Before the UNITED STATES COPYRIGHT ROYALTY JUDGES Library of Congress Washington, D.C. ) In re ) ) DETERMINATION OF ROYALTY ) DOCKET NO. 14-CRB-0001-WR RATES AND TERMS FOR ) (2016-2020) EPHEMERAL RECORDING AND ) DIGITAL PERFORMANCE OF SOUND ) RECORDINGS (WEB IV) ) ) TESTIMONY OF JONATHAN BENDER Chief Operating Officer, SoundExchange, Inc. Witness for SoundExchange, Inc. I. Background and Qualifications I am the Chief Operating Officer of SoundExchange, Inc. (“SoundExchange”). I have held this position since September 2011. I have more than 20 years of music industry business and management expertise, including senior operational roles at Concord Music Group, Universal Music Group, and EMI Music. I was senior vice president, operations, IT and digital development at Concord Music Group, one of the fastest growing independent label groups in the world. At Concord, I designed and managed a consolidated digital infrastructure to host and distribute the artist catalogs of the three combined companies: Concord Records, Fantasy Records, and Telarc International. I also led the integration of all physical product operations and revamped all of the group’s online properties. Before joining Concord, I spent seven years with Universal Music Group, most recently as vice president, digital asset management and logistics. In this role, I served as team leader for the building of the music industry's first e-commerce distribution infrastructure, and converted production operations from physical assets to digital. I also spent nine years with EMI Music, formerly one of the world's largest music companies. As director of new technology based in London, I implemented the industry's first worldwide transmission network for production assets, setting global standards for digital assets and metadata. I hold a bachelor's degree from the University of North Carolina at Chapel Hill, where I was a Morehead Scholar, and an MBA from Harvard Business School. My responsibilities as SoundExchange's Chief Operating Officer include overseeing the collection, processing and distribution of royalty payments for the performance of sound recordings through the various types of services eligible for statutory licensing, including the webcasting services at issue in this proceeding. I supervise SoundExchange staff who receive 2 reports of use from licensees, determine the amounts owed to copyright owners and performers, and process the distributions of royalties to those individuals and entities. The groups within SoundExchange that handle account services, distribution services, data management, claims and license management all report to me. Additionally, I oversee SoundExchange's technical involvement with licensees and assist with coordination of its systems requirements, development, and testing. II. Overview I will address several subjects in this testimony. I will describe the operations of SoundExchange and the services it provides. I will identify the activity of webcasters during the last license period, particularly with respect to the number of licensees and types of fees paid by licensees. I will explain why SoundExchange should be the sole Collective for collecting and distributing royalties under the Section 112 and 114 licenses. Finally, I will provide reasons to support SoundExchange's proposals with respect to the minimum fees, treatment of ephemeral royalties, and terms of the statutory licenses at issue in this proceeding. III. SoundExchange's Processing and Distribution of Royalties A. Overview of SoundExchange SoundExchange is a 501(c)(6) nonprofit performance rights organization established to ensure the prompt, fair and efficient collection and distribution of royalties payable to performers and sound recording copyright owners for the performance of sound recordings over, among other things, the Internet, cable and satellite television networks, and satellite radio services via digital audio transmissions. SoundExchange is governed by an 18-member Board of Directors that is made up of equal numbers of artist representatives and sound recording copyright owner representatives. Copyright owners are represented by board members associated with the major 3 record companies (four), independent record companies (two), the Recording Industry Association of America (two), and the American Association of Independent Music (one). Artists are represented by one representative each from the American Federation of Musicians (“AFM”) and the Screen Actors Guild - American Federation of Television and Radio Artists (“SAG-AFTRA”). There are also seven at-large artist seats, which are currently held by artists’ lawyers and managers, as well as a recording artist. In the previous Webcasting III proceeding, Docket No. 2009-1 CRB Webcasting III, the Judges designated SoundExchange “as the Collective to receive statements of account and royalty payments from Licensees due under § 380.3 and to distribute such royalty payments to each Copyright Owner and Performer, or their designated agents, entitled to receive royalties under 17 U.S.C. 112(e) or 114(g).” 37 C.F.R. § 380.4(b). Since its founding, SoundExchange has, on behalf of artists and record labels, sought the establishment of royalties and regulations that enable the prompt, fair and efficient distribution of royalties to all those artists and copyright owners entitled to such royalties. In addition to participating in rate-setting proceedings, SoundExchange has represented artists and record labels with respect to other issues, such as notice and recordkeeping. SoundExchange also undertakes a number of measures to protect the interests of artists and copyright owners under the statutory licenses, including by conducting audits of licensees, seeking and obtaining compliance by noncompliant licensees, and engaging in other enforcement and compliance measures. SoundExchange frequently refers to those record labels and artists who have specifically authorized us to collect royalties on their behalf as “members.” We have approximately 18,000 rights owner members (including both record labels and artists who own the copyrights in their 4 own recordings) and more than 40,000 artist members. We also pay statutory royalties to non- members — copyright owners and artists alike — as if they were also members. In total, and because some artists and rights holders maintain multiple accounts, we maintain more than 100,000 accounts for recording artists and rights holders. SoundExchange has distributed royalties based on trillions of digital sound recording performances, and processes royalties related to tens of billions of webcasting performances each month. To date, SoundExchange has conducted a total of 61 royalty distributions and has made more than 510,000 individual payments totaling more than $2 billion. SoundExchange paid out statutory royalties of approximately $293 million in 2011, $462 million in 2012, $590 million in 2013, and, in just the first six months of 2014, SoundExchange has already paid out $323.6 million. SoundExchange strives to minimize the administrative costs associated with royalty collection and distribution. SoundExchange has 142 full-time staff members. In 2013, our administrative rate was 4.5%. For comparison purposes, the American Society of Composers, Authors and Publishers (“ASCAP”) reported operating expenses of 11.6% for 2012 (http://www.ascap.com/~/media/files/pdf/about/annual-reports/2012-annual-report.pdf). B. Royalty Collection and Distribution SoundExchange's core mission is to collect and distribute statutory royalties as efficiently and accurately as possible. SoundExchange has developed sophisticated systems, business processes and extensive databases uniquely suited to the challenging task of distributing statutory royalties. For managing royalty collection and distribution, SoundExchange employs the following operational procedures. 5 Receipt of Payment. SoundExchange's License Management Department receives from statutory licensees royalty payments and, when the system works properly, two reports: (1) statements of account that reflect the licensee’s calculation of the payments for the reporting period; and (2) reports of use that log performances of sound recordings. (We also receive notices of election that indicate whether the licensee has utilized any optional rates and terms.) When SoundExchange receives payment from a licensee, that payment is logged into SoundExchange’s licensee database. If this is the first payment from a licensee, a new profile is created for the licensee. If the licensee has previously paid royalties, then the payment is entered under the existing profile. If the licensee operates services in multiple rate categories, the royalty payments are allocated among the applicable rate categories based on the statements of account. Similarly, aggregated payments by a parent corporation covering corporate subsidiaries (e.g. by a radio station group covering individual radio stations) may be allocated among the subsidiaries if the parent provides separate statements of account for each of the covered subsidiaries. Loading of Reports of Use. Reports of use are associated with a service’s payments and statements of account for a particular period and loaded into SoundExchange’s system. Details of the required reporting vary among different types of services, but broadly speaking, the reports are supposed to provide information about matters such as the sound recording title, album, artist, marketing label, International Standard Recording Code (“ISRC”)