WDS of Pandora Media
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Before the UNITED STATES COPYRIGHT ROYALTY JUDGES The Library of Congress Washington, D.C. In the Matter of: Docket No. 16-CRB-0003-PR (2018-2022) Determination of Rates and Terms for Making and Distributing Phonorecords (Phonorecords III) WRITTEN DIRECT STATEMENT OF PANDORA MEDIA, INC. TABLE OF CONTENTS Tab Content 1 Introductory Memorandum to the Written Direct Statement of Pandora Media, Inc. (including summary of witness testimony) (Restricted) 2 Proposed Rates and Terms of Pandora Media, Inc. 3 Index of Witness Testimony 4 Index of Exhibits 5 Declaration and Certification of Benjamin Marks Regarding Restricted Materials 6 Redaction Log 7 Certificate of Service 8 Written Direct Testimony of Michael Herring (Restricted) 9 Written Direct Testimony of Christopher Phillips (Restricted) 10 Written Direct Testimony of Adam Parness 11 Written Direct Testimony of Michael L. Katz (including appendices) (Restricted) 12 Exhibits to the Written Direct Statement of Pandora Media, Inc. PUBLIC VERSION Before the UNITED STATES COPYRIGHT ROYALTY JUDGES The Library of Congress Washington, D.C. In the Matter of: Docket No. 16-CRB-0003-PR (2018-2022) Determination of Rates and Terms for Making and Distributing Phonorecords (Phonorecords III) INTRODUCTORY MEMORANDUM TO THE WRITTEN DIRECT STATEMENT OF PANDORA MEDIA, INC. Pandora Media, Inc. (“Pandora”) hereby submits its Written Direct Statement to the Copyright Royalty Judges pursuant to 37 C.F.R. § 351.4. Pandora’s proposed rates and terms for the compulsory license for making and distributing phonorecords during the 2018-2022 license period, the written direct testimony of Pandora’s witnesses, and Pandora’s exhibits are provided in subsequent tabs of this submission. SUMMARY OF TESTIMONY Until mid-September 2016, Pandora, the nation’s largest music streaming service, operated exclusively as a noninteractive streaming service compliant with the statutory license for ephemeral recordings and digital performance of sound recordings available under sections 112 and 114 of the Copyright Act. To publicly perform the musical works embodied in the sound recordings used in connection with its service, Pandora has relied primarily on blanket licenses secured from performing rights organizations. Because noninteractive streaming does not implicate the mechanical rights associated with musical works, Pandora has not previously PUBLIC VERSION operated under the statutory license at issue in this proceeding or otherwise needed to secure mechanical rights from music publishers. Pandora, however, has undertaken a comprehensive redesign of its service in order to combine the features that have driven its success to date—an interface that is simple to use along with expert curation that makes Pandora an engine of highly personalized music discovery and enjoyment—with interactive features that it believes will enable it to attract millions of new listeners to on-demand streaming and improve the monetization of its service. As explained in the accompanying testimony of Christopher Phillips, Pandora’s Chief Product Officer, Pandora just recently launched two of the three product tiers contemplated by its product redesign. The first product tier offers the same style of advertising-supported internet radio service that made Pandora the nation’s leading provider of “lean back” listening, but users now have the opportunity to earn additional skips and, for the first time, limited replay functionality by engaging with additional advertising. Pandora also has introduced a subscription-based service known as Pandora Plus. Pandora Plus is also primarily an internet radio service, but it provides subscribers with greater functionality than Pandora’s ad-supported tier provides, including more skips and the ability to replay the songs the user has recently listened to on the service without ad engagement, as well as the ability to listen offline to a limited number of cached stations. In the next few months, Pandora will introduce subscribers to the final tier of service contemplated by its redesign, Pandora Premium—a full on-demand offering with attributes that are unique to Pandora. Pandora Premium will combine Pandora’s expert curation and ability to serve as an engine of music discovery, its hallmark ease-of-use, and the ability to select particular songs and the order in which those songs are played, when the user is in the mood for complete control of what they hear and when. PUBLIC VERSION Pandora’s decision to withhold full interactivity from Pandora Plus and its ad-supported offering was both deliberate and strategic. A meaningful number of consumers are not currently—and may never be—willing to pay $9.99 per month for access to music, even if they would enjoy on-demand functionality. Offering its differentiated products across a range of price points will allow Pandora to reach millions of additional consumers that it could not reach as an exclusively noninteractive service, and it will create opportunities to upsell, over time, many millions of listeners introduced to Pandora through its radio-style offerings to its premium- priced offering. As explained in the accompanying testimony of Michael Herring, Pandora’s President and Chief Financial Officer, Pandora made the decision to develop interactive features well aware that no on-demand service has ever been able to operate profitably in the U.S. for any sustained period, if at all. Pandora, moreover, already has spent—in addition to its multi-billion- dollar investments in creating and developing its Music Genome Project, proprietary algorithms, and pre-existing internet streaming platform—over $100 million to develop interactive features. Pandora has entered into thousands of new direct licenses with sound recording and musical work copyright holders to secure the additional rights needed to offer interactive streaming. No longer compliant with the limitations of the compulsory license for noninteractive streaming under sections 112 and 114 of the Copyright Act, Pandora is now subject to a much higher music royalty structure than it was before. In other words, Pandora undertook enormous risk and expense to redesign its service in advance of receiving any benefit from the mechanical rights license at issue here. While Pandora’s , and while Pandora does not expect to be profitable according to Generally PUBLIC VERSION Accepted Accounting Principles (“GAAP”) by 2018, the start of the next section 115 statutory license period, Pandora believes—over time, and provided there is no increase in musical work royalty obligations from current statutory rates—it ultimately will be able to operate a sustainable and profitable music streaming business. As a result of numerous innovations that have increased access to music and music discovery for consumers, Pandora has unique advantages that make the success of its redesigned service possible, but Pandora would not have been willing to make the investments to offer interactive streaming if the prevailing mechanical license rates were set at the rates the copyright-owner participants have indicated they will be seeking in this proceeding. While the testimony and other evidence submitted as part of Pandora’s written direct case provides ample basis to conclude that current rates should be lowered, Pandora conservatively proposes to carry over the existing rates and rate structure for the 2018-2022 statutory license period, subject only to modest modification. Thus, as more fully described in the next tab, Pandora proposes: (i) for interactive streaming under subpart B and limited offerings under subpart C, services should continue to pay an “all-in” rate of 10.5% of service revenues for both mechanical and performance rights, subject to certain minima that vary by service characteristic and are determined with reference to the number of subscribers or a percentage of payments made to record labels for sound recording rights; and (ii) services should be able to deduct their payments for performance rights to determine the pool of mechanical royalties to be paid under the statutory license and allocated to individual rightsholders. Pandora submits, however, that the mechanical rights-only royalty “floors” in subpart B of the current regulations that are applied following the deductions for performance rights payments are not appropriate for the 2018-2022 license period and has proposed to eliminate that feature of the current rate structure. PUBLIC VERSION Professor Michael Katz, who holds the Sarin Chair in Strategy and Leadership at the University of California at Berkeley and has a joint appointment at the Haas School of Business Administration and the Department of Economics at Berkley, presents testimony that forms the economic basis for this rate proposal. Working within an economically appropriate framework that accounts for the rate-setting standard at issue in this proceeding—the section 801(b)(1) standard—Professor Katz explains why the industry-wide settlement that resulted in the current Section 115 license rates and terms (the “2012 Settlement”) is an excellent benchmark for setting rates and terms for the 2018-2022 license period and requires only modest modification. Based on his analysis of the 2012 Settlement, and as described more fully below, Professor Katz concludes that (i) an “all-in” rate structure for both mechanical and performance rights remains sound, (ii) the existing “headline” rate of 10.5% of revenue is, if anything, too high, and (iii) the “mechanical only” royalty floor in 37 C.F.R. §385.13 is not warranted and should be eliminated. Professor Katz’s conclusions, and the reasonableness of Pandora’s rate proposal, are reinforced by his analyses of two other sets of benchmark agreements: the recent direct license agreements that Pandora has entered into with music publishers and the recent settlement between record labels and publishers concerning subpart A of 37 C.F.R. §385. The remainder of this memorandum briefly describes the topics covered in the testimony of each of the fact and expert witnesses who will provide testimony in support of Pandora’s rate request. Fact Witnesses Michael Herring Michael Herring is Pandora’s President and Chief Financial Officer. Mr.