Electronically Filed PUBLIC VERSION Docket: 19-CRB-0005-WR (2021-2025) Filing Date: 01/28/2020 10:51:09 PM EST Before the UNITED STATES COPYRIGHT ROYALTY BOARD LIBRARY OF CONGRESS Washington, D.C. In the Matter of: Determination of Rates and Terms for Docket No. 19-CRB-0005-WR Digital Performance of Sound Recordings (2021-2025) and Making of Ephemeral Copies to Facilitate those Performances (Web V) CORRECTED WRITTEN REBUTTAL STATEMENT OF THE NATIONAL ASSOCIATION OF BROADCASTERS Volume 1 of 5 Sarang Vijay Damle (D.C. Bar No. 1619619) [email protected] 555 Eleventh Street, NW, Suite 1000 Washington, D.C. 20004-1304 T: (202) 637-2200 F: (202) 637-2201 Joseph R. Wetzel (CA Bar No. 238008) [email protected] Andrew M. Gass (CA Bar No. 259694) [email protected] 505 Montgomery Street, Suite 2000 San Francisco, CA 94111-6538 T: (415) 391-0600 F: (415) 395-8095 Counsel for the National Association of Broadcasters January 28, 2020 Table of Contents for the Corrected Written Rebuttal Statement of The National Association of Broadcasters Volume 1: Documents and Witness Testimony A. Introductory Memorandum to the Written Rebuttal Statement B. Index of Rebuttal Witness Testimony C. Rebuttal Index of Exhibits D. Corrected Written Rebuttal Testimony of Gregory K. Leonard and Appendices E. Written Rebuttal Testimony of John R. Hauser and Appendices F. Written Rebuttal Testimony of Joseph Ritz G. Confidentiality Declaration and Certification H. Certificate of Service Volume 2: NAB Exhibits 78-90 Volume 3: NAB Exhibits 91-105 Volume 4: NAB Exhibits 106-123 Volume 5: NAB Exhibits 124-146 NAB Written Rebuttal Statement Dkt. No. 19-CRB-0005-WR (2021-25) TAB A PUBLIC VERSION Before the UNITED STATES COPYRIGHT ROYALTY BOARD LIBRARY OF CONGRESS Washington, D.C. In the Matter of: Determination of Rates and Terms for Digital Performance of Sound Recordings Docket No. 19-CRB-0005-WR and Making of Ephemeral Copies to (2021-2025) Facilitate those Performances (Web V) INTRODUCTORY MEMORANDUM TO THE WRITTEN REBUTTAL STATEMENT OF THE NATIONAL ASSOCIATION OF BROADCASTERS The National Association of Broadcasters (“NAB”) presented evidence and expert opinion in its written direct case that digital simulcasts of over-the-air radio broadcasts are fundamentally different from other non-interactive services, and as a result, the Judges should establish a lower royalty rate for simulcasts. It should not have come as a surprise to SoundExchange that NAB would present such a case; NAB proposed just such a differential in Web IV, and SoundExchange’s own members have entered into numerous direct licenses applying materially different economic terms to simulcasts than to custom radio offerings. SoundExchange had every opportunity in its written direct case to demonstrate why simulcast transmissions should be treated the same as custom radio transmissions, or to address simulcasts at all.1 Instead, SoundExchange’s written direct case ignored completely the important distinctions between simulcasts and other non- interactive services. SoundExchange’s entire direct case simply assumes that simulcasters and 1 As noted in the NAB’s written direct case, although there are some non-custom, non- simulcast streaming services in the marketplace, they form a fairly small share of the market. See Written Direct Testimony of Gregory K. Leonard, ¶ 35. 1 NAB Written Rebuttal Statement Dkt. No. 19-CRB-0005-WR (2021-25) PUBLIC VERSION custom radio services occupy the same market and that consumers view them interchangeably. But all of the available evidence demonstrates otherwise. Based on the record to date, NAB has established that a separate, lower rate for simulcasts is appropriate. In virtually every agreement between record labels and services that offer both simulcasts and custom radio, the labels have agreed to license simulcasts at a substantially lower rate than custom radio. So too for other music license agreements, such as those executed by “performing rights organizations” like ASCAP and BMI. Moreover, NAB conducted a consumer survey that shows that, if simulcasts were unavailable, almost a third of simulcast listeners would switch to over-the-air broadcasts and not to any royalty-generating service. Using these survey results, NAB’s economic expert Dr. Gregory Leonard performed an opportunity cost analysis that shows that, in a hypothetical competitive marketplace, willing buyers and willing sellers of licenses to stream sound recordings would agree to rates for simulcasts far below the current statutory rate. Because the plurality of simulcast listeners would switch to over-the-air broadcasts if they could not listen to simulcasts, sellers would recognize that the cost of not doing a deal would be a substantial loss of accretive revenue, resulting in a lower royalty rate. This result makes sense: as NAB’s fact witnesses explained, people listen to simulcasts for reasons that are very different from the reasons they listen to music-centered services, including the on-air personalities, content about local events and emergencies, and human connection. Nothing in SoundExchange’s written direct case is contrary to—or even addresses—any of these points. Indeed, without any support for doing so, SoundExchange lumps together simulcast and custom radio and proposes a single higher royalty rate for all non-interactive services. That rate is based on Dr. Robert Willig’s opportunity cost calculations and Mr. Jonathan Orszag’s benchmarking analysis. Neither expert provides any reason that simulcasts and custom 2 NAB Written Rebuttal Statement Dkt. No. 19-CRB-0005-WR (2021-25) PUBLIC VERSION radio services should pay the same royalty rate, and both reports suffer from serious flaws that inappropriately inflate SoundExchange’s rate proposal. To make matters worse, one of SoundExchange’s core arguments for a rate increase is the alleged convergence between custom radio services and interactive services—a rationale with no application whatsoever to simulcasts. Dr. Willig’s opportunity cost calculations are unreliable because they are based on a flawed consumer survey conducted by Professor Gal Zauberman, which purports to determine how listeners of “streaming radio services” would listen to music if those “streaming radio services” were no longer available. As an initial matter, this survey sheds no light at all on the switching behavior of simulcast listeners in particular, since the switching hypothetical asked respondents to imagine that both simulcasts and custom radio were no longer available. Moreover, as NAB’s survey expert Dr. John Hauser explains, flaws in the design of Professor Zauberman’s survey lead to overestimates of switching to new, paid music subscriptions. For example, if a respondent indicated that he or she had not listened to an existing paid on-demand streaming service in the last thirty days, the respondent was only given the option to subscribe to a paid on-demand service; there was no option to switch to the respondent’s existing paid on-demand service, even though there are many reasons why someone might not have listened to (or remembered listening to) his or her existing paid service in the prior thirty days. Likewise, the switching question—which asked respondents which music-listening options they would choose—improperly encouraged respondents to select music over non-music activities. In addition, the survey failed to distinguish between making new purchases of physical or digital records, and listening to an existing physical or digital music collection. Finally, a basic flaw in the survey’s design means that the survey cannot accurately measure how listeners would allocate their time across substitute options. Any one of these flaws, standing alone, would render Professor Zauberman’s survey an unreliable tool 3 NAB Written Rebuttal Statement Dkt. No. 19-CRB-0005-WR (2021-25) PUBLIC VERSION to estimate switching to royalty-generating activities. Taken together, these flaws are so serious that the survey should be ignored in its entirety. Moreover, as Dr. Leonard explains, the flaws in Professor Zauberman’s survey infect Dr. Willig’s opportunity cost calculations, and therefore his Shapley Value and Nash-in-Nash analyses. By assuming that any respondent who did not report listening to a subscription service in the prior thirty days is not already a subscriber and would pay a new subscription fee in the absence of non-subscription non-interactive services, Dr. Willig overstates the opportunity cost. Similarly, Dr. Willig inflates the opportunity cost by assuming that each respondent who said he or she would switch to a CD or digital music collection would purchase new CDs or digital music rather than listen to an existing collection. Further, Dr. Willig implausibly assumes that, where a respondent indicated he or she would switch to more than one subscription service, that respondent would actually subscribe to multiple services instead of just one—again resulting in a magnified opportunity cost. Finally, even setting aside the problems with Dr. Willig’s opportunity cost inputs, his Shapley Value and Nash-in-Nash frameworks are not specific to simulcast, offer no justification for using Pandora’s financials as a proxy for simulcasters, and make a number of improper simplifying assumptions that may result in an overstated royalty calculation. Mr. Orszag’s benchmarking analysis is an equally unsound basis for SoundExchange’s proposed rate. As a threshold matter, Mr. Orszag entirely ignores the most relevant non-interactive benchmarks: iHeartMedia Inc.’s (“iHeart”) renewed direct deals with independent record labels. As Dr. Leonard explained in his Written Direct Testimony, direct licenses that have been renewed with the bilateral assent of both the buyer (the radio station) and the seller (the record label) are the best evidence of a willing-buyer willing-seller transaction at the effective per-play royalty rate that predated the renewal. Because of the complexity of the financial terms of sound recording 4 NAB Written Rebuttal Statement Dkt. No. 19-CRB-0005-WR (2021-25) PUBLIC VERSION license agreements, when they initially agree to a license, the radio station and the record label can only predict how those terms will play out.