PUBLIC VERSION Before the COPYRIGHT ROYALTY JUDGES LIBRARY OF CONGRESS Washington, D.C. ) ) ) ) Docket No. 2005-1 CRB DTRA DIGITAL PERFORMANCE RIGHT ) IN SOUND RECORDINGS AND ) EPHEMERAL RECORDINGS ) RADIO FINDINGS OFBROADCASTERS'ROPOSED FACT AND CONCLUSIONS OF LAW Bruce G. Joseph (D.C, Bar No. 338236) Karyn K. Ablin (D.C. Bar No. 454473) Matthew J. Astle (D.C. Bar No. 488084) WILEY REIN A FIELDING LLP 1776 K Street NW Washington, DC 20006 202.719.7258 202,719.7049 (Fax) bj oseph@wrf,corn [email protected] [email protected] Counselfor Bonneville International Corp., Clear Channel Communications, Inc.; National Religious Broadcasters Music License Committee, and Susquehanna Radio Corp. December 15, 2006 PUBLIC VERSION Before the 8; ~E)559 COPYRIGHT ROYALTY JUDGES LIBRARY OF CONGRESS OEC 1 gag Washington, D.C. QOppgllt RO)8llg Hggd ) IN THE MATTER OF: ) ) ) Docket No. 2005-1 CRB DTRA DIGITAL PERFORMANCE RIGHT ) IN SOUND RECORDINGS AND ) EPHEMERAL RECORDINGS ) RADIO FINDINGS OFBROADCASTERS'ROPOSED FACT AND CONCLUSIONS OF LA Bruce G. Joseph (D.C. Bar No. 338236) Karyn K. Ablin (D.C. Bar No. 454473) Matthew J. Astle (D.C. Bar No. 488084) WILEY REIN 8'c FIELDING LLP 1776 K Street NW Washington, DC 20006 202.719.7258 202.719.7049 (Fax) [email protected] kablin wrf.corn [email protected] Counselfor Bonneville International Corp., Clear Channel Communications, Inc.; National Religious Broadcasters Music License Committee, and Susquehanna Radio Corp. December 15, 2006 PUBLIC VERSION TABLE OF CONTENTS Pace PROPOSED FINDINGS OF FACT I. INTRODUCTION AND OVERVIEW II. RADIO BROADCASTERS AND AM/PM STREAMING. III. HISTORY OF RADIO'S RELATIONSHIP WITH THE SOUND RECORDING PERFORMANCE RIGHT A. CONGRESS HAS RESISTED GRANTING A BROAD SOUND RECORDING PERFORMANCE RIGHT IN ORDER TO PROTECT THE LONG-STANDING, MUTUALLY BENEFICIAL RELATIONSHIP BETWEEN RADIO BROADCASTERS AND THE RECORD INDUSTRY B. THE DIGITAL PERFORMANCE RIGHT ACT OF 1995 RECOGNIZED THE NEED TO PROTECT RADIO WITH THE RECORDBROADCASTERS'ELATIONSHIP INDUSTRY. 14 C. THE DIGITAL MILLENNIUM COPYRIGHT ACT OF 1998 CANNOT BE INTERPRETED TO HAVE CHANGED CONGRESS'S INTENT TO PROTECT RADIO BROADCASTERS'ELATIONSHIP WITH THE RECORD INDUSTRY 15 IV. THE ENORMOUS PROMOTIONAL VALUE OF AM/FM STREAMING TO ARTISTS AND RECORD COMPANIES WOULD PERVADE A COMPETITIVE MARKET AND MUST BE ACCOUNTED FOR BY A SUBSTANTIALLY REDUCED SOUND RECORDING PERFORMANCE ROYALTY FEE. ..17 A. THE RECORD IS REPLETE WITH EVIDENCE DEMONSTRATING THAT OVER-THE-AIR RADIO HAS SIGNIFICANT PROMOTIONAL VALUE.. 19 1. Witnesses Testifying on Behalf of SoundExchange and Broadcasters Agree that Radio Air Play "Is Crucial" to the Success of the Recording Industry and its Artists. 20 2. The Record Companies'wn Conduct Provides Further Evidence of the Value to the Record Companies Conferred by Radio Air Play. 25 3. Record Companies Spend Huge Sums to Encourage Radio Broadcasters to Perform their Recordings. 27 PUBLIC VERSION B. THE PROMOTIONAL VALUE OF AM/FM STREAMING IS AT LEAST AS GREAT AS THE PROMOTIONAL VALUE OF OVER- THE-AIR RADIO 32 C. SOUNDEXCHANGE DOES NOT SERIOUSLY DISPUTE THE PROMOTIONAL VALUE OF RADIO OR OF AM/FM STREAMING.... ....37 D. DR. BRYNJOLFSSON'S SUGGESTION THAT MARKET DEALS CAN BETTER ACCOMMODATE AM/FM STREAMING'S PROMOTIONAL VALUE THAN A RATE ADJUSTMENT IGNORES REALITY AND THE LAW. E. THERE IS NO EVIDENCE THAT.AM/FM STREAMING DISPLACES RECORD SALES 40 THE SIGNIFICANT CREATIVE AND TECHNOLOGICAL CONTRIBUTIONS BY RADIO BROADCASTERS TO THEIR PROGRAMMING — AS WELL THEIR CAPITAL INVESTMENTS, COST, AND RISK — POINT TOWARD A LOWER SOUND RECORDING PERFORMANCE ROYALTY A. THE STATUTE REQUIRES CONSIDERATION OF THE RELATIVE CREATIVE AND TECHNICAL CONTRIBUTIONS, AS WELL AS INVESTMENT, COST, AND RISK 45 B. ON THE MARGIN, RADIO BROADCASTERS MAKE SIGNIFICANT. TECHNICAL AND FINANCIAL CONTRIBUTIONS AND INCUR RISK RELATED TO AM/FM STREAMING; THE RECORD COMPANIES DO NOT 46 1. There Is No Evidence that Record Companies Make any Marginal Creative Contributions, Technological Contributions, Capital Investments, or incur Cost, or Risk in Connection with AM/FM Streaming. 46 2. Radio Broadcasters Make Significant Technological and Financial Contributions Specific To Streaming. 3. Radio Broadcasters Incur Significant Operating Costs to Provide AM/FM Streaming. 50 4. Radio Broadcasters Continue To Face Substantial Risks Related to AM/FM Streaming. 51 IN CREATING THEIR BROADCAST PRODUCTS FOR OTHER USES, RADIO BROADCASTERS'REATIVE CONTRIBUTIONS ARE AT LEAST AS GREAT AS THOSE OF THE RECORD LABELS IN CREATING THEIR SOUND RECORDINGS 52 PUBLIC VERSION 1. Radio Broadcasters'roduct Requires the Creation of a Package of Compelling Audio Content. 2. Radio Broadcasters Employ Program Directors Who Determine the Creative Focus for a Station. 55 3. On-Air Talent Add Significant Creative Contributions To The Content That Is Aired On The Radio. 56 4. Radio Broadcasters'ebsites Are Significant Creative Contributions To The Listening Experience, Whether Over-The- Air Or Online.......................................................... 58 VI. IN A COMPETITIVE MARKET, THE SOUND RECORDING LICENSE FEES FOR AM/jFM STREAMING WOULD BE LOWER THAN THOSE FOR INTERNET-ONLY WEBCASTING DUE ITS UNIQUE CHARACTERISTICS......... 61 A. UNLIKE INTERNET ONLY WEBCASTERS, RADIO BROADCASTERS CAN REACH THEIR AUDIENCE AND CARRY ON THEIR CORE BUSINESS USING THEIR PRIMARY MEDIUM, FOR WHICH NO SOUND RECORDING FEE IS DUE. B. THE PROMOTIONAL VALUE TO THE RECORD COMPANIES AND ARTISTS OF AM/FM STREAMING IS BEYOND DISPUTE AND SOUNDEXCHANGE'S OWN TESTIMONY CONFIRMS THAT ITS PROMOTIONAL VALUE EXCEEDS THAT OF INTERNET-ONLY WEBCASTS 67 1. Radio Simulcasts Are Even More Promotional of Record Sales than Internet-Only Webcasts. .68 2. AM/FM Streaming Poses Even Less of a Risk of Substituting for Record Sales than Internet-Only Webcasting. .73 3. The Greater Promotional Value of Radio Simulcasts Must Be Accounted for in the Fees Applicable to Radio Simulcasters....... ....79 THE SOUND RECORDING PERFORMANCE RIGHT IS OF RELATIVELY LESS VALUE TO AM/FM STREAMING THAN TO INTERNET-ONLY WEBCASTING BECAUSE RADIO BROADCASTERS CONTRIBUTE MORE ORIGINAL NON-MUSIC CONTENT TO THEIR PROGRAMMING THAN INTERNET-ONLY WEBCASTERS. .81 D. HOUR FOR HOUR, FEWER SOUND RECORDINGS ON AVERAGE ARE TRANSMITTED VIA AM/JFM STREAMING THAN VIA INTERNET-ONLY WEBCASTING. PUBLIC VERSION E. THE FACT THAT DIFFERENT MUSICAL WORKS PERFORMANCE RIGHTS AGREEMENTS EXIST FOR AlVMFM STREAMING THAN FOR INTERNET-ONLY WEBCASTING CONFIRMS THAT AM/FIVI STREAMING SHOULD BE SUBJECT TO A Dll'l'TRENT, AND LOWER, FEE.. VII. SOUNDEXCHANGE'S "ONE-SIZE-FITS-ALL" FEE MODEL FAILS TO ACCOUNT FOR THE SIGNIFICANT DIFFERENCES BETWEEN LARGE INTERNET-ONLY WEBCASTERS AND RADIO SIMULCASTERS............... ....88 A. SOUNDEXCHANGE PRESENTS NO CASE WITH RESPECT TO AM/FM STREAMING EXCEPT A BOOTSTRAP ARGUMENT THAT ITS FEE PROPOSAL, BASED ENTIRELY ON LARGE INTERNET- ONLY WEBCASTING, SHOULD APPLY 88 Dr. Pelcovits'ee Model Is Based Entirely on Internet Only Webcasting—and Did Not Account for AM/FM Streaming.. ........, 89 2, Dr. Brynjolfsson's Fee Model Is Based Entirely on Internet Only Webcasting—and Did Not Account for AM/FM Streaming.................... 91 SOUNDEXCHANGE'S FEE MODELS AND FEE PROPOSAL DO NOT ACCOUNT FOR THE PLETHORA OF DIFFERENCES BETWEEN AM/FM STREAMING AND INTERNET ONLY WEBCASTING. 93 C. SOUNDEXCHANGE'S ASSERTED JUSTIFICATIONS FOR ITS BOOTSTRAP ARE UNSUPPORTED BY THE RECORD. 93 VIII. SOUNDEXCHANGE'S PROPOSED FEE METRIC BASED ON A PERCENTAGE OF REVENUE IS WHOLLY INAPPROPRIATE FOR RADIO BROADCASTERS.......................................... 94 A. REVENUES EARNED BY RADIO BROADCASTERS ARE RELATED TO ORIGINAL CONTRIBUTIONS, NOT TO THE MUSIC THEY PLAY 96 The Contributions of On-Air Talent Drive Radio Revenues.... ....97 2. The Contributions Of Programming Directors Contribute to Radio Revenues. 99 Radio Stations Must Develop a Relationship With Their Audience...... 100 4. Radio Station Sales and Marketing Skills also Drive Radio Revenues.. 100 5. Music Does Not Drive Radio Revenues. 101 PUBLIC VERSION B. VOLUNTARY AGREEMENTS FOR PERFORMANCE RIGHT ROYALTIES DEMONSTRATE THAT WILLING BUYERS AND SELLERS WILL NOT AGREE TO A PERCENT-OF-REVENUE METRIC . 103 C. SOUNDEXCHANGE'S PERCENT-OF-REVENUE METRIC DOES NOT ACCOUNT FOR DIFFERENT LEVELS OF MUSIC USE......... 104 D. SOUNDEXCHANGE'S HISTORY DEMONSTRATES THAT A PERCENT-OF-REVENUE FEE METRIC IS A RECIPE FOR ABUSE AND CONTROVERSY .106 E. IF ANYTHING, RADIO BROADCASTERS SHOULD SHARE IN THE REVENUES OF THE RECORD LABELS DUE TO THEIR TREMENDOUS CONTRIBUTION TO THE SUCCESS OF SOUND RECORDINGS 109 IX. SOUNDEXCHANGE'S PROPOSED "GREATER OF" METRIC IMPROPERLY ALLOCATES ALL RISK ON THE SERVICES.. 110 X. FINANCIAL RESULTS FROM AM/FM STREAMING DEMONSTRATE THE RISK FO A FEE SET HIGHER THAN A COMPETITIVE FAIR MARKET RATE AND CERTAINLY DO NOT SUPPORT AN INCREASED ROYALTY RATE A. THE VALUE OF THE SOUND RECORDING PERFORMANCE RIGHT CANNOT BE DETERMINED BY THE OVERALL SUCCESS OF RADIO BROADCASTERS'TREAMING OPERATIONS; AT MOST, LACK OF SUCCESS CAN SHOW THAT A RATE WAS SET TOO HIGH B. STREAMING WAS A LOSING PROPOSITION FOR THE ENTIRE PERIOD OF THE PRIOR FEE (1998-2005) C. EVEN NOW, RADIO BROADCASTERS'INANCIAL EXPERIENCE WITH AM/FM STREAMING CANNOT BE CALLED A SUCCESS.......... ... 114 1. Dr. Brynjolfsson Relies On Incomplete Information To Make Generalizations About The Entire AM/FM Streaming Industry.... ... 114 2. The Evidence Does Not Support Dr. Brynjolfsson's Conclusions about the Radio Broadcasters'articipating in this Case ................. ..