PUBLIC Before the UNITED STATES COPYRIGHT ROYALTY JUDGES THE LIBRARY OF CONGRESS Washington, D.C. In the Matter of DETERMINATION OF ROYALTY RATES Docket No. 14-CRB-0001-WR FOR DIGITAL PERFORMANCE IN SOUND (2016–2020) RECORDINGS AND EPHEMERAL RECORDINGS (WEB IV) PROPOSED FINDINGS OF FACT AND CONCLUSIONS OF LAW OF iHEARTMEDIA, INC. PUBLIC Before the UNITED STATES COPYRIGHT ROYALTY JUDGES THE LIBRARY OF CONGRESS Washington, D.C. In the Matter of DETERMINATION OF ROYALTY RATES Docket No. 14-CRB-0001-WR FOR DIGITAL PERFORMANCE IN SOUND (2016–2020) RECORDINGS AND EPHEMERAL RECORDINGS (WEB IV) PROPOSED FINDINGS OF FACT OF iHEARTMEDIA, INC. PUBLIC TABLE OF CONTENTS Page INTRODUCTION AND SUMMARY ............................................................................................ i GLOSSARY OF PRE-FILED TESTIMONY CITED ................................................................... v iHEARTMEDIA’S PROPOSED FINDINGS OF FACT ............................................................... 1 I. BACKGROUND ................................................................................................................ 1 A. History of Prior Webcasting Proceedings ............................................................... 1 B. The Webcasting IV Proceeding ............................................................................... 4 C. iHeartMedia ............................................................................................................ 6 1. Overview of iHeartMedia and iHeartRadio ................................................ 6 2. iHeartMedia’s Testimony and Rate Proposal ............................................. 9 D. The Webcasting Industry ...................................................................................... 10 1. Webcasting Has Many Appealing Features and Has Demonstrated Popularity with Consumers ............................................... 11 2. Given the Appeal of Webcasting, ............................................................... 14 3. Despite the Appeal of Statutory Webcasting, Growth of Webcasting Has Been Stymied, and the Industry Has Not Thrived ...................................................................................................... 15 4. The Webcasting IV Proceeding Is a Critical Inflection Point for the Webcasting and Music Industry More Generally. .............................. 23 E. The Recorded Music Industry ............................................................................... 25 1. The Recorded Music Industry Is Thriving ................................................ 26 2. Webcasting Is Restoring the Health of the Record Industry, Not Exacerbating Its Decline ........................................................................... 34 3. Outside of the Regulatory Context, Record Labels View Webcasting as Critical to Industry Growth ............................................... 40 PUBLIC II. RADIO PROMOTES: IT DRIVES SALES AND BREAKS ARTISTS ........................ 44 A. Record Labels Devote Enormous Resources to Promotion .................................. 46 B. There Is Extensive Promotion on Terrestrial Radio Because Increased Play Results in Increased Sales ............................................................................. 51 C. Digital Radio Is Radio, and Promotes in the Same Way as Terrestrial Radio ..................................................................................................................... 56 D. Record Labels Compete on Price for Market Share on Noninteractive Services ................................................................................................................. 58 E. The Record Labels’ Other Conduct Also Shows Noninteractive Services Are Promotional ..................................................................................... 63 F. Empirical Studies Prove Noninteractive Services Promote Music Sales ............. 67 1. Dr. Kendall Concluded Noninteractive Services Promotes Music Purchasing ...................................................................................... 67 2. Dr. McBride Concluded Pandora Promotes Music Purchasing ................ 69 3. Dr. Blackburn’s Analysis Shows that Noninteractive Services Promote ..................................................................................................... 70 G. Empirical Studies Prove Digital Radio Promotes Music Sales More Than “On-Demand” Services ............................................................................... 72 H. Noninteractive Services Do Not Substitute for Other Record Label Income Sources ..................................................................................................... 73 III. AGREEMENTS BETWEEN WILLING BUYERS AND WILLING SELLERS FOR STATUTORY SERVICES ESTABLISH A BENCHMARK RATE OF $0.0005. ........................................................................................................... 76 A. The Direct Licensing Agreements in the Noninteractive Market Show that a Willing Buyer and a Willing Seller Would Agree to a Rate of $0.0005 Per Performance ...................................................................................... 76 B. iHeartMedia’s Agreement with Warner Proves that Willing Buyers and Willing Sellers in This Market Would Agree to a Royalty Rate of $0.0005 Per Performance ...................................................................................... 79 1. The Terms of the iHeartMedia-Warner Agreement .................................. 79 2. iHeartMedia Expected To Pay $0.0005 For Additional Performances of Warner Music as a Result of the Agreement ................. 82 PUBLIC 3. Warner Expected To Receive for Additional Performances of Warner Music as a Result of the Agreement ................. 87 4. Professor Rubinfeld’s Contrary Analysis of the iHeartMedia-Warner Agreement Is Unreliable and Unpersuasive ............................................................................................. 89 C. iHeartMedia’s Agreements with 27 Independent Record Labels Provide Further Support for a Rate of $0.0005 .................................................................. 99 D. Pandora’s Agreements with Thousands of Labels Represented By Merlin Provide Further Support for a Rate of $0.0005 ....................................... 105 IV. OTHER ECONOMIC EVIDENCE SUPPORTS IHEARTMEDIA’S IN-MARKET BENCHMARKS ..................................................................................... 111 A. Professors Fischel and Lichtman’s “Thought Experiment” Shows that iHeartMedia’s Rate Proposal Is Reasonable and that the Current Statutory Rates Are Too High............................................................................. 112 B. Professors Fischel and Lichtman’s Economic Value Added (“EVA”) Analysis Also Shows That iHeartMedia’s Rate Proposal Is Reasonable ........... 115 C. The SDARS Statutory Rate Further Corroborates iHeartMedia’s Rate Proposal............................................................................................................... 119 V. THE JUDGES SHOULD REJECT SOUNDEXCHANGE’S RELIANCE ON INTERACTIVE AGREEMENTS AS BENCHMARKS TO SET THE ROYALTY RATES THAT WOULD BE NEGOTIATED BY WILLING BUYERS AND WILLING SELLERS IN THE NONINTERACTIVE MARKET. ....................................................................................................................... 121 A. None of Professor Rubinfeld’s Claimed Justifications for Using Interactive Agreements as Benchmarks Is Persuasive ........................................ 123 B. Professor Rubinfeld’s Analysis Relies on Key Assumptions That Are Unfounded in the Record and Demonstrably Incorrect ...................................... 127 C. Professor Rubinfeld’s Analysis Fails To Account for Critical Differences Between the Interactive and Noninteractive Markets ..................... 134 D. The Supposed Convergence of Statutory and Interactive Services Cannot Support Use of the Interactive Agreements as Benchmarks for the Statutory Rate ................................................................................................ 140 E. Professor Rubinfeld’s Analysis Is Compromised by an Improper and Unreliable Data Set ............................................................................................. 146 PUBLIC F. Professor McFadden’s Survey Provides No Support for Professor Rubinfeld’s Analysis ........................................................................................... 149 G. Other Alternative Implementations of Professor Rubinfeld’s Analysis Yield Much Lower Rates .................................................................................... 153 H. Professor Rubinfeld Provides No Support for his Percentage-of-Revenue Alternative Royalty Rate .............................................. 155 I. Professor Rubinfeld’s Interactive Benchmark Is a Particularly Unreliable Benchmark for Simulcast Services ................................................... 158 VI. APPLE’S AGREEMENTS WITH WARNER AND SONY DO NOT SUPPORT PROFESSOR RUBINFELD’S INTERACTIVE BENCHMARK OR SOUNDEXCHANGE’S RATE PROPOSAL .......................................................... 167 A. Apple’s iTunes Radio Service Is Not a Statutory Service and Professor Rubinfeld Made No Attempt To Adjust the Rates Apple Expected To Pay In Light of the Additional Functionality It Obtained ................................... 167 B. Professor Rubinfeld Failed To Account for the Shadow of the Statutory Rate ....................................................................................................................