PUBLIC VERSION Before the UNITED STATES COPYRIGHT ROYALTY JUDGES THE LIBRARY OF CONGRESS Washington, D.C. In re ) ) DETERMINATION OF ROYALTY ) RATES AND TERMS FOR ) Docket No. 14-CRB-0001-WR (2016-2020) EPHEMERAL RECORDING AND ) DIGITAL PERFORMANCE OF ) SOUND RECORDINGS (WEB IV) ) PANDORA MEDIA, INC.’S PROPOSED FINDINGS OF FACT AND CONCLUSIONS OF LAW R. Bruce Rich (N.Y. Bar No. 1304534) Benjamin E. Marks (N.Y. Bar No. 2912921) Todd Larson (N.Y. Bar No. 4358438) David Yolkut (N.Y. Bar No. 4444543) Reed Collins (N.Y. Bar No. 4628152) Elisabeth M. Sperle (N.Y. Bar No. 5035571) WEIL, GOTSHAL & MANGES LLP 767 Fifth Avenue New York, NY 10153 Tel: 212.310.8000 Fax: 212.310.8007 [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] Jacob B. Ebin (N.Y. Bar No. 4774618) AKIN GUMP STRAUSS HAUER & FELD LLP Two Commerce Square 2001 Market Street, Suite 4100 Philadelphia, PA 19103 Tel: 212.965.1200 Fax: 212.965.1210 [email protected] Counsel for Pandora Media, Inc. June 19, 2015 PUBLIC VERSION TABLE OF CONTENTS INTRODUCTION ...........................................................................................................................1 I. THE GENESIS OF PANDORA, ITS PRODUCT OFFERING, AND THE NATURE OF THE MARKETPLACE IN WHICH IT OPERATES ......................7 A. Pandora’s Early History and the Development of the Music Genome Project ............................................................................................7 B. Pandora’s Playlist Technology ..................................................................10 C. The Pandora Listener Experience ..............................................................12 D. Pandora’s Position in the Digital Music Ecosystem ..................................14 II. THE WILLING BUYER/WILLING SELLER RATE-SETTING STANDARD, THE REQUIREMENT OF EFFECTIVE COMPETITION, AND THE IMPLICATIONS FOR THE PARTIES’ RESPECTIVE BENCHMARKS IN THIS PROCEEDING ..........................................................17 A. The Hypothetical Market – and the Benchmarks Used To Guide the Judges’ Analysis – Must Reflect Effective Competition .....................18 1. Prior Decisions of the Copyright Royalty Judges and Librarian of Congress, as well as the Legislative History, Require Rates that Reflect Effective Competition .........................18 2. Basic Economic Principles Require Effective Competition in the Hypothetical and Benchmark Markets .................................20 3. In an Analogous Setting, the ASCAP and BMI Rate Courts Have Interpreted “Reasonable” Rates to Signify Those that Would Prevail in a Competitive Marketplace ................................24 B. The Enumerated Statutory Factors Do Not Constitute Additional or Exclusive Considerations Separate From the Willing Buyer/Willing Seller Inquiry .....................................................................26 C. SoundExchange’s Interactive Service Benchmarks Fail the Most Basic Requirement of Reflecting the Workings of an Effectively Competitive Market and Should Be Rejected on that Basis Alone ...........30 1. By Their Own Admission, the Majors Control “Must Have” Repertoires for Interactive Services and are Economic Complements Rather than Substitutes ..........................31 2. Admissions from the Major Record Company Representatives, Coupled with Contractual Undertakings, Underscore the Absence of Effective Competition in the Licensing of Sound Recording Performance Rights in the Interactive Services Market ...........................................................36 i PUBLIC VERSION 3. SoundExchange’s Interest in Replicating the Non- Competitive Licensing Conditions of the Interactive Services Market in the Statutory Webcast Market Ignores the Competitive Market Standard Governing this Proceeding......................................................................................41 D. The Services’ Benchmarks Demonstrate the Workings of Effective Competition and Thus Satisfy the Basic Statutory Command ...................43 III. PANDORA’S DIRECT LICENSE WITH MERLIN: AN OPTIMAL BENCHMARK REFLECTING THE WORKINGS OF EFFECTIVE COMPETITION ....................................................................................................47 A. The Merlin Agreement Addresses the Same Rights At Issue Here, Involves the Same Buyers and Sellers, and Was Negotiated Under Effectively Competitive Conditions ..........................................................47 1. The Merlin Agreement ...................................................................49 2. The Concept of Steering – Which Lies At The Heart of the Merlin Agreement – Injects Competition into the Licensing of Sound Recording Performance Rights ......................................53 3. Merlin Includes Numerous Prominent Independent Labels, Which Produce Commercially and Critically Successful Music..............................................................................................56 B. The Reasonable Royalty Rates Implied By The Merlin Agreement Benchmark .................................................................................................59 C. Pandora’s Rate Proposal Fully Accounts For The Entirety of Consideration Received By Merlin ............................................................63 D. The Merlin Agreement is Representative of the Rates That the Major Record Companies Would Negotiate in a Workably Competitive Market ...................................................................................65 1. The Sound Recordings of Independent Labels Generally, and the Merlin Labels Specifically, Are as Valuable as Those of the Majors, and Independents Generally Secure Rates Through Sophisticated Bargaining at Around the Same Levels as the Majors ............................................................66 2. The Music Sales Experiments Show That Pandora’s Ability to Promote Is—If Anything—Larger for the Majors than for the Merlin Labels, Requiring No Upward Adjustment to the Merlin Benchmark ...................................................................68 3. Just as Pandora Can Steer Performances Toward Merlin Labels, Pandora Has a Proven Ability to Steer Towards or Away Each of the Majors ..............................................................69 ii PUBLIC VERSION 4. Professor Rubinfeld’s Own Empirical Analysis Confirms That The Merlin Labels Negotiate the Same or Similar Rates as the Majors in Their Other Direct License Deals ..............71 E. The Rates Reflected in the Merlin Agreement Are Above Competitive Levels—Not Below—Because the Statutory License Acts as a Magnet to Pull Rates Up............................................................73 F. SoundExchange’s Other Objections to the Merlin Benchmark Are Unfounded..................................................................................................75 1. Pandora Did Not Exert Any Undue Buyer-Side Market Power Over Merlin ........................................................................75 2. The Timing and Duration of the Merlin Agreement Do Not Inhibit Its Use as a Benchmark ......................................................76 3. The “First-Mover Advantage” Reflects Competition at Work ..............................................................................................78 4. Professor Talley’s Observations About “Low-Value” Buyers and Sellers is Untethered to Reality ..................................80 G. The Rates Agreed-To By Pandora and Naxos Are Similar To Those in the Merlin Agreement and Corroborate Pandora’s Proposed Rates Here ..................................................................................81 H. After Appropriate Adjustments, the Satellite II Benchmark Further Corroborates Pandora’s Proposed Rates ....................................................82 IV. THE IMPROPRIETY OF RELIANCE UPON SOUNDEXCHANGE’S BENCHMARK DRAWN FROM the NON-COMPETITIVE INTERACTIVE SERVICES LICENSING MARKET .........................................87 A. The Market To License Sound Recordings to Interactive Services Is Demonstrably Not Competitive .............................................................89 1. The Majors are “Must Have” Suppliers to the Interactive Services ..........................................................................................91 2. Major Record Label Witnesses Conceded That The Majors Do Not Compete When Licensing Interactive Services ................95 3. Record Labels, , Ensure that Any Potential For Competition Between Labels is Eliminated ........................................................96 4. Professor Rubinfeld’s Belated Efforts to Defend the “Competitiveness” of Licensing to Interactive Services Fall Flat .................................................................................................98 B. Professor Rubinfeld’s Analysis of the Interactive Benchmark Suffers a Number of Additional Crippling Flaws ....................................101 iii PUBLIC VERSION 1. Professor Rubinfeld Failed to Account for Critical Differences Between the Buyers in the Interactive Market and the Buyers in the Statutory Market .......................................101 a. Non-Interactive Services Have a Greater Ability to Steer Than Do Interactive Services ..................................103 b. Non-Interactive Services Are More Promotional of Other Record Company Revenues Than Are Interactive Services ..........................................................105 2. Professor Rubinfeld’s