transmissions, or to address simulcasts at all.1 Instead, SoundExchange’s written direct case ignored completely the important distinctions between simulcasts and other non- interactive services. SoundExchange’s entire direct case simply assumes that simulcasters and
1 As noted in the NAB’s written direct case, although there are some non-custom, non- simulcast streaming services in the marketplace, they form a fairly small share of the market. See Written Direct Testimony of Gregory K. Leonard, ¶ 35. 1 NAB Written Rebuttal Statement Dkt. No. 19-CRB-0005-WR (2021-25)
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custom radio services occupy the same market and that consumers view them interchangeably.
But all of the available evidence demonstrates otherwise.
Based on the record to date, NAB has established that a separate, lower rate for simulcasts
is appropriate. In virtually every agreement between record labels and services that offer both
simulcasts and custom radio, the labels have agreed to license simulcasts at a substantially lower
rate than custom radio. So too for other music license agreements, such as those executed by
“performing rights organizations” like ASCAP and BMI. Moreover, NAB conducted a consumer
survey that shows that, if simulcasts were unavailable, almost a third of simulcast listeners would
switch to over-the-air broadcasts and not to any royalty-generating service. Using these survey
results, NAB’s economic expert Dr. Gregory Leonard performed an opportunity cost analysis that
shows that, in a hypothetical competitive marketplace, willing buyers and willing sellers of
licenses to stream sound recordings would agree to rates for simulcasts far below the current
statutory rate. Because the plurality of simulcast listeners would switch to over-the-air broadcasts
if they could not listen to simulcasts, sellers would recognize that the cost of not doing a deal
would be a substantial loss of accretive revenue, resulting in a lower royalty rate. This result makes sense: as NAB’s fact witnesses explained, people listen to simulcasts for reasons that are very different from the reasons they listen to music-centered services, including the on-air personalities, content about local events and emergencies, and human connection.
Nothing in SoundExchange’s written direct case is contrary to—or even addresses—any of these points. Indeed, without any support for doing so, SoundExchange lumps together simulcast and custom radio and proposes a single higher royalty rate for all non-interactive services. That rate is based on Dr. Robert Willig’s opportunity cost calculations and Mr. Jonathan
Orszag’s benchmarking analysis. Neither expert provides any reason that simulcasts and custom
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radio services should pay the same royalty rate, and both reports suffer from serious flaws that
inappropriately inflate SoundExchange’s rate proposal. To make matters worse, one of
SoundExchange’s core arguments for a rate increase is the alleged convergence between custom
radio services and interactive services—a rationale with no application whatsoever to simulcasts.
Dr. Willig’s opportunity cost calculations are unreliable because they are based on a flawed
consumer survey conducted by Professor Gal Zauberman, which purports to determine how
listeners of “streaming radio services” would listen to music if those “streaming radio services”
were no longer available. As an initial matter, this survey sheds no light at all on the switching behavior of simulcast listeners in particular, since the switching hypothetical asked respondents to
imagine that both simulcasts and custom radio were no longer available. Moreover, as NAB’s
survey expert Dr. John Hauser explains, flaws in the design of Professor Zauberman’s survey lead
to overestimates of switching to new, paid music subscriptions. For example, if a respondent
indicated that he or she had not listened to an existing paid on-demand streaming service in the
last thirty days, the respondent was only given the option to subscribe to a paid on-demand service;
there was no option to switch to the respondent’s existing paid on-demand service, even though
there are many reasons why someone might not have listened to (or remembered listening to) his
or her existing paid service in the prior thirty days. Likewise, the switching question—which
asked respondents which music-listening options they would choose—improperly encouraged
respondents to select music over non-music activities. In addition, the survey failed to distinguish between making new purchases of physical or digital records, and listening to an existing physical
or digital music collection. Finally, a basic flaw in the survey’s design means that the survey
cannot accurately measure how listeners would allocate their time across substitute options. Any
one of these flaws, standing alone, would render Professor Zauberman’s survey an unreliable tool
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to estimate switching to royalty-generating activities. Taken together, these flaws are so serious
that the survey should be ignored in its entirety.
Moreover, as Dr. Leonard explains, the flaws in Professor Zauberman’s survey infect
Dr. Willig’s opportunity cost calculations, and therefore his Shapley Value and Nash-in-Nash
analyses. By assuming that any respondent who did not report listening to a subscription service
in the prior thirty days is not already a subscriber and would pay a new subscription fee in the
absence of non-subscription non-interactive services, Dr. Willig overstates the opportunity cost.
Similarly, Dr. Willig inflates the opportunity cost by assuming that each respondent who said he
or she would switch to a CD or digital music collection would purchase new CDs or digital music rather than listen to an existing collection. Further, Dr. Willig implausibly assumes that, where a respondent indicated he or she would switch to more than one subscription service, that respondent would actually subscribe to multiple services instead of just one—again resulting in a magnified opportunity cost. Finally, even setting aside the problems with Dr. Willig’s opportunity cost inputs, his Shapley Value and Nash-in-Nash frameworks are not specific to simulcast, offer no justification for using Pandora’s financials as a proxy for simulcasters, and make a number of improper simplifying assumptions that may result in an overstated royalty calculation.
Mr. Orszag’s benchmarking analysis is an equally unsound basis for SoundExchange’s proposed rate. As a threshold matter, Mr. Orszag entirely ignores the most relevant non-interactive benchmarks: iHeartMedia Inc.’s (“iHeart”) renewed direct deals with independent record labels.
As Dr. Leonard explained in his Written Direct Testimony, direct licenses that have been renewed with the bilateral assent of both the buyer (the radio station) and the seller (the record label) are the best evidence of a willing-buyer willing-seller transaction at the effective per-play royalty rate that predated the renewal. Because of the complexity of the financial terms of sound recording
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license agreements, when they initially agree to a license, the radio station and the record label can only predict how those terms will play out. But once that license is up for renewal, the radio station and the record label know the actual financial performance of the deal. If the deal is renewed, both parties must have deemed it beneficial, both ex post as well as ex ante. Dr. Leonard thus relies for his benchmarking analysis on the fifteen instances in which independent record labels that originally entered into direct deals with iHeart have chosen to renew their agreements. Mr. Orszag overlooks these agreements completely.
Instead, Mr. Orszag bases his proposed royalty rate on the effective royalty rates as a percentage of revenue paid by subscription interactive services. He claims that subscription interactive rates are appropriate benchmarks because the functionality between interactive and non-interactive services has converged, particularly with respect to subscribers’ use of playlists.
But this alleged convergence has zero relevance to simulcasts, which do not allow users to have any control over what they hear. Indeed, simulcasts provide the least amount of interactivity of any non-interactive service, and cannot offer the core feature (and primary driver of demand) of an interactive service: the ability to listen to any song in the service’s library at any time.
Moreover, Mr. Orszag’s benchmark agreements are the product of the undisputed market power of the major record labels, yet his rate proposal fails to adjust for that power. Mr. Orszag admits—as he must, given the deposition testimony of Warner and Universal witnesses—that the major record labels are “must-haves” for the interactive services, at least in the long term. Indeed, nothing has changed since the Judges’ consistent findings in Web IV, SDARS III, and
Phonorecords III that the majors have complementary oligopoly power: an interactive service still needs the full catalog of each major to be successful; an interactive service cannot induce price
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competition by steering; and there is no evidence of price competition among the major labels to be included in the libraries of interactive services.
Nonetheless, Mr. Orszag claims that the interactive services have recently gained bargaining power that offsets the major labels’ complementary oligopoly power. He relies in
substantial part on the alleged ability of the interactive services to steer by placing songs on playlists or in other prominent locations on the service. But he ignores [
. In addition, the evidence developed in discovery contradicts Mr. Orszag’s
claim that .
For example, Universal’s Aaron Harrison testified that
Indeed, both publicly available materials and documents produced by the labels establish that the interactive services are
engaged in intense competition with one another for end users, which weakens their bargaining power in negotiations with the majors. The substitutability of Spotify and Apple Music, and thus
the likelihood that a user unsatisfied with one service could simply switch to the other, make it
imperative that the services continue to offer the core functionality of on-demand access to all
major content and maintain the longstanding $9.99 per month price point while offering discounted
family and student plans. Accordingly, if the Judges rely on the interactive benchmarks (which
they should not, for all the reasons explained in NAB’s submission), they must be adjusted for the
complementary oligopoly power of the major record labels.
Finally, SoundExchange’s proposed changes to the minimum fee and audit-related terms
of the statutory license are unworkable. With respect to minimum fees, Dr. Leonard explains why
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SoundExchange has not offered evidence sufficient to support the doubling it proposes. With respect to audits, iHeart’s Joe Ritz discusses how an audit is a complicated, detailed, and sometimes contentious process. Auditors frequently seek extensive raw data and related information that is several years old, requiring the licensee to task engineers, finance team members, and legal personnel with piecing together and interpreting data from multiple systems created by employees no longer working at the company. It simply is not possible to respond to every data request within sixty days, and allowing audits of multiple time periods in the same year—especially by an auditor that is not independent—would only slow the process down. Not surprisingly, SoundExchange’s proposals are inconsistent with the audit provisions of license agreements reached in the market.
Summary of the Written Rebuttal Testimony of NAB’s Witnesses
NAB’s Written Rebuttal Statement includes testimony from the following expert and fact witnesses.
Expert Witnesses
Dr. Gregory K. Leonard is an economist and Vice President at Charles River Associates.
In his Written Direct Testimony, Dr. Leonard explained that simulcast is differentiated from other non-subscription non-interactive services (such as custom radio) in economically important ways that dictate a lower per-play royalty rate for simulcasts. Further, Dr. Leonard reviewed the available direct license agreements and determined that iHeart’s renewed licenses with independent record labels provide a useful benchmark for both (i) the need for separate rates for simulcast and custom radio and (ii) what those rates should be. Dr. Leonard’s benchmarking analysis demonstrated that competitive rates for simulcasts and custom radio would fall somewhere between [ ] and [ ], and [ ] and [ ], respectively.
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Additionally, Dr. Leonard used consumer survey data provided by Dr. John Hauser (discussed below) to conduct an opportunity cost analysis to determine the net loss in royalties a label would
expect from licensing simulcasts. Using that approach, Dr. Leonard calculated the opportunity
cost of licensing simulcasts, and thus the appropriate per-play royalty rate for simulcasts, as falling
somewhere between $0.00065 and $0.00108.
Dr. Leonard submits Written Rebuttal Testimony in response to the Written Direct
Testimony of Dr. Robert Willig, Mr. Jonathan Orszag, and Dr. Catherine Tucker. Dr. Leonard
explains that SoundExchange’s experts assume—with no justification—that the royalty for
simulcast and the royalty for custom radio should be the same, despite economically significant
distinctions between those services. He further explains that Dr. Willig’s royalty proposal is
flawed because his improper use of SoundExchange’s consumer survey results in overstated
opportunity cost calculations. Dr. Leonard addresses various problems with Mr. Orszag’s benchmarking analysis, including that (i) he ignores non-interactive benchmarks that are more
comparable than his interactive benchmarks; (ii) his subscription interactive benchmark is not
appropriate for simulcasts, which have not “converged” with interactive services; and (iii) his
adjustment for interactivity based on ratio equivalency is insufficient. Moreover, Dr. Leonard
explains that Mr. Orszag is wrong in arguing that the complementary oligopoly problem posed by
the major sound recording companies no longer exists: Mr. Orszag admits that the major record
labels are “must-haves”; the interactive services still have no ability to steer; [
]; and the interactive services are engaged in intense competition for end
users that weakens their bargaining power vis-à-vis the major record labels. Dr. Leonard also
rebuts Dr. Tucker’s claim that the ability to pay higher rates somehow justifies higher rates and
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explains that SoundExchange’s proposed increase in the minimum fee is untethered from its
incremental administrative costs. Finally, in rebuttal to SoundExchange’s unitary rate proposal,
Dr. Leonard provides an update to his opinions on workably competitive royalty rates based on
the CRB’s recent announcement of the 2020 webcasting rates, and discusses additional evidence
of the promotional value of radio.
Dr. John Hauser is the Kirin Professor of Marketing at the Massachusetts Institute of
Technology (“MIT”) Sloan School of Management. He is an expert in survey design, demand
forecasting, product confusion, product feature valuation, and measurement of consumer preferences, beliefs, and willingness to pay. In his Written Direct Testimony, Dr. Hauser
conducted a consumer survey to measure what consumers would do in place of listening to Internet
simulcasts of terrestrial commercial radio if such simulcasts were not available. The survey also
determined consumers’ listening behavior with respect to Internet simulcasts of terrestrial
commercial radio including (1) how much they listen, (2) what content they listen to, and (3) the
importance of that content to consumers. The results of Dr. Hauser’s survey confirm that non-
music aspects of NAB members’ simulcasts drive listening behavior, and show that simulcast
listeners tend not to be people who would otherwise listen to content that would result in higher
royalties for record companies.
On behalf of NAB and Sirius XM/Pandora, Dr. Hauser submits Written Rebuttal
Testimony in response to the Written Direct Testimony of Professor Gal Zauberman, who designed
and administered a survey attempting to measure the music-listening behavior of listeners of music
streaming services and to determine how those listeners would listen to music if those music
streaming services were not available. In his rebuttal testimony, Dr. Hauser explains why
Professor Zauberman’s survey data cannot be used to reliably estimate such switching behavior,
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particularly with respect to simulcast listeners. Dr. Hauser also explains that flaws in the design
of Professor Zauberman’s survey likely lead to overestimates of switching to new, paid music
subscriptions. Further, he shows that the design of Professor Zauberman’s survey prevents it from
reliably estimating the switching behavior of listeners of Internet simulcasts of terrestrial
commercial radio and listeners of Sirius XM over the Internet in particular. As a result of the flaws
in the design of Professor Zauberman’s survey, and other differences between Dr. Hauser’s survey
and Professor Zauberman’s survey, only Dr. Hauser’s survey can be used to measure the switching behavior of listeners to Internet simulcasts of terrestrial radio.
Fact Witness
Joseph Ritz is Vice President, Finance, Digital Networks at iHeart. He submits Written
Rebuttal Testimony in response to SoundExchange’s proposed changes to the audit-related terms
of the statutory license. Mr. Ritz explains that, contrary to the testimony of SoundExchange’s
Chief Operating Officer Jonathan Bender, iHeart has strong business incentives to ensure its
royalty payments are timely and accurate. He discusses how iHeart takes its sound recording
royalty obligations seriously in order to foster and maintain its valued relationships with artists
and direct deal partners. He also explains the burdens that audits typically impose on iHeart,
especially when they require iHeart personnel to take substantial time away from their jobs to
reconstruct extensive raw data from many years prior. In particular, Mr. Ritz describes iHeart’s
ongoing 2011-2013 SoundExchange audit and highlights several logistical issues and delays on
the part of the auditors, including multiple requests for redelivery of already available files and a
15-month delay in receiving the draft audit report. Mr. Ritz explains why audits of multiple time periods in the same year, strict deadlines for responding to auditor requests and cost-shifting for
failure to comply, and SoundExchange’s participation in the audit are unworkable proposals. He
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testifies that these proposed changes will only lead to longer delays and more costs for both the licensee and SoundExchange. Lastly, Mr. Ritz supports NAB’s proposal to amend the interest rate for underpayments to the rate recently adopted in SDARS III.
Respectfully submitted,
LATHAM & WATKINS LLP
Sarang Vijay Damle (D.C. Bar No. 1619619) [email protected] 555 Eleventh Street, NW, Suite 1000 Washington, D.C. 20004-1304 T: (202) 637-2200 F: (202) 637-2201
Joseph R. Wetzel (CA Bar No. 238008) [email protected] Andrew M. Gass (CA Bar No. 259694) [email protected] 505 Montgomery Street, Suite 2000 San Francisco, CA 94111-6538 T: (415) 391-0600 F: (415) 395-8095
Counsel for the National Association of Broadcasters
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TAB B
Index of Rebuttal Witness Testimony
Tab Witness Title D Gregory K. Leonard, Ph.D. Vice President, Charles River Associates
John R. Hauser, Sc.D. Kirin Professor of Marketing, Massachusetts E Institute of Technology Sloan School of Management
Joseph Ritz Vice President, Finance, Digital Networks, F iHeartMedia, Inc.
NAB Written Rebuttal Statement Dkt. No. 19-CRB-0005-WR (2021-25)
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Before the UNITED STATES COPYRIGHT ROYALTY BOARD LIBRARY OF CONGRESS Washington, D.C.
In the Matter of:
Determination of Rates and Terms for Docket No. 19-CRB-0005-WR Digital Performance of Sound Recordings (2021-2025) and Making of Ephemeral Copies to Facilitate those Performances (Web V)
CORRECTED EXPERT REBUTTAL WITNESS STATEMENT OF DR. GREGORY K. LEONARD
January 17, 2020
NAB Written Rebuttal Statement Dkt. No. 19-CRB-0005-WR (2021-25)
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TABLE OF CONTENTS
I. QUALIFICATIONS ...... 1
II. ASSIGNMENT AND SUMMARY OF OPINIONS ...... 1
III. SOUNDEXCHANGE’S EXPERTS DID NO ANALYSIS OF THE APPROPRIATE ROYALTY FOR SIMULCAST, BUT INSTEAD ASSUMED (WITH NO ATTEMPT AT JUSTIFICATION) THAT THE ROYALTY FOR SIMULCAST SHOULD BE THE SAME AS THAT FOR CUSTOM RADIO ...... 3
IV. DR. WILLIG’S ROYALTY PROPOSAL IS FLAWED ...... 7
A. SoundExchange’s Consumer Survey Provides an Unreliable Basis for Calculating the Opportunity Cost of Licensing Simulcast ...... 7
B. Dr. Willig’s Flawed Use of the SoundExchange Survey Results in Overstated Opportunity Cost Calculations ...... 11
C. The “Share of Ear” Survey Also Provides an Unreliable Basis for Dr. Willig’s Opportunity Cost Calculations ...... 17
D. Dr. Willig’s Use of the Shapley Value and Nash-in-Nash Frameworks Is Flawed ...... 22
V. MR. ORSZAG’S ROYALTY PROPOSAL IS FLAWED ...... 26
A. Mr. Orszag’s Subscription Interactive Streaming Services Benchmark Is Not Appropriate for Non-Subscription Non-Interactive Streaming Services ...... 26
B. Mr. Orszag’s Adjustment for Interactivity Based on Ratio Equivalency Is Insufficient ...... 35
C. Mr. Orszag’s Claim That the Complementary Oligopoly Problem No Longer Exists Is Incorrect ...... 40
1. The Major Labels Still Have Complementary Oligopoly Power ...... 41
2. The Interactive Services Have No Ability to Steer ...... 43
3. The Evidence Shows the Major Labels Recognized Their Strong Bargaining Positions Vis-à-vis the Services ...... 50
4. The Interactive Services Are Engaged in Intense Competition With Each Other, Which Weakens Their Bargaining Positions Vis-à-vis the Major Labels ...... 51 i NAB Written Rebuttal Statement Dkt. No. 19-CRB-0005-WR (2021-25)
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VI. DR. TUCKER’S OPINIONS DO NOT SUPPORT A HIGHER ROYALTY RATE FOR SIMULCAST ...... 63
VII. SOUNDEXCHANGE HAS FAILED TO DEMONSTRATE THAT THE MINIMUM FEE SHOULD BE INCREASED ...... 66
VIII. UPDATED SIMULCAST ROYALTY RATE BASED ON AN OPPORTUNITY COST FRAMEWORK ...... 68
IX. PROMOTIONAL VALUE OF RADIO ...... 70
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I. QUALIFICATIONS
1. My qualifications are discussed in my opening report.
II. ASSIGNMENT AND SUMMARY OF OPINIONS
2. I have been asked by counsel for the National Association of Broadcasters to review and respond to the opinions expressed by SoundExchange’s witnesses in their written direct testimony. My opinions are based on the information and data cited herein. I reserve the right to update my analysis and opinions if more information and data become available through discovery. I also reserve the right to respond to any further opinions and analysis offered by other experts in this case.
3. Based on my analysis, as described in greater detail below, I have reached the following opinions:
• SoundExchange’s experts did not perform any analysis of simulcast. Indeed, simulcast is barely mentioned in their reports. Instead, they calculated a royalty for custom radio and then assume, without justification, that this royalty should also apply to simulcast. • A separate analysis for simulcast is necessary because simulcast is an economically distinct service from custom radio and because the distinction has been recognized in market transactions that [ ]. • The SoundExchange user survey and Dr. Willig’s use of the survey results are unreliable for the purpose of analyzing the royalty for simulcast because: o By virtue of its design, the survey does not measure how simulcast users would respond to the absence of simulcast. o The survey shows different diversion patterns than the Hauser survey, which is designed to study simulcast user behavior. o The survey does not provide a reliable means to identify existing subscribers to paid services or to identify diversion to CDs/Vinyl/Digital Downloads. o The survey shows diversions of questionably large size to alternatives requiring a payment, suggesting the hypothetical nature of the exercise may have induced an overstatement of willingness to make a payment. o Dr. Willig assumes that respondents who chose multiple paid alternatives in an initial question would actually pay for each of those alternatives, despite many
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respondents who, in response to a follow-up question regarding time allocation across their indicated alternatives, assigned zero time to one or more paid alternatives they had indicated. • Dr. Willig’s royalty calculations based on the “share of ear” survey are flawed because: o Dr. Willig incorrectly lumps simulcast in with other non-interactive services. o The “share of ear” survey provides an unreliable basis for predicting how simulcast users would substitute to other activities. o Dr. Willig assumes that all plays diverted to subscription services and CD/Vinyl/Digital Downloads in the hypothetical scenario would represent an opportunity cost to SoundExchange. However, this assumption ignores that some users already have subscriptions and already own CD/Vinyl/Digital Downloads. Plays diverted to these options would not represent an opportunity cost to SoundExchange. • Mr. Orszag’s use of subscription interactive services as a benchmark for non-subscription non-interactive services is invalid, particularly for simulcast. As a general matter, subscription interactive services have not “converged” with non-subscription non- interactive services, as Mr. Orszag claims, and subscription interactive services have not “converged” at all with simulcast—which is the least interactive of the non-interactive services—a point that Mr. Orszag did not even address. • Mr. Orszag’s claim that the subscription interactive services now have increased bargaining power that offsets the major labels’ complementary oligopoly is incorrect. o The major labels have had and continue to have complementary oligopoly power with respect to the subscription interactive services, as was recognized by the judges in Web IV and Phonorecords III and the Department of Justice in the Phonorecords III appeal. o The subscription interactive services cannot steer because on-demand functionality is central to their product offering (i.e., each major label is a “must have”), “lean-back” listening that allows for steering is limited, and [ ]. o Indeed, the major labels’ ability to [ ] consistently throughout time is a sign of their continued strong relative bargaining power. o The subscription interactive services are close substitutes from the point of view of users and compete intensely with each other for users. There are no substantial barriers to entry or expansion. Accordingly, downstream competition is intense. This downstream competition flows upstream, limiting services’ bargaining power in upstream negotiations with labels, contrary to Mr. Orszag’s claim. o Mr. Orszag notes that and asserts that this is a sign that the relative bargaining power of the services has increased. However, basic economic principles demonstrate that the observed [ ] is consistent with the interactive services having little bargaining
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power, given the observed [ ]. o Mr. Orszag also ignores that [
], contrary to his claim of increased interactive service bargaining power. • SoundExchange has failed to justify an increase in the minimum royalty fee. • Additional evidence further supports the proposition that radio, and by association simulcast, have greater promotional value to the labels than other services.
III. SOUNDEXCHANGE’S EXPERTS DID NO ANALYSIS OF THE APPROPRIATE ROYALTY FOR SIMULCAST, BUT INSTEAD ASSUMED (WITH NO ATTEMPT AT JUSTIFICATION) THAT THE ROYALTY FOR SIMULCAST SHOULD BE THE SAME AS THAT FOR CUSTOM RADIO
4. Neither Dr. Willig nor Mr. Orszag did any economic analysis of simulcast. Instead, they lump all non-subscription non-interactive services together and treat them as a uniform product category. But their royalty calculations effectively are for custom radio. They apparently are contending that the royalty for custom radio should apply to simulcast as well, although they never make this explicit, let alone provide a justification for such an assertion. Such a contention is inconsistent with the documents, deposition testimony, and survey evidence that suggest that labels, services, and consumers view simulcast as economically distinct from other non- interactive services, particularly with respect to the extent of diversion from interactive services and CDs/digital downloads.
5. Dr. Willig bases his opportunity cost calculations on a survey conducted by Dr. Gal
Zauberman that asks the survey respondents about (i) “what music-listening options respondents currently use”; (ii) “what replacement music-listening options they would choose if their paid or free Streaming Radio services were no longer available”; and, for a particular subset of respondents, (iii) “how they would allocate their replacement time among these options.”1 The
1 Introductory Memorandum to the Written Direct Statement of SoundExchange, Inc., American Federation of Musicians of the United States and Canada, Screen Actors Guild-American Federation of Television and Radio 3 NAB Written Rebuttal Statement Dkt. No. 19-CRB-0005-WR (2021-25)
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survey instrument did not allow respondents to provide different answers concerning their likely
behavior in the absence of simulcast versus the absence of other “free Streaming Radio”
services. As discussed further below, the evidence suggests that survey respondents do, in fact,
provide different answers for simulcast and custom radio, if allowed by the survey instrument to
do so.
6. Dr. Willig based his Shapley Value and Nash-in-Nash calculations for non-subscription
non-interactive services on financial information from Pandora.2 He did not do a version of the
calculations based on the financial information of any simulcaster, nor did he demonstrate that
the financial situation for any simulcaster is the same as that of Pandora.
7. Mr. Orszag uses subscription interactive service royalties as benchmarks for non-
interactive service royalties.3 In doing so, he makes no distinction between simulcast and custom radio. In attempting to justify subscription interactive services as a valid benchmark for non- interactive services, Mr. Orszag’s discussion is almost entirely directed at custom radio. Indeed,
many of his claimed justifications do not even apply to simulcast. For example, Mr. Orszag
claims that the subscription interactive benchmarks include the same sellers (i.e., record
companies) and similar buyers; however, in his application of ratio equivalency to non-
subscription non-interactive streaming services Mr. Orszag uses effective revenue per play
information for Pandora’s and iHeart’s ad-supported custom radio services and does not use any
information pertaining to simulcast. Thus, the “buyers” in his benchmark analysis are
Artists, American Association of Independent Music, Sony Music Entertainment, UMG Recordings, Inc., Warner Music Group Corp., and Jagjaguwar Inc., p. 10; see generally Written Direct Testimony of Gal Zauberman, September 20, 2019 (“Zauberman Report”), Appendix D. 2 Written Direct Testimony of Robert Willig, September 23, 2019 (“Willig Report”), p. 20-21, 24-26. 3 See Sections III and IV of the Written Direct Testimony of Jonathan Orszag, September 23, 2019 (“Orszag Report”).
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exclusively custom radio services and do not include simulcasters. Additionally, Mr. Orszag claims that the subscription interactive benchmarks are relevant because of the convergence between interactive services’ and non-interactive services’ functionality over time, and that this alleged convergence stems primarily from the growing use of playlists by interactive service subscribers. However, none of Mr. Orszag’s supposed evidence of increased “lean-back listening” by subscribers of interactive streaming services applies to simulcast at all, and Mr.
Orszag makes no attempt to establish convergence between interactive services’ and simulcasting’s functionality over time. Nor could he, because there is no such convergence to speak of.
8. In short, neither Dr. Willig nor Mr. Orszag has performed any actual analysis of simulcast. Indeed, the word “simulcast” appears in their reports a total of two times combined.
Rather than analyzing simulcast, Dr. Willig and Mr. Orszag assume that the conclusions they reach based on what are essentially analyses of custom radio apply to simulcast as well and that therefore the royalty for simulcast should be equal to the royalty for custom radio. However, they provide no justification for this assumption.
9. As I discussed in my opening report, this assumption is invalid because simulcast differs in economically important respects from custom radio.4 For example, Dr. Willig argues that ad- supported non-interactive services should be viewed as a part of a service’s broader business model in which the ad-supported service is used as a way to funnel users into the service’s more profitable subscription services.5 However, it is not even possible for many simulcasters to use
4 Written Direct Testimony of Dr. Gregory K. Leonard, September 23, 2019 (“Leonard Report”), p. 20. 5 Willig Report, pp. 27-31.
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such a business model, as they have no subscription service to which to funnel users.6 Similarly,
because simulcast users have no ability to influence what songs they hear on a given simulcast, i.e., simulcast has less interactivity than custom radio, simulcast is more distant from interactive services in the product space than is custom radio. As I explained in my opening report, simulcast is thus substantially differentiated from custom radio and it is economically inappropriate to treat simulcast as the same as or equivalent to custom radio.
10. The assumption of Dr. Willig and Mr. Orszag that the same royalty rate should apply to simulcast and custom radio is contradicted by actual market outcomes. In my opening report, I discussed music copyright license agreements, negotiated between willing buyers and willing sellers, that specify [ ], consistent with the economic differences between the services.7 Furthermore, the concept of different rates for
simulcast than for custom radio goes back to the beginning of the Web proceedings. Before the first statutory rate was set, the original benchmark included a differentiated per-play rate of
$0.0007 for simulcast.8 Converting the $0.0007 to 2019 dollars using the Consumer Price Index
results in a per-play royalty rate of $0.0010 for simulcasting.9 This figure is roughly consistent
with the NAB’s proposed rate for simulcasting and well below the current rate for simulcasting.
6 In other contexts (e.g., Spotify), labels have sought to encourage funneling of listeners to higher-royalty services. Given the zero royalty on plays on terrestrial broadcasts, the labels would benefit from a funneling of listeners from a terrestrial broadcast to the corresponding simulcast. Of course, one way to encourage services to promote such a shift is a lower royalty on plays on simulcast. ] See, e.g., NAB Ex. 78 (Wheeler Dep.), pp. 54-56. 7 Leonard Report, pp. 31-55. 8 Web I, pp. 74-75, 88. 9 Calculated using the Consumer Price Index from “Consumer Price Index: Total All Items for the United States, Growth Rate Same Period Previous Year, Annual, Not Seasonally Adjusted,” Federal Reserve Bank of St. Louis.
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11. In short, neither Dr. Willig nor Mr. Orszag has provided any reliable analysis of what the
royalty rate for simulcast should be. They have instead assumed, without providing any
justification and contrary to actual willing-buyer willing-seller (“WBWS”) agreements, that the
royalty rate for simulcast should be the same as that for custom radio.
IV. DR. WILLIG’S ROYALTY PROPOSAL IS FLAWED
A. SoundExchange’s Consumer Survey Provides an Unreliable Basis for Calculating the Opportunity Cost of Licensing Simulcast
12. A key input into Dr. Willig’s opportunity cost calculations is a consumer survey
commissioned by SoundExchange.10 Respondents to the survey were asked a screening question
about the entertainment services that they use. Those who indicated they used a music streaming
service continued the survey and were asked which music-listening options they had used in the
past 30 days.11 Next, each respondent was randomly assigned to either the scenario where (1) free streaming radio was no longer available or (2) paid streaming radio was no longer available.
If the service assumed to be no longer available in the scenario to which the respondent was assigned was a service the respondent had previously indicated he or she had used within the past
30 days, the respondent moved forward in the survey.12 The survey then directed respondents to
select how they would fill their music-listening time in the assigned scenario. The options listed
were paid on-demand streaming; free on-demand streaming; paid streaming radio service (in the
no free scenario); free streaming radio service (in the no paid scenario); satellite receiver in the
car; AM/FM radio on a traditional radio receiver; CDs, vinyl records, or MP3 files; and do
10 Willig Report, pp. 21-22. 11 Zauberman Report, pp. 13-14, 16. 12 Zauberman Report, pp. 14-15.
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something other than listen to music.13 A subset of respondents was further asked how they would allocate their time among the options they had picked.14
13. I understand that NAB’s survey expert Dr. John Hauser is providing a critique of the
SoundExchange survey from a survey perspective. Here, I only discuss the economic
implications of the survey’s flaws.
14. First, as explained in the Hauser Rebuttal Report, the SoundExchange survey is biased
against respondents expressing preferences for non-music alternatives, as Q2 asks respondents
“which of the following music-listening option(s)” they would use as substitutes for listening to music with a free (or paid, depending on the scenario) streaming radio service.15 This has the effect of overstating the opportunity cost that Dr. Willig ultimately calculates because non-music alternatives do not generate any royalties for SoundExchange. In contrast, the Hauser survey listed specific non-music alternatives such as “non-music digital content” and “print or online content.”16 Absent the survey’s bias, more users would have expressed a preference for non-
music alternatives, thereby resulting in a lower opportunity cost.
15. Second, as discussed above, the SoundExchange survey was not separately implemented
for simulcast. Instead, all non-subscription non-interactive services were lumped together.
Specifically, the SoundExchange survey asked respondents to “Imagine that all FREE [PAID]
streaming radio services were no longer available”; it did not ask respondents to imagine that
only simulcasts were no longer available.17 Even if the survey were otherwise free of flaws, it
13 Zauberman Report, pp. 16-19. 14 Zauberman Report, pp. 19-22. 15 Written Rebuttal Testimony of John R. Hauser, January 10, 2020 (“Hauser Rebuttal Report”), p. 3. 16 Written Direct Testimony of John R. Hauser, September 23, 2019 (“Hauser Report”), p. R-2. 17 Zauberman Report, pp. 16-17.
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would not be appropriate to apply the SoundExchange survey results to simulcast unless the
distribution of survey responses would have been the same for a simulcast-only version of the
survey. A comparison of the SoundExchange survey results (all non-subscription non-interactive
services lumped together) to the Hauser survey results (simulcast only) provides a rough test of
whether the distribution of survey responses is the same for simulcast as for other non-
subscription non-interactive services.18 Table 1 below compares the diversion ratios from non- subscription non-interactive services to other options derived from the results of the
SoundExchange and Hauser surveys.19 There are substantial differences between the two sets of
diversion ratios. Specifically, the SoundExchange survey produced uniformly higher diversion ratios for royalty-bearing alternatives than did the Hauser survey. This difference suggests that simulcast users would have a lower opportunity cost to SoundExchange than would users of other non-subscription non-interactive services.20 With a lower opportunity cost for simulcast,
all else equal, Dr. Willig’s Shapley Value and Nash-in-Nash calculations would have yielded a
lower royalty for simulcast than, e.g., custom radio.
18 It is a “rough” test because the SoundExchange survey is flawed in other ways that could have led to biased and unreliable results. 19 Note that the Hauser survey asked respondents about a hypothetical scenario which did not include simulcasting but did include custom radio. This means that the respondents were allowed to “switch” to custom radio in the absence of simulcast in the Hauser survey, but not in the SoundExchange survey. To account for this difference in posed hypothetical scenarios, I have calculated the percentage of the subset of respondents who did not choose custom radio who said they would switch to each of the other alternatives. 20 Another possibility, of course, is that the flaws in the SoundExchange survey render it unreliable for any purpose.
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Table 1: SoundExchange and Hauser Survey Diversion Ratios
SoundExchange Hauser
Subscription On-Demand 9.1% 1.5% SiriusXM 5.5% 3.4% Ad-supported On-Demand 16.4% 10.3% CDs/Vinyl/Digital Downloads 14.8% 1.9%
16. One particularly notable difference between the two surveys is with respect to the diversion ratio from non-subscription non-interactive services (SoundExchange)/simulcast
(Hauser) to purchases of CDs/Vinyl/Digital Downloads. The SoundExchange survey finds a diversion ratio for this alternative of 14.8%, while the Hauser survey finds a diversion ratio of only 1.9%. The SoundExchange survey’s 14.8% figure is implausibly high given the sharp decline in purchases of CDs/Vinyl/Digital Downloads in recent years. From 2014-2018, the
RIAA reports that [
].22
Furthermore, Universal documents demonstrate [
23 Research from MusicWatch
21 NAB Ex. 79 (RIAA 2018 Year-End Music Industry Revenue Report) and NAB Ex. 80 (RIAA 2015 Year-End Industry Shipment and Revenue Statistics). Vinyl is classified as LP/EP and both CD and vinyl sales excludes singles. 22 NAB Ex. 79 (RIAA 2018 Year-End Music Industry Revenue Report) and NAB Ex. 80 (RIAA 2015 Year-End Industry Shipment and Revenue Statistics). 23 NAB Ex. 81 (SOUNDEX_W5_000046466) (Universal Music Group U.S. Recorded Music, 2012 – 2019 YTD Revenue Sources).
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demonstrates that [
].24 It is unlikely that such a large
percentage of simulcast users (for whom the service is zero-fee and who likely have relatively
low willingness to pay (“WTP”) for music) would switch to the small, declining, and costly
alternative of purchasing CDs/Vinyl/Digital Downloads in the absence of simulcast. Moreover,
the SoundExchange survey’s finding of a large diversion to CDs/Vinyl/Digital Downloads is
inconsistent with evidence in the record that shows that [
].25 The implausible results of the SoundExchange survey may be the result of having a
single response option for switching to CDs/Vinyl/Digital Downloads that the respondent
already owns or would purchase, as discussed in more detail below.
B. Dr. Willig’s Flawed Use of the SoundExchange Survey Results in Overstated Opportunity Cost Calculations
17. In incorporating the SoundExchange survey results into his calculations, Dr. Willig makes several flawed assumptions that result in an overstatement of his calculation of opportunity cost and, ultimately, the royalty.
18. First, Dr. Willig effectively identifies a survey respondent as a subscriber or non- subscriber to a given service depending on whether the respondent reported listening to the
service in the last 30 days.26 Any respondent who reported not listening to a subscription service in the last 30 days is assumed by Dr. Willig not to be a subscriber to that service. However, not
24 NAB Ex. 82 (SOUNDEX_W5_000045448) (Research Snapshot Alexa, Streaming & Social, May 2018), at SOUNDEX_W5_000045455. 25 NAB Ex. 83 (SOUNDEX_W5_000186861) ([ ]), at SOUNDEX_W5_000186861 and SOUNDEX_W5_000186883. 26 Willig Report, Appendix E, p. E-1.
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all subscribers of a service use the service within any given 30-day period. For example, in the
third quarter of 2018, Spotify had 5 million inactive premium subscribers, which is 6% of total
premium subscribers and up from 1% earlier the same year.27 As explained in the Hauser
Rebuttal Report, a respondent may not have used his or her subscription service in the past 30
days because the respondent instead listened to the option that the SoundExchange survey
instructed was no longer available, or for some other reason.28 Moreover, as discussed in the
Hauser Rebuttal Report, many respondents may not accurately recall the services they used in
the past 30 days.29 Thus, some of the survey respondents Dr. Willig has classified as non-
subscribers may in fact be subscribers. In that case, Dr. Willig overstates the opportunity cost
associated with such survey respondents, because he assumes they would pay a subscription fee
in the absence of non-subscription non-interactive services when in fact they had already paid the subscription fee.
19. Second, the SoundExchange survey asks each respondent to indicate which music- listening options he or she would use in the absence of non-subscription non-interactive services.30 Some of the survey respondents indicated they would use more than one subscription
service.31 Dr. Willig assumes that each such respondent would, in fact, subscribe to multiple
27 Inactive users are defined as users who did not listen to any music on Spotify in the last thirty days of a given quarter. See “1 Potentially Troubling Trend for Spotify,” The Motley Fool, November 6, 2018, https://www.fool.com/investing/2018/11/06/1-potentially-troubling-trend-for-spotify.aspx. Performing the same calculation from this article using data from Spotify’s SEC filings from October 2019, the number of inactive users has increased to around 6 million. See NAB Ex. 90 (Spotify Form 6-K, October 2019). 28 Hauser Rebuttal Report, p. 10-14. 29 Hauser Rebuttal Report, pp. 11-13. 30 Zauberman Report, pp. 16-17. In the case of the “no paid radio streaming” hypothetical, each respondent was asked to indicate which music-listening options he or she would use in the absence of subscription non- interactive services. 31 NAB Ex. 84 (SOUNDEX_W5_000044743) (Zauberman Survey Data)
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services, paying multiple subscription fees, rather than subscribing to just one.32 For example, one respondent identified on-demand streaming, satellite radio, and CDs/Vinyl/Digital
Downloads as alternatives that he or she would use in the absence of free streaming; Dr. Willig assumed that this respondent would actually purchase a new on-demand streaming subscription, purchase a new satellite radio subscription, and purchase new CDs/Vinyl/Digital Downloads to replace the free noninteractive service.33 It is questionable that every one of these respondents
(who have demonstrated a lower WTP for music34) would replace their zero-fee service with not just one, but multiple new for-fee services. In making this questionable assumption, Dr. Willig overstates the opportunity cost. More plausibly, respondents provided the set of potential activities they would consider, but in the event, many would not actually pay for multiple for-fee services.
20. Table 2 shows the percentages of respondents who said they used each alternative in the last 30 days and the percentages of respondents who would be using each alternative in the hypothetical world without ad-supported non-interactive services, according to the respondents’ answers.35
32 Willig Report, Appendix E. 33 See NAB Ex. 84 (SOUNDEX_W5_000044743) (Zauberman Survey Data), respondent with record number 2091. 34 Bain, retained as a consultant by UMG, concluded, consistent with the Judges’ previous findings, that [
NAB Ex. 83 (SOUNDEX_W5_000186861) at SOUNDEX_W5_000186880. Other user studies have found that [ ]. NAB Ex. 85 (Music Watch Annual Music Study 2018 RIAA from April 2019) (SOUNDEX_W5_000053019) at SOUNDEX_W5_000053071- SOUNDEX_W5_000053072. 35 Calculated using NAB Ex. 84 (SOUNDEX_W5_000044743) (Zauberman Survey Data). The percentages in the first column are calculated using data on respondents’ reported music-listening behavior in the previous 30 days. Listening in the hypothetical assumes that people (a) do what they did in the actual world, and (b) additionally do what they stated they would do in the absence of free non-interactive streaming. If a respondent was asked 13 NAB Written Rebuttal Statement Dkt. No. 19-CRB-0005-WR (2021-25)
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Table 2: SoundExchange Actual vs. Hypothetical Music Listening Last 30 Days Hypothetical Difference Paid On-Demand 34.0% 40.2% 6.3% Paid Noninteractive 23.0% 35.1% 12.1% Sirius XM 28.8% 32.6% 3.7% CDs, Vinyl Records, or MP3 Files 56.9% 68.4% 11.4%
Ad-Supported Noninteractive 100.0% n/a n/a Ad-Supported On-Demand 73.1% 84.6% 11.5% AM/FM Radio on a receiver 84.7% 89.0% 4.2%
The largest gain in respondents in the hypothetical scenario is in paid non-interactive services, with ad-supported on-demand services and CDs/Vinyl/MP3 approximately tied for second place.36 In total, the sum of gains across the paid alternatives is more than twice the sum of gains across the free alternatives. If the survey is to be believed, respondents are quite willing to incur additional expenses in the hypothetical scenario even though free services are available. There is further evidence of a large stated hypothetical willingness to make a payment. Of respondents with no listening to subscription services in the last 30 days, 14% stated they would add a subscription service category (i.e., paid on-demand, paid non-interactive, or Sirius XM) and, of these, a third (5%) stated they would add two or all three subscription service categories in response to the absence of free non-interactive services. Of respondents who reported to
how they would allocate their time between their indicated options, and they allocated zero time to an option, this option is not included in the calculations for the hypothetical. 36 Another anomaly in the SoundExchange survey results is that, as shown in Table 2, 59.9% of respondents indicated listening to CDs, Vinyl Records, or MP3 Files in the last 30 days. Other evidence suggests this figure is quite high. A study prepared for the RIAA found that [ ]. NAB Ex. 86 (SOUNDEX_W5_000187914) (Mid-Year Review with RIAA Septembers 2019) at SOUNDEX_W5_000187919.
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listening to two of the subscription service categories in the last 30 days, 19% stated that they
would add the third category in response to the absence of free non-interactive services. While
some greater willingness to make a payment might be expected given the (hypothetical)
elimination of the free non-interactive alternative (although this would be tempered by the
continued availability of free on-demand alternatives), the question is whether the observed
hypothetical stated willingness to make a payment is economically plausible. I find the
respondents’ stated willingness to make payments implausible, particularly given other evidence
that users of free services have low willingness to pay and given that the stated diversion to paid
alternatives outstrips diversion to free alternatives. The academic literature recognizes that the
hypothetical nature of the “payment” in this type of survey can lead respondents to overstate their true willingness to pay, as they do not actually have to make the payment that they say they
would make.37
21. Another notable result of the SoundExchange survey is that, of the subset of respondents
who were asked to allocate their time among the options they had picked, 37% of them said they
would spend zero additional time on at least one of the choices they had previously indicated.38
Indeed, of the 376 respondents who said they would turn to at least one paid alternative and were subsequently asked to allocate their time, 101 zeroed out one of the paid alternatives they had chosen previously. This demonstrates that when pressed to further think about their time, many of the respondents narrowed their choices and often eliminated a paid alternative. However, because this question was only asked to a subset of the respondents -- namely those who chose
37 See, e.g., F. Voelckner, “An Empirical Comparison of Methods for Measuring Consumers’ Willingness to Pay,” Marketing Letters, 2006; J. Murphy, et al., “A Meta-analysis of Hypothetical Bias in Stated Preference Valuation,” Environmental and Resource Economics, 2005. 38 Calculated using NAB Ex. 84 (SOUNDEX_W5_000044743) (Zauberman Survey Data).
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more than one option, and among those at least one free on-demand service39 -- it is not possible to observe the time allocation of anyone that picked more than one subscription service, but not a
free service. It is likely that some of the respondents who were not asked about their time
allocation and who said they would “switch” to more than one subscription service would have
allocated zero time to at least one of the subscriptions if also pressed. To the extent this is the case, Dr. Willig’s opportunity cost is again overstated.
22. Third, a sizable percentage of the SoundExchange survey respondents said that they would listen to CDs/Vinyl/Digital Downloads in the absence of non-subscription non-interactive services.40 However, the survey did not ask respondents to specify whether the
CDs/Vinyl/Digital Downloads to which they would listen would be from their existing collection
or new purchases; instead, this listening option was described as “Listen to CDs, vinyl records,
or MP3 files that you currently own or would purchase.”41 The distinction is important because
a simulcast user who states he or she would listen more to their existing CD/Vinyl/Digital
Download collection in the absence of simulcast would not represent an opportunity cost to
SoundExchange. Dr. Willig, however, assumes that each respondent who said that he or she
would switch to CDs/Vinyl/Digital Downloads and who said that he or she had not listened to
CDs in the last 30 days would purchase new CDs/Vinyl/Digital Downloads rather than listen to
an existing collection.42 To the extent any of these respondents would listen to their existing
39 Zauberman Report, p. 19-22. 40 NAB Ex. 84 (SOUNDEX_W5_000044743) (Zauberman Survey Data). 41 Zauberman Report, Appendix D, p. 60 (emphasis added). 42 Willig Report, Appendix E, p. E-6.
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collections, rather than purchase new CDs/Vinyl/Digital Downloads, Dr. Willig’s opportunity
cost calculation is again overstated.
C. The “Share of Ear” Survey Also Provides an Unreliable Basis for Dr. Willig’s Opportunity Cost Calculations
23. As an alternative to the SoundExchange survey, Dr. Willig uses Edison Research’s Q2
2019 “Share of Ear” survey.43 This survey asks respondents to track time spent listening to
music in various channels and then calculates percentage of listening time spent on each channel.
Dr. Willig assumes that the diversion ratio from non-subscription non-interactive services to an
alternative is equal to the listening share of that alternative divided by one minus the listening
share of non-subscription non-interactive services.44
24. Dr. Willig’s use of the “share of ear” survey is flawed for a number of reasons. First, Dr.
Willig’s Shapley Value framework using the “share of ear” survey again combines simulcast
with other ad-supported non-interactive services rather than analyzing simulcast separately.45
25. Second, because the “share of ear” survey attributes no share to non-music alternatives,
Dr. Willig’s approach does not account for such alternatives at all. That is, in his approach based on the “share of ear” survey, Dr. Willig assumes zero diversion to non-music alternatives.46
Given that both the SoundExchange and Hauser surveys find an appreciable percentage of
43 Willig Report, p. 32, Appendix F. Edison Research, “Share of Ear,” Q2 2019 (SoundExchange Exhibit 44). 44 Willig Report, Appendix F, pp. F-6 to F-11. 45 Willig Report, pp. 32-34. In fact, Dr. Willig’s assumption discussed further below that diversion ratios are proportional to shares means that Dr. Willig assumes that the diversion ratio from simulcast to, say, subscription interactive services is equal to the diversion ratio from custom radio to subscription interactive services. This assumption makes no economic sense given the economic evidence that degree of interactivity affects substitution, which implies that the diversion ratio from custom radio (greater interactivity) to subscription interactive services should be greater than the diversion ratio from simulcast (lesser interactivity) to subscription interactive services (see, e.g., NAB Ex. 83 (SOUNDEX_W5_000186861) ([ ]) at SOUNDEX_W5_000186880. 46 Willig Report, pp. 21-23, 32-33, Appendix F, pp. F-8 to F-11.
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respondents saying they would turn to non-music alternatives, Dr. Willig has no justification for making this assumption.47 Moreover, this assumption necessarily results in an overstatement of
the opportunity cost because non-music alternatives represent no opportunity cost to
SoundExchange. Recalculating Dr. Willig’s opportunity cost, assuming 19% diversion to non-
music alternatives, reduces it from [
26. Third, Dr. Willig assumes that the “share of ear” associated with CDs is indicative of the
percentage of non-subscription non-interactive plays that would be diverted to the purchase of
new CDs in the absence of the non-subscription non-interactive services.48 However, the CD-
listening that makes up the reported “share of ear” for CDs is based on owned CDs and does not
specify how recently these were purchased, meaning that both new and existing CDs would be
included.49 By Dr. Willig’s own logic that listener diversion is accurately represented by the various alternatives’ “share of ear,” he should have assumed that listeners would have diverted plays to new CDs only in proportion to new CD share of ear (rather than total CD share of ear,
which is by definition greater than new CD share of ear), or, put another way, that some of the
total diversion to CDs would have been to existing CDs, which do not represent an opportunity
cost to SoundExchange. By assuming that the entire diversion of plays to CDs represents
47 Of the SoundExchange survey respondents, 39% selected non-music alternatives as one of the alternatives they would use in the hypothetical scenario. NAB Ex. 84 (SOUNDEX_W5_000044743) (Zauberman Survey Data).. Of the Hauser survey respondents, 19% selected non-music alternatives as the alternative they would use in the hypothetical scenario. Hauser Report, Appendix R, items 16-19, 21-24. Note that, as discussed above, the SoundExchange survey respondents could choose multiple alternatives. A subset was asked how they would allocate time among the alternatives identified in the first step, and many respondents assigned zero time to one or more alternatives previously identified. If a respondent was asked how they would allocate their time between their chosen options, and they allocated zero time to the “Do something else” option, this respondent is not included in the percentage of people who chose to “Do something else.” 48 Willig Report, Appendix F. 49 Edison Research, “Share of Ear,” Q2 2019 (SoundExchange Exhibit 44); “‘Share of Ear’ Documents the Transition from Owned to Rented Music,” Edison Research, February 1, 2019, https://www.edisonresearch.com/share-of-ear-documents-the-transition-from-owned-to-rented-music/.
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diversion to new CDs, Dr. Willig overstates the number of plays diverted to CDs that would represent an opportunity cost to SoundExchange. Dr. Willig makes a similar incorrect assumption regarding diversion of plays to the subscription services. He assumes that the entirety of the diversion of non-subscription non-interactive plays to a given subscription service would invoke the payment of a royalty to SoundExchange. However, based on the results of the
SoundExchange survey, a substantial fraction of users of non-subscription non-interactive services are already subscribers to other subscription services. Diversion of plays by these users to their existing subscription services would not invoke the payment of any additional royalty to
SoundExchange. Thus, by ignoring the fact that some non-subscription non-interactive users are already subscribed to subscription services, Dr. Willig again overstates the number of diverted plays that represent an opportunity cost to SoundExchange.
27. Fourth, economic literature undermines Dr. Willig’s assumption that shares provide reliable estimates of diversion ratios in this type of differentiated product market.50 For example,
50 Dr. Willig’s assumption that diversion ratios are proportional to shares imposes the “independence of irrelevant alternatives” (IIA) property, which underlies, for example, the “logit” model of demand. The IIA assumption places strong restrictions on substitution patterns between products (i.e., the own- and cross-price elasticities of demand and related diversion ratios). Because of IIA’s restrictiveness regarding substitution patterns, the literature warns about imposition of the IIA property and associated use of the logit model of demand in circumstances when the nature of substitution patterns is a central question of interest. See, e.g., D. McFadden, “Econometric Models of Probabilistic Choice,” in Structural Analysis of Discrete Data with Econometric Applications, 1981, pp. 222-223 (“…models satisfying [IIA] yield implausible conclusions when there are strong contrasts in the similarity of the alternatives”); S. Berry, “Estimating Discrete Choice Models of Product Differentiation,” RAND Journal of Economics, 1994, p. 250 (“[t]he logit model products unreasonable substitution patterns”); J. Hausman and G. Leonard, “Economic Analysis of Differentiated Products Mergers Using Real World Data,” George Mason Law Review, 1997, p. 322 (“…the [IIA] assumption…implicitly restricts the demand structure by constraining the pattern of demand substitution between products”); D. Brownstone and K. Train, “Forecasting New Product Penetration with Flexible Substitution Patterns,” Journal of Econometrics, 1999, p. 110 (“…identification of the correct substitution patterns is an empirical issue, and the IIA property…imposes a particular substitution pattern rather than allowing the data analysis to find and reflect whatever substitution pattern actually occurs”); A. Nevo, “Mergers with Differentiated Products: The Case of the Ready-to-Eat Cereal Industry,” RAND Journal of Economics, 2000, p. 402 (“the logit model greatly restricts the own- and cross-price elasiticities”); P. Davis and E. Garces, Quantitative Techniques for Competition and Antitrust Analysis, 2010, pp. 477-478 (“…the logit model imposes severe limitations on own- and cross-price elasticities…we recommend strongly against using [logit] models in situations where we must learn something about substitution patterns…”).
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in a market with “premium” and “economy” segments, the premium products likely have higher
diversion ratios with each other than they do with the economy products, regardless of what the
market shares would suggest. In other words, users of a premium product are likely to view other premium products as closer substitutes for their preferred premium product than economy products. Consistent with recognizing product differentiation of this type, [
].52 More generally, the labels recognize that [
].54 Thus, there is no economic reason to believe that listening
shares among the universe of users accurately reflect how the subset of simulcast users would
behave in the absence of simulcast.
51 NAB Ex. 83 (SOUNDEX_W5_000186861) ([ ]) at SOUNDEX_W5_000186862. ]. 52 NAB Ex. 83 (SOUNDEX_W5_000186861) ([ ]) at SOUNDEX_W5_000186883. 53 NAB Ex. 87 (Harrison Dep.), pp. 150-153. See also NAB Ex. 83 (SOUNDEX_W5_000186861) ([ ]) at SOUNDEX_W5_000186880. 54 Aaron Harrison in his deposition discusses [ ] NAB Ex. 87 (Harrison Dep.), pp. 145-147.
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28. Dr. Willig’s assumption that diversion ratios are proportional to shares of ear has another,
related implication that is inconsistent with market realities. If diversion ratios are proportional
to shares, a necessary implication is that the diversion ratio from simulcast to, say, subscription
interactive services is equal to the diversion ratio from custom radio to subscription interactive
services. Yet, this is inconsistent with the economic evidence that degree of interactivity affects
substitution, which implies that the diversion ratio from custom radio (greater interactivity) to subscription interactive services should be greater than the diversion ratio from simulcast (lesser interactivity) to subscription interactive services.55
29. The Hauser survey results provide support for the conclusion that listening shares provide poor estimates of diversion ratios from simulcast to other alternatives. Table 3 compares the
diversion ratios implied by the listening shares to the diversion ratios from the Hauser survey.
As with the SoundExchange survey, there are substantial differences between the two sets of
diversion ratios. Specifically, the “share of ear” survey (along with the assumption that diversion
ratios are proportional to shares) produces uniformly higher diversion ratios for royalty-bearing
alternatives than does the Hauser survey. This difference suggests that either (1) the “share of
ear” survey and assumption that diversion ratios are proportional to shares produces unreliable
diversion ratios, or (2) simulcast users have a different and lower opportunity cost to
SoundExchange than users of other non-subscription non-interactive services. With lower
diversion ratios, all else equal, Dr. Willig’s Shapley Value calculations would have yielded a
lower royalty for simulcast than, e.g., custom radio.
55 See, e.g., NAB Ex. 83 (SOUNDEX_W5_000186861) ([ ]) at SOUNDEX_W5_000186880.
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Table 3: Share of Ear and Hauser Diversion Ratios
Share of Ear Hauser
Subscription On Demand 1.5% SiriusXM 3.4% Ad-supported On Demand 10.3% CDs/Vinyl/Digital Downloads 1.9%
D. Dr. Willig’s Use of the Shapley Value and Nash-in-Nash Frameworks Is Flawed
30. As inputs into the Shapley Value and Nash-in-Nash frameworks that he uses to calculate
his proposed royalty, Dr. Willig uses (i) the opportunity cost information based on the
SoundExchange survey and his calculation of royalty rates for alternatives to non-subscription
non-interactive services and (ii) financial information from Pandora.56 These frameworks are
flawed not only because they rely on the unreliable survey information and assumptions
addressed above, but also for additional reasons.
31. As noted above, the inputs for Dr. Willig’s Shapley Value and Nash-in-Nash frameworks
are not specific to simulcast, and Dr. Willig provides no justification for assuming that the values
of the inputs are accurate for simulcast. Of particular note is Dr. Willig’s use of Pandora’s
financial information as a stand-in for the financial situation of every non-subscription non-
interactive service.57 Given the substantial difference between Pandora and simulcast in terms of business model, there is no reason to believe that Pandora is representative of the simulcast services provided by, e.g., Mel Wheeler, Inc. Indeed, as discussed in my opening report, the economic evidence suggests that [ ].58 Thus, there is no
56 Willig Report, pp. 16-26, 34-37, Appendices D, E, G. 57 Willig Report, Appendix D. 58 Leonard Report, pp. 27-29.
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basis to conclude that the royalties that emerge from Dr. Willig’s Shapley Value and Nash-in-
Nash frameworks are appropriate for simulcast.
32. Moreover, in constructing his Shapley Value and Nash-in-Nash frameworks, Dr. Willig makes a number of simplifying assumptions. While it is common in economic modeling to make
simplifying assumptions, one must be careful lest the omission of an important factor renders the
model misleading as applied to a real-world situation. There are several respects in which
Dr. Willig’s frameworks make simplifying assumptions that may result in an overstatement in
the calculation of the royalty.
33. First, Dr. Willig assumes that the royalties for musical compositions are set exogenously
outside of his frameworks.59 Yet, for Pandora, historically the royalties for musical compositions have been closely and contractually linked to sound recording royalties.60 Thus, in the real
world, if sound recording royalties were increased by the amount that Dr. Willig proposes based
on his models, music composition royalties would be expected to increase as well. But, in that
event, Dr. Willig’s frameworks incorrectly model the music composition royalties as exogenous
and, moreover, assume a level of musical composition royalties that is too low. If Dr. Willig’s
frameworks were made more realistic to allow musical composition royalties to be endogenous
(for example, set to be positively related to sound recording royalties), the frameworks would
59 Willig Report, pp. 14-15, Appendix C. 60 NAB Ex. 88 (PANWEBV_00005062) (Pandora Content Costs Overview), at PANWEBV_00005076; “Pandora Details Its Pay Raise to Publishers,” Billboard, February 12, 2016, https://www.billboard.com/articles/business/6874911/pandora-publisher-pay; “Pandora Is Now Paying Publishers 1/5th of the Money It Gives Labels,” Music Business Worldwide, February 17, 2016, https://www.musicbusinessworldwide.com/pandora-is-paying-major-publishers-fifth/.
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generate lower royalties than they do with the unrealistic assumption that musical composition royalties are exogenously determined.61
34. Second, and similarly, Dr. Willig’s frameworks implicitly assume that any royalty for
sound recordings would be assessed as a lump sum that would have no effect on service
providers’ decisions regarding pricing, use of music versus non-music content, and other
characteristics of their services.62 In reality, however, [
] and thus represent a marginal cost to services that, under
economic principles, would be expected to affect service providers’ decisions regarding pricing
and product characteristics. Indeed, Dr. Willig even converts his calculated lump sum royalty to
a per-play royalty that he argues should be imposed in the future.63 If this per-play royalty were
imposed in the real world, however, it would affect services’ decision-making, and the services’
economic outcomes (revenue, plays, and profitability) would be different than the levels assumed
as inputs in Dr. Willig’s frameworks. That means the inputs to Dr. Willig’s frameworks that led
to his per-play royalty proposal are incorrect. The result is that the royalty Dr. Willig proposes
may give SoundExchange an excessive share of the surplus.64
35. Third, a flaw specific to Dr. Willig’s Nash-in-Nash framework is his assumption that each pair of negotiating parties would split the surplus 50/50. Dr. Willig seems to imply that a
61 When the musical composition royalties are assumed to be a positive function of the sound recording royalties, an increase in the sound recording royalties decreases the surplus available to split among the labels and services because the musical composition copyright holders capture more of the surplus. 62 Willig Report, p. 16. A lump sum royalty would not affect a service’s marginal costs and thus would not affect decisions on the margin regarding pricing and product characteristics. However, a lump sum royalty may affect a service’s decision as to whether to participate in the market. If the lump sum royalty makes participation unprofitable, the service would decide not to participate. 63 Willig Report, pp. 27, 31-32. 64 Specifically, the surplus available to split among labels and services would be less than Dr. Willig assumes. This, in turn, means that the royalty Dr. Willig proposes (which assumes the incorrect higher level of surplus) gives too much of the correct level of surplus to the labels.
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50/50 split is a necessary implication of the Nash Bargaining Solution (“NBS”).65 However, a
50/50 split necessarily emerges from the NBS only if the negotiating parties are assumed to have
the same utility function. In general, if the parties have different utility functions (e.g., different
levels of risk-aversion), the split of the surplus will not be 50/50.66 Dr. Willig provides no
justification for the assumption that labels and services all have the same utility function. Absent
such an assumption, Dr. Willig would have to determine the split between each pair of
negotiating parties. He has not shown how that could be done given available information.
36. Finally, there is a question as to whether the Shapley Value framework is appropriate given the task in this proceeding, which I understand to be modeling the outcome of a WBWS negotiation assuming effective competition. Shapley Values provide a specific split of surplus among contributing factors that possess certain properties. Shapely Values are not meant to mimic a WBWS outcome and, indeed, a WBWS outcome may well differ from the outcome implied by Shapley Values, depending on the institutional structure.67 This point is underscored
by the fact that Dr. Willig’s Nash-in-Nash framework gives a different answer than his Shapley
Value framework.68 In contrast to the Shapley Value framework, the Nash-in-Nash framework
is an attempt to model WBWS outcomes—but Dr. Willig’s Nash-in-Nash framework here
remains flawed for all the reasons described above.
65 Willig Report, pp. 35-36. 66 For example, see M. Osborne and A. Rubinstein, A Course in Game Theory, 1994, p. 303 (“A main goal of Nash’s theory is to provide a relationship between the players’ attitudes towards risk and the outcome of the bargaining...We compare two bargaining problems that differ only in that one player’s preference relation in one of the problems is more risk-averse than it is in the other; we verify that the outcome of the former problem is worse for the player than that of the latter.”). 67 See, e.g., F. Gul, “Bargaining Foundations of Shapley Value,” Econometrica, 1989. In an experiment described in C. Moellers, et al., “Communication in Vertical Markets: Experimental Evidence,” International Journal of Industrial Organization, 2017, the Shapley Value framework failed to predict “market” outcomes accurately. 68 Willig Report, p. 36.
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V. MR. ORSZAG’S ROYALTY PROPOSAL IS FLAWED
A. Mr. Orszag’s Subscription Interactive Streaming Services Benchmark Is Not Appropriate for Non-Subscription Non-Interactive Streaming Services
37. Mr. Orszag’s proposed royalty rate for non-subscription non-interactive streaming services of $0.0025 per play is based on the effective royalty rates as a percentage of revenue paid by subscription interactive streaming services. Specifically, Mr. Orszag’s recommended
rate is equal to the effective royalty rate as a percentage of revenue paid by Spotify to the major
record labels and Merlin for its subscription interactive streaming service for the year ending
April 2019 of [ ], multiplied by the effective revenue per play paid for Pandora and
iHeart’s non-subscription non-interactive services for the year ending April 2019 of [ ].69
Mr. Orszag’s rationales for using subscription interactive streaming services as a benchmark for subscription and non-subscription non-interactive streaming services are: the subscription interactive benchmarks are market-based and were used in prior webcasting proceedings; the subscription interactive benchmarks include the same sellers (i.e., record companies) and similar buyers; and there has been a convergence between interactive services’ and non-interactive services’ functionality over time.70 Each of Mr. Orszag’s rationales is flawed.
38. First, the complementary oligopoly power of the major record labels in the interactive
market renders this market less than effectively competitive. This is the conclusion that was
reached by the Judges in Web IV, where the Judges determined that an effective competition
adjustment was necessary to account for major record labels’ complementary oligopoly power.71
Mr. Orszag incorrectly believes that such an effective competition adjustment is no longer
69 Orszag Report, pp. 41-43. 70 Orszag Report, pp. 19-29. 71 Web IV Determination, 81 Fed. Reg. 26316, 26343-44 (CRB May 2, 2016).
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necessary because the major record labels’ bargaining power is now offset by the interactive services’ supposed bargaining power resulting from their alleged must-have status vis-à-vis the major labels.72 As I discuss in Section V.C below, however, the complementary oligopoly power of the major record labels is not offset by the supposed bargaining power of the subscription interactive streaming services. Thus, even though the interactive streaming services benchmarks are market-based, they do not reflect effective competition and therefore still need to be adjusted if they are to be used as benchmarks in this proceeding. Mr. Orszag did not perform an effective competition adjustment, which inflates his recommended royalty rate for non-subscription non- interactive streaming services. As discussed in my opening report, to ensure that the royalty rates for non-subscription non-interactive services (including simulcast) reflected effective competition, in Web IV, the Judges used as benchmarks royalties from actual license agreements between labels and services that contained steering provisions.73 Steering is a means by which a service can create competition among labels, mitigating the complementary oligopoly problem.
The steering discount applied in Web IV was 12%.74 Applying this discount to Mr. Orszag’s
$0.0025 per-play rate lowers his recommended rate for all webcasting (custom radio and simulcast combined) to $0.0022.
39. Second, although the interactive services benchmarks used by Mr. Orszag include the same sellers—i.e., labels—they do not include similar buyers. Mr. Orszag’s per-play rate is based solely on the effective royalty rate as a percentage of revenue of [ ] that one buyer,
Spotify, paid to major record labels and Merlin for its subscription interactive streaming service.
72 Orszag Report, Section V. 73 Web IV Determination, 81 Fed. Reg. 26316, 26365-69 (CRB May 2, 2016). 74 Id. at 26405.
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As I explain in the following paragraphs, that service is a fundamentally different service from non-subscription non-interactive streaming services, especially simulcasts.
40. Third, and relatedly, Mr. Orszag’s assessment of the increased comparability between interactive and non-interactive streaming services is incorrect as a general matter, and has no application at all to simulcasts specifically. Mr. Orszag argues that there has been a convergence between interactive services’ and non-interactive services’ functionality over time, which makes them comparable to each other. This alleged convergence stems primarily from the growing use of playlists by subscribers of interactive streaming services.75 In other words, Mr. Orszag claims
that increased “lean-back listening” by subscribers of interactive streaming services has made
their user experience more similar to the user experience of a non-interactive streaming service.
This claim is flawed for several reasons.
41. Most importantly, the evidence of “convergence” that Mr. Orszag cites does not apply to
simulcast. For example, Mr. Orszag classifies various types of activities as “lean-back listening” and claims that “as of 2017, up to 68 percent of listening on Spotify is lean-back.”76 Mr. Orszag
further claims:
Apple’s and Spotify’s increasing focus on the lean-back listening experience illustrates the convergence between interactive and noninteractive services in terms of user behavior and the type of services they offer; in the noninteractive world, the stations are effectively playlists. The playlists on interactive services and the stations on noninteractive services are not necessarily identical, but they attempt to achieve the same goals, which is to provide listeners with a lean-back listening experience and sometimes music discovery options, which attract and retain users on the platform. A person unfamiliar with the services simply listening to the music programming would not necessarily know the difference between lean-back listening with interactive
75 Orszag Report, pp. 65-67. 76 Orszag Report, pp. 23-24.
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service-generated playlists and lean-back listening with noninteractive service stations.77
But while 68% of Spotify listening is lean-back—i.e., playlists—only 15% of monthly content
hours are from editorially curated playlists, which is the closest type of playlist to what one
would get listening to simulcast.78 The rest of the Spotify activities that Mr. Orszag classifies as
lean-back listening are algorithmically-curated playlists created by Spotify for each user (17%)
and a user’s own-generated playlists (36%).79 Neither of these types of playlists are available on
a simulcast. SoundExchange witnesses Aaron Harrison, UMG Recordings, Inc.’s Senior Vice
President, Business & Legal Affairs, Digital, and Reni Adadevoh, Warner’s Vice President of
Legal and Business Affairs, [
].80 Thus, there is, in fact, little to no evidence of overlap and thus convergence between interactive services and simulcast.81 With regard to custom radio, the addition of lean-back features to
interactive services is an effort to provide an additional functionality to a subset of interactive
users who may value such functionality. Many interactive users do not use the functionality (and
thus do not value it significantly). Moreover, even among the subset of interactive users that use
the functionality, its existence does not necessarily create “convergence.” Two products sharing
a feature does not necessarily make them substitutes. For example, collision avoidance features
77 Orszag Report, p. 26. 78 Orszag Report, pp. 23-24. 79 Orszag Report, pp. 23-24. 80 NAB Ex. 87 (Harrison Dep.), pp. 105, 118-119; NAB Ex. 89 (Adadevoh Dep.), pp. 116-117. 81 There is also relatively little overlap between ad-supported interactive services and custom radio given that custom radio users cannot listen to user-generated playlists. Mr. Orszag ignores the distinctions between the playlist categories.
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are available on both a Honda Civic or a Mercedes E-series sedan, but these two car models are
hardly close substitutes.
42. Moreover, interactive services provide other playlist-related features that are valuable to
users but are not even possible on simulcast (and, indeed, are not permitted under the statutory
license for non-subscription non-interactive services). For example, on an interactive service a
user can view the entire playlist, including upcoming songs, and can skip songs and move
forward and backward in the playlist—a significant value to the user and features that are not
permitted under the statutory license for a non-interactive service such as simulcast.
43. According to Aaron Harrison, [
].82 This demonstrates that the royalty negotiated in a WBWS framework will depend on the extent of interactivity.83
Again, simulcast provides the least interactivity of any of the non-interactive services.
44. Finally, an interactive service offers users a key feature that simulcast cannot, both as a matter of what is allowed under the statute and as a technical matter: the ability to listen to any song in the service’s library at any time. In other words, interactive services provide on-demand
82 NAB Ex. 87 (Harrison Dep.), pp. 141-145. 83 As such, the royalty for a service such as ad-supported Spotify can be thought of as a weighted average of the (lower) royalty for lean-back (less interactive) plays and the (higher) royalty for lean-forward (more interactive) plays.
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functionality that custom radio and simulcast cannot.84 For instance, [
]85 As an interactive service, Spotify [
86
Because the simulcast stream is identical to the over-the-air broadcast, the same functionality restrictions apply, further differentiating simulcast from interactive services.
45. The on-demand nature of interactive services has significant value to users of those services. In fact, numerous studies show that on-demand functionality is a primary driver of user demand for subscription interactive services. According to a September 2019 industry report,
“[
]88 Interactive service users value the convenience and control
84 According to Aaron Harrison, “
. NAB Ex. 87 (Harrison Dep.), pp. 79, 81, 102. 85 NAB Ex. 91 (SOUNDEX_W5_000026604) (Spotify 2018 SEC Form 20F), at SOUNDEX_W5_000026651. 86 NAB Ex. 91 (SOUNDEX_W5_000026604) (Spotify 2018 SEC Form 20F), at SOUNDEX_W5_000026651. 87 NAB Ex. 86 (SOUNDEX_W5_000187914) (Mid-Year Review with RIAA September 2019), at SOUNDEX_W5_000187934. 88 NAB Ex. 85 (SOUNDEX_W5_000053019) (Annual Music Study 2018 Report to RIAA April 2019), at SOUNDEX_W5_000053070; see also NAB Ex. 92 (SOUNDEX_W5_000044967) (Annual Music Study 2016 Final Report to RIAA Research Committee), at SOUNDEX_W5_000045054; NAB Ex. 93 (SOUNDEX_W5_000045545) (Annual Music Study 2017 Final Report to RIAA Research Committee April 2018), at SOUNDEX_W5_000045629.
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associated with on-demand listening, functionality that simulcast does not provide. Mr. Orszag entirely ignores this important economic distinction when attempting to justify his choice of benchmark.
46. The significant value of on-demand functionality to users of interactive services is further demonstrated by actual in-platform user behavior. [
].89 The use of the on-demand functionality demonstrates that interactive service users are subscribing to take advantage of on- demand functionality, exercising specific music choices as opposed to listening to pre- programmed simulcasts.
47. Simulcasts contain limited, pre-selected music content and provide the listener with no in-platform on-demand functionality. As long as such on-demand features have a significant value to users (as they currently do, as demonstrated, for example, by the higher subscription price for interactive than non-interactive services90 and established user behavior on these platforms), economically meaningful divergence exists between interactive services and simulcast.
89 NAB Ex. 94 (SOUNDEX_W5_000052770) (Amazon Music Unlimited On-Platform Behavior), at SOUNDEX_W5_000052771-73; see also NAB Ex. 95 (SOUNDEX_W5_000053352) (Spotify User Behavior Study), at SOUNDEX_W5_000053358-59; NAB Ex. 96 (SOUNDEX_W5_000052820) (Apple Music In- Platform Behavior Study), at SOUNDEX_W5_000052831. 90 Pandora’s non-interactive subscription service, Pandora Plus, is priced monthly at $4.99, whereas its interactive subscription service, Pandora Premium, is priced monthly at $9.99. See “Upgrade to Pandora Plus or Premium,” Pandora Help, https://help.pandora.com/s/article/Upgrade-to-Pandora-Plus-or-Pandora-Premium- 1519949306612?language=en_US. iHeartRadio also prices its non-interactive subscription service, iHeartRadio Plus, and its interactive subscription service similarly at $4.99 and $9.99 per month respectively. See “How much is iHeartRadio All Access? What can I use to pay for it?” iHeartRadio, https://help.iheart.com/hc/en- us/articles/235721027-How-much-is-iHeartRadio-All-Access-What-can-I-use-to-pay-for-it- and “How much is iHeartRadio Plus? What can I use to pay for it?” iHeartRadio, https://help.iheart.com/hc/en- us/articles/235720747--How-much-is-iHeartRadio-Plus-What-can-I-use-to-pay-for-it-.
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48. SoundExchange expert Dr. Tucker highlights the value of on-demand features to users in
her report, which is contrary to Mr. Orszag’s claims about convergence. Dr. Tucker discusses
how on-demand services have gained popularity in recent years, and that “[i]ndustry analysts
generally agree that paid subscriptions to services that offer interactive functionalities (such as
Spotify Premium) are the future of music.”91 If there is “convergence,” as Mr. Orszag claims,
there would be no basis for Dr. Tucker to distinguish interactive services. In fact, the increasing
demand for on-demand services demonstrates that they are significantly differentiated from
services that do not offer on-demand functionality.
49. While Mr. Orszag has failed to demonstrate convergence of interactive services with
custom radio, he has not even addressed convergence of interactive services with simulcast. In
fact, interactive services have not converged toward simulcast, and simulcast has not converged toward interactive services, both because it is not possible given the nature of simulcast and because it is not allowed under the statutory license. Convergence of functionality would require moving outside of the statutory license and, therefore, is not relevant for determining the rate
within the statutory license. Accordingly, Mr. Orszag’s justification for using subscription
interactive services as a benchmark for simulcast is not valid.
50. Fourth, Mr. Orszag ignores non-interactive benchmarks that are more comparable than
his interactive benchmarks. As discussed extensively in my opening report, iHeart’s direct deals
with the renewal indies are the most relevant benchmarks for establishing the statutory rate for
non-subscription non-interactive streaming services including custom radio and simulcast.
These deals represent the best benchmarks for several reasons, including that they are market
91 See Written Direct Testimony of Catherine Tucker, September 23, 2019 (“Tucker Report”), pp. 7-8.
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transactions consistent with Section 114’s WBWS standard and (i) cover the licensing of rights
for the public performance of sound recordings; (ii) cover custom radio and simulcast services;
and (iii) include the same sellers (i.e., record companies) and same buyers (i.e., non-subscription
non-interactive streaming services) that would be involved in the statutory license. Moreover, by limiting my analysis to iHeart’s agreements with the renewal indies and calculating iHeart’s effective per-play royalty rates paid to these renewal indies during the pre-renewal period, I have focused on rates that must have been acceptable to both parties because both parties agreed to renew the direct deal at the same contractual rate with knowledge of the actual per-play rate.92
Further, the rates in these agreements are relatively free of complementary oligopoly power due to the fact that the renewal indies likely have less complementary oligopoly power than the major record labels. Finally, any argument that these non-interactive benchmarks are in the shadow of regulation ignores the fact that when the renewal indies agreed to the lower effective rates than the statutory rate those rates were freely negotiated. The renewal indies must have understood that iHeart could and perhaps would steer toward the labels’ recordings or that licensing iHeart offers other (e.g., promotional) benefits.93 Indeed, I have reviewed evidence
produced in discovery that [
].94
51. Finally, Mr. Orszag also ignores ad-supported interactive services as a potential
benchmark. Such services share all of the characteristics of subscription interactive services that
92 Leonard Report, pp. 31-37. 93 Leonard Report, pp. 34-35. 94 See, e.g., NAB Ex. 97 (NAB00003944) (iHeart Email Re BMG Question); NAB Ex. 98 (NAB00003948) (iHeart Email to BMG RE Update); NAB Ex. 99 (NAB00003969) (iHeart Email Re BMG / iHeart Metadata Deliver); NAB Ex. 100 (NAB00004024) (iHeart Email Re Big Machine - Overnight).
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Mr. Orszag pointed to as support for their use as benchmarks, plus they are also ad-supported,
which makes them more comparable to non-subscription non-interactive services. Spotify’s ad-
supported interactive service had a per-play royalty of [ ] and a percentage-of-revenue
royalty of [ ] from January through April of 2019.95 Both of these figures are well below the respective figures ($0.0025 per play and [ ] of revenue) that Mr. Orszag derives from his subscription interactive benchmark. I note that, if the Spotify ad-supported interactive
service rate were to be used as a benchmark for non-subscription non-interactive services, adjustments would need to be made to account for effective competition and lack of interactivity.
I do not attempt to quantify the lack of interactivity adjustment here as I view the iHeart agreements with indies to be superior benchmarks for the purposes of this proceeding.96
B. Mr. Orszag’s Adjustment for Interactivity Based on Ratio Equivalency Is Insufficient
52. Mr. Orszag’s adjustment for interactivity used to arrive at his recommended royalty rate for non-subscription non-interactive streaming services is based on his assumption of ratio equivalency between the subscription interactive and non-subscription non-interactive markets.
Specifically, according to Mr. Orszag:
Thus, I use the concept of “ratio equivalency” as adopted and explained by the Judges in the Web IV Determination. As the Judges stated, “when the downstream subscription market is competitive, the ‘Hicks/Marshall relationship’ provides that if the elasticities in the downstream market are the same then, ceteris paribus, pursuant to the Lerner Equation the markup of price over cost will be the same in both the upstream and downstream subscription markets, thereby supporting Dr. Rubinfeld’s ‘ratio equivalency’ in the subscription market.” In other words, assuming similar own elasticities of demand in the benchmark and target market, one can adjust for the value of
95 Calculated using Orszag data. 96 As discussed above, [ ], thus providing a real-world example of the additional value associated with interactivity. NAB Ex. 87 (Harrison Dep.), pp. 141-144.
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interactivity by determining the ratio of royalty cost to revenue in the benchmark market and then applying that ratio to the revenues in the target market to solve for the appropriate royalty. The result, presumably, will be lower royalties in the target noninteractive market compared to the benchmark market, reflecting the fact that the critical difference between the two markets—the absence of interactive functionality—is revealed and quantified by the revenues in the target market.97
53. Mr. Orszag acknowledges that the Judges in Web IV rejected the use of subscription interactive services as a benchmark for non-subscription non-interactive services because ratio equivalence “did not apply to the ad-supported market because users of ad-supported services have no willingness to pay.”98 However, Mr. Orszag argues that users of non-subscription non- interactive services do pay “with their time spent listening to advertisements,”99 and, therefore,
“a benchmark analysis that uses subscription interactive services is appropriate if the interactivity
adjustment is calculated using the revenue of noninteractive ad-supported services (thus
reflecting their particular willingness to pay) rather than the revenue of noninteractive
subscription services.”100 Mr. Orszag concludes that his “approach to this analysis appears to
have been tacitly endorsed by the Judges in Web IV, who suggested that any attempt to apply
ratio equivalency to the ad-supported market would have to consider the revenue earned by the
services in that market.”101 He also concludes that the subscription interactive benchmark is now
more applicable to the non-subscription non-interactive market because “consumers increasingly
view subscription interactive services as a viable (and sometimes preferred) alternative to an ad-
97 Orszag Report, p. 30. 98 Orszag Report, p. 38. 99 Orszag Report, pp. 38-39. 100 Orszag Report, p. 39. 101 Orszag Report, p. 39.
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supported noninteractive service.”102 Mr. Orszag’s interactivity adjustment as it pertains to non- subscription non-interactive streaming services, and in particular simulcast, is flawed for several reasons.
54. First, Mr. Orszag misses an important distinction between subscription and ad-supported services that undermines his argument regarding the applicability of ratio equivalency, namely that the relationship between interactivity and revenue generation differs between the two types of services. Subscription services generate revenues through subscription fees paid by users. To the extent some users value interactivity, a subscription service may be able to charge a higher price for an interactive service than a non-interactive service. An ad-supported service, in contrast, generates revenue through placing advertisements. Advertisers have no reason to prefer advertising on a service with greater interactivity. In particular, they would not be willing to pay more per impression for an ad on an interactive service than a non-interactive service (unless an interactive service attracts more valuable impressions than a non-interactive service, a proposition for which I have seen no evidence). In any event, the relationship between revenue generation and interactivity is substantially different for ad-supported than for subscription services. Moreover, there is no reason to think that the elasticities of demand of the buyers for the respective types of services (advertisers for ad-supported and users for subscription) are the same or that the cost structures are the same (e.g., ad-supported services may have costs and investments associated with an advertising platform). These key economic differences cause Mr.
Orszag’s rationale for ratio equivalency between subscription and ad-supported services to fail.
Relatedly, Mr. Orszag overstates the case on user WTP. While it is true that users of ad- supported services “pay” with the time spent with ads, they had the choice to pay for a
102 Orszag Report, p. 41.
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subscription service and avoid ads. Thus, by revealed preference, their WTP to avoid ads (and
by implication their WTP for more music in place of ads) is less than that of subscribers to paid
services (moreover, as discussed above, the ad-supported service receives revenue from the
advertiser, not based on the user’s time). This distinction is the one the Judges appear to have
been making,103 and it is correct.
55. Second, Mr. Orszag’s application of ratio equivalency as it relates to simulcast is completely unsupported. In fact, he treats simulcast the same as all other non-subscription non- interactive streaming services without providing any support for such an assumption. For example, Mr. Orszag’s application of ratio equivalency to non-subscription non-interactive streaming services uses the effective revenue per play for Pandora and iHeart for their ad- supported custom radio services for the year ending April 2019 of [ ].104 Thus,
Mr. Orszag’s analysis relies exclusively on the effective revenue per play for custom radio and
assumes with no support that simulcast should be treated the same as custom radio. As
previously discussed, simulcast differs in economically important ways from custom radio and,
therefore, Mr. Orszag’s assumption is unsupported. A more appropriate (but still incorrect)
application of ratio equivalency pertaining to simulcast would be to calculate the effective
revenue per play for simulcasters. Mr. Orszag has not done this. As discussed in my opening report, the revenue per play for many simulcasters is likely low due to difficulties in generating
revenues on the simulcast. Even using the simulcaster revenue per play would be incorrect,
103 Web IV Determination, 81 Fed. Reg. 26316, 23650, n. 110 (CRB May 2, 2016). 104 Revenue per play for Pandora is [ ] and for iHeart is [ ] (NAB Ex. 101 (SOUNDEX_W5_000033401) (Orszag Benchmark Analysis). The difference is substantial. If Mr. Orszag applied his ratio equivalency approach to iHeart alone, he would have determined a per-play royalty of [ ], much less than his proposed royalty. Indeed, his proposed per-play royalty is greater than iHeart’s revenue per play. He does not explain how his proposal makes economic sense given this context. Any claim that iHeart and Pandora are perfect substitutes for users is unsupported.
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however. As discussed in my opening report, many simulcasts, unlike interactive services or
custom radio, contain significant non-music content, and thus some of the simulcast revenue
should be attributed to this content rather than music.105 Dividing revenue by music plays
without any adjustment for non-music content would fail to account for the value of the non-
music content.
56. Third, Mr. Orszag wrongly states that there is no connection in the marketplace between
percentage-of-revenue rates and the degree of interactivity offered. Mr. Orszag claims: “We do not see in the marketplace [
]”106 This statement is incorrect. As previously discussed, marketplace evidence provided by music copyright licensing agreements have specified different percentage- of-revenue royalty rates for simulcast and custom radio, which have different degrees of interactivity. This evidence includes iHeart’s direct deals with independent record labels and the recent PRO licenses (and offered licenses) for rights to publicly perform musical compositions.
Specifically, iHeart’s direct deals with several renewal indies specify [
].107
57. Finally, Mr. Orszag’s conclusion that the subscription interactive benchmark is now more applicable to the non-subscription non-interactive market because “consumers increasingly view
105 Leonard Report, pp. 19-24. Additionally, Mr. Orszag ignores that Mr. Harrison testified that [ ]. NAB Ex. 87 (Harrison Dep.), pp. 138-139; Written Direct Testimony of Aaron Harrison, September 22, 2019 (“Harrison Written Testimony”), pp. 24-25. However, simulcast is not a close substitute for interactive services. 106 Orszag Report, p. 33. 107 See Leonard Report, pp. 31-36, which specifies these royalty terms for iHeart’s direct deal with Big Machine, a representative agreement for iHeart’s agreements with renewal indies.
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subscription interactive services as a viable (and sometimes preferred) alternative to an ad- supported noninteractive service” is unsupported, particularly with respect to simulcast, for the reasons discussed above. Mr. Orszag also claims that the SoundExchange survey finds a cross elasticity between non-interactive ad-supported services and interactive services, with 14% of users of non-interactive ad-supported services (who did not use interactive subscription services) stating that they would start listening to interactive subscription services if the ad-supported services were not available.108 Cross (price) elasticity is not well-defined when the price charged
for the product is zero. However, even so, Mr. Orszag ignores the fact that several other
services, such as ad-supported interactive services and CDs/Vinyl/Digital Downloads, are found
by the SoundExchange survey to have higher diversion ratios than subscription interactive
services109, implying they are closer substitutes for ad-supported non-interactive services than interactive services. A diversion ratio of 14% is not particularly large in any event. Moreover, as discussed above, the SoundExchange survey does not address simulcast users and likely biases responses in favor of subscription services. As seen in Table 1 above, when the Hauser
survey results are used, the diversion ratio from simulcast to subscription interactive services is
only 1.5% and lower than the diversion ratios to other alternatives.
C. Mr. Orszag’s Claim That the Complementary Oligopoly Problem No Longer Exists Is Incorrect
58. Mr. Orszag argues that the royalty rates from subscription interactive services need not be adjusted to account for any complementary oligopoly power of the major labels before using
108 Orszag Report, pp. 40-41. 109 Willig Report, p. F-9.
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these rates as benchmarks for non-subscription non-interactive services.110 Mr. Orszag’s
argument is incorrect.
1. The Major Labels Still Have Complementary Oligopoly Power
59. As an initial point, Mr. Orszag does not even attempt to demonstrate that the
complementary oligopoly power of the majors with respect to the interactive services has
diminished. Rather, he admits that it “likely remains the case that the Majors are ‘must-haves’
for the interactive services, at least in the long run.”111 That is consistent with the testimony of
Warner and Universal witnesses that [
].112
60. Indeed, the factors that the Web IV Judges identified as the basis for their finding that the
major labels have complementary oligopoly power remain true today.113 This was recognized by
the Phonorecords III judges, who reached the same finding about label complementary oligopoly
power, and recently by the Department of Justice’s brief in the ongoing Phonorecords III appeal,
which reiterated the Phonorecords III judges’ finding in this regard.114 First, an interactive
110 Orszag Report, pp. 75-76. 111 Orszag Report, p. 45. 112 NAB Ex. 89 (Adadevoh Dep.), p. 96
); NAB Ex. 89 (Adadevoh Dep.), p. 179
]); NAB Ex. 89 (Adadevoh Dep.), pp. 182-183
); NAB Ex. 87 (Harrison Dep.), p. 80 ); Harrison Written Testimony, p. 16 ]. 113 Web IV, p. 26341-26344. 114 Public Initial Brief for Appellees’, Johnson v. CRB and Librarian of Congress, Nov. 12, 2019, pp. 18 (acknowledging that “record companies had significant market power in the real world”), 39, 59 (“[T]his was 41 NAB Written Rebuttal Statement Dkt. No. 19-CRB-0005-WR (2021-25)
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service still needs the full catalog of each major label’s sound recordings to be competitive.
According to a market report issued at the end of 2018, 76% of streaming users consider “access to millions of tracks” very or fairly important.115 As of 2019, most interactive streaming services offer 30 million songs or more in order to be competitive.116 As discussed above, the on-demand functionality is a primary driver of user demand for on-demand services. Even when Sony
Music launched its own streaming service in Japan in 2018, its catalog covered a broad selection from other record labels and was not limited to just the Sony repertoire.117 Second, as discussed in detail below, the interactive services still cannot induce price competition among the major labels by steering. Despite any increase in “lean-back” listening on on-demand services via playlists, [
]. Also, as discussed above, the amount of “lean-back” listening for which steering might even be possible is limited. Third, there is no evidence of price competition among labels to be included in the libraries of interactive services.118 In fact, Reni Adadevoh testified that [
caused, in part, by the record companies; ability to exercise their market power to extract ‘supranormal’ profits in the real world.”). 115 “Music Streaming,” Goldman Sachs, https://www.goldmansachs.com/insights/pages/infographics/music- streaming/. 116 “Best Music Streaming: Spotify, Apple Music and More, Compared,” CNET, December 28, 2019, https://www.cnet.com/how-to/best-music-streaming-service-of-2019-spotify-pandora-apple-music/. 117 “Why Has Sony Music Just Launched A Streaming Service (And Spotify Rival) In Japan?” Music Business Worldwide, December 11, 2018, https://www.musicbusinessworldwide.com/why-has-sony-just-launched-a- music-streaming-service-and-spotify-rival-in-japan/. 118 Mr. Orszag claims that [ ] Orszag Report, pp. 45-46. However, Mr. Harrison testified that [
.]” NAB Ex. 87 (Harrison Dep.), p. 56.
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].119 Likewise,
Aaron Harrison testified that [
].120 He further testified that [
]”121
61. Thus, Mr. Orszag’s argument is not that the majors lack complementary oligopoly power vis-à-vis subscription interactive services, but that subscription interactive services have recently gained bargaining power that allows them to offset the complementary oligopoly power of the major labels. However, Mr. Orszag’s argument in this regard is flawed in a number of ways.
2. The Interactive Services Have No Ability to Steer
62. Mr. Orszag’s claim regarding the ability of subscription interactive services to steer is contrary to the evidence I have reviewed. Mr. Orszag argues that interactive rates need not be adjusted to reflect effective competition because “[t]he interactive services’ ability to ‘steer’ has grown substantially since the Web IV proceeding,” in particular via service-generated playlists.122
As discussed above, the amount of “lean-back” listening on on-demand services for which steering might be possible is limited. But, Mr. Orszag also ignores [
]. Those provisions include:
119 NAB Ex. 89 (Adadevoh Dep.), pp. 73, 175. 120 NAB Ex. 87 (Harrison Dep.), pp. 64-65. 121 NAB Ex. 87 (Harrison Dep.), p. 56. 122 Orszag Report, pp. 45, 64-71.
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123 NAB Ex. 89 (Adadevoh Dep.), pp. 17-18.
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63. Importantly, [
].124 Thus, it cannot be argued that the supposed increase in bargaining power of the interactive services was what led the major labels to seek these provisions, or that the major labels were able to impose them only by granting other concessions. In fact, the existence of the provisions, [
], is itself evidence that labels have and continue to have a strong bargaining position vis-à-vis Spotify, contrary to Mr. Orszag’s claim.
64. Warner and Universal personnel testified that [
]. For example, Reni Adadevoh testified that Warner wants to ensure
] and that
]125 Ms. Adadevoh furthered testified that [
].126 Similarly, Aaron Harrison
124 See, e.g., NAB Ex. 89 (Adadevoh Dep.) Ex. 2, [ ], Sections 8, 10 & Ex. D Section 6; SoundExchange Ex. 190, [ ], Section 16; SoundExchange Ex. 152, [ ], Section 8(a)(viii). 125 NAB Ex. 89 (Adadevoh Dep.), pp. 31-34. 126 NAB Ex. 89 (Adadevoh Dep.), p. 54.
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testified that [
].127 Mr. Harrison testified that if
.]128 He further testified that [
]”129 He explained that these provisions “[
.]”130
65. Moreover, the major labels have [
].131 These contractual prohibitions include:
127 NAB Ex. 87 (Harrison Dep.), p. 59. 128 NAB Ex. 87 (Harrison Dep.), pp. 63-64. 129 NAB Ex. 87 (Harrison Dep.), pp. 168-169, 188. 130 NAB Ex. 87 (Harrison Dep.), pp. 169-170. 131 This is another example of how negotiated royalties are positively related to the extent of interactivity of the service. 132 ] NAB Ex. 89 (Adadevoh Dep.), p. 64.
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66. Mr. Orszag claims that [
] for several reasons, each of which is contradicted by evidence I have reviewed.133
Mr. Orszag asserts that it is ]134
However, I have reviewed documents showing that [
Mr. Orszag also argues that [
].136 I have reviewed documents, however, indicating that [
133 Orszag Report, p. 70. 134 Orszag Report, pp. 70-71. 135 NAB Ex. 102 ([Spotify Market Share Analysis]) (SOUNDEX_W5_000097619) at SOUNDEX_W5_000097620 ([
). 136 Orszag Report, p. 71.
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].137 Finally, Mr. Orszag claims that [
]138 In fact, [
].
3. The Evidence Shows the Major Labels Recognized Their Strong Bargaining Positions Vis-à-vis the Services
67. Mr. Orszag’s claims about the increased bargaining power of the interactive services generally are also inconsistent with the documentary and testimonial evidence obtained in discovery. For example, [
139 Furthermore, according to Aaron Harrison of Universal, [
137 NAB Ex. 103 (SOUNDEX_W5_000055164) ([ ]); NAB Ex. 104 (SOUNDEX_W5_000108335) ([ ]). 138 Orszag Report, p. 71. 139 NAB Ex. 87 (Harrison Dep.), pp. 18-25 and NAB Ex. 87 (Harrison Dep.), Exhibit 2.
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].140
Therefore, this evidence contradicts Mr. Orszag’s claim that the [ ] was the result of Spotify exercising increased bargaining power to increase its profits. Rather, the
[ ] was the result of the increasingly competitive environment that Spotify faced
downstream, which [ ]. That such a downstream change may lead to a
[ ] is entirely consistent with Spotify not having any
increased bargaining power. Moreover, even absent any increased Spotify bargaining power, the labels may have found it in their best interest to [
] that would allow it to better compete downstream
(thereby benefiting the labels).
4. The Interactive Services Are Engaged in Intense Competition With Each Other, Which Weakens Their Bargaining Positions Vis-à-vis the Major Labels
68. The industry economic conditions do not support Mr. Orszag’s claim of increased
bargaining power on the part of the interactive services. Mr. Orszag points to the HHI for
subscription interactive services, claiming it is indicative of a concentrated market which, he
implies, means the individual firms in the market (i.e., the services) have market power.141 He
also claims that the market shares of Spotify and Apple are indicative of their market power.142
These suggestions are incorrect, for a number of reasons.
140 NAB Ex. 87 (Harrison Dep.), pp. 25-40 and NAB Ex. 87 (Harrison Dep.), Exhibits 3, 4, 6, 8. 141 Orszag Report, p. 56-57. I note that Mr. Orszag does not address ad-supported interactive services in this analysis. 142 Orszag Report, pp. 55-56.
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69. As an initial point, Mr. Orszag fails to analyze the change in HHI between the time when it is undisputed that the services did not have the bargaining power that Mr. Orszag claims they have now, and the present. However, based on Mr. Orszag’s gross revenue HHI calculation methodology, the HHI [ ].143 If HHI is a meaningful indicator of market power as Mr. Orszag claims, he should have concluded the market power of the services has decreased, not increased.
70. In reality, though, HHIs (which measure market concentration) and market shares are not a reliable basis for inferring market power in this context. Instead, their proper use is limited to serving as an initial “screen,” after which (if so indicated) a more in-depth analysis of economic conditions must be conducted before a conclusion of market power is reached. [
].144 The remaining market share is held by other services, such as Google and Amazon. Thus, using market share as a screen would suggest the inquiry should end without further analysis, with the conclusion that Spotify and Apple have no market power.
143 Using gross revenues listed in Mr. Orszag’s production document NAB Ex. 105 (SOUNDEX_W5_000033399), the calculation of the HHI was [ ]. Similarly, Spotify’s share based on gross revenues was [ ]. 144 According to the Department of Justice, “[a]lthough the courts ‘have not yet identified a precise level at which monopoly power will be inferred’, they have demanded a dominant market share…A high share indicates that it is appropriate to examine other relevant factors. In this regard, if a firm has maintained a market share in excess of two-thirds for a significant period and market conditions (for example, barriers to entry) are such that the firm’s market share is unlikely to be eroded in the near future, the Department believes that such evidence ordinarily should establish a rebuttable presumption that the firm possesses monopoly power…In many decades of section 2 enforcement, we are aware of no court that has found monopoly power when defendant’s share was less than fifty percent, suggesting instances of monopoly power below such a share, even if theoretically possible, are exceedingly rare in practice.” (emphasis added). See “Competition and Monopoly: Single-Firm Conduct under Section 2 of the Sherman Act : Chapter 2,” DOJ, https://www.justice.gov/atr/competition-and- monopoly-single-firm-conduct-under-section-2-sherman-act-chapter-2. See also D. Carlton and J. Perloff, Modern Industrial Organization, 4th Edition, 2005, p. 644: “There is no agreement as to exactly what share (or change in share) is ‘high,’ but many economists regard a share in the range of 30 to 50 percent as too low to indicate significant market power in an industry with a competitive fringe comprising the remainder of the market.”
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71. Nevertheless, looking more deeply into the industry’s economic conditions confirms the conclusion of no market power. The conditions under which a firm may have market power are that its rivals face barriers to expansion and there are barriers to entry by new rivals. Otherwise, an attempt by the firm to increase unilaterally its price to buyers (or decrease unilaterally its price to input suppliers) will be met with switching by buyers (or input suppliers) to its competitors, which will have no trouble accommodating the increased demand given no substantial barriers to expansion, thereby defeating the attempted price increase. HHIs and market shares are not indicative of a firm’s market power when there are no substantial barriers to expansion and entry.145 As discussed below, these conditions hold for interactive services. Thus, Mr. Orszag’s
HHI and market share calculations are economically meaningless and, moreover, the interactive services do not have increased market power/bargaining power in their negotiations with the major labels.
72. It is undisputed that Spotify and Apple Music compete for users. Spotify points out in public filings with the U.S. Securities and Exchange Commission that its “closest competitor” is
Apple Music.146 As articulated in Spotify’s 2018 filing, it faces “increasing competition for
Users from a growing variety of businesses, including other subscription music services around the world, many of which offer services that seek to emulate our Service.”147 Interactive, on- demand services emulate and enhance the same user-valued features to ensure user retention.148
145 D. Carlton and J. Perloff, Modern Industrial Organization, 4th Edition, 2005, p. 644: “Market shares are imperfect indicators of market power… For example, if entry is easy, then the industry pricing is severely constrained regardless of whether an existing firm has a large market share.” 146 NAB Ex. 106 (SOUNDEX_W5_000033096) (Spotify SEC Form-1 2018), at SOUNDEX_W5_000033103. 147 NAB Ex. 106 (SOUNDEX_W5_000033096) (Spotify SEC Form-1 2018), at SOUNDEX_W5_000033131 (emphasis added). 148 NAB Ex. 106 (SOUNDEX_W5_000033096) (Spotify SEC Form-1 2018), at SOUNDEX_W5_000033131. “Why Do We Still Pay Only $10 a Month for Music?,” Rolling Stone, December 11, 2019, https://www- 53 NAB Written Rebuttal Statement Dkt. No. 19-CRB-0005-WR (2021-25)
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For Spotify, user retention (i.e., competition) depends in large part on its “ability to continue to offer leading technologies and products, compelling content, superior functionality, and an engaging User experience.”149 Without these offerings, users can easily switch to Spotify’s closest competitor, Apple Music, or any other on-demand streaming service. Third-party apps such as Soundiiz further facilitate switching by enabling users to transfer personal playlists between streaming services, another contributing factor to these services’ substitutability.150
73. From the point of view of users, interactive services are substitutable, and therefore, each interactive service must continue to be competitive to retain its users. While the interactive services have attempted various forms of differentiation (e.g., some services offer higher sound quality), they share the same core functionality—unlimited access to large libraries of songs— that users desire from an interactive service.151 [
rollingstone-com.cdn.ampproject.org/c/s/www.rollingstone.com/music/music-news/music-streaming-10-month- fee-924809/amp/. 149 NAB Ex. 106 (SOUNDEX_W5_000033096) (Spotify SEC Form-1 2018), at SOUNDEX_W5_000033117; NAB Ex. 91 (SOUNDEX_W5_000026604) (Spotify 2018 SEC Form 20F), at SOUNDEX_W5_000026613. 150 “How to transfer playlists from Spotify to Apple Music,” AppleInsider, August 18, 2019, https://appleinsider.com/articles/19/08/18/how-to-transfer-playlists-from-spotify-to-apple-music. 151 While some existing users of a service may face a cost of switching to another service due to, e.g., costs of porting playlists, there are existing users that do not face such costs, apps and other methods to minimize such costs, and new users who do not face such costs. 152 See, e.g., NAB Ex. 86 (SOUNDEX_W5_000187914) (Mid-Year Review with RIAA September 2019), at SOUNDEX_W5_000187934. 153 NAB Ex. 95 (SOUNDEX_W5_000053352) (Spotify User Behavior Study), at SOUNDEX_W5_000053359.
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].154 Indeed, song selection and control over the music drive subscribers to choose interactive services over other available music services. For example, a study of new subscribers on Apple Music indicated
that, as compared to other services, [
].155 The functionalities most sought-after by users can be achieved only if the service has access to the catalogs of all the major labels.
74. If an interactive service is unable to provide superior functionality and broad music
selection, users will switch to other on-demand services offering the same core functionality and
desired music collection. User behavior studies produced by SoundExchange in this proceeding
demonstrate that [ ]. According to research
on Spotify’s premium service, [
].158
This type of switching behavior between interactive services is indicative of substitutability, which diminishes the ability of a service to maintain its users without remaining competitive, i.e., reduces an interactive service’s market power.
154 NAB Ex. 96 (SOUNDEX_W5_000052820) (Apple Music In-Platform Behavior Study), at SOUNDEX_W5_000052831. 155 NAB Ex. 107 (SOUNDEX_W5_000052867) (Apple New Subscriber Motivations Study), at SOUNDEX_W5_000052875. 156 NAB Ex. 95 (SOUNDEX_W5_000053352) (Spotify User Behavior Study), at SOUNDEX_W5_000053389. 157 NAB Ex. 95 (SOUNDEX_W5_000053352) (Spotify User Behavior Study), at SOUNDEX_W5_000053389. 158 NAB Ex. 95 (SOUNDEX_W5_000053352) (Spotify User Behavior Study), at SOUNDEX_W5_000053389.
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75. This substitutability from the user perspective is one reason Apple and Amazon were able
to increase their shares substantially and rapidly after their respective entries. Spotify and Apple have engaged in various tactics to improve their competitive positions relative to the other.159
Further evidence of the intense competition among interactive services for users (driven by user substitutability) is the decline over time in revenue per subscriber and subscription prices in real terms for interactive services.160 Despite inflation along with catalog and functionality
enhancements, base subscription prices have been the same for over a decade.161 Moreover,
discounts from this base price have been offered through, e.g., family plans.162 If anything,
competition among interactive services has grown more intense.
76. The effects of this downstream competition flow back upstream, weakening the services’
bargaining positions in licensing negotiations with the labels. The downstream competition for
users makes it crucial for an interactive service to be able to offer the core functionality of broad
access to music. This need, and the inability of services to steer, means that the services have
little leverage in negotiations with the major labels. From the labels’ perspective, because the
services are substitutable from the point of view of users, they are also substitutable from the
point of view of labels seeking to reach those users (and, of course, the labels have other
159 See “Apple Music vs Spotify: the music streaming titans go head-to-head,” TechRadar, June 18, 2019, https://www.techradar.com/news/audio/apple-music-vs-spotify-vs-play-music-vs-tidal-vs-deezer-1296240 (“Apple has gone to great means to cut Spotify and the smaller music streaming services out of the picture by signing some of the biggest names in popular music to exclusivity deals on new albums”). See also “A Lawsuit Against Apple’s App Store Could Be a Big Bonus for Spotify,” Rolling Stone, November 29, 2018, https://www.rollingstone.com/music/music-news/apple-app-store-spotify-lawsuit-760636/. 160 “Spotify Hits 108M Paying Users and 232M Overall, But Its Average Revenue Per User Declines,” Tech Crunch, July 31, 2019, https://techcrunch.com/2019/07/31/spotify-108-million/. 161 “Why Do We Still Pay Only $10 a Month for Music?,” Rolling Stone, December 11, 2019, https://www- rollingstone-com.cdn.ampproject.org/c/s/www.rollingstone.com/music/music-news/music-streaming-10-month- fee-924809/amp/. 162 See, e.g., “Best Music Streaming Services,” Consumer Reports, September 18, 2019, https://www.consumerreports.org/streaming-media/best-music-streaming-service-for-you/.
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channels for reaching users as well). A service could have market power over a label only to the
extent that it was a conduit between the label and users for which there was no close substitute.
However, the services are substitutes for each other. Consistent with these points, none of the
major interactive services has ever attempted to go without one of the major labels.
77. Mr. Orszag claims that a label would be hurt more than a service by a bargaining impasse
between them. This claim is unsupported. Following a significant decrease in its library of
songs, a subscription interactive service likely would have to give immediate discounts on
subscription fees to disgruntled users who were not getting what they paid for, would suffer
subscriber losses given the ease of switching to other services, and would sustain lasting harm to
its reputation. Mr. Orszag points to pre-payment of subscriber fees, but he fails to show that the
extent of pre-payment is significant, either in terms of users who do it or length of time covered.
In any event, a service would have to refund a significant portion of the pre-payments to avoid
harm to reputation that would otherwise occur by providing less than was promised. The label,
in contrast, would recapture a portion of the royalties via other channels to which users turned to
hear the label’s music. Moreover, a label would have a greater ability to wait out the impasse, given that it would continue to receive royalties from other sources, whereas the service’s entire subscription revenues would potentially be at risk given that it was not able to meet the primary driver of demand for an interactive service.
78. A further important factor is that the services face no substantial barriers to expansion.
Thus, any service could easily expand to accommodate users switching from other services.
Again, Apple and Amazon have shown how easy expansion is. Apple has participated in the
U.S. interactive subscription service segment for less than five years but expanded quickly and
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has overtaken Spotify in paid U.S. subscribers.163 There are also no significant barriers to entry.
In fact, potential entrants may face lower entry barriers since Congress’s adoption of the Music
Modernization Act (“MMA”). Starting in January 2021—the start of the rate term being decided here—the MMA will establish a new blanket license for the musical composition rights that are necessary to launch an interactive streaming service.164 As the then-CEO of the Digital Media
Association testified to Congress, “[b]y reducing uncertainty and increasing efficiency, the
MMA will result in greater consumer choice in the on-demand music streaming space, as new entrants will be able to launch a service with lower barriers to entry.”165 Entry by a new service faces no significant barriers. This is particularly the case for a platform with economies of scope, as in the cases of Apple, Google, and Amazon. Since 2015, several new interactive services have entered in the US, including Apple Music (2015), iHeartRadio and iHeartRadio All
Access (2016), Primephonic (2017), Pandora Premium (2017), YouTube Music (2018), and
Qobuz (2019).166 Furthermore, the fact that industry revenue has been growing makes entry
163 “Apple Music Overtakes Spotify in Paid U.S. Subscribers,” The Wall Street Journal, April 5, 2019, https://www.wsj.com/articles/apple-music-overtakes-spotify-in-u-s-subscribers-11554475924. 164 Public Law 115-264: Music Modernization Act, 132 Stat. 3676, October 11, 2018, Title I. 165 Statement of Christopher Harrison (Chief Executive Officer Digital Media Association), at the Hearing on “Protecting and Promoting Music Creation for the 21st Century,” May 15, 2018. 166 “Introducing Apple Music — All The Ways You Love Music. All in One Place,” Apple, June 8, 2015, https://www.apple.com/newsroom/2015/06/08Introducing-Apple-Music-All-The-Ways-You-Love-Music-All-in- One-Place-/ ; “iHeartMedia Launches First Ever -- and Only – Interactive on Demand Radio Services, ‘iHeartRadio Plus’ & ‘iHeartRadio All Access,’” BusinessWire, December 1, 2016, https://www.businesswire.com/news/home/20161201005685/en/iHeartMedia-Launches----%E2%80%93- Interactive-Demand-Radio/; “Primephonic launches hi-res classical-music streaming service,” Musically, June 14, 2017, https://musically.com/2017/06/14/primephonic-classical-music-streaming/; “Pandora’s on-demand music service finally arrives,” TechCrunch, March 13, 2017, https://techcrunch.com/2017/03/13/pandoras-on- demand-music-service-finally-arrives/; “YouTube Music and YouTube Premium Officially Launch in US, Canada, UK, and Other Countries,” The Verge, June 18, 2018, https://www.theverge.com/2018/6/18/17475122/youtube-music-premium-launch-us-canada-uk; “New high-res music streaming service Qobuz launches in US, takes aim at Spotify, Pandora,” USA Today, February 14, 2019, https://www.usatoday.com/story/tech/news/2019/02/14/spotify-pandora-have-new-competitor-music-streaming- service-qobuz/2860467002/.
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more attractive. Even the major labels have acquired or launched interactive streaming services
to enter the market – e.g., Sony has launched its own Hi-Res interactive service in Japan.167
79. Furthermore, similar to other internet industries, interactive services participate in a
segment that is dynamic and subject to rapid change, as demonstrated by the entry and
subsequent growth of Apple and Amazon. Even firms with leading shares can lose that share
quickly to existing or new competitors. For example, SoundCloud, despite being one of the top
five interactive services as of 2018, struggled to maintain its position as indicated by its mass
layoffs and rapid decline in its market valuation in 2017 due to intense competition from other
services that blunted its growth.168
80. Mr. Orszag claims that [
], which he argues is a further sign that the interactive services are exercising increased bargaining power in licensing negotiations with the labels.169 (Mr. Orszag, however, ignores the
labels’ [ ] on interactive services, which as discussed
above is a sign of the labels’ continued greater relative bargaining power over the services.) Mr.
Orszag’s claim is flawed for the following reasons.
81. First, in making this argument, Mr. Orszag only considers subscription interactive
services as a benchmark, and ignores ad-supported interactive services which are a better
167 “Why Has Sony Music Just Launched A Streaming Service (And Spotify Rival) In Japan?” Music Business Worldwide, December 11, 2018, https://www.musicbusinessworldwide.com/why-has-sony-just-launched-a- music-streaming-service-and-spotify-rival-in-japan/. 168 “Most popular music streaming services in the United States as of March 2018, by reach”, Statista, November 20, 2019, https://www.statista.com/statistics/798715/most-popular-us-music-streaming-services-ranked-by- reach/; “As Streaming Services Boom, SoundCloud Strives for Relevancy,” Wired, April 25, 2017, https://www.wired.com/2017/04/soundcloud-crossroads/; “SoundCloud, the ‘YouTube for audio’, cuts 173 jobs, closes San Francisco, London offices” TechCrunch, July 6, 2017, https://techcrunch.com/2017/07/06/soundcloud-the-youtube-for-audio-cuts-173-jobs-closes-san-francisco- london-offices/. 169 Orszag Report, pp. 73-75.
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benchmark for non-subscription non-interactive services (although still substantially flawed for the reasons discussed throughout this report).170 In fact, [
]. The reason that [
], by making efforts and investment to improve the value of its advertising platform to advertisers. Indeed, according to
Spotify’s Form 20-F of 2018, its ad-supported service generates revenue “from the sale of
display, audio, and video advertising delivered through advertising impressions.”172 In order to
increase its advertising revenue, Spotify has “introduced a number of new advertising products,
including sponsored playlists … and continue[d] to focus on analytics and measurement tools to
evaluate, demonstrate, and improve the effectiveness of advertising campaigns on [its]
platform.”173 These efforts have been made to “improve the efficiency and scalability of
[Spotify’s] advertising platform.”174 As Dr. Tucker acknowledges, Spotify launched its
“programmatic advertising” offering in 2015. She explains that such programmatic advertising
“enhances the attractiveness of digital music services to advertisers and enables digital music
services to compete better with large players in online advertising such as Google and
Facebook.”175 Dr. Tucker also acknowledges that Spotify launched its fast-growing self-service
170 Orszag Report, pp. 35-37, 42-43. 171 Calculated using Orszag data. 172 NAB Ex. 91 (SOUNDEX_W5_000026604) (Spotify 2018 SEC Form 20F), at SOUNDEX_W5_000026653. 173 NAB Ex. 91 (SOUNDEX_W5_000026604) (Spotify 2018 SEC Form 20F), at SOUNDEX_W5_000026653. 174 NAB Ex. 91 (SOUNDEX_W5_000026604) (Spotify 2018 SEC Form 20F), at SOUNDEX_W5_000026658. 175 Tucker Report, pp. 21-22.
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advertising platform in 2017, “Ad Studio.” She notes that self-service advertising platforms such
as these “platforms can help digital music services increase their advertising inventory.”176 To the extent [ ] is the result of Spotify’s efforts and investments in building its advertising platform, it would be incorrect to interpret [
] as due to increased Spotify bargaining power. Instead, the
[
] provides no support for an increase in Spotify market power – rather, it reflects Spotify’s
continuous efforts to improve its product quality and revenue generating ability in order to maintain its market position in a highly competitive market.
82. Moreover, Mr. Orszag is mistaken as a matter of economics in his claim that a decrease in the royalty as a percentage of revenue implies increasing market power on the part of the
interactive services. Mr. Orszag’s fundamental assumption—that the royalty should be the same
percentage of revenue, not only across services (which is wrong for the reasons discussed
above), but also across time, even as the downstream revenue per play fluctuates—is simply
wrong as a matter of economics. Indeed, if the interactive services are competitive in the
upstream licensing market and the downstream demand curve each service faces flattens (which
would occur, for example, with increased downstream competitiveness among them), the
176 Tucker Report, pp. 22-23. Spotify notes that the Ad Studio is their “fastest growing advertising channel” based on quarterly revenue and advertiser growth. See “Spotify’s Ad Studio is its fastest-growing advertising channel,” Music Ally, January 30, 2019, https://musically.com/2019/01/30/spotifys-ad-studio-is-its-fastest- growing-advertising-channel/. Additionally, Spotify’s Global Head of Advertising said, “The self-serve tool Ad Studio that allows smaller businesses to activate the Spotify free audience is a big growth area for us.” See “Spotify: Our Ads Business is a real Trigger for Growth,” Music Business Worldwide, October 31, 2018, https://www.musicbusinessworldwide.com/spotify-our-ads-business-is-a-real-trigger-for-growth-moving- forward/.
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percentage-of-revenue royalty would be expected to fall, [ ].
Thus, Mr. Orszag has no basis in economics to claim that the [
] is an indication that those services have
increased market power or bargaining power in upstream licensing negotiations.
83. This can be illustrated in a simplified, but instructive example. Suppose a monopolist
label of sound recordings sells a license to plays to a perfectly competitive intermediary industry
(i.e., services) at a royalty of r per unit. Each unit of the input is transformed by the
intermediaries into one unit of (homogeneous) output. Assume the intermediaries are perfectly
competitive and exhibit constant returns to scale with cost c per unit to transform the input.
Suppose downstream demand is Q(p), where p is the downstream unit price. Under these assumptions, downstream price equals to marginal cost177 (i.e., = + ) and the label chooses r to maximize its revenue that is equal to ∙ ( + ). The royalty as a percentage of revenue is