BEFORE THE UNITED STATES COPYRIGHT OFFICE LIBRARY OF CONGRESS WASHINGTON, D.C. In The Matter Of: Docket No. 2000-9 CARP DTRA1 & 2 Digital Performance Right in Sound Recordings and Ephemeral Recordings TESTIMONY OF MICHAEL FINK 1. I have been asked to provide expert testimony in this proceeding :oncerning two principal issues: (i) the promotional effect upon record sales ofInternet streaming ofmusic by Over-the-air broadcasters ("Broadcasters") and Internet-only webcasters ("Webcasters"), meeting the conditions ofthe statutory license under $ 114(f) of the Copyright Act ("$ 114(f) Streaming") and (ii) the displacement effect upon record sales (by reason of copying) of such $ 114(f) Streaming by Broadcasters and Webcasters. Because Internet streaming by Broadcasters and Webcasters is an infant industry, data bearing directly on the foregoing issues is quite limited. However, there are rich sources of data bearing on the effects on record sales of over-the-air radio broadcasting ofmusic, and these data would appear to be highly relevant in assessing the actual and potential effects of $ 114(f) Streaming. QUALIFICATIONS 2. I was chief executive officer ofthree firms operating services to the music industry that survey music consumption, sales and usage in the United States — Soundata, SoundScan and Broadcast Data Systems ("BDS") — until December 31, 2000; and I now serve as a management consultant to the firms operating these services. 3. Founded in 1987, Soundata is a monthly music study designed to enable corporations to quantify music sponsorships, special events and advertising decisions. The monthly music studies are mailed to a panel of sixteen hundred active music consumers who are chosen through a random digit dialing screening process. In order to qualify as a panel member a participant must be an active music consumer, which is defined as someone who has purchased at least three or more pieces ofmusic in the past six months. Each month Soundata panel members complete a self-administered questionnaire, along with a diary ofmusic, video and DVD purchases as well as concerts and movies they have attended over the past month. The Soundata panel represents an estimated seventy million active music consumers in the United States. 4. SoundScan is a data gathering service founded in 1991 that collects information on music sales from the vast majority ofretail outlets in the United States. Over 18,000 retail outlets, representing 86% of all retail music sales in the United States, report their sales information to SoundScan on either a daily or weekly basis. This information is projected up to 100% on a DMA (designated market area) basis to derive the estimated total retail music sales in the United States. The sales data is reported from the point of sale at the retail level by registering the sales ofmusical recordings based on. bar code scanning. SoundScan data is extremely accurate, with a margin of error ofless than 1% at the national level. Record companies use our data to track record sales, and artists, composers, and publishers use the data for royalty purposes. In numerous court cases involving disputes over the payment of copyright royalties, SoundScan data has been accepted as a reliable source of sales data. SoundScan also forms the basis for charts indicating the weekly, monthly and yearly top-selling albums and singles as reported in the popular trade publication, Billboard, and over 20 U.S. newspapers, including the Los Angeles Times, The New York Times and the Boston Globe. 5. BDS is a company founded in 1988 that measures what music is actually played on broadcast radio stations and those cable television channels that feature music videos. Today BDS monitors over 1000 radio stations in the United States and records close to two million song detections each week. Using a patented computer technology, BDS monitors the broadcasts, identifying songs as they are being aired. Each BDS monitor stores thousands ofunique electronic "fingerprints"'or patterns) of songs created by BDS computers. The patterns are created from music supplied by the record companies and radio stations. As a station plays a song, the digitized broadcast signal is compared with the pattern library. Once a song pattern has been recognized by the remote computer„ the system identifies the exact time, date, and station for that play. The data gathered by this service is routinely used by record companies to follow or measure what songs are being played and by which music radio stations. 6. Prior to forming Soundata and SoundScan, I was the President of George Fine Research, Inc. We conducted opinion polls for media outlets and many Fortune- 500 companies. We also performed a large amount ofwork in the telecommunications industry, gathering opinions from customers regarding new products and performing economic modeling work to support the setting ofnew rates. 7. I earned a Bachelor of Science in Management from New York University. I also completed all course work requirements towards a Master's degree in Statistics at Baruch College. A copy ofmy resume is attached hereto as Exhibit 1. 8. I have prepared expert reports and given expert testimony in a number of legal proceedings involving music copyright issues, including, most recently, A k M Records v NAPSTER, Civ. No. C 99-5183 (N.D. Cal.) and USA v ASCAP, Civ. No. 13— 95 (S.D.N.Y.). SUMMARY OF CONCLUSIONS 9. Based upon my analysis of data collected by Soundata, SoundScan and BDS, my review ofmany other surveys, research studies and reports prepared concerning radio and internet listening, and my own in-depth experience in and knowledge of the music industry for more than a decade, I have reached the following conclusions: a. It is a universal truth in the music industry that radio airplay ofmusic has a powerful promotional effect on the sale of sound recordings — the more a song is played on the radio, the greater the sales of recordings that include that song; b. Radio airplay is clearly and overwhelmingly the most significant driver of consumer awareness of artists, new songs and album releases, and in motivating music consumers to make album purchasing decisions; c. Listening to Internet music streaming is functionally very similar to listening to over-the-air radio, and therefore can be expected to have a similar promotional effect on the sale of sound recordings — i.e., the more a song is streamed over the Internet, the greater the sales of recordings that include that song; d. Internet streaming has certain features that enable this medium to have an even greater promotional impact on listeners than over-the-air radio play— specifically, the Web site &om which the streaming occurs provides an additional platform for promotional activities that are likely to increase record sales; e. Internet streaming ofmusic also provides a rich new medium for surveys and other research activities by which record companies will be able to study consumer listening preferences to enhance the business ofmaking sound recordings; f. There is no published evidence to date that copying of Internet streaming of music has had any displacement effect upon record sales — indeed, there is no evidence that such copying of streaming has been engaged in to any significant degree at all to date. THE POWER%K INFLUENCE OF RADIO ON MUSIC PURCHASING BEHAVIOR 10. Radio exposure greatly affects music consumers'urchasing decisions. Although other media (including, particularly, music television) can and do have a positive effect on record sales, data gathered &om a number of surveys conducted by Soundata, shows that nearly all music consumers listen to radio and that radio exerts more influence than any other form of exposure on music consumers when it comes to purchasing sound recordings. 11. On a typical day, 97% of all active music consumers (as defined by Soundata) spend time listening to radio. Music consumers spend, on average, one to two hours a day listening to radio. One out of every four music consumers listens to radio at least three hours a day if not more. During a typical week, music consumers listen to radio 12 hours, on average. Music consumers tune into an average ofthree different stations on a regular basis throughout a given week. 12. When asked to identify what form of advertising has the greatest influence on their music purchasing, music consumers overwhelmingly cited radio. Most recently, 67% of all music consumers stated that what they hear on radio influences them most when it comes to buying music, an 18 point increase since 1998 (49%). Television is a distant second in influence with a response of 16%. The chart below shows the overwhelming power ofradio in influencing music consumers purchasing decisions, as reported in surveys conducted in the past three years. "Which form of advertising do you feel influences you the greatest when it comes to purchasing prerecorded music?" 2000 1999 1998 Radio 67% 58% 49% Television 16% 22% 23% Magazine 5% 6% 8% Internet 2% 2% 2% Word ofMouth 2% 1% 2% Newspaper 1% 2% 4% 13. On a monthly basis, Soundata collects a log of all music purchases, together with detailed information about each purchase, from its panel of active music consumers. One item of information that'is collected for each purchase is "what influenced [them] most to buy" that piece of music. Soundata results from the past two years clearly point to "Heard on Radio" as being the factor that influenced music consumers purchase decisions most. 14. In 1999, there were 12,108 album purchases made by the Soundata music panel. Twenty-eight percent of all album purchases in 1999 were most influenced by what was "Heard on Radio." Fourteen percent of all album purchases in 1999 were most influenced by "Browsing in Store." In 2000, there were 10,982 album purchases made by the Soundata music panel.