ASM RECORDS DECCA RECORD COMPANY PUBLIC VERSION DEUTSCHE GRAMMOPHDN GEFFEN RECORDS GLOBAL e INTERSCOPE RECORDS ISLAND DEF JAM MUSIC GROUP JIMMY AND DOUG'S FARMCLUB.corn MCA NASHVILLE MCA RECORDS MERCURY NASHVILLE MERCURY RECORDS MOTOWN RECORDS PHILIPS POLYDOR UNIVERSAL RECORDS VERVE MUSIC GROUP UMe TESTIMONY OF UNIVERSAL eLebs UNIVERSAL MUSIC INTERNATIONAL UNIVERSAL MUSIC ENTERPRISES UNIVERSAL MUSIC PUBLISHING GROUP LAWRENCE KENSWIL UNIVERSAL MUSIC S VIDEO DISTRIBUTION President, Universal eLabs UNIVERSAL MUSIC GROUP Santa Monica, CA Before the COPYRIGHT ARBITRATION ROYALTY PANEL Washington, D.C. April 2001 UNIVERSAL MUSIC GROUP 2220 COLORADO AVENUE SANTA MONICA CA 90404 TEL 310 865 5000 PUBLIC TABLE OF CONTENTS Page QUALIFICATIONS SUMMARY. DISCUSSION I. GENERAL LICENSING CONSIDERATIONS II. UMG'S INTERNET I ICENSING AGREEMENTS A. Interactive Radio License B. Music Locker License C. Digital Jukebox License D. Music Clip License PUBLIC TESTIMONY OF LAWRENCE KENSWIL QUALIFICATIONS I am the President of Universal eLabs, a division of the Universal Music Prior Group ("UMG"). I have headed eLabs since its founding in January 1999. Affairs. I to that, I was UMG's Executive Vice President for Business and Legal am a member of the Board of Directors of the Recording Industry Association of America ("RIAA") and a member of the Board of Directors of the International Federation of the Phonographic industry ("IFPI"). I have worked for UMG for 17 years. I also am a member of the RIAA Negotiating Committee, which oversees the negotiation of the webcaster statutory licenses. A summary of my professional background and education is attached to my testimony. Universal eLabs is UMG's center for developing global strategies for the electronic commerce ("e-commerce") marketplace and seeking out investment opportunities in e-commerce for UMG and its affiliates. Universal eLabs also operates a business incubation group that develops new businesses internally with the goal of spinning such businesses out into existing operating units or new free-standing divisions. Universal eLabs includes in-house research and development as well as business development staffs to support all of UMG's e- commerce efforts. As president of Universal eLabs, I oversee all of UMG*s efforts to license sound recordings for performance and distribution on the Internet. I have supervised all of UMG's Internet licensing activities and am responsible for approving UMG Internet licensing agreements. PUBLIC UMG is the world's largest music company. In 2000, its share of the sound recording market in the United States was about 27%. Artists on the UMG roster include Erykah Badu, Andrea Bocelli, Bon Jovi, Sheryl Crow, Dr. Dre, Guns'N'Roses, B.B. King, George Strait, Shania Twain, U2, and Trisha Yearwood, as well as Patsy Cline, the Andrews Sisters, Bing Crosby, and Louis Armstrong. UMG consists of the following record labels: A8 M Records, Decca Record Company, Deutsche Grammophon, Geffen Records, lnterscope Records, Island Def Jam Music Group, Jimmy and Doug's Farmclub.corn, MCA Nashville, MCA Records, Mercury Records, Motown Records, Philips, Polydor, Universal Records, and Verve Music Group. UMG also includes Universal Music and Video Distribution, Universal Music Publishing Group, Universal Music Enterprises, UM, Universal eLabs, mail order music and video clubs, and an extensive manufacturing system. Universal Music international manages local operations in over fifty countries. SUMMARY I will discuss some of the factors that we take into account when UMG enters into Internet licenses. I also will describe agreements UMG has negotiated with companies who seek to provide access to our sound recordings over the internet. I believe that these marketplace agreements, as well as the webcaster agreements negotiated by the RIAA Negotiating Committee, provide a sound basis for determining the statutory license royalty to be paid by webcasters. -2- PUBLIC DISCUSSION I. GENERAL LICENSING CONSIDERATIONS I have reviewed the public version of the testimony of Ron Wilcox of Sony Music, and agree with his observations about the factors that influence our view of the webcaster statutory license rates and terms. I wish to highlight two arguments that we hear frequently from prospective licensees, and how we have responded to these arguments in our marketplace negotiations. First, certain webcasters have expressed concern about their ability to operate a profitable business. We do not minimize the difficulties associated with operating an Internet business any more than we minimize the difficulties associated with operating our own business. Nevertheless, we strongly believe that webcasters should pay a fair market rate for the use of sound recordings- the most valuable component of their businesses — just as they do for all the other costs of running a business, such as storage and transmission of data. Second, webcasters frequently claim that their services will help increase sales of our physical product. It is far from clear whether, and to what extent, particular services may have that effect. In any event, what is important to UMG is that webcasters are exploiting our content to build their business. And those who attempt to build their business on the product we have created at great expense, effort and risk should expect to compensate us directly — and not indirectly through a hypothetical potential for increased sales. PUBLIC LAWRENCE KENSWIL Larry Kenswil is President of Universal eLabs, a division of the Universal Music Group ("UMG"). Universal eLabs is UMG's center for developing global strategies within the e-commerce realm and seeking out investment opportunities. It also houses a business incubation group that develops new businesses internally to be "spun out" into either existing operating units or new free-standing divisions. Universal eLabs includes in-house research and development as well as business development staffs to support all of UMG's e- businesses. Universal eLabs was formerly known as "eCAT," which Mr. Kenswil headed from its founding in January 1999. Previously, Mr. Kenswil was UMG's Executive Vice President, Business and Legal Affairs. Mr. Kenswil sits on the Boards of Directors of both the Recording Industry Association of America ("RIAA") and the international Federation of the Phonographic industry ("IFPI"). Mr. Kenswil is active in government affairs on behalf of the music industry, having testified before both congressional and administration committees. Mr. Kenswil holds a B.A. from Cornell University, an M.S. from Boston University, and a J.D. from Georgetown University. PUBLIC Universal Music is the largest music company in the world and includes Interscope/Geffen/ARM Records; Island/Def Jam Records; Universal/Motown Records; MCA Records; Verve/Impulse Records, Universal Music and Video Distribution, Universal Music International with businesses in over 50 countries, and Universal Music Publishing Group. PVBLIC Exhibits Sponsored bv Lawrence Kenswii RIAA Exhibit No. 057 DR — [Material Redacted Pursuant to Protective Order in Copyright Office Docket No. 2000-9 CARP DTRA 182] RIAA Exhibit No. 058 DR — [Material Redacted Pursuant to Protective Order in Copyright Office Docket No. 2000-9 CARP DTRA 1&2] RIAA Exhibit No. 059 DR — [Material Redacted Pursuant to Protective Order in Copyright Office Docket No. 2000-9 CARP DTRA 182] PUBLIC Notwithstanding the differences that may exist between UMG and our prospective licensees on these points, we do find ways to negotiate license agreements with Internet companies. And we believe that our license agreements should benefit us as well as our licensees. We also believe that these negotiated agreements, which are made in the absence of a statutory license (a license that makes us a forced seller), are useful models for the CARP to follow in establishing the rates and terms to be paid by webcasters availing themselves of the Section 112 and 114 licenses. I should note, however, that when UMG agrees to license a non-statutory service, we generally reach agreement on a variety of additional terms that address our concerns, ranging from cash payments, in the form of advances, guaranteed minimums and monthly or quarterly royalties, to other benefits, including the right to send messages to end users, links from the service's Web page to one or more Web pages designated by UMG, data on user demographics and usage, programming rights to promote certain UMG artists, advertising rights, and the option to purchase equity. Moreover, we receive the important contractual assurance that our licensees will operate their services in a secure manner that prevents the unauthorized reproduction of our sound recordings. We value all of these terms, and if we are unable to obtain them from companies operating under statutory licenses, the rate for those licenses should compensate us for the absence of these other terms that we obtain in free market negotiations. PUBLIC II. UMG'S INTERNET LICENSING AGREEMENTS A. Interactive Radio License [Material Redacted Pursuant To Protective Order In Copyright Office Docket No. 2000-9 CARP DTRA 1&2j PUBLIC [Material Redacted Pursuant To Protective Order ln Copyright Office Docket No. 2000-9 CARP DTRA 182] PUBLIC B. Music Locker License [Material Redacted Pursuant To Protective Order In Copyright Office Docket No. 2000-9 CARP DTRA 182] PUBLIC C. Digital Jukebox License [Material Redacted Pursuant To Protective Order ln Copyright Office Docket No. 2000-9 CARP DTRA 5 &2] PUBLIC D. Music Clip License [Material Redacted Pursuant To Protective Order ln Copyright Office Docket No. 2000-9 CARP DTRA 152] I declare under penalty of perjury that the foregoing testimony is true and correct to the best of my knowledge and belief. Date Lawrence Kenswil.