PUBLIC sit~~ch~f~ MUSIC eNTIR781NM&NT SSQQuhadi?i~al~,~~~uuE. NcwYcrB . ~PrY .1662~11. Z128a31Ra~0 TESTIMONY OF RON ~7ILCOX Executive Vice President and Chief Business and Legal Affairs Officer SONY BMG MUSIC ENTERTAINMENT New York, NY Before the COPYRIGHT ROYALTY JUDGES Washington, D.C. PUBLIC OUALIFICATIONS My name is Ron Wilcox, and I am the Executive Vice President and Chief Business and Legal Affairs Officer of SONY BMG MUSIC ENTERTATNMENT. Zn that position, I oversee all of SONY BMG's Business and Legal Affairs activities, including negotiating deals with artists, music publishers, and digital music services and formulation of policies concerning new technologies and other matters. I have worked in the music business for almost 25 years. Prior to Sony's merger with BMG, I was Executive Vice President, Business Affairs and New Technology at Sony Music Entertainment. Between 1990 and 2000, I was Senior Vice President, Business Affairs & Administration at Sony Music. From 1983 to 1990, I worked in Business Affairs for CBS Records. Previously, I was an attorney for CBS Inc. I graduated ~om the College of Wooster in 1975 and the University of Michigan Law School in 1978. INTRODUCTION AND SUMMARY Record companies like SONY BMG are the driving force of the music industry. It is record companies that turn the notes and lyrics of songs - or often just an idea for a song - into a high-quality commercial product, connect it with an audience, and distribute it through every practicable means. The creative contribution and investment made by record companies are what makes it possible for songwriters and publishers to make money from songs. The music marketplace is undergoing fundamental and permanent changes. Historically, recordcompanies sold basically one product - physicalcopies ofrecordings. Even when new formats such as the CD were introduced, change was evolutionary. The basic business model and distribution channels of the industry remained essentially unchanged. Today, the old physical sales model is in decline. The future of the recording industry lies primarily in new PUBLIC channelsof distributionand new product and serviceofferings made possible by an explosionof transformativetechnologies and non-traditionalchannels of distribution. We are working every day to bringabout that futureby makingpossible distribution of musicthrough every available channel,although new media products are unlikely to makeup the declinein traditionalphysical product sales during the next statutoryroyalty rate period. Record companiesand their technologypartners have createda wide array of new products and servicesand developedinnovative new marketingstrategies. We have created new businessmodels and agreementsto formthe basisof the emergingdigital marketplace. All of this has requiredhigh capital investmentsand clearingenormous licensing and consumer acceptancehurdles. Music publishersdo not make such investments. Indeed,music publishers haverelied upon Section 115's inflexible rate structureand uncertainty concerning how new types of offeringsfit into that rate structureto resist our effortsto launch new products and services,even though they and their clients would stand to make more money if these new products and servicessucceed in the marketplace. SONY BMG led the industry with a business innovation to unlock storehouses of musical works and make them availableto consumersin a range of new product and service offerings. Theseso-called "New Digital Media Agreements" or'T\JDMAs" served the veryimportant purpose of allowingus quicklyto enter the marketplacewith a wide selectionof repertoirein a range of new formats. However,these NDMAswere not meant to set a rate precedentand should not be used as a benchmarkin this proceeding. The NDMAsrepresent an intricate and heavily negotiatedpackage of rights and rates that go beyond the scope of Section 115. We entered into these agreementsout ofnecessity, and made significantcompromises during the negotiations to enable the timely release of new and innovative products. For the reasons more -2- PUBLIC fully set forth below, the rates set in an NDMA for any particulartype of product should not be relied upon in setting rates in this proceeding. Going forward, we need a mechanical royalty rate structure and rate that will allow us to continueto innovate and make progressin definingthe new music marketplace. A percentage rate would be most appropriate. A percentageroyalty is the only way to cover all forms of phonorecorddistribution in the marketplacetoday and that may be developedin the next five years. It is alsothe onlyfair wayto addressuncertainty concerning pricing and variations among prices for differenttypes of offeringsin the marketplace. A percentageroyalty would allow artistic considerationsand consumerdemands to shape the form of futureproducts without the constraintsof an inflexible"cents rate" royalty. A percentageroyalty would allow entry into new and experimentalmarkets by reducingthe investmentrequired and risk undertakenwhile at the same time allowing publishers to share in our success if those markets are successful. We also need a mechanicalrate that reflects the overwhelmingcontributions and investmentsof recordcompanies and the risksand uncertainty of today's marketplace conditions. I have reviewed and supportRIAA's rate proposalin this proceeding. I believe that adoptingit wouldcontribute significantly to the abilityof recordcompanies to expandthe music business, to the betterment of everyone in the music value chain. In my testimony,I first provide some backgroundconcerning SONY BMG. Se~ond,I brieflydescribe current industry conditions and why they compel us to moveaggressively to use a wide variety of new technologiesto make our creativeworks availableto the public. Third, I describethe incrediblediversity of the emergingdigital marketplaceand the contributionsof record companies to its development. Fourth, I describe some of the difficulties we have had obtainingrights to distributemusical works in new ways despite Section 115's compulsory -3- PUBLIC license,and how we made progress in addressingthose problems with our NDMAs. Finally, I describewhy we needa percentagerate structure,and a rate lowerthan today's, to completethe transition to the music marketplace of the future. DISCUSSION I. Backgronnd Concerning SONY BMG SONY BMG is a global recordedmusic joint venturethat was formed in August 2004. It is 50%owned by BertelsmannAG and 50%owned by SonyCorporation of America.SONY BMGencompasses some of the mostinfluential and successfulrecord labels in the world,which are hometo a widearray of bothlocal and international artists, including Arista (Whitney Houston,Sarah McLachlan and Santana);Columbia Records (Aerosmith, Tony Bennett, Beyonce,Bob Dylan, Destiny's Child, Dixie Chicks, Bruce Springsteen and Barbra Streisand); EpicRecords (Incubus, Los Lonely Boys and Jennifer Lopez); Jive (R. Kelly, Britney Spears and JustinTimberlake); J Records(Alicia Keys, Annie Lennox and Rod Stewart); LaFace (OutKast, Pinkand Usher); RCA Records (Christina Aguilera, Dave Matthews Band and Avril Lavigne); SONY BMG Nashville(Kenny Chesney,Alan Jackson,Martina McBride, Travis Tritt and GretchenWilson); Masterworks (Yo-Yo Ma, Joshua Bell and The Five Browns); SONY BMG UK (I1Divo, Oasis, Sade, Westlife and Will Young); SONY BMG Japan (Kazumasa Oda); SONYBMG Italy (Eros Ramazzotti); SONY BMG Australia (Human Nature, Delta Goodrem); and over40 otherSONY BMG international companies, which are hometo suchmajor artists as CelineDion, Julio Iglasias, Leonard Cohen, Ricky Martin, Ricardo Arajona, Roberto Carlos, Jay Chang,Coco Lee, Lordi, Pascal Obispo, and La Orejade Van Gogh. In addition,SONY BMG is hometo a broadarray of catalogrecordings, including masterworksfrom such all-timegreats as Miles Davis, The Byrds, John Denver, Johnny Cash, FrankSinatra, Rosemary Clooney, Bing Crosby, Benny Goodman, Al Jolson,Janis Joplin, Louis -4- PUBLIC Armstrong, Dolly Parton, Elvis Presley, Vladimir Horowitz, Glenn Could and Stevie Ray Vaughan. II. Industry Conditions Since 1999, the recording industry has been hit by a "perfect storm" - a confluence of business conditionsthat have createdintense pressure on margins and caused a contractionin the business that is unprecedented in its history, including: Piracy - In the late 1990s,music began to be distributedover the Intemet - usually illegally - and at the same time, CD ripping and burning technologybecame widespreadand easy to use. Almost overnightit became easy for anyone with a computer to get a perfect digital copy of almost any recording ever made for free, burn it to a CD, and redistributeit electronicallyor in physical form. Today, we estimate that more permanentcopies of recordedmusic are acquiredillegally than legally. Harsh retail environment- Specialtyrecord stores have closed, including,most recently,Tower Records. In their place, "big box" retailerslike Wal-Mart,Target, and BestBuy have emerged as SONYBMG's largest retail accounts. Well over of SONY BMG's physical album sales in 2005 were through big box retailers. Our sales through specialtyrecord stores are considerablylower. During the first half of 2006, our sales throughTransworld, the largest owner of traditionalrecord stores, including such widely-knownchains as Sam Coody's, FYE, and Coconuts,were only about % of ourcombined sales through Wal-Mart, Target and Best Buy. Largeretailers today carry less selection, cutting into sales of older "catalog" releases; sell music at deep discounts;and