1918 Federal Register / Vol. 84, No. 24 / Tuesday, February 5, 2019 / Rules and Regulations 

1This rate determination is not unanimous. Judge 

Strickler prepared, to a disproportionately large 

degree, the initial drafts of this Determination. 

Notwithstanding the Judges’ concurrence on most 

of the factual recitation and economic analysis, they 

were unable to reach consensus on their 

conclusions. Judge Strickler’s dissenting opinion is 

appended to and is a part of this rate determination. 

Note that all redactions in this publication were 

made by the Copyright Royalty Judges and not by 

the Federal Register. 

2National Music Publishers’ Association and 

Nashville Songwriters Association International 

together filed the Copyright Owners’ Motion for 

Clarification or Correction . . . (Owners’ Motion). 

Amazon Digital Services, LLC; Google Inc.; Pandora 

Media, Inc. and Spotify USA Inc. filed a Joint 

Motion for Rehearing to Clarify the Regulations 

(Services’ Motion). The Judges did not treat the 

motions as motions for rehearing under 17 U.S.C. 

803(c)(2), as neither requested a literal rehearing of 

evidence or legal argument. 

LIBRARY OF CONGRESS 

Copyright Royalty Board 

37 CFR Part 385 

[Docket No. 16–CRB–0003–PR (2018–2022)] 

Determination of Royalty Rates and 

Terms for Making and Distributing 

Phonorecords (Phonorecords III) 

AGENCY: Copyright Royalty Board, 

Library of Congress. 

ACTION: Final rule and order. 

SUMMARY: The Copyright Royalty Judges 

announce their final determination of 

the rates and terms for making and 

distributing phonorecords for the period 

beginning January 1, 2018, and ending 

on December 31, 2022. 

DATES: 

Effective Date: February 5, 2019. 

Applicability Date: The regulations 

apply to the license period beginning 

January 1, 2018, and ending December 

31, 2022. 

ADDRESSES: The final determination is 

posted in eCRB at https://app.crb.gov/. 

For access to the docket to read the final 

determination and submitted 

background documents, go to eCRB and 

search for docket number 16–CRB– 

0003–PR (2018–2022). 

FOR FURTHER INFORMATION CONTACT: 

Anita Blaine, CRB Program Assistant, by 

telephone at (202) 707–7658 or by email 

at crb@loc.gov. 

SUPPLEMENTARY INFORMATION: 

Final Determination 

The Copyright Royalty Judges (Judges) 

commenced the captioned proceeding to 

set royalty rates and terms to license the 

copyrights of songwriters and 

publishers in musical works made and 

distributed as physical phonorecords, 

digital downloads, and on-demand 

digital streams. See 81 FR 255 (Jan. 5, 

2016). The rates and terms determined 

herein shall be effective during the rate 

period January 1, 2018, through 

December 31, 2022. Under the 

Copyright Act, royalty rates for uses of 

musical works shall end ‘‘on the 

effective date of successor rates and 

terms, or such other period as the 

parties may agree.’’ 17 U.S.C. 115(c)(3)); 

The Judges included the designation 

(2018–2022) in the docket number for 

this proceeding for the purpose of 

designating the relevant five-year period 

with the knowledge that affected parties 

may agree to successor rates and terms 

for a different or additional period. In 

this proceeding, each party included in 

its Proposed Findings of Fact (PFF) and 

Proposed Conclusions of Law (PCL) a 

designation of the rate period as January 

1, 2018, through December 31, 2022. 

The Judges, therefore, adopt that agreed 

rate period. 

For the reasons detailed in this 

Determination,1 the Judges establish the 

following section 115 royalty rate 

structure, and rates, for the period 2018 

through 2022. 

For licensing of musical works for all 

service offerings, the all-in rate for 

performances and mechanical 

reproductions shall be the greater of the 

percent of service revenue and Total 

Content Cost (TCC) rates in the 

following table. 

2018–2022 ALL-IN ROYALTY RATES

2018 2019 2020 2021 2022 

Percent of Revenue ............................................................. 11.4 12.3 13.3 14.2 15.1 

Percent of TCC .................................................................... 22.0 23.1 24.1 25.2 26.2 

The Judges also adopt for the new rate 

period existing royalty floors in effect 

for certain streaming configurations. 

In the Initial Determination issued on 

January 27, 2018, the Judges 

promulgated regulatory terms that made 

changes in style and substance of the 

regulatory terms governing 

administration of the section 115 

licenses. In February 2018, the Judges 

received a motion from Copyright 

Owners (Owners’ Motion) and a joint 

motion from four Services (Services’ 

Motion) seeking clarification of 

regulatory terms promulgated with the 

Initial Determination.2 The Judges 

treated both motions as general motions 

governed by 37 CFR 350.4 and issued 

their ruling on the motions by separate 

Order dated October 29, 2018. The 

Judges incorporate the reasoning and 

rulings in that Order and to the extent 

necessary for clarity, include portions of 

that Order in this Final Determination. 

The final text of the amended 

regulations is set out below this 

SUPPLEMENTARY INFORMATION section. 

I. Background 

A. Statute and Regulations 

The Copyright Act (Act) establishes a 

compulsory license for use of musical 

works in the making and distribution of 

phonorecords. 17 U.S.C. 115. For 

purposes of section 115, phonorecords 

include physical and digital sound 

recordings embodying the protected 

musical works, digital sound recordings 

that may be downloaded or streamed on 

demand by a listener, and downloaded 

telephone ringtones. Entities offering 

bundled music services and digital 

music lockers are also permitted to do 

so under the section 115 compulsory 

license. 

The section 115 compulsory license 

created in 1909, reflected Congress’s 

attempt to balance the exclusive rights 

of owners of copyrighted musical works 

with the public’s interest in access to 

the protected works. However, Congress 

made that right subject to a compulsory 

license because of concern about 

monopolistic control of the piano roll 

market (and another burgeoning 

invention, phonorecords). 17 U.S.C. 1 

Federal Register / Vol. 84, No. 24 / Tuesday, February 5, 2019 / Rules and Regulations 1919 

3 In 1993, Congress abolished the CRT and 

replaced it with copyright arbitration royalty panels 

(CARPs). Copyright Royalty Tribunal Reform Act of 

1993, Public Law 103–198, 107 Stat. 2304. In 2004, 

Congress abolished the CARP system and replaced 

it with the Copyright Royalty Judges. Copyright 

Royalty and Distribution Reform Act of 2004, Public 

Law 108–419, 118 Stat. 2341. 

4Public Law 104–39, 109 Stat. 336. 

5For clarity, references to the regulations 

applicable to the sec. 115 license are to the 

regulations as configured before conclusion of the 

present proceeding. The Judges discuss appropriate 

regulatory changes in section VII of this 

determination. 

6The United States Court of Appeals for the 

District of Columbia Circuit affirmed the CRT. 

Recording Industry Ass’n. of America v. Copyright 

Royalty Tribunal, 662 F.2d 1 (D.C. Cir. 1981) (1981 

Phonorecords Appeal) (remanded on other 

grounds). 7The Librarian initiated the 1996 proceeding 

during the CARP period, when controversies 

regarding royalty rates and terms were referred to 

privately retained arbitrators. 

8Once again, the parties to the negotiations 

included the NMPA and DiMA. Mirchandani WDT 

at ¶ 59. 

(1909); see also H.R. Rep. No. 60–2222, 

at 9 (1909). This license is often referred 

to as the ‘‘phonorecords’’ license, but is 

also identified, synonymously, as the 

‘‘mechanical’’ license. 

Congress revised the mechanical 

license in its 1976 general revision of 

the copyright laws. The 1976 revision 

also created a new entity, the Copyright 

Royalty Tribunal (CRT), to conduct 

periodic proceedings to adjust the 

royalty rate for the license.3

In 1995, Congress passed the Digital 

Performance Right in Sound Recordings 

Act (DPRA),4 extending the mechanical 

license to ‘‘digital phonorecord 

deliveries’’ (DPDs), which Congress 

defined as each individual delivery of a 

phonorecord by digital transmission of 

a sound recording which results in a 

specifically identifiable reproduction by 

or for any transmission recipient of a 

phonorecord of that sound recording, 

regardless of whether the digital 

transmission is also a public 

performance of the sound recording or 

any nondramatic musical work 

embodied therein. 17 U.S.C. 115(d). 

Accordingly, the section 115 

mechanical license now covers DPDs, in 

addition to physical copies. 

By statute, the Judges commence a 

proceeding to determine royalty rates 

and terms for the section 115 license 

every fifth year. See 17 U.S.C. 

803(b)(1)(A)(i)(V). The Act favors 

negotiated settlements among interested 

parties, but in absence of a settlement, 

the Judges must determine ‘‘reasonable 

rates and terms of royalty 

payments. . . .’’ The Judges must 

further set rates that comport with the 

itemized statutory policy considerations 

described in section 801(b)(1) of the Act. 

Rates and terms for the mechanical 

license are codified in chapter III, part 

385, title 37, Code of Federal 

Regulations. 

As currently configured, the 

applicable regulations are divided into 

three subparts.5 Subpart A regulations 

govern licenses for reproductions of 

musical works (1) in physical form 

(vinyl albums, compact discs, and other 

physical recordings), (2) in digital form 

when the consumer purchases a 

permanent digital copy (download) of 

the phonorecord (PDD), and (3) 

inclusion of a musical work in a 

purchased telephone ringtone. Subpart 

B regulations include licenses for (1) 

interactive streaming and limited 

downloads. The regulations in subpart C 

relate to limited offerings, mixed 

bundles, music bundles, paid locker 

services, and purchased content locker 

services. The current regulations 

resulted from a negotiated settlement of 

the previous mechanical license 

proceeding. 

B. Prior Proceedings 

Until 1976, Congress legislated 

royalty rates for the mechanical 

reproduction of musical works and 

notes. In 1980, the CRT conducted the 

first contested proceeding to set rates for 

the section 115 compulsory license. The 

CRT increased the then-existing rate by 

more than 45%, from the statutory 2.75¢ 

rate per phonorecord to 4¢ per 

phonorecord. 45 FR 63 (Jan. 2, 1980).6

By 1986, the CRT had increased the 

mechanical rate to the greater of 5¢ per 

musical work or .95¢ per minute of 

playing time or fraction thereof. 46 FR 

66267 (Dec. 23, 1981); see 37 CFR 

255.3(a)–(c). The next adjustment of the 

section 115 rates was scheduled to begin 

in 1987. However, the parties entered 

into a settlement setting the rate at 5.25¢ 

per track beginning on January 1, 1988, 

and the CRT established a schedule of 

rate increases generally based on 

positive limited percentage changes in 

the Consumer Price Index every two 

years over the following 10 years. See 52 

FR 22637 (June 15, 1987). The rate 

increased until 1996, when the rate was 

set at 6.95¢ per track or 1.3¢ per minute 

of playing time or fraction thereof. See 

37 CFR 255.3(d)–(h). 

The rates set by the 1987 settlement 

were to expire on December 31, 1997. 

The Librarian of Congress announced a 

negotiation period for copyright owners 

and users of the section 115 license in 

late 1996. The parties reached a 

settlement regarding rates for another 

ten-year period to end in 2008.7 Under 

the settlement, ultimately adopted by 

the Librarian, the parties agreed to a rate 

for physical phonorecords of 7.1¢ per 

track and established a schedule for 

fixed rate increases every two years for 

a 10-year period. At the beginning of 

January 2006, the mechanical rate was 

the larger of 9.1¢ per track or 1.75¢ per 

minute of playing time or fraction 

thereof. See 37 CFR 255.3(i)–(m); see 

also 63 FR 7288 (Feb. 13, 1998). 

In 2006, with expiration of the 

previous settlement term nearing, the 

Judges commenced a proceeding to 

adjust the mechanical rates under 

section 115. On January 26, 2009, they 

issued a Determination, effective March 

1, 2009. In that Determination, the 

Judges noted that the parties had settled 

their dispute regarding rates and terms 

for conditional downloads, interactive 

streaming, and incidental digital 

phonorecord deliveries (i.e., rates in the 

new subpart B) (2008 Settlement). See 

Mechanical and Digital Phonorecord 

Delivery Rate Determination, 74 FR 

4510, 4514 (Jan. 26, 2009) 

(Phonorecords I). The parties who 

negotiated the 2008 Settlement included 

the National Music Publishers 

Association (NMPA) and the Digital 

Music Association (DiMA), the trade 

association representing its member 

streaming services. Written Direct 

Testimony of Rishi Mirchandani, Trial 

Ex. 1, at ¶ 59 (Mirchandani WDT). 

The 2008 Settlement rates that the 

Judges adopted maintained the existing 

rate and rate structure at the greater of 

9.1¢ per song or 1.75¢ per minute of 

playing time (or fraction thereof) for 

physical phonorecords and permanent 

digital downloads (PDD). The Judges 

also adopted a license rate of 24¢ per 

ringtone, a newly regulated product. 74 

FR at 4515. Physical sales, PDDs, and 

ringtones were included in subpart A of 

the regulations. 

In 2011, the Judges commenced a 

proceeding to again determine section 

115 royalty rates and terms. See 76 FR 

590 (Jan. 5, 2011). The participants in 

that proceeding negotiated a settlement 

(2012 Settlement) that carried forward 

the existing rates and added a new 

subpart C to the regulations to cover 

several newly regulated service offering 

categories, viz., limited offerings, mixed 

service bundles, music bundles, paid 

locker services, and purchased content 

locker services.8 The Judges adopted the 

participants’ settlement in 2013. See 

Adjustment of Determination of 

Compulsory License Rates for 

Mechanical and Digital Phonorecords, 

78 FR 67938 (Nov. 13, 2013) 

(Phonorecords II). 

The present section 115 proceeding is 

the third since the establishment of the 

Copyright Royalty Board (CRB) program 

1920 Federal Register / Vol. 84, No. 24 / Tuesday, February 5, 2019 / Rules and Regulations 

9Public Law 108–419, 118 Stat. 2341. 

10 Initial Participants were: Amazon Digital 

Services, LLC (Amazon); Apple, Inc. (Apple); 

Broadcast Music, Inc. (BMI); American Society of 

Composers, Authors and Publishers (ASCAP); 

David Powell; Deezer S.A. (Deezer); Digital Media 

Association (DiMA); Gear Publishing Company 

(Gear); George Johnson d/b/a/GEO Music Group 

(GEO); Google, Inc. (Google); Music Reports, Inc. 

(MRI); Pandora Media, Inc. (Pandora); Recording 

Industry Association of America, Inc. (RIAA); 

Rhapsody International Inc.; SoundCloud Limited; 

Spotify USA Inc.; ‘‘Copyright Owners’’ comprised 

of National Music Publishers Association (NMPA), 

The Harry Fox Agency (HFA), Nashville 

Songwriters Association International (NSAI), 

Church Music Publishers Association (CMPA), 

Songwriters of North America (SONA), Omnifone 

Group Limited; and publishers filing jointly, 

Universal Music Group (UMG), Sony Music 

Entertainment (SME), Warner Music Group (WMG). 

11The settling parties were: NMPA, NSAI, HFA, 

UMG, and WMG. As part of the settlement 

agreement, UMG and WMG withdrew from further 

participation in this proceeding. 

12See 81 FR 48371 (Jul. 25, 2016). 

13Three parties filed comments. American 

Association of Independent Music (A2IM), Sony 

Music Entertainment (SME), and George Johnson 

dba GEO Music Group (GEO). A2IM urged adoption 

of the settlement and SME approved of all but one 

provision of the settlement. GEO objected to the 

settlement. 

14See 82 FR 15297 (Mar. 28, 2017). 

15By stipulation of the participants, the Judges 

also accepted and considered written testimony 

from six additional witnesses who did not appear. 

Amazon designated and other participants counterdesignated testimony from the Phonorecords I 

proceeding, which was admitted as Exhibits 321 

and 322. 

16 Digital download sales gained popularity in 

2003 when Apple introduced the iTunes Music 

Store. The iTunes Store provided a convenient way 

for iTunes users to purchase a song or an entire 

album, legally, with a single click of the computer 

mouse. The iTunes Store also allowed users of 

Apple’s iPod to sync songs directly to the device. 

Expert Report of Jui Ramaprasad, Trial Ex. 1615, at 

25–26 (Ramaprasad WDT). Prior to the launch of 

the iTunes Music Store, virtually all music was sold 

as albums. Eisenach WDT at 44, n.58. 

17Some evidence in the record suggests, however, 

that since 2013, with the inclusion of ‘‘streaming 

under the Copyright Royalty and 

Distribution Reform Act of 2004.9 In the 

Phonorecords II settlement, the parties 

agreed that any future rate 

determination presented to the Judges 

for subparts B and C service offering 

configurations would be a de novo rate 

determination. See 37 CFR 385.17, 

385.26 (2016). 

C. Statement of the Case 

In response to the Judges’ notice 

commencing the present proceeding, 21 

entities filed Petitions to Participate.10

The participants engaged in negotiations 

and discovery. On June 15, 2016, some 

of the participants 11 notified the Judges 

of a partial settlement with regard to 

rates and terms for physical 

phonorecords, PDDs, and ringtones, the 

service offerings covered by the extant 

regulations found in subpart A of part 

385. The Judges published notice of the 

partial settlement 12 and accepted and 

considered comments from interested 

parties.13

On October 28, 2016, NMPA, 

Nashville Songwriters Association 

International (NSAI), and Sony Music 

Entertainment (SME) filed a Motion to 

Adopt Settlement Industry-Wide. The 

motion asserted that SME, NMPA, and 

NSAI had resolved the issue raised by 

SME in its response to the original 

notice. The Judges evaluated the 

remaining objection to the settlement 

filed by George Johnson dba GEO Music 

Group (GEO) and found that GEO had 

not established that the settlement 

agreement ‘‘does not provide a 

reasonable basis for setting statutory 

rates and terms.’’ See 17 U.S.C. 

801(b)(7)(A)(iii). As a part of the second 

settlement, SME withdrew from this 

proceeding. The Judges published the 

agreed subpart A regulations as a Final 

Rule on March 28, 2017.14

During the course of the present 

proceeding, the Judges dismissed some 

participants and other participants 

withdrew. Remaining participants at the 

time of the hearing were NMPA and 

NSAI, representing songwriter and 

publisher copyright owners (Copyright 

Owners) and GEO, a songwriter/ 

publisher/copyright owner, appearing 

pro se. Copyright licensees appearing at 

the hearing were Amazon Digital 

Services, LLC (Amazon), Apple Inc. 

(Apple), Google, Inc. (Google), Pandora 

Media, Inc. (Pandora), and Spotify USA 

Inc. (Spotify), (collectively, the 

Services). 

Beginning on March 8, 2017, the 

Judges conducted a hearing that 

concluded on April 13, 2017. During the 

course of the hearing, the Judges heard 

oral testimony from 37 witnesses.15 The 

Judges admitted over 1,100 exhibits, 

exclusive of demonstrative or 

illustrative materials the participants 

offered to explicate oral testimony. The 

participants submitted Proposed 

Findings of Fact (PFF) and Proposed 

Conclusions of Law (PCL) on May 12, 

2017, and Replies to those filings on 

May 26, 2017. Under 37 CFR 

351.4(b)(3), a participant may amend its 

rate proposal at any time up to and 

including the time it files proposed 

findings and conclusions. In this 

proceeding, Copyright Owners and 

Google filed amended rate proposals 

contemporaneously with their 

respective PFF and PCL. The parties 

delivered closing arguments on June 7, 

2017. 

Based on the record of this 

proceeding, the Judges have determined 

that the mechanical license rate shall be 

an All-In rate derived from a Greater-Of 

rate structure. Weighing the advantages 

and disadvantages highlighted by the 

participants in this proceeding, the 

Judges conclude that a rate that balances 

a percent-of-service revenue with a 

percent-of-TCC (total cost of content) 

shall be the basis for the All-In 

phonorecords royalty. The mechanical 

portion of the royalty shall be the 

greater of those figures, less the actual 

amount services pay for the 

phonorecord performance right. The 

Judges have no role in setting the 

performance right license rates. Further, 

performance right licensees pay the 

performance royalties to music 

publishers and songwriters. Services 

pay mechanical royalties primarily to 

music publishers. 

II. Context of This Proceeding 

A. Changes in Music Consumption 

Patterns and Revenue Allocation 

In recent years, music consumption 

patterns have undergone profound 

shifts—first from purchases of physical 

albums to downloads of digital singles, 

and then from downloads to on-demand 

access through digital streaming 

services. These shifts in music 

consumption patterns have led to 

corresponding changes in the magnitude 

and relative mix of income streams to 

copyright owners; in particular, 

copyright owners note an increased 

reliance on performance royalties as 

compared to reproduction and 

distribution royalties. Witness 

Statement of David M. Israelite, Trial 

Ex. 3014, ¶ 63 (Israelite WDT). 

While earlier format changes (piano 

rolls to wax cylinders to lacquer or vinyl 

discs to CDs) had altered the way 

households consumed music, they did 

not fundamentally alter the distribution 

of music. For all these music formats, 

copyright owners distributed music to 

consumers physically, either directly or 

through record stores. In addition, with 

the exception of ‘‘singles,’’ after 

conversion to the vinyl format, 

purveyors of music typically distributed 

a bundle of songs (an album). Witness 

Statement of Bart Herbison, Trial Ex. 

3015, ¶ 20 (Herbison WDT). 

By the early 2000s, digital data 

compression and higher-bandwidth 

internet connections allowed relatively 

fast transmission of recorded music files 

over the internet, drastically altering the 

distribution and consumption of music. 

Music services 16 began to offer 

individual tracks or songs online as 

‘‘digital downloads.’’ In 2008, 

approximately 435 million albums were 

sold in the U.S. (both digital and 

physical). By 2015, that number fell to 

249 million.17 Sales of singles, by 

Federal Register / Vol. 84, No. 24 / Tuesday, February 5, 2019 / Rules and Regulations 1921 

equivalent’’ albums, overall album consumption 

may have increased. See Katz WDT at 42. 

18The Judges cite the Register’s Report as a source 

of industry background, developed by the Register 

of Copyrights following public hearings held 

nationwide in 2013 and 2014. The Judges do not 

base their conclusions in this Determination on any 

background information from the Register’s Report 

that the parties did not also present as evidence in 

this proceeding. 

19 Industry total revenues in this analysis include 

digital downloads (40%), physical sales (35%), 

subscription and streaming (21%), and ringtones 

and ringbacks (1%). Copyright and the Music 

Marketplace at 70, citing RIAA-sourced chart. 

20Musical works copyright owners complain that 

streaming services are at least partially responsible 

for the paucity of revenues that the musical works 

generate for writers and publishers. They blame 

streaming services’ business practices that favor 

growth in user base and market share over 

maximizing profitability. Digital services counter 

that they pay a substantial portion of the revenues 

they receive to license copyrighted works and 

compete with terrestrial radio, which is exempt 

from paying performance royalties. Digital services 

and broadcasters also argue that the lack of royalty 

compensation that makes its way to content creators 

is due in large part to the content creators’ 

agreements with intermediaries, which, they argue, 

keep a large portion of royalties earned by content 

creators for their own account or to recoup 

advances. Id. at 76–77. 

21An ‘‘unsigned artist’’ is one recording music 

but not under contract to a recording company. 

22Until late 2016, Pandora operated as a 

noninteractive streaming service that, did not incur 

a compulsory license fee for mechanical royalties. 

Pandora recently began offering more interactive 

features, including a full on-demand tier. Pandora 

WDS Introductory Memo at 1–2; Written Direct 

Testimony of Christopher Phillips, Trial Ex. 877, at 

8 (Phillips WDT). 

23Amazon Prime is a $99-per-year service that 

offers Amazon customers access to a bundle of 

services including free two-day shipping, video 

streaming, photo storage and e-books, in addition to 

Prime Music. Expert Report of Glenn Hubbard, Trial 

Ex. 22, at 15 (Hubbard WDT). 

24Mirchandani WDT at 5. 

25 3/15/17 Tr. 1315–16 (Mirchandani). 

26 Google’s experience with music licensing dates 

at least far back as 2006, when it acquired YouTube. 

Written Direct Testimony of Zahavah Levine, Trial 

Ex. 692, at 3 (Levine WDT). Google’s music services 

were part of Google’s Android Division but were 

recently combined within the YouTube business 

unit. Id. at 3–4. 

27Section 114 of the Act includes requirements 

for the compulsory license to perform digitally 

sound recordings over noninteractive internet 

music streaming services. 

contrast, have remained fairly stable 

over the same period, averaging 

approximately one billion per year from 

2008 to 2015 (with a peak of 1.4 billion 

in 2012). Expert Report of Jeffrey A. 

Eisenach, Trial Ex. 3027, at ¶ 67 & Table 

4 (Eisenach WDT). 

Changes in consumption patterns 

have had an impact on industry 

revenues. For example, between 2004 

and 2015, record label revenues from 

physical sales declined from $15.3 

billion to $2 billion, while digital 

revenues increased from $230 million to 

about $4.8 billion. Id. at ¶ 44. In 2004, 

over 98% of music industry revenue 

was the result of physical sales. 

Copyright and the Music Marketplace: A 

Report of the Register of Copyrights 70 

(Feb. 2015) (Register’s Report), citing 

RIAA-sourced chart.18 Digital 

downloads made up most of the 

remaining revenue. Id. By 2013, 

revenues from physical sales fell to 35% 

of industry total revenues.19 Digital 

downloads, which made up 1.5% of 

industry revenues in 2004, had climbed 

to 40% of industry revenues. 

Changes in music consumption 

patterns have coincided with an 

increase in the use of musical works. 

Review of relevant market factors imply, 

however, that the ways in which those 

works are used currently do not 

compensate copyright owners as well as 

they did in the past. See Register’s 

Report at 72–74.20

B. Emergence of New Streaming 

Services 

Many diverse enterprises have 

launched music streaming services to 

meet growing consumer demand for 

streaming. Currently, there are at least 

31 music streaming services available 

from 20 identifiable providers. Some of 

the well-known of these include: 

Amazon, Apple, Google (and its recently 

acquired YouTube), Deezer (partnered 

with Cricket/AT&T), iHeartRadio, 

Napster, Pandora, SoundCloud, Spotify, 

and Tidal (partnered with Sprint). 

Written Rebuttal Testimony of Jim 

Timmins, Trial Ex. 3036, ¶ 20 (Timmins 

WRT). Most of the companies entering 

the on-demand streaming music market 

have done so recently. Id. ¶ 21. In the 

last five years, new entrants to the 

market have initiated at least five 

interactive streaming services, joining 

Spotify which launched in the United 

States in 2011. See id. ¶ 22. 

The largest players in the interactive 

streaming market by song catalog are 

Apple Music, Google Play, and Spotify, 

each of which each has a catalog that 

exceeds [REDACTED] million songs. 

Tidal, which provides an outlet for 

unsigned artists,21 has a catalog of over 

40 million songs. See Written Direct 

Testimony of Michael L. Katz, Trial Ex. 

885, ¶ 34, Table 1 (Katz WDT). By one 

estimate, in 2016 there were 18 million 

U.S. on-demand subscribers: Spotify 

accounted for [REDACTED] million, 

followed by Apple Music (4 million), 

Rhapsody and Tidal (2 million each) 

and all others accounting for the 

remaining 4 million. See id. 

Some of the services that offer music 

streaming are pure-play music 

providers, such as Spotify and 

Pandora.22 Others, such as Amazon, 

Apple Music, and Google Play Music, 

are part of wider economic 

‘‘ecosystems,’’ in which a music service 

is one part of a multi-product, multiservice aggregation of activities, 

including some that are also related to 

the provision of a retail distribution 

channel for music. For example, 

Amazon is a multi-faceted internet retail 

business. Amazon offers a buyers’ 

program for an annual fee (Amazon 

Prime) that affords loyalty benefits to 

members, such as free or reduced rate 

shipping or faster delivery on the 

products members purchase. Amazon 

Prime reportedly has approximately 

[REDACTED] subscribers.23 For its 

music service offering, Amazon bundles 

interactive streaming at no additional 

cost with its Prime membership. In 

addition to the Prime Music service 

offering, Amazon’s U.S.-based business 

also includes a physical music store, a 

digital download store, a purchased 

content locker service, Amazon Music 

Unlimited (a full-catalog subscription 

music service), and Amazon Music 

Unlimited for Echo (a full-catalog 

subscription service available through a 

single Wi-Fi enabled device, Amazon 

Echo).24 In launching Prime Music, 

Amazon relied on the section 115 

license as it did for Amazon Music 

Unlimited and Amazon Music 

Unlimited for Echo.25

Google describes its ‘‘Google Play’’ 

offerings as its ‘‘one-stop-shop’’ for the 

purchase of Android applications. The 

Google Play Store allows users to 

browse, purchase, and download 

content, including music. Google Play 

Music is Google Play’s entire suite of 

music service offerings. Google Play 

Music, launched in 2011, is bundled 

with the YouTube Red video service 

subscription.26 It includes several 

functionalities: (1) A Music Store; (2) a 

cloud-based locker service; (3) an ondemand digital music streaming service; 

and (4) a section 114 compliant noninteractive digital radio service (in the 

U.S.).27 Levine WDT, Trial Ex. 692, ¶ 43. 

The evidence is conflicting regarding 

whether the market for streaming 

services is faring poorly financially or 

performing about the same as other 

emerging industries. See, e.g., Timmins 

WRT, Trial Ex. 3036, ¶¶ 16–17; Levine 

WDT ¶ 16 (‘‘streaming music services 

generally remain unprofitable 

businesses’’ with content acquisition 

costs being ‘‘the biggest barrier to 

profitability.’’) For example, Spotify, 

one of the largest pure-play streaming 

services, has reportedly [REDACTED]. 

Katz WDS at ¶ 65. Some estimates place 

1922 Federal Register / Vol. 84, No. 24 / Tuesday, February 5, 2019 / Rules and Regulations 

28 In 2016, Spotify had over [REDACTED] million 

monthly active users, [REDACTED]% of which 

were in the U.S. [REDACTED] million of those U.S. 

users were also Premium subscribers. Written 

Direct Testimony of Barry McCarthy, Trial Ex. 1060, 

¶ 2 (McCarthy WDT). 

29This Billboard measure tracks songs played on 

AM–FM terrestrial radio broadcasters, which are 

not required to license the works or the sound 

recordings they play. 

30Another revenue source is folio licenses, lyrics, 

and musical notations in written form. See Katz 

WDT ¶ 31. 

31Performance royalties are administered 

primarily by Performing Rights Organizations acting 

as collectives and clearinghouses for songwriters 

and publishers as licensors, and broadcasters and 

streaming services as licensees. 

32 It is noteworthy that the shift from mechanical 

royalties to performance royalties coincides with 

the shift from sales of physical phonorecords (e.g., 

CDs) and downloads, for which no performance 

royalty is required, to the use of interactive 

streaming, which pays both a mechanical royalty 

(when a DPD results) and a performance royalty, 

and to the use of noninteractive streaming, which 

historically pays only a performance royalty but no 

mechanical royalty. 

33The lesser-of prongs include a per-subscriber 

per month prong and percent-of-service payments 

for sound recording royalties, differing depending 

upon whether the sound recording licenses are 

pass-through or not pass-through. 

34Calculation of royalties for paid locker services 

varies slightly from this formula, but the complexity 

is similar. 

Spotify’s market value at more than $8 

billion, suggesting perhaps, investors’ 

expectations regarding future profits. 

Written Rebuttal Testimony of Marc 

Rysman, Trial Ex. 3032, ¶ 11, n.3 

(Rysman WRT).28 Spotify forecasts 

being profitable in [REDACTED]. Id. at 

¶ 65 n.80. 

C. Effects of Streaming on Publishers’ 

and Songwriters’ Earnings 

Although many songwriters perform 

their own musical works, it is also 

common for songwriters to compose 

songs to be performed by others. 

Songwriters typically enter into 

contractual arrangements with music 

publishers, which promote and license 

the songwriters’ works and collect 

royalties on their behalf. Music 

publishers and songwriters negotiate a 

split of the royalty payments. In some 

cases, songwriters are commissioned to 

write a song and are compensated with 

a flat fee for the work in exchange for 

giving up ownership rights to the song 

and any royalties it might earn. 

The four largest publishers—Sony/ 

ATV, Warner/Chappell, Universal 

Music Publishing Group, and Kobalt 

Music Publishing—collectively 

accounted for just over 73 percent of the 

top 100 radio songs tracked by 

Billboard 29 as of the second quarter in 

2016. In addition, there are several other 

significant publishers, including BMG 

and Songs Music Publishing, and many 

thousands of smaller music publishers 

and self-publishing songwriters. See 

Katz WDT ¶ 46. 

Songwriters have three primary 

sources of ongoing royalty income, 

which they generally share with music 

publishers: Mechanical royalties, 

synchronization (‘‘synch’’) royalties for 

use of their works in conjunction with 

video or film, and performance 

royalties.30 See Katz WDT ¶ 41; 

Copyright and the Music Marketplace at 

69. Songwriters who are also recording 

artists receive a share of revenues from 

their record labels for the fixing of the 

musical work in a sound recording. 

Sound recording royalties include those 

from the sale of physical and digital 

albums and singles, sound recording 

synchronization, and digital 

performances. Id. Recording artists can 

also derive income from live 

performances, sale of merchandise, and 

other sources. Id. at 69–70. 

The shift in consumption from 

physical sales to streaming coincided 

with a reallocation of publisher revenue 

sources. In 2012, 30% of U.S. music 

publisher revenues came from 

performance royalties and 36% from 

mechanical royalties, with the rest 

coming from synch royalties and other 

sources. See Register’s Report at 70. By 

2014, 52% of music publisher revenues 

came from performance royalties 31

while 23% came from musical works 

mechanical royalties, with the 

remainder coming from synchronization 

royalties and other sources. Id at 71, 

n.344, citing NMPA press release. By 

one estimate, mechanical license 

revenues from interactive streaming 

services accounted for only 

[REDACTED] percent of total music 

publishing revenues in 2015. Katz WDT 

¶ 42.32

Evidence in the present record 

indicates that total publishing revenue 

declined by [REDACTED] percent 

between 2013 and 2014, but increased 

by [REDACTED] percent between 2014 

and 2015. See Katz WDT ¶ 58. Large 

publishers, such as Sony/ATV, UMPG, 

and Warner Chappell, were 

[REDACTED] in 2015, earning a 

combined $[REDACTED] million from 

U.S. publishing operations for that year. 

Id. ¶ 59. 

III. The Present Rate Structure and 

Rates 

Subpart B of the current regulations 

contains mechanical royalty rates 

payable for the delivery and offering of 

interactive streams and/or limited 

downloads. There are three product 

distinctions within the subpart B rate 

structure: 

• Portable vs. Nonportable Services 

• Bundled vs. Unbundled Services 

• Subscription vs. Ad-Supported 

Services 

37 CFR 385.13. The regulations also 

separate certain promotional uses for 

separate treatment, setting the rate for 

those promotional uses at zero. 

Each of these offering characteristics 

can be combined independently with 

almost every other characteristic, 

resulting in a very complex web of rate 

calculations. In the 2012 Settlement, the 

parties structured rate calculations for 

both subpart B and subpart C into three 

arithmetic segments. 

In the first step of the calculation, the 

parties determine the All-In royalty 

pool; that is, the royalty that would be 

payable based on a formula balancing 

the greater of a percent-of-service 

revenue and a percentage of one of two 

other expense measures. One expense 

measure if a percent-of-royalties 

services pay to record companies for 

sound recording performance rights, 

differing depending upon whether the 

sound recording licenses are passthrough or not pass-through. For certain 

subscription services, the percent-of 

service revenue is balanced against the 

lesser of two or three other potential 

mathematical outcomes.33

The second calculation reduces the 

All-In royalty pool to the ‘‘payable’’ 

royalty pool in a two-step process. First 

the parties subtract royalties the services 

pay for musical works performance 

rights from the All-In royalty 

established in the first calculation. This 

remainder is considered the payable 

royalty pool for certain service offerings; 

viz., non-subscription, ad-supported, 

purchased content lockers, mixed 

service bundles, and music bundles. For 

subscription service offerings, whether 

standalone or bundled, and depending 

upon whether the offering is portable or 

non-portable, streaming only or mixed 

use, determining the payable royalty 

pool requires a balancing of the 

mechanical remainder against a set rate 

for ‘‘qualified’’ subscribers per month to 

determine the greater-of result. The set 

rate for qualified subscribers differs for 

each variation of subscription offering. 

The final step in the rate 

determination for each service offering 

is an allocation among licensors based 

upon the number of plays from each 

licensor’s catalog.34

The Services, the licensor participants 

in the present proceeding, refer to this 

convoluted process as the establishment 

of royalty rates with ‘‘minima.’’ 

According to the Services, these minima 

are designed to protect copyright 

owners from the potential downside of 

Services’ business models that might 

Federal Register / Vol. 84, No. 24 / Tuesday, February 5, 2019 / Rules and Regulations 1923 

35The Pandora Amended Proposal superseded its 

original proposal filed on November 1, 2016, by 

adding definitions (for ‘‘fraudulent streams’’ and 

‘‘play’’) that do not directly relate to the royalty 

rates. See Pandora PFF/PCL, Appx. C. 

36Pandora does not expressly describe this 

change as a change in rates per se. 

37The Google Amended Proposal amended its 

original proposal filed on November 1, 2016. Google 

originally proposed a subpart B rate structure that 

generally followed the existing structure. Google 

Written Direct Statement, Introductory 

Memorandum at 3 (Nov. 1, 2016). 

38 ‘‘TCC’’ is an industry acronym for ‘‘Total 

Content Cost’’, a shorthand reference to the extant 

regulatory language describing generally the 

amount paid by a service to a record company for 

the section 114 right to perform digitally a sound 

recording. Google’s proposed regulatory terms 

retain some of the distinctions in service offerings 

for purposes of computing per-work royalty 

allocations. See, e.g., id. at 29–31. This does not 

affect the total royalty charged to the service. 

39 Google describes this proposed change as a 

change in the definition of ‘‘Service Revenue,’’ 

unlike Amazon, which described its proposed 15% 

discount as a change in rates. The difference is 

mathematically irrelevant. 

minimize service revenue and thus 

manipulate the percent-of-service 

revenue rate standard. The Services, 

whose current royalty payments are 

determined under the minima prongs of 

the formulae, point to the minima as a 

reason to keep the percent-of-service 

revenue ‘‘headline’’ rate low, reasoning 

that the headline rate is not, or is rarely, 

binding in any event. 

Notwithstanding the parties’ prior 

agreement to the apparent complexity, 

the alternative calculation methods, or 

the variations in the descriptions of the 

service offerings, evidence presented in 

this proceeding does not support 

continuing the fractionalization of the 

rate determination for the service 

offerings at issue. At the conclusion of 

the tortured rate calculations required 

by the present regulations, the evidence 

suggests that differences in the rates 

Services pay are not great enough to 

justify the complexity of the formulae. 

Some of the rate determination prongs 

are rarely if ever triggered. Despite the 

myriad configurations of rate 

calculations, some of the service 

offerings are incapable of categorization 

under the extant rate structure. Apple 

and Google entered the digital music 

delivery marketplace by negotiating 

direct licenses covering several 

compulsory licenses, avoiding the 

regulatory scheme entirely. 

IV. Analysis of Rate Structure 

Proposals 

A. Parties’ Proposals 

1. The Services (Excluding Apple and 

Google) 

The Services propose rates and rate 

structures that, while varying in their 

particulars, share a number of common 

elements. Broadly, the Services propose 

a rate structure that, in the main, 

continues the current rate structure. 

More particularly, the Services’ 

proposals share core elements: (1) An 

‘‘All-In’’ rate for mechanical and 

performance rights; (2) based upon a 

10.5 percent-of-service revenue headline 

rate with minima; (3) without a 

‘‘Mechanical Floor.’’ 

a. Amazon 

In its Proposed Rates and Terms 

(Amazon Proposal), Amazon proposes 

that the rate structure as currently in the 

applicable regulations rollover into the 

2018–22 rate period, except: (1) The per 

subscriber minimum and/or subscriberbased royalty floors for a ‘‘family 

account’’ should equal 150% of the per 

subscriber minimum and/or subscriberbased royalty floor for an individual 

account; (2) a student subscription 

account discount of 50% should be 

included in the regulations to the per 

subscriber minimum and subscriberbased royalty floor that would otherwise 

apply under the current regulations; (3) 

a discount for annual subscriptions 

equal to 16.67% of the minimum royalty 

rate (or rates) and subscriber-based 

royalty floor (or floors) that would 

otherwise apply under § 385.13; and (4) 

15% discount to the minimum royalty 

rate (or rates) and subscriber-based 

royalty floor (or floors) to reflect a 

service’s actual ‘‘app store’’ and carrier 

billing costs, not to exceed 15% for 

each. Amazon Proposal at 1–2. 

b. Pandora 

Pandora’s amended proposed rates 

and terms (Pandora Amended 

Proposal),35 seek the following changes 

from the current regulations: (1) 

Elimination of the ‘‘Mechanical Floor;’’ 

(2) elimination of the alternative 

computation of sub-minima I and II now 

in § 385.13 and in § 385.23 (for subparts 

B and C, respectively) ‘‘in cases in 

which the record company is the section 

115 licensee;’’ (3) A broadening of the 

present ‘‘not to exceed 15%’’ reduction 

of ‘‘Service Revenues’’ in § 385.11 to 

reflect, in toto, an exclusion of costs 

attributable to ‘‘obtaining’’ revenue, 

‘‘including [but not expressly limited to] 

credit card commissions, app store 

commissions, and similar payment 

process charges;’’ 36 and (4) a discount 

on minimum royalties for student plans 

‘‘not to exceed 50%’’ off minimum 

royalty rates set forth in § 385.13. Id. at 

1, 7. 

c. Spotify 

In its amended proposed rates and 

terms, Spotify proposed the following 

changes from the current regulations: (1) 

Removal of the ‘‘Mechanical Floor’’ for 

all licensed activity; and (2) a 

broadening of the present ‘‘not to exceed 

15%’’ reduction of ‘‘Service Revenues’’ 

in § 385.11 to reflect, in toto, an 

exclusion of the actual costs attributable 

to ‘‘obtaining’’ revenue, ‘‘including [but 

not expressly limited to] credit card 

commissions, app store commissions 

similar payment process charges, and 

actual carrier billing cost.’’ See Second 

Amended Proposed Rates and Terms of 

Spotify USA Inc., passim. 

2. Apple 

Apple proposed that the Services pay 

$0.00091 for each nonfraudulent stream 

of a copyrighted musical work lasting 30 

seconds or more. Apple Inc. Proposed 

Rates and Terms (as amended) at 3–4 

(Apple Amended Proposal). Apple 

proposed defining a use as any play of 

a sound recording of a copyrighted work 

lasting 30 seconds or more. 

Additionally, Apple proposed an 

exemption for a ‘‘fraudulent stream,’’ 

which it defined as ‘‘a stream that a 

service reasonably and in good-faith 

determines to be fraudulent.’’ Id. at 2. 

For paid locker services, Apple 

proposes a $0.17 per subscriber fee, also 

as a component of an All-In musical 

works royalty rate that would include 

the ‘‘subpart C’’ royalty. Id. at 7–8. For 

purchased content locker services, 

Apple proposed a zero royalty fee. Id. at 

7. 

3. Google 

In its amended proposed rates and 

terms (Google Amended Proposal),37

Google parts company with the other 

Services and proposes that the rate 

structure ‘‘eliminat[e] . . . different 

service categories’’ in both subparts B 

and C and replace them with ‘‘a single, 

greater-of rate structure between 10.5% 

of net service revenue and an uncapped 

15-percent TCC component.’’ Google 

Amended Proposal at 1.38 That 15% 

TCC rate is reduced to 13% for passthrough licenses (i.e., where a record 

company is the licensee under section 

115, and the record company has 

granted streaming rights to a service). Id. 

at 33–34. Google’s proposed rate does 

not include a ‘‘Mechanical Floor.’’ 

Similar to one of Amazon’s proposals, 

Google also seeks a discount in rates for 

‘‘carrier billing costs’’ and ‘‘app store 

commissions,’’ plus ‘‘credit card 

commissions’’ and ‘‘similar payment 

process charges,’’ all not to exceed 15%. 

Id. at 6 (for subpart B); 26 (for subpart 

C).39 In addition, Google’s proposal 

includes a zero rate for certain free trial 

periods. Id. at 35–37. 

1924 Federal Register / Vol. 84, No. 24 / Tuesday, February 5, 2019 / Rules and Regulations 

40The Copyright Owners’ rate proposal would 

apply the subpart A rates to so-called ‘‘music 

bundles’’ (‘‘offerings of two or more subpart A 

products to end users as part of one transaction’’) 

which are currently covered by subpart C. Id. at 3 

nn. 2 & 4. 

41The proposal would consider each paying 

subscriber to a service, or each active user, to be an 

‘‘end user.’’ Id. at 8–9. 

42At the time of hearing in the present 

proceeding, Mr. Johnson had stepped back from his 

music business and was employed in real estate. 

See 3/9/17 Tr. 418–19 (Johnson). 

43 In his oral testimony, Mr. Johnson appears to 

concede that if a customer purchased a song and 

paid whatever price he proposes that an additional 

streaming rate might not be necessary. 3/9/17 Tr. 

432: 14–17 (Johnson) (‘‘my proposal is that if you 

paid up front . . . you might not need those 

Subpart B [streaming] rates.’’). 

4. Copyright Owners (Excluding GEO) 

The Copyright Owners proposed that 

the Judges adopt a unitary rate structure 

for all interactive streaming and limited 

downloads that are currently covered by 

subparts B and C.40 Copyright Owners’ 

Amended Proposed Rates and Terms, at 

3 (May 11, 2017) (CO Amended 

Proposal). The Copyright Owners 

structured the proposal as the greater-of 

a usage charge and a per-user charge. 

Specifically, under the Copyright 

Owners’ proposal, each month the 

licensee would pay the greater of (a) a 

per-play fee ($0.0015) multiplied by the 

number of interactive streams or limited 

downloads during the month and (b) a 

per-end user 41 fee ($1.06) multiplied by 

the number of end users during the 

month. Id. at 8. The license fee would 

be for mechanical rights only, and 

would not be offset by any performance 

royalties that the licensee paid for the 

same activity. Id. 

5. GEO Music Group 

The Judges accepted written and oral 

testimony from Mr. George Johnson dba 

GEO Music Group. Mr. Johnson 

appeared pro se. Mr. Johnson is a selfemployed songwriter, music publisher, 

and performer, who formerly operated 

his own recording company.42 The 

other participants in the proceeding 

agreed to preserve objections to Mr. 

Johnson’s testimony to avoid 

interruptions and to submit any 

objections in writing after his testimony. 

The crux of Mr. Johnson’s case is that 

‘‘songs and copyrights have real 

intrinsic value in dollars’’ and that 

current royalty rates do not fairly 

account for that value. Second 

Amended Written Direct Statement of 

George D. Johnson (GEO) for Proposed 

Subpart C or New Subpart D Rates and 

Terms at 3 (Johnson Second AWDS). 

Mr. Johnson proposes what he refers to 

as a ‘‘Buy Button’’ or ‘‘Paid Permanent 

Digital Song Sale’’ (PDS) under a newly 

created subpart C or subpart D of the 

applicable regulations. Id. at 2. Mr. 

Johnson contends that the PDS would 

‘‘eliminate the unpaid limited download 

in 37 CFR 385, Subparts B and C.’’ Id. 

at 3. Under Mr. Johnson’s proposal all 

‘‘interactive and non-interactive Subpart 

B and C streaming services’’ would be 

required to include a ‘‘buy button’’ that 

‘‘allows customers to voluntarily buy or 

purchase a work as a permanent paid 

digital download.’’ § 385 Regulation 

Redline and Changes of George D. 

Johnson (GEO) at 4 (Feb. 20, 2017) 

(Johnson Redline and Changes). Mr. 

Johnson proposes that the cost to the 

consumer for these permanent paid 

digital song sales would be, for 2018: 

$1.00; 2019: $1.50; 2020: $2.00; 2021: 

$2.50; 2022: $3.00. Id. 

Mr. Johnson also proposes that 

proceeds from sales of permanent 

downloads purchased through the 

proposed ‘‘buy button’’ be allocated to 

the following groups of interested 

parties under one of two alternatives (A 

or B): Artist ($.19 or $.18 per dollar paid 

by the consumer), ‘‘record’’ (presumably 

the label or record company) ($.21 or 

$.20), ‘‘AFM’’ (presumably American 

Federation of Musicians) ($.01), 

‘‘AFTRA’’ (presumably American 

Federation of Television and Radio 

Artists) ($.01), Songwriter ($.21 or $.20), 

Publishers ($.21 or $.20), and Services 

($.16 or $.20). Id. Mr. Johnson refers to 

the alternative allocations as royalties 

but they appear instead to be shares of 

sales proceeds that he would allocate to 

what he believes are all of the interested 

parties. He does not explain why or 

when alternative A should be applied as 

opposed to alternative B. 

The allocations he proposes would 

include royalties for the section 112/114 

licenses and the section 115 license, 

divided equally between the section 115 

and section 114 copyright owners. 

Johnson Redline and Changes at 4. 

However, under his proposal the 

copyright users (the Services) would 

still pay a mechanical royalty for 

streaming performances of ‘‘$.0015, 

etc.’’ Johnson Second AWDS at 4. It is 

unclear what year the $.0015 rate would 

apply to and what the ‘‘etc.’’ means.43

In short, Mr. Johnson proposes two 

alternatives for allocating revenues from 

sales that might occur if a customer 

were to buy a song directly from a 

Service. Under Alternative A, the 

Services would effectively pay in the 

aggregate 84% of the PDS revenues to 

all copyright owners for licenses under 

both the section 114 (which includes 

section 112 royalties) and 115. Under 

Alternative B, the Services would pay 

80% of PDS revenues for the same two 

licenses. Johnson Second AWDS at 4–5. 

In his written direct statement Mr. 

Johnson does not propose any 

benchmark or other evidence that would 

justify a ‘‘buy button’’ requirement with 

a rate of 80% or 84% of PDS revenues. 

He does assert, however, that it is the 

‘‘only reasonable proposal that captures 

the true value of a music copyright 

today and historically.’’ Johnson Second 

AWDS at 5. Ultimately, Mr. Johnson 

concedes that the Judges previously 

rejected his proposal to combine the 

section 112/114 and 115 rates in Web IV 

and that the proposal continues to be 

impracticable. 3/9/17 Tr. 433: 2–3, 11– 

12 (Johnson) (‘‘that didn’t happen in 

Web IV and . . . it won’t happen here 

. . . it’s so segmented, all the different 

licenses, it’s probably impossible.’’). 

While the Judges appreciate Mr. 

Johnson’s participation in the 

proceeding, they must view his proposal 

through the prism of the Copyright Act. 

Nothing in section 115 would authorize 

the Judges to require all Services 

availing themselves of the section 115 

license to include a mandatory ‘‘buy 

button’’ as part of any service offering. 

Services may install a ‘‘buy button’’ if 

they wish, but the Judges cannot 

mandate that service business 

innovation as Mr. Johnson proposes. 

Likewise, the Judges have no 

authority to set the price that Services 

charge consumers for purchasing a 

download whether from a PDD service 

offering or through Mr. Johnson’s 

proposed buy button. Even if the Judges 

had the authority to impose a ‘‘buy 

button’’ requirement on the Services, it 

is unclear what purpose that button 

would serve other than to alert 

consumers to the possibility of buying a 

song they happen to stream. The Judges 

believe consumers of music are already 

aware that if they want to buy a song 

they can do so. Perhaps Mr. Johnson 

believes with a buy button, consumers 

might be more willing to click on the 

button and buy the song than if the 

button were not visible and readily 

available. Mr. Johnson provides no 

evidence to support that premise. As for 

the 80% or 84% combined royalty that 

Mr. Johnson proposes for the section 

112/114 and 115 licenses, he provides 

no evidence upon which the Judges 

might base such a royalty other than his 

belief that it is the ‘‘only reasonable 

proposal that captures the true value of 

a music copyright today and 

historically.’’ See Johnson Second 

AWDS at 5. Mr. Johnson’s opinion alone 

is insufficient evidence upon which to 

support his ‘‘buy button’’ proposal. 

Given the lack of sufficient substantial 

and persuasive evidence to support the 

Federal Register / Vol. 84, No. 24 / Tuesday, February 5, 2019 / Rules and Regulations 1925 

44Mr. Johnson’s oral testimony went well beyond 

his ‘‘buy button’’ proposal and included criticism 

of the current Copyright Act as well as criticism of 

the Services’ rate proposals and business models 

and other concerns about the music industry more 

generally. While the Judges considered Mr. 

Johnson’s testimony in determining the appropriate 

royalty rates for the upcoming rate period, as a lay 

witness sponsored by no party other than himself 

the Judges placed little weight on his opinions 

regarding the various rate proposals of the Services 

and the condition of the industry. As for his 

criticism of the Copyright Act, those opinions are 

more appropriately directed to Congress. 

GEO proposal, the Judges will not 

further analyze it.44 The Judges 

respectfully decline to adopt Mr. 

Johnson’s proposed approach to rate 

setting. 

B. Arguments Concerning Elements of 

the Proposed Rate Structures 

1. Per-Unit Rate 

Copyright Owners and Apple 

emphasize that a per-play royalty rate 

structure, as compared with a percentof-revenue structure, provides 

transparency and simplicity in reporting 

to songwriters and publishers, because 

it requires only one metric besides the 

rate itself, i.e., the number of plays, 

making it much easier to calculate, 

report, and understand. See, e.g., Expert 

Report of Marc Rysman, Trial Ex. 3026, 

¶ 56 (Rysman WDT); Wheeler WDT, 

Trial Ex. 1613, ¶ 19; Expert Report of 

Anindya Ghose, Trial Ex. 1617, ¶¶ 83– 

84 (Ghose WDT); Expert Report of Jui 

Ramaprasad, Trial Ex. 1615, ¶ 41 

(Ramaprasad WDT); Witness Statement 

of Peter Brodsky, Trial Ex. 3016, ¶ 76 

(Brodsky WDT); 3/22/17 Tr. 2476–78 

(Dorn); 3/23/17 Tr. 2855–56 (Ghose). 

Relatedly, Copyright Owners argue that 

a transparent metric tied to actual usage 

is superior because, under the 

alternative percent-of-revenue approach, 

services might manipulate revenue 

through bundling, discounting, and 

accounting techniques, or might defer 

service revenues and emphasize 

increasing market share rather than 

profits. See Rysman WDT ¶¶ 43–45. 

Copyright Owners and Apple contrast 

their proposed per play approaches with 

the current rate structure, which they 

characterize as cumbersome and 

convoluted. They emphasize that under 

the current rate structure, the Services 

must perform a series of different greater 

of and lesser of calculations, depending 

on a service’s business model, to 

determine which prong of the rate 

structure is operative. See Copyright 

Owners’ Proposed Findings of Fact 

(COPFF) (and record citation therein). 

Copyright Owners assert that because of 

this complexity, publishers and 

songwriters cannot easily verify the 

accuracy of data the Services input 

when calculating royalty payments. See 

Brodsky WDT ¶ 76; Ghose WDT ¶¶ 80, 

81, 82; Ramaprasad ¶¶ 4, 38, 42–44; 

Rysman WDT ¶ 57; Tr. 2865 (Ghose); Tr. 

824 (Joyce); Tr. 247778 (Dorn). 

Beyond the issue of complexity, 

Copyright Owners and Apple argue that 

interactive streaming services do not 

need the present upstream rate structure 

in order to adopt any particular 

downstream business model. Rather, 

Copyright Owners and Apple assert that 

a per-play structure would establish a 

level of equality in the royalty rates 

across the Services, without regard to 

business models. Songwriters and 

publishers would be paid on the same 

transparent, fixed amount without 

advantaging any one business model 

over another. 3/23/17 Tr. 2849, 2863 

(Ghose). Thus, Copyright Owners and 

Apple maintain that a royalty based on 

the number of plays aligns the 

compensation paid to the creators of the 

content with actual demand for and 

consumption of their content. Ghose 

WDT ¶ 84; Rysman WDT ¶¶ 9, 58; 

Testimony of David Dorn, Trial Ex. 

1611, ¶ 33 (Dorn WDT). 

Copyright Owners further argue that 

the present rate structure’s failure to 

measure royalties based on per-play 

consumption is counterintuitive, 

because it permits a decreasing effective 

per-play rate even as the quantity of 

songs listeners consume via interactive 

streaming is increasing. Israelite WDT 

¶ 39. Copyright Owners note, for 

example, that listening to [REDACTED] 

increased from [REDACTED] streams in 

July 2014 to [REDACTED] streams in 

December 2016, a [REDACTED] increase 

in the number of streams. Rebuttal 

Report of Glenn Hubbard, Trial Exs. 

132–33, Ex. 1 and ¶ 2.22 (Hubbard 

WRT); 4/13/17 Tr. 5971–72 (Hubbard). 

However, contemporaneously 

[REDACTED]’s mechanical royalty 

payments to the Copyright Owners only 

increased [REDACTED], from 

$[REDACTED] in mechanical royalties 

in July 2014 to only $[REDACTED] in 

December 2016. Hubbard WRT ¶ 3.9; 4/ 

13/17 Tr. 5971–73 (Hubbard). The 

upshot, Copyright Owners assert, is that, 

as streaming consumption increased 

dramatically from 2014 to 2016, the 

effective per stream mechanical 

royalties paid by [REDACTED] to 

Copyright Owners decreased from 

[REDACTED] per hundred streams in 

July 2014 to [REDACTED] per hundred 

streams in December 2016—only 

[REDACTED]% of the effective per 

stream rate in July 2014. 4/13/17 Tr. 

5972–73 (Hubbard). 

The Services made four arguments in 

opposition to the use of a per-play 

royalty rate. The overarching theme of 

these arguments is that an inflexible 

‘‘one size fits all’’ rate structure would 

be ‘‘bad for services, consumers, and the 

copyright owners alike.’’ See Services’ 

Joint Proposed Findings of Fact (SJPFF) 

at 89. 

First, the Services argued that an 

upstream per-play rate would not align 

with the downstream demand for ‘‘allyou-can-eat’’ streaming services. As 

Professor Marx testified, a per stream fee 

introduces a number of distortions and 

inefficiencies, encouraging a capping of 

downstream plays and reduces 

incentives for services to meet the 

demand of consumers ‘‘who are going to 

stream a lot of music.’’ Written Direct 

Testimony of Leslie Marx, Trial Ex. 

1065, ¶¶ 130–131 (Marx WDT). In this 

vein, Pandora’s then-president, Michael 

Herring, noted that a per-play 

consumption-based model where the 

revenue is fixed creates uncertainty and 

volatility, which discourage investment 

and hamper profitability. 3/14/17 Tr. 

894–95 (Herring). Mr. Herring noted that 

this is a general economic problem that 

occurs when a retail subscription 

business has fixed subscription 

revenues per customer, but variable 

(and unpredictable) costs derived from 

variable (and unpredictable) 

downstream usage. Written Rebuttal 

Testimony of Michael Herring, Trial Ex. 

888, at ¶ 17 (Herring WRT); 3/14/17 Tr. 

894–98 (Herring); see Mirchandani WDT 

¶ 39 (one-size-fits-all rate is not 

‘‘offering agnostic’’ as Copyright Owners 

claim, but rather is ‘‘offering 

determinative.’’). 

Second, the Services argued that there 

is no ‘‘revealed preference’’ in the 

marketplace for a per-play royalty rate 

structure for licensing musical works or 

sound recordings rights, as opposed to 

a percent-of-revenue (with minima) 

royalty structure. In particular, they 

contended that mechanical royalties 

have never been set on a per-play basis. 

See Herring WRT ¶ 19. The Services 

also pointed to the interactive services’ 

direct licenses with music publishers, 

PROs and record companies, claiming 

that all rely on a percent-of-revenue 

royalty calculation. SJPFF ¶¶ 174–175 

(and record citations therein). They 

acknowledged that some of the direct 

license agreements with record 

companies contain alternative per-user 

prongs but they noted that this is 

consistent with the existing rate 

structure which already contains a persubscriber minimum, but not a per-play 

prong. Id. ¶ 175. Further, the Services 

noted that Apple, which is proposing a 

per-play rate, in fact has [REDACTED]. 

See 3/23/17 Tr. 2857 (Ghose); 3/22/17 

Tr. 2479 (Dorn). 

1926 Federal Register / Vol. 84, No. 24 / Tuesday, February 5, 2019 / Rules and Regulations 

45This problem is irrelevant to Copyright 

Owners’ proposal, because they propose the 

elimination of the All-In provision in the rate 

structure. 

46Except when it doesn’t. The Services seek the 

elimination of the ‘‘Mechanical Floor,’’ a significant 

departure from the existing structure. 

47 In more formal economic terms, Professor Katz 

noted that the present structure enhances variable 

pricing that allows streaming services ‘‘to work 

[their] way down the demand curve,’’ i.e., to engage 

in price discrimination that expands the market, 

providing increased revenue to the Copyright 

Owners as well as the Services.’’ 3/13/17 Tr. 701 

(Katz). 

48The Copyright Owners sought to rebut 

Professor Hubbard’s argument by confronting him 

with the offerings of Tidal, a streaming service that 

does not compete by offering a low-cost service. 

Eisenach WDT ¶¶ 49–50. However, Tidal’s offering 

of a higher priced subscription service that provides 

enhanced features such as hi-fidelity sound quality 

actually proves the point that Professor Hubbard 

and the other Service economists are making: There 

is a segmentation of demand across product 

characteristics and WTP that permits differential 

pricing in this industry. 

Third, the Services discounted the 

argument that Copyright Owners’ 

proposed rate structure is superior to 

the present rate structure because the 

latter is too complicated or 

cumbersome. They characterized this 

criticism as ‘‘overblown’’ and assert that 

any problems arising in the use of a 

revenue-based headline rate is mitigated 

by the inclusion of per subscriber and 

TCC minima. SJPFF ¶ 174. They further 

noted that section 801(b)(1) does not list 

as a criterion or objective that the rates 

be simple, easy to understand, or 

otherwise ‘‘transparent.’’ Services’ Joint 

Reply to Apple PFF (SJR(Apple)) at 34, 

36. Thus, they argued, the Judges cannot 

jettison an otherwise appropriate rate 

structure because some unquantified 

segment of the songwriting community 

might be uncertain as to how their 

royalties were computed. 

Separate from these four arguments 

against per-play rate proposals, the 

Services noted a practical problem 

related to Apple’s specific proposal: 

Apple’s proposal calls for deducting 

performance royalties from the per-play 

mechanical royalty, yet it does not 

explain how to convert the typical 

percent-of-revenue performance royalty 

into a per play rate in order to perform 

that computation.45 The Services noted 

that Apple Music’s Senior Director, 

David Dorn, was unable to explain how 

this calculation would be made. See 3/ 

22/17 Tr. 2508–09 (Dorn). Thus, the 

Services asserted that Apple’s proposal 

would introduce ‘‘more complexity, not 

less,’’ SJR (Apple) at 34. 

2. Flexible Rate 

The Services propose a rate structure 

for configurations in extant subparts B 

and C that follows the structure in the 

existing regulations adopted after the 

2012 Settlement.46 The Services 

asserted that they are not advocating 

preservation of the basics of the 

settlement rate structure merely to 

preserve the status quo. See 3/13/17 Tr. 

564 (Katz). Rather, the Services, through 

their economic experts, argue that the 

settlement rate structure as an 

appropriate benchmark for the Judges to 

weigh, consider, adjust (if appropriate), 

and apply or reject, as they would any 

proffered benchmark. The Services note 

that considering the current rate 

structure as a benchmark is instructive 

because it allows for identification of 

market value by analogy. The Services 

assert that examination of a comparable 

circumstance obviates the need for 

experts and the Judges to build a 

theoretical model from the ‘‘ground up.’’ 

See 3/13/17 Tr. 691–2 (Katz). 

The Services’ experts opine that, for a 

number of reasons, the 2012 rate 

structure is a highly appropriate 

benchmark. First, they note that it 

applies to (1) the same rights; (2) the 

same uses; and (3) the same types of 

market participants. See 3/15/17 Tr. 

1082–83 (Leonard); 3/13/17 Tr. 551, 

566–67 (Katz). Additionally, the 

Services maintain that because the 2012 

rate structure resulted from a negotiated 

settlement, it reflects market forces, 

including an implicit consensus on such 

issues as substitutional effects. See 3/ 

13/17 Tr. 580, 722 (Katz). More broadly, 

the Services assert the 2012 Settlement 

demonstrates the ‘‘revealed preferences’’ 

of these economic actors. See 3/15/17 

Tr. 1095 (Leonard); see also Amended 

Written Direct Statement of Gregory K. 

Leonard, Trial Ex. 695, ¶ 72 (Leonard 

AWDT) (direct license agreements that 

track statutory structure evidence 

‘‘revealed preference’’). Finally, the 

Services assert that the 2012 Settlement 

rate structure as benchmark is relevant 

and helpful because, although it was 

adopted five years ago, it is nonetheless 

a relatively recent agreement, covering 

the current rate period. See Katz WDT 

¶¶ 6, 71; 3/13/17 Tr. 608–09 (Katz); 

Leonard AWDT ¶ 45 et seq.; 3/15/17 Tr. 

1082 (Leonard). 

The Services’ experts candidly 

acknowledge that the rate structure they 

advocate cannot be construed 

economically as the ‘‘best’’ approach to 

pricing in this market. See, e.g., 4/7/17 

Tr. 5574–76 (Marx). Rather, the 

Services’ experts uniformly link the fact 

that the marginal physical cost of 

streaming is zero to the need for a 

flexible rate structure, such as now 

exists. See, e.g., 3/20/17 Tr. 1829 

(Marx); 3/13/17 Tr. 558 (Katz); 3/15/17 

Tr. 122 (Leonard). Indeed, Copyright 

Owners’ economic experts acknowledge 

this underlying fact. See, e.g., 3/30/17 

Tr. 4086 (Gans) (streamed music is 

‘‘non-rival good.’’); 3/27/17 Tr. 3167 

(Watt); 4/3/17 Tr. 4318 (Rysman); 4/13/ 

17 Tr. 5917–18 (Hubbard). 

Professor Katz noted that the existing 

revenue-based rate structure captures 

important specific aspects of the 

economics of the interactive streaming 

market, accounting for the variable 

willingness to pay (WTP) among 

listeners and the corollary variable 

demand for streaming services. See 3/ 

13/17 Tr. 586–87 (Katz); see also 

Written Rebuttal Testimony of Leslie M. 

Marx, Trial Ex. 1069, ¶¶ 239 et seq. 

(Marx WRT); 4/7/17 Tr. 5568 (Marx) 

(present structure serves customer 

segments with variety of preferences 

and WTP).47 Professor Rysman, an 

expert for Copyright Owners, 

hypothesized that under the current rate 

regime overall revenues might be 

increasing because of movements 

‘‘down the demand curve’’ (i.e., changes 

in quantity demanded in response to 

lower prices), rather than because of, or 

in addition to, an outward shift of the 

demand curve (i.e., increase in demand 

at every price). 4/3/17 Tr. 4373–74 

(Rysman). Professor Hubbard perceives 

a link between the existing rate 

structure and the ‘‘growth in the number 

of consumers, number of streams, entry, 

the number of companies providing the 

streaming services, and the identity of 

the companies providing those services 

. . . .’’ 4/13/17 Tr. 5978 (Hubbard); see 

Hubbard WDT ¶ 4.7 (settlement rate 

structure provides ‘‘necessary flexibility 

to accommodate the underlying 

economics of [REDACTED]’s various 

digital music service offerings.’’); 48

3/15/17 Tr. 1176 (Leonard) 

(notwithstanding changes in streaming 

marketplace, economic structure of 

marketplace, which made percent-ofrevenue appropriate, has not changed). 

The Services’ experts further assert 

that the multiple pricing structures 

necessary to satisfy the WTP and the 

differentiated quality preferences of 

downstream listeners relate directly to 

the upstream rate structure to be 

established in this proceeding. Professor 

Marx opines that the appropriate 

upstream rate structure is derived from 

the characteristics of downstream 

demand. 3/20/17 Tr. 1967 (Marx) (rate 

structure upstream should be derived 

from need to exploit WTP of users 

downstream via a percentage of 

revenue). This upstream to downstream 

consonance in rate structures represents 

an application of the concept of 

‘‘derived demand,’’ whereby the 

demand upstream for inputs is 

dependent upon the demand for the 

Federal Register / Vol. 84, No. 24 / Tuesday, February 5, 2019 / Rules and Regulations 1927 

49 In a real-life example of this phenomenon, 

[REDACTED] explained [REDACTED]’s internal 

analysis of the marketplace impact of 

[REDACTED]’s decision to discount the monthly 

subscription price of its [REDACTED] service 

[REDACTED]. The analysis indicated that 

[REDACTED]% of the subscribers were new to the 

interactive streaming segment of the market, and 

[REDACTED]% came from existing subscribers to 

other services at the standard $9.99 monthly price. 

As [REDACTED] explained, music publishers 

would lose royalties on $[REDACTED] of revenue 

on the [REDACTED]% who migrated away from a 

$9.99 service, but would add royalties on the 

$[REDACTED] for each subscriber who was part of 

the [REDACTED]% cohort. See 3/16/17 Tr. 1576– 

1639 ([REDACTED]); see also 3/21/17 Tr. 2243–44 

(Hubbard). 

50There is a facially discordant aspect to the 

Services’ argument. They are consistently incurring 

losses under this rate structure and the present 

rates, yet they are essentially content for the present 

rates and structure to be continued. The presence 

of chronic losses would facially suggest that the 

Services would be in need of rate reduction (as 

some of their experts suggest would be proper given 

their analyses). This conundrum is explained by the 

Services’ engaging in competition for market share, 

as discussed infra. 

51No witness offered any testimony that might 

indicate whether the currently operating Services 

perceive themselves to be at the beginning, middle, 

or ‘‘late-stage’’ of this cycle. 

final product downstream. Id.; see P. 

Krugman & R. Wells, Microeconomics at 

511 (2d ed. 2009) (‘‘[D]emand in a factor 

market is . . . derived demand . . . 

[t]hat is, demand for the factor is 

derived from the [downstream] firm’s 

output choice’’). 

The Services’ economists also 

contend that the existing rate structure 

has produced generally positive 

practical consequences in the 

marketplace. As the Services’ joint 

accounting expert, Professor Mark 

Zmijewski testified, the decrease in 

publishing royalties from the sale of 

product under subpart A since 2014 has 

been offset by an increase in music 

publisher royalties (mechanical + 

performance royalties) over the same 

period. Expert Report of Mark E. 

Zmijewski, Trial Ex. 1070, ¶¶ 38, 40 

(Zmijewski WRT); 4/12/17 Tr. 5783 

(Zmijewski). Professor Hubbard 

dismisses as economically 

‘‘meaningless’’ the argument that 

Copyright Owners have suffered relative 

economic injury under the current rate 

structure simply because the increase in 

their revenues from interactive 

streaming has been proportionately less 

than the growth in the number of 

interactive streams. 4/13/17 Tr. 5971–73 

(Hubbard). There is no evidence in this 

record that, if the price of the services 

available to these low to zero WTP 

listeners had been increased, they 

would have paid the higher price. In 

fact, the only survey evidence in the 

record suggests that listeners to 

streaming services have a highly elastic 

demand, i.e., they are highly sensitive to 

price increases.49

On the Licensee Services’ side of the 

ledger, Professor Katz identifies the 

entry of new interactive streaming 

services and new investment in existing 

interactive streaming services during the 

present rate period as evidence that the 

present rate structure is ‘‘working.’’ 3/ 

13/17 Tr. 667 (Katz). He notes the 

ubiquity of percent-of-revenue based 

royalty structures in the music industry, 

indicating (as a matter of revealed 

preference) the practicality of a revenuebased royalty system. See 3/13/17 Tr. 

766–67 (Katz).50

Although the Services’ economic 

experts extol the benefits of the current 

rate structure, they acknowledge the 

problem, whether hypothetical or real, 

that the Services have an incentive and 

a capacity to minimize the amount of 

revenue that is attributed to the revenue 

base. Further, even absent any wrongful 

intent with regard to the measurement 

of revenue, the Services recognize that 

attribution of revenue across product/ 

service lines of various service offerings 

can be difficult and imprecise. See, e.g., 

4/5/17 Tr. 5000 (Katz). Additionally, the 

Services might focus on long-term profit 

maximization, thereby deferring shorterterm profits through temporarily lower 

downstream pricing in a manner that 

suppresses revenue over that shorterterm. The Services might also use music 

as a ‘‘loss leader,’’ displacing streaming 

revenue to encourage consumers to 

enter into the so-called economic 

‘‘ecosystem’’ of the streaming services, 

especially the multi-product/service 

firms in this proceeding, such as 

Amazon, Apple, and Google. The 

operators of these multi-product 

environments might assume music 

consumers can be exposed to other 

goods and services available for 

purchase. Third, the Services might 

obscure royalty-based streaming 

revenue by offering product bundles 

that include music service offerings 

with other goods and services, rendering 

it difficult to allocate the bundle 

revenue between royalty-bearing service 

revenue and revenue attributable to 

other products in the bundle. 

Professor Katz testified, however, that 

the existing rate structure 

accommodates these bundling, deferral, 

and displacement issues by the use of 

minima that are triggered if the royalty 

resulting from the headline percent-ofservice revenue falls below the 

established minima. Katz WDT ¶¶ 82– 

83; 3/13/17 Tr. 670 (Katz). Moreover, he 

concluded that because the marketplace 

appears to be functioning, the 

alternative minimum rates must be 

adequately handling revenue 

measurement issues. Id. at 738; 4/5/17 

Tr. 5055–57 (Katz). In similar fashion, 

Dr. Leonard opined that the 2012 

Settlement rate structure created a 

number of ‘‘buckets’’ to deal with 

problems of this sort, although he 

acknowledged that there was no reason 

why adjustments could not be made to 

the ‘‘buckets’’ going forward. 3/15/17 

Tr. 1227–28 (Leonard); see also 3/13/17 

Tr. 670–71 (Katz) (did not analyze 

whether to adjust ‘‘specific rates’’ of the 

minima). 

Copyright Owners criticize the 2012 

rate structure because of the inherent 

problems with measurement of revenue. 

Specifically, Copyright Owners focus on 

deferral and displacement problems. 

See Rysman WDT ¶ 13. With regard to 

revenue deferral, Copyright Owners 

argue that the services’ attempt to grow 

their customer base and future profits is 

fueled by a strategic decision to lower 

retail prices, thus sacrificing current 

revenue for future economic benefits. 

Id.; see also 3/21/17 Tr. 2081–83 

([REDACTED]). 

The Services concede that there is a 

period in the life-cycle of a streaming 

service when ‘‘user numbers’’ may be 

more important to a service, its 

investors, and its market price; however 

there comes a time, in the ‘‘late-stage 

private and public markets,’’ when 

‘‘[REDACTED].’’ Written Rebuttal 

Testimony of Barry McCarthy, Trial Ex. 

1066, ¶¶ 37 (McCarthy WRT).51 The 

Services argue, however, that Copyright 

Owners misunderstand the emphasis on 

long term growth. That emphasis, they 

argue, relates to the Services’ 

willingness to sacrifice short-term 

profitability by incurring up-front costs, 

which has no bearing on current period 

revenues. 3/21/17 Tr. 2085 

([REDACTED]). The Services 

nonetheless acknowledge that they 

focus currently on the second derivative 

of revenue—the ‘‘growth of the 

growth’’—rather than revenue growth. 

The Judges find that the record in this 

proceeding indicates that the Services 

do seek to engage to some extent in 

revenue deferral to promote a long-term 

growth strategy. A long-term strategy 

that emphasizes scale over current 

revenue can be rational, especially 

when a critical input is a quasi-public 

good. Growth in market share and 

revenues is not matched by a 

commensurate increase in the cost of 

inputs, whose marginal cost of 

production (reproduction in this 

context) is zero. It appears to the Judges 

that the nature of the downstream 

interactive streaming market and its 

reliance on scaling for success, results 

1928 Federal Register / Vol. 84, No. 24 / Tuesday, February 5, 2019 / Rules and Regulations 

52More precisely, although some [REDACTED] 

listeners might have paid the full subscription 

price, the [REDACTED] pricing analysis indicated 

that any revenue losses arising from discounts 

obtained by these sub-groups were dwarfed in term 

of revenue gains from the new subscribers at the 

lower discounted rates [REDACTED]. [REDACTED] 

WRT ¶ 22. 

53 It is important to note that Copyright Owners’ 

attacks on the Klein Survey are not levelled by any 

witnesses, nor contradicted by their own survey 

expert, because Copyright Owners elected not to 

proffer such an expert in their direct (or rebuttal) 

cases. Rather, Copyright Owners elected to make a 

descriptive argument regarding the elasticity of 

demand among different segments of the market, as 

opposed to a survey-based or econometric study of 

price elasticity. 

necessarily in a competition for the 

market rather than simply competition 

in the market. This competition 

emphasizes the importance of the 

dynamic creation of new markets and 

‘‘new demand curves,’’ recognizing that 

short-term profit or revenue 

maximization might be inconsistent 

competing for the market long-term. 

When the Services pay royalties as a 

percent of their current revenue, the 

input suppliers, i.e., Copyright Owners, 

are likewise deferring some revenue to 

a later time period and assuming some 

risk as to the ultimate existence of that 

future revenue. One way the Copyright 

Owners could avoid this impact would 

be to refuse to accept a percent-ofrevenue form of payment and move to 

a fixed per-unit price. Another way 

would be to establish a pricing structure 

that provides minima and floors, below 

which the revenue could not fall. The 

bargain struck between Copyright 

Owners and Services in 2012 is an 

example of the latter structure. 

In this proceeding, the Services assert 

there is no evidentiary support for 

Copyright Owners’ conclusory assertion 

that the Services intentionally displace 

revenue by engaging in ‘‘cross-selling’’ 

or revenue bundling. See SJPFF at 308. 

The Judges agree that there is no 

support for any sweeping inference that 

cross-selling has diminished the 

revenue base. 

Regardless of the existence or extent 

of cross-selling, Copyright Owners argue 

that the Services manipulate revenue 

calculations in their favor, allegedly 

defining revenue in opportunistic ways. 

See Rysman WDT ¶ 44; Rysman WRT 

¶ 15; see also Ghose WDT ¶¶ 78 (arguing 

on behalf of Apple that ‘‘service revenue 

for . . . bundles is subjective and can be 

interpreted differently by different 

service providers’’). Copyright Owners 

maintain that they cannot discern the 

alleged manipulation and opportunism 

as it occurs, because the booking of 

revenue among lines of business is 

‘‘opaque to publishers.’’ Rysman WDT 

¶ 43; Rysman WRT ¶ 15; Ghose WDT 

¶¶ 80–81. In support of this assertion of 

revenue manipulation, Copyright 

Owners point to [REDACTED]. 

Before [REDACTED] engaged in 

[REDACTED], it engaged in a pricing 

analysis to determine its optimal price 

point for [REDACTED] and interactive 

streaming access. See [REDACTED] 

Pricing Study—Final Report, Trial Ex. 

113 ([red] Study). [REDACTED] 

contends its pricing analysis 

demonstrated that [REDACTED]. Trial 

Ex. 111, ¶ 14 n.9 ([REDACTED] WRT). 

In conjunction with [REDACTED]. 

[REDACTED] lowered the [REDACTED] 

subscription price to $[REDACTED] per 

month, compared to the full 

$[REDACTED] per month price. 

Amazon determined that Prime 

members who were unwilling to pay the 

full [REDACTED]/month subscription 

price for [REDACTED] could be enticed 

to pay $[REDACTED] per month less, 

subscribing to [REDACTED] service at 

$[REDACTED]/month. Id. ¶ 22. 

[REDACTED] maintains these 

[REDACTED] created ‘‘unique 

distribution channels’’ generating new 

listeners and thus new royalties for the 

licensors without cannibalizing higher 

royalties at the full $[REDACTED] per 

month subscription price. Id. ¶¶ 25, 21– 

22.52 [REDACTED] asserts that the net 

benefits of its pricing strategies are 

confirmed by a consumer survey 

undertaken by [REDACTED] Mr. Robert 

L. Klein, Chairman and co-founder of 

Applied Marketing Science, Inc. 

(‘‘AMS’’), a market research and 

consulting firm. In that survey (Klein 

Survey), Mr. Klein identified 

[REDACTED]. At a high level, the Klein 

Survey results indicated that 

[REDACTED]’s music listeners had an 

overall high elasticity of demand for 

streamed music, meaning that their 

subscription demand was highly 

sensitive to changes in subscription 

prices. Written Rebuttal Testimony of 

Robert L. Klein, Trial Ex. 249, ¶ 67 

(Klein WRT).53

Copyright Owners attack the Klein 

Survey on several fronts. The arguments 

made by Copyright Owners are 

insufficient, however, to seriously 

weaken the probative value of the Klein 

Survey. In the end, the Judges are not 

persuaded by the Copyright Owners’ 

revenue bundling arguments not to 

adopt a flexible, revenue-based royalty 

rate. 

3. All-In Rate vs. Independent 

Mechanical Rate 

The current mechanical royalty rate is 

calculated as a so-called ‘‘All-In’’ rate. 

When calculating the mechanical rate 

the parties subtract from the base rate 

the amount paid by the interactive 

streaming services to performing rights 

organizations (PROS) for the musical 

works performance right. All five 

Services urge the Judges to establish a 

statutory rate structure for the 

forthcoming rate period that contains 

this ‘‘All-In’’ feature; whereas Copyright 

Owners request that the rate for the 

forthcoming rate period be set without 

regard to the amounts the Services pay 

PROs for the performance rights. 

According to the Services, a key 

aspect of the 2008 and 2012 settlements 

was the deduction of expenses for 

public performance royalties; in other 

words, the top-line rate the Services 

paid under the section 115 license 

would be added to the performance 

rights royalties for an All-In musical 

works fee from the Services’ point of 

view. Levine WDT ¶ 35; Written Direct 

Testimony of Adam Parness, Trial Ex. 

875, ¶ 7 (Parness WDT); 3/8/17 Tr. 298– 

99 (Parness). According to Apple, the 

absence of any value in the mechanical 

license separate from the performance 

license is underscored by the fact that 

interactive streaming is the only 

distribution channel that pays both a 

performance royalty and a mechanical 

royalty. Noninteractive services, 

SDARS, and terrestrial radio pay a 

performance royalty but not a 

mechanical royalty, whereas record 

companies pay a mechanical royalty 

under subpart A but not a performance 

royalty. Rebuttal Testimony of David 

Dorn, Trial Ex. 1612, ¶ 10 (Dorn WRT). 

According to the Services this All-In 

rate structure is consistent with the 

parties’ expectations in settling 

Phonorecords I and II. See SJPFF ¶ 112. 

Additionally, the Services note that 

many direct licenses between musical 

works copyright owners and streaming 

services incorporate the ‘‘All-In’’ feature 

of the existing section 115 license. See 

SJPFF ¶¶ 143–145 (and record citations 

therein). 

Separately, Apple concurs in the 

proposal of an ‘‘All-In’’ rate in the 

forthcoming rate period. According to 

Apple, the Judges 

should adopt an All-In rate for interactive 

streaming because (1) mechanical and 

performance royalties are complementary 

rights that must be considered together in 

order to prevent exorbitant costs, (2) the 

current statute use an All-In rate, (3) All-In 

rates provide greater predictability for 

businesses, and (4) recent fragmentation and 

uncertainty with respect to performance 

licenses threaten to exacerbate the problems 

of high costs and uncertainty already present 

in the industry. 

Apple PFF ¶¶ 138, et seq. (and record 

citations therein). Apple maintains that, 

as a policy matter, an All-In rate helps 

maintain royalties at an economically 

Federal Register / Vol. 84, No. 24 / Tuesday, February 5, 2019 / Rules and Regulations 1929 

54 In this context, ‘‘fragmentation’’ refers to the 

existence of more than one owner of copyrights to 

a single musical work. 

55Since 1941, ASCAP and BMI have been subject 

to Consent Decrees they reached with the 

Department of Justice in a DOJ antitrust suit. See, 

e.g., United States v. Broadcast Music, Inc., 1940– 

43 Trade Cas. ¶ 56,096 (W.D.Wis. 1941). 

56Apple also claims that there is recent legal 

uncertainty because of the 2016 decision regarding 

fractional licensing in United States v. Broadcast 

Music Inc., 64 Civ. 3787 (LLS), 2016 WL 4989938 

(S.D.N.Y. Sept. 16, 2016), which Apple claims has 

created even more market power for the owners of 

musical works. Apple hypothesizes fractional 

licensing ‘‘almost certainly will lead to higher total 

payments for performance rights, higher 

transactions costs, and greater uncertainty.’’ Parness 

WDT ¶ 20. In the BMI case, according to Apple, the 

Rate Court confirmed that PROs can grant licenses 

for fractional interests in musical works, meaning 

that in order to offer a work, interactive streaming 

services must obtain licenses from every entity with 

any de minimis interest in the work. Id. 

57Copyright Owners take this argument one step 

further—maintaining that consequently the Services 

‘‘have presented no competent evidence that an 

‘‘All-In’’ rate structure ‘‘is consistent with the 

parties’ expectations in settling Phonorecords I and 

II.’’ CORSJPCL ¶ 112. It is difficult to conclude that 

this fundamental rate structure, agreed to in two 

separate settlements between the parties, was not 

consonant with their ‘‘expectations.’’ 

efficient level because it sets a single 

value for all of the rights that interactive 

streaming services must obtain from 

publishers and songwriters. See 

Rebuttal Report of Professor Jui 

Ramaprasad, Trial Ex. 1616, ¶ 13 

(Ramaprasad WRT) (separate 

mechanical royalty could lead to 

‘‘unreasonably high combined royalties 

for publishers and songwriters’’); 3/23/ 

17 Tr. 2667–69, 2670 (Ramaprasad); see 

also Leonard AWDT ¶ 56; Katz WDT 

¶ 94; Written Direct Testimony of 

Michael Herring, Trial Ex. 880, ¶ 59 

(Herring WDT). Accordingly, Apple 

asserts that adoption of an All-In rate 

will ensure that these two 

complementary rights are considered in 

tandem, with the cost of one offset 

against the cost of the other. See Dorn 

WRT ¶ 15; see also 3/13/17 Tr. 587–588 

(Katz); 3/15/17 Tr. 1191–92 (Leonard); 

Herring WDT ¶ 59. 

Apple, consistent with the other 

Services, argues that the All-In rate 

structure is particularly important 

because of recent ‘‘fragmentation’’ 54

and uncertainty in performance rights 

licensing. The Services all claim this 

potential fragmentation threatens to 

exacerbate existing uncertainty over 

royalty costs. See Dorn WRT ¶¶ 17–18; 

Ramaprasad WRT ¶¶ 13, 63; Parness 

WDT ¶¶ 16–20; Katz WDT ¶¶ 87–94; 3/ 

13/17 Tr. 602–04 (Katz). Apple notes 

that this problem may be amplified 

because of the emergence of a fourth 

PRO, Global Music Rights (GMR) in 

addition to SESAC which, like GMR, is 

not subject to musical works 

performance license proceedings in the 

Rate Court.55 Parness WDT ¶ 18; Katz 

WDT ¶ 91; see 3/9/17 Tr. 382–83 

(Parness); 3/13/17 Tr. (Katz) 602–04.56

The Services also raise the specter of 

future ‘‘withdrawals’’ by music 

publishers from one or more PROs. 

Copyright Owners’ initial response to 

the All-In structure is a jurisdictional 

argument. They emphasize that this is a 

proceeding to set rates and terms for the 

section 115 compulsory mechanical 

license to make and distribute 

phonorecords, not to perform works. 17 

U.S.C. 115, 801(b)(1). More particularly, 

Copyright Owners note that, the section 

115 compulsory license explicitly 

applies solely to the exclusive rights 

bestowed by clauses (1) and (3) of 

section 106; that is the rights to make 

and to distribute phonorecords of 

[nondramatic musical] works.’’ This 

proceeding does relate to the exclusive 

right provided by clause (4) to perform 

the work publicly. 17 U.S.C. 106, 115. 

Thus, Copyright Owners argue, the 

public performance right provided by 17 

U.S.C. 106(4) is an entirely separate and 

divisible right from the mechanical right 

at issue in this proceeding and is not 

subject to the section 115 license. See 

COPCOL ¶ 314 (citing 17 U.S.C. 106, 

115, 201(d) and 2 Nimmer on Copyright 

sec. 8.04[B] (‘‘[T]he compulsory license 

does not convey the right to publicly 

perform the nondramatic musical work 

contained in the phonorecords made 

under that license. Similarly, a grant of 

performing rights does not, in itself, 

confer the right to make phonorecords 

of the work.’’)). 

Copyright Owners note that 

performance royalties are negotiated 

between licensors and licensees, subject 

to challenge in a Rate Court proceeding. 

They conclude that the Judges cannot 

set an ‘‘All-In’’ rate because they have 

‘‘not been vested with the authority to 

set rates for performance rights because 

they are not covered by section 115.’’ 

Copyright Owners’ Proposed 

Conclusions of Law ¶ 315 (COPCL). 

Copyright Owners further note that the 

Services have not provided evidence in 

this proceeding to justify an ‘‘All-In’’ 

rate, such as evidence showing the rates 

and terms in existing performance 

licenses; the duration of such licenses; 

benchmarks for performance rights 

licenses; and the impact of interactive 

streaming on other sources of 

performance income, including noninteractive streaming, terrestrial radio, 

and satellite radio income. Further, 

Copyright Owners point out that the 

PROs and all music publishers would be 

necessary parties for any such 

determination. See id. ¶ 319. 

For these reasons, Copyright Owners 

decry as mere ‘‘sophistry’’ the Services’ 

argument that they are not asking the 

Judges to set performance rates, but 

rather only to ‘‘set’’ a ‘‘mechanical’’ rate 

that permits them to deduct what they 

pay as a performance royalty. More 

particularly, they argue that this 

approach, if adopted, would leave the 

mechanical rate indeterminate, subject 

to negotiations or judicial action 

regarding the performance license rate. 

See id. ¶ 320. Indeed, Copyright Owners 

note, under the Services’ ‘‘All-In’’ 

proposal, the mechanical rate could be 

zero (if performance royalties are agreed 

to or set by the Rate Court at a rate that 

is greater than or equal to the ‘‘All-In’’ 

rate proposed by the Services here). 

Copyright Owners argue that a 

mechanical royalty rate of zero ‘‘is 

anything but reasonable. . . .’’ Id. 

¶ 322. 

In an evidentiary attack, Copyright 

Owners demonstrate that the only 

percipient witness who engaged directly 

in the 2008 negotiations involving the 

‘‘All-In’’ rate was the NMPA president, 

David Israelite. By contrast, the 

Services’ two witnesses, Mr. Parness 

and Ms. Levine, did not participate 

directly in those negotiations. See 

Copyright Owners’ Reply Proposed 

Findings of Fact ¶ 125 (CORFF). Thus, 

Copyright Owners assert that the 

Services cannot credibly argue based on 

what the negotiating parties actually 

intended with regard to, inter alia, the 

‘‘All-In’’ rate.57

Copyright Owners also take aim at the 

Services’ argument that it matters not 

whether they pay royalties designated as 

‘‘performance’’ or ‘‘mechanical,’’ 

because the same rights owners are also 

receiving performance royalties. 

According to Copyright Owners, this 

argument (1) ignores the Copyright Act’s 

separate and distinct mechanical and 

performance rights; (2) ignores that the 

rates for the use of those two rights, to 

the extent not agreed, are set in different 

jurisdictions; and (3) ignores the 

disruption that would be caused by 

eliminating mechanical royalties, e.g., 

disruptions arising from (a) the fact that 

mechanical royalties are the most 

significant source of recoupment of 

advances to songwriters; and (b) 

songwriters receive a greater share of 

mechanical royalties than they do of 

performance royalties (both because of 

the standard splits in songwriter 

agreements and the fact that 

performance income, unlike mechanical 

income, is diminished by PRO 

commissions). COPCL ¶ 323; COPFF 

¶ 640. 

1930 Federal Register / Vol. 84, No. 24 / Tuesday, February 5, 2019 / Rules and Regulations 

58See also Determination of Royalty Rates and 

Terms for Making and Distributing Phonorecords 

(Phonorecords III); subpart A Configurations of the 

Mechanical License, Docket No. 16–CRB–0003–PR, 

82 FR 15297, 15298 n. 15 (March 28, 2017). 

(‘‘[M]usic licensing is fragmented, both by reason of 

the Consent Decree and the fragmentation of the 

statutory licensing schemes in the Act. These issues 

are beyond the scope of authority of the Judges; 

they can only be addressed by Congress.’’). 

59 If the All-In Rate calculation results in a dollar 

royalty payment below the stated Mechanical Floor 

rate, then that floor rate would bind. 

60Although Apple does not join in the 

endorsement of the 2012 rates as benchmark, Apple 

does propose elimination of the Mechanical Floor 

for the upcoming rate period. Apple Inc. Proposed 

Rates and Terms, at 4, 7–8 (royalties calculated by 

multiplying number of streams times per-stream 

rate, subtracting public performance royalties, and 

allocating per work) (May 11, 2017). Google’s 

revised rate proposal, which also does not rely on 

the 2012 rate as a benchmark, does not include a 

Mechanical Floor. See, Google Amended Proposal, 

at 1. 

61This claimed ‘‘illusion’’ became a reality, as the 

[REDACTED], has been paying the vast majority of 

its royalties pursuant to the Mechanical Floor, as 

has [REDACTED]. See, e.g., Marx WDT ¶ 76; Marx 

WRT ¶ 40. 

Copyright Owners also assert that ‘‘a 

single All-In payment will . . . 

diminish payments to songwriters, and 

will negatively impact the publishers’ 

ability to recoup advances, which will, 

in turn, negatively impact the size and 

number of future advances.’’ Witness 

Statement of Thomas Kelly, Trial Ex. 

3017, ¶ 66 (Kelly WDT); Witness 

Statement of Michael Sammis, Trial Ex. 

3019, ¶ 27 (Sammis WDT); Witness 

Statement of Annette Yocum, Trial Ex. 

3021, ¶ 23 (Yocum WDT); Israelite WDT 

¶ 71. 

Copyright Owners counter the 

Services’ claim that increasing 

‘‘fractionalization’’ of licenses justifies 

an ‘‘All-In’’ rate as a red herring. 

Specifically, they argue there has always 

been fractional licensing of performance 

rights by the PROs; there typically are 

multiple songwriters and publishers 

with ownership rights in a song and 

they might not all be affiliated with the 

same PRO. The recent litigation only 

confirmed that there is no legal basis on 

which any one PRO has the right to 

license rights it does not have. Rebuttal 

Witness Statement of David M. Israelite, 

Trial Ex. 3030, ¶¶ 65–66 (Israelite 

WRT); 3/29/17 Tr. 3662–63 (Israelite); 3/ 

9/17 Tr. 372–373 (Parness). 

Moreover, contrary to the Services’ 

assertions, they presented no evidence 

that the presence of GMR, a new PRO, 

has altered the extent of fragmentation 

in any manner, let alone increased the 

degree of fragmentation in the 

marketplace. Copyright Owners point 

out that the Services admitted that GMR 

represents fewer than 100 songwriters 

and has a meager market share of 

roughly 3 percent of the performance 

market. 3/9/17 Tr. 365–67 (Parness); see 

Israelite WRT ¶ 59. Copyright Owners 

also note that the Services presented no 

evidence either that there has been an 

increase in performance rates in licenses 

issued by GMR, or, more generally, of 

any actual or potential impact of this 

alleged ‘‘fragmentation’’ of the 

performance rights marketplace on their 

interactive streaming businesses. 3/9/17 

Tr. 381 (Parness)). 

Finally, Copyright Owners note that, 

if it ever were a justification for an AllIn rate, the issue of publisher 

withdrawals from PROs has been 

overtaken by events. Specifically, they 

note that the ASCAP and BMI Rate 

Courts in the Southern District of New 

York, the Second Circuit, and the 

Department of Justice have determined 

that partial withdrawals by publishers 

are not permitted. Israelite WRT ¶¶ 62– 

63, citing In re Pandora Media, 785 F.3d 

73, 77–78 (2d Cir. 2015), aff’g 6 F. Supp. 

3d 317 (S.D.N.Y. 2014).58

4. Mechanical Floor 

Copyright Owners urge the Judges to 

retain the feature of the extant rate 

regulations establishing a Mechanical 

Floor; that is, a rate below which the 

calculated mechanical license rate could 

not fall.59 They emphasize that the 

revenue displacement and deferral 

problems they perceive under a percentof-revenue rate structure are alleviated 

with a Mechanical Floor because that 

rate is based on a per-subscriber 

calculation. COPFF ¶¶ 639–40. 

Copyright Owners maintain that the 

Services’ desire to eliminate the 

Mechanical Floor is nothing other than 

a ‘‘thinly veiled effort to sharply reduce 

the already unfairly low mechanical 

royalties.’’ COPFF ¶ 644. The import of 

the Mechanical Floor is underscored by 

Dr. Eisenach who testifies that, in 2015, 

the Services triggered the Mechanical 

Floor in over 43% of service-months (66 

of 152 such months). Written Rebuttal 

Testimony of Jeffrey A. Eisenach, Trial 

Ex. 3033, ¶ 115 (Eisenach WRT). 

Copyright Owners further argue that 

the Mechanical Floor is necessary to 

preserve a source of publishers’ 

advances to songwriters and 

recoupments of prior advances. COPFF 

¶ 640 (and record citations therein). 

They assert that songwriters benefit 

more from publishing agreements than 

from performance agreements with 

PROs because, under current publishing 

agreements, songwriters typically 

receive 75% or more of mechanical 

royalty income; whereas, PRO’s split 

performance royalty income 50/50 

between publishers and songwriters. Id. 

Moreover, PROs charge songwriters an 

administrative fee, further reducing the 

value of the performance royalty income 

relative to mechanical royalty income. 

Id. 

Despite their proffer of the 2012 rates 

as an appropriate benchmark, the 

Services 60 propose elimination of the 

Mechanical Floor in the forthcoming 

rate period. In support of this position, 

the Services assert that they acquiesced 

to the Copyright Owners’ insistence on 

the Mechanical Floor in the 2012 

Settlement, because they believed the 

Mechanical Floor was ‘‘illusory,’’ i.e., 

that it was ‘‘highly unlikely to ever be 

triggered. . . .’’ SJPFF ¶¶ 127, 160 (and 

record citations therein).61 According to 

the Services, experience has shown that 

the Mechanical Floor in the current rate 

structure has added uncertainty and has 

led to Services paying ‘‘windfall’’ 

royalties to Copyright Owners well 

above the stated ‘‘All-In’’ amount. See 

Apple PFF ¶¶ 85, 165; see also Google 

PCOL ¶ 22 (triggering of Mechanical 

Floor caused in some circumstances by 

Copyright Owners leveraging market 

power). 

The Services argue that the 

Mechanical Floor is tantamount to a 

separate rate and defeats the benefits of 

an All-In rate. Apple PFF ¶¶ 164–167 

(and record citations therein). They 

acknowledge the mechanical rights and 

public performance rights are ‘‘perfect 

complements’’ from the perspective of 

an interactive streaming service, but 

assert there is no economic rationale for 

setting the two rates separately from one 

another. Id. ¶ 88. The Services fear the 

alternative minimum Mechanical Floor 

could supersede a ‘‘reasonable headline 

royalty rate.’’ Marx WDT ¶ 165; see 

Leonard AWDT ¶¶ 54, 80–81 (‘‘perfect 

complements’’ argue for elimination of 

Mechanical Floor). The Services also 

argue that removal or adjustment of the 

Mechanical Floor would improve 

economic efficiency. Marx WDT ¶¶ 135, 

165. 

5. Greater-Of per Unit/per User 

Structure 

Copyright Owners’ proposal 

constitutes a ‘‘greater of’’ rate structure, 

whereby the royalty would equal the 

greater of $.0015 per play and $1.06 perend user per month. In support of this 

approach, Copyright Owners contend it 

establishes a value for each copy of a 

musical work, independent of the 

Services’ business models and pricing 

strategies. Rysman WDT ¶ 89. They 

argue that the greater-of structure is no 

more complicated than a per-play rate 

alone and is much less complicated 

Federal Register / Vol. 84, No. 24 / Tuesday, February 5, 2019 / Rules and Regulations 1931 

62Professor Ghose used a hypothetical scenario in 

which a service had one user who listened to 300 

streams in a given month. Under Copyright Owners’ 

$0.0015 per play prong, the service would pay $ 

0.0015 × 300, or $.45 in royalties. Under Copyright 

Owners’ per user prong, the service would pay a 

royalty of $1.06 for the one user, which is an 

effective per play rate of $0.0035 per play ($1.06 ÷ 

300) or more than twice the $0.0015 per-play rate. 

4/12/17 Tr. 5687 (Ghose). 

63 Deezer averaged [REDACTED] streams in 2014 

and Tidal averaged [REDACTED] streams in 2016. 

Id. 

64This analysis underscores the inconsistency 

between Copyright Owners’ claim that each stream 

of a musical work has ‘‘inherent value.’’ See, e.g., 

Israelite WDT ¶ 39 (it ‘‘makes no sense’’ if ‘‘[e]ach 

service effectively pays to the publisher and 

songwriter a different per-play royalty’’). But in 

reality, Copyright owners understand that each 

musical work also contributes to a different value— 

access value (what economists call ‘‘option 

value’’)—when the musical works are collectivized 

and offered through an interactive streaming 

service, resulting in different effective per play rates 

paid by services if the per user prong is triggered. 

To explain this inconsistency, Copyright owners 

note the existence of a second ‘‘inherent value’’— 

not created by the songwriter in his or her 

composition—but rather created by the user—who 

inherently values access to a full repertoire. But 

these two purportedly ‘‘inherent’’ values are 

inconsistent (which is why there are two prongs in 

the proposal) and, given the heterogeneity of 

listeners, the ‘‘access value’’ is not ‘‘homogeneous 

throughout the market. These points illustrate but 

some of the reasons why a single per play rate is 

inappropriate. 65See supra note 57 and accompanying text. 

than the 2012 Settlement rate structure. 

According to Copyright Owners, a peruser rate adds only one additional 

metric for royalty calculation. Brodsky 

WDT ¶ 76. Copyright Owners also assert 

that their usage-based structure is 

aligned with the value of the licensed 

copies because couples rates with usage 

and consumption. CORFF at 22. Finally, 

Copyright Owners note that in music 

licensing agreements it is not 

uncommon to find royalty rates set in a 

greater-of formula that includes a peruser and a per-play prong, as well a 

percent-of-revenue prong. See CORFF at 

97 (and record citations therein). 

The Services assert that the greater-of 

aspect of Copyright Owners’ rate 

proposal would lead to absurd and 

inequitable results, well above the rates 

established under Copyright Owners’ 

per-play rate prong. Professor Ghose, 

one of Apple’s economic expert 

witnesses, calculated that under 

Copyright Owners’ greater-of structure, 

interactive streaming services would 

pay under the per-user prong if the 

number of monthly streams per user 

averaged less than 707. 4/12/17 Tr. 

5686–87 (Ghose). In other words, the 

hypothetical service would be required 

to pay $1.06 per user rather than 

$0.0015 per stream.62 Id. at 5687. 

Importantly, Apple argues that the 

record in this proceeding shows that 

Services’ monthly streams have been 

historically less than 707 per user per 

month. Specifically, relying on data in 

Dr. Leonard’s Written Rebuttal 

Testimony, Apple contends that the 

annual weighted average number of 

streams per user per month across 

current subpart B and subpart C service 

offerings has been below [REDACTED] 

in each year from 2012 to 2016, while 

the average number of streams per user 

per month has exceeded 707 (which 

would trigger the per play prong) only 

[REDACTED] according to service-byservice data. Id.; 63 see Written Rebuttal 

Testimony of Gregory K. Leonard, Trial 

Ex. 698, at Ex. 3b (Leonard WRT). Apple 

argues that these historical data indicate 

that the Services would consistently pay 

more than the $0.0015 per play rate 

emphasized by Copyright Owners in 

this proceeding. See Apple PFF 284.64

According to Apple, even Copyright 

Owners’ own expert, using different 

data, found that if the Copyright 

Owners’ proposal had been in effect, 

[REDACTED] of the [REDACTED] 

Services he reviewed would have been 

required to pay under the per-user 

prong in December 2015. Rysman WRT 

¶ 87, Table 1. Professor Rysman’s data 

for December 2014 indicated that 

[REDACTED] of the [REDACTED] 

Services would have been required to 

pay under the per-user prong. Id. at 

Table 2. 

Copyright Owners do not dispute the 

statistical analyses; rather, they claim 

that the binding nature of the per-user 

prong is not problematic. They cite 

sound recording performance license 

agreements in which a per-user of prong 

binds interactive streaming services at a 

rate of $[REDACTED], well above the 

$1.06 proposed by Copyright Owners for 

mechanical licenses. See CORPFF 

(Apple) at 104. Copyright Owners also 

attempt to support the higher effective 

per play rates by explaining that peruser rates reflect the value of access to 

the publishers’ repertoires, not just the 

value of an individual stream. See 

CORPFF (Apple) at 104–05 (and 

citations therein). 

C. 2012 Settlement as Rate Structure 

Benchmark 

The Services request a rate structure 

that (although not uniform in the 

respective particulars) generally tracks 

the present rate structure (including the 

All-In rate approach, but excluding the 

present Mechanical Floor). More 

particularly, they propose a structure 

based on a ‘‘headline’’ percent-ofrevenue royalty, but, subject to certain 

minima that are triggered if the revenuebased royalty is either too low or 

inapplicable. 

By contrast, Copyright Owners seek a 

radical departure from the present rate 

structure. First, Copyright Owners seek 

to eliminate the All-In rate, thus 

decoupling the mechanical rate from the 

performance rate. Second, they advocate 

for a replacement of the ‘‘percent-ofrevenue with minima’’ structure and a 

substitution of a rate equal to the greater 

of a per-play royalty and a per-user 

royalty. Copyright Owners’ Amended 

Proposed Rates and Terms at 8. 

Copyright Owners criticize using the 

2012 rate structure as a benchmark for 

rates in the present market. Copyright 

Owners contend that results of a 

negotiated settlement have limited 

evidentiary value in the present context. 

They also argue that the parties arrived 

at the 2012 rate structure and rates in a 

market that was not mature and that, 

thus, the settlement rates were merely 

‘‘experimental.’’ The Copyright Owners 

further contend that any benchmark 

based upon a compulsory, statutory rate 

is suspect because of the ‘‘shadow’’ of 

the statutory construct. 

1. Evidentiary Value of Settlement Rates 

Copyright Owners criticize the 

relevance of the 2012 settlement-based 

rate structure. First, they note that, as 

terms in a settlement, the elements of 

the rate structure do not reflect the 

structure the market would set, but 

rather reflect the parties’ own 

understanding of how the Judges would 

rule in the absence of a settlement. 

Second, Copyright Owners assert that, 

assuming arguendo that the current rate 

structure can be used for benchmarking 

purposes, the Services have not 

presented competent evidence or 

testimony as to the intentions of the 

settling parties who had negotiated the 

2012 settlement, or, for that matter, the 

2008 settlement that preceded it. 

Specifically, Copyright Owners claim 

that the witnesses who were called by 

the Services to testify did not negotiate 

directly with the Copyright Owners. 3/ 

29/17 Tr. 3621–22 (Israelite).65 More 

particularly, the two Services’ witnesses 

who provided testimony concerning the 

negotiations, Adam Parness and 

Zahavah Levine, acknowledged they 

had no direct involvement in the 

Phonorecords I negotiations, and Ms. 

Levine did not engage in direct 

negotiations with regard to the 

Phonorecords II settlement either. 3/9/ 

17 Tr. 339–40 (Parness); 3/29/17 Tr. 

3885–86 (Israelite); Israelite WRT ¶ 14 

(indicating that Ms. Levine had left Real 

Networks in 2006, before her former 

1932 Federal Register / Vol. 84, No. 24 / Tuesday, February 5, 2019 / Rules and Regulations 

66The Mechanical Floor is discussed in greater 

detail, supra, section IV.B.4. 

subordinate was negotiating the 2008 

settlement). 

Mr. Parness testified, at the time of 

the Phonorecords I settlement, he was 

Director of Musical Licensing for 

RealNetworks, Inc., an interactive 

streaming service and a member of 

DiMA, its bargaining representative. In 

that capacity, Mr. Parness was ‘‘actively 

involved’’ on behalf of Real Networks. 

Parness WDT ¶ 5. Substantively, Mr. 

Parness testified to his understanding 

that the important aspects of the 

Phonorecords I negotiations and 

settlement were: (1) An agreement that 

noninteractive services did not need a 

mechanical license; (2) the interactive 

mechanical license would be calculated 

on an ‘‘All-In’’ basis; (3) the rate would 

be structured as a percent-of-revenue 

with certain minima; and the headline 

rate would be 10.5%. Parness WDT ¶ 7. 

He noted that the rate minima were 

included at the behest of Copyright 

Owners, who were concerned that low 

retail pricing by the services would 

cause a revenue-based rate to result in 

too little royalty revenue. Id. ¶ 8. Mr. 

Parness further testified, with regard to 

the 2012 negotiations, that he directly 

negotiated with Mr. Israelite and the 

general counsel for the NMPA– 

negotiations that led to the parties’ 

agreement essentially to maintain the 

subpart B structure and to create what 

became the new subpart C rate 

structure. Id. at 11; see also 3/9/17 Tr. 

325–27 (Parness). 

Ms. Levine, who was employed by 

Google YouTube at the relevant time, 

testified that in the Phonorecords II 

negotiations, Copyright Owners sought 

an increase in the subpart B rates, the 

services refused, and Copyright Owners 

ultimately withdrew that demand. 

Written Rebuttal Statement of Zahavah 

Levine, Trial Ex. 697, ¶ 2 (Levine WRT). 

Ms. Levine was not directly involved in 

the negotiations, however, as DiMA 

represented the interests of the services 

in those negotiations. Knowing the 

outcome of the negotiations does not 

illuminate the thought processes (or the 

horse-trading) that actually drove the 

negotiations or shaped the settlement 

structure. 

The Copyright Owners proffered no 

specific testimony as to how or why the 

provisions of the 2008 and 2012 

settlements were negotiated and valued, 

either in their constituent parts or as 

they were integrated into the rate 

structure ultimately adopted. 

2. The 2012 Rates Were ‘‘Experimental’’ 

Copyright Owners maintain that the 

current rate structure was 

‘‘experimental,’’ i.e., when it was first 

agreed to there was no data to evaluate 

the business and Copyright Owners 

lacked knowledge as to the future 

development of the interactive market. 

Thus, they claim to have accepted the 

present rate structure because it offered 

protection against poorly monetized 

services, through the establishment of 

the alternate prongs. In fact, it was 

Copyright Owners that first proposed 

the three tiered rate structure that now 

exists, but the specific percentages and 

rates were the subject of negotiation. 

Copyright Owners’ understanding of the 

characterization of the 2012 rates is 

informative; Mr. Israelite, who engaged 

in the negotiations, did not view the 

minima in the structure as minima, but 

rather as alternative rate prongs by 

which Copyright Owners would be paid 

the greatest of the rates calculated. 3/29/ 

17 Tr. 3637 (Israelite). Copyright 

Owners acknowledge that they had no 

idea which prong would bind—because 

they had no control over the services 

business models or over the 

performance rates that are deductions to 

the All-In rate—so they negotiated all 

three alternatives to reflect that 

uncertainty. Id. at 3636–38. 

With regard to the Mechanical Floor, 

Copyright Owners assert that they 

required this provision in part to protect 

against a severe or complete reduction 

in mechanical royalties that would as 

possible by virtue of the All-In 

structure. See Israelite WRT ¶¶ 19–22, 

29, 81; 3/29/17 Tr. 3632, 3634–36, 3638, 

3754, 3764–65 (Israelite); 3/8/17 Tr. 259 

(Levine).66

The Services assert that there is no 

record evidence, beyond Mr. Israelite’s 

testimony, that the existing rate 

structure was, or remains, experimental. 

They further note that by 2012, when 

this rate structure was renewed, 

consumer adoption of streaming was 

obvious, contrary to Copyright Owners’ 

allegations. Levine WRT ¶ 5. The 

Services also assert that numerous 

services, including those backed by 

large companies, such as Yahoo and 

Microsoft, had already entered the 

market, and some of those services had 

achieved significant subscriber 

numbers. 3/8/17 Tr. 155–57 (Levine); 

see also Parness WDT ¶ 12. 

The Services also dispute the 

assertion that there was no significant 

market development by the time of 

Phonorecords II. Levine WRT ¶¶ 5–6; 3/ 

8/17 Tr. 171–72, 270–72 (Levine). 

Numerous services, including the more 

recent large new entrants, had already 

entered the market, with some realizing 

significant subscriber numbers. Id. at 

155–57 (Levine). 

3. The ‘‘Shadow’’ of the Statutory 

License 

Copyright Owners assert that any 

benchmark, including the Services’ 

proffered benchmarks, based on rates set 

for a compulsory license, is inherently 

suspect, because they are distorted by 

the so-called ‘‘shadow’’ of the statutory 

license. This is a recurring criticism. 

See, e.g., Web IV, 81 FR at 26329–31. 

More particularly, Copyright Owners 

argue: ‘‘The royalty rate contained in 

virtually any agreement made by a 

music publisher or songwriter with a 

license for rights subject to the 

compulsory license will be depressed by 

the availability of the compulsory 

license.’’ COPFF ¶ 708 (and record 

citations therein). In summary, this 

alleged shadow diminishes the value of 

a benchmark rate that was formed by 

private actors who negotiated the rate 

while understanding that either party 

could refuse to consummate a contract 

and instead participate in a proceeding 

before the Judges to establish a rate. 

Thus, neither side can utilize any 

bargaining power to threaten to actually 

‘‘walk away’’ from negotiations and 

refuse to enter into a license. In that 

sense, therefore, any bargain they struck 

would be subject to the so-called 

‘‘shadow’’ of the regulatory proceeding. 

The metaphorical shadow actually 

can be cast in two ways. First, when the 

parties are negotiating, they are aware of 

the rates established in prior 

proceedings, which shape their 

expectations of the likely outcome if 

they do not enter into a negotiated 

agreement. Second, there is the alleged 

shadow of the upcoming proceeding, 

should the parties fail to negotiate an 

agreement. That in futuro shadow 

reflects not merely the prior rulings of 

this tribunal (and its predecessors), but 

also any predictions the parties may 

make regarding, for example, the Judges’ 

likely positions with regard to the 

present and changing nature of the 

industries involved, the economic 

issues, the weight of various types of 

evidence, the credibility of witnesses 

and the Judges’ application of the 

801(b)(1) standards. 

The argument that the shadow taints 

the use of statutory rates, and direct 

agreements otherwise subject to the 

statutory license must be considered in 

light of section 115 of the Copyright Act, 

which provides that in addition to the 

objectives set forth in section 801(b)(1), 

in establishing such rates and terms, the 

Copyright Royalty Judges may consider 

rates and terms under voluntary license 

agreements described in subparagraphs 

(B) and (C). 17 U.S.C. 115(c)(3)(D). 

Subparagraphs (B) and (C), respectively, 

Federal Register / Vol. 84, No. 24 / Tuesday, February 5, 2019 / Rules and Regulations 1933 

67The Judges note that one of the two 

benchmarking methods relied upon by Copyright 

Owners subtracts the statutory rate set in Web III 

for noninteractive streaming from a royalty rate 

derived from the unregulated market for sound 

recording licenses between labels and interactive 

streaming services. This would seem to violate the 

Copyright Owners’ own assertion that statutorily set 

rates cannot be used to establish reasonable rates. 

However, Copyright Owners’ expert testified that, 

in his opinion, the Judges in Web III accurately 

identified the market rate for noninteractive 

streaming, so that rate could be utilized as if it were 

set in the market. 4/4/17 Tr. 4643 (Eisenach). This 

assertion proves too much. If one expert on behalf 

of a party may equate a rate set by the Judges with 

the market rate, why cannot the Judges, or any other 

party’s expert, do the same? The end result of such 

an approach takes us back to the point the Judges 

made at the outset in this section: Any rate set by 

the Judges or influenced by the Judges’ rate-setting 

process must be considered on its own merits. 

68For example, the Judges regularly assume that 

the parties have ‘‘baked-in’’ the values of promotion 

and substitution when agreeing to rates. See, e.g., 

Web IV, 61 FR at 26326. 

69The Shapley analyses conducted by Professors 

Marx and Watt also eliminate this ‘‘walk away’’ 

power by valuing all possible orderings of the 

players’ arrivals. See discussion, infra, section 

V.D.1. 

refer to agreements on ‘‘the terms and 

rates of royalty payments under this 

section’’ by ‘‘persons entitled to obtain 

a compulsory license under [17 U.S.C. 

115(a)(1)]’’ and ‘‘licenses’’ covering 

‘‘digital phonorecord deliveries.’’ Id. 

Thus, it is beyond dispute that Congress 

has authorized the Judges, in their 

discretion, to consider such agreements 

as evidence, notwithstanding the 

argument that the compulsory license 

may cast a shadow over those 

agreements. 

Additionally, the Judges may consider 

the existing statutory rates themselves 

as evidence of the appropriate rate for 

the forthcoming rate period. Indeed, the 

Judges may consider existing rates as 

dispositive evidence when setting new 

rates. Music Choice, supra, 774 F.3d at 

1012 (the Judges may ‘‘use[ ] the 

prevailing rate as the starting point of 

their Section 801(b) analysis’’ and may 

ultimately find that ‘‘the prevailing rate 

was reasonable given the Section 801(b) 

factors.’’). Of course, the fact that the 

Copyright Act and the D.C. Circuit grant 

the Judges statutory authority to 

consider statutory rates and related 

agreements as evidence does not 

instruct the Judges as to how much 

weight to afford such agreements. The 

exercise of that judicial discretion 

remains with the Judges. 

Further, there is no reason to find 

such benchmark agreements per se 

inferior to other marketplace benchmark 

agreements that may be unaffected by 

the shadow, because the latter may be 

subject to their own imperfections and 

incompatibilities with the target market. 

Thus, the Judges must not only consider 

(i) the importance, vel non, of any 

‘‘shadow-based’’ differences between 

the regulated benchmark market and an 

unregulated market; but also (ii) how 

those differences (if any) compare to the 

differences (if any) between the 

unregulated market and the target 

market (e.g., differences based on 

complementary oligopoly power, 

bargaining constraints and product 

differentiation).67

In the present proceeding, the parties 

weigh in on the shadow issue with 

several additional arguments. Copyright 

Owners emphasize that the purpose of 

their benchmarking approach is to avoid 

the distortions of the shadow, by 

utilizing the unregulated sound 

recording agreements between labels 

and interactive streaming services and 

then applying a ratio of sound recording 

to musical works royalties, also in 

unregulated contexts, to develop a 

benchmark wholly free of the shadow 

cast by the statute. See Eisenach WDT 

¶¶ 34–40. The Judges agree that a 

strength of the Copyright Owners’ 

benchmarking approach is that it allows 

for the identification of marketplace 

benchmarks, so that the Judges can 

ascertain whether there are analogous 

markets from which statutory rates can 

be derived. 

The Services’ experts discount the 

shadow argument and, indeed, 

essentially rely on the statutory rates in 

subpart B and in subpart A as their 

benchmarks. Professor Marx opines that 

the statutory rates are superior in at 

least one way, because they incorporate 

the elements the Judges must consider— 

both the market forces and the section 

801(b)(1) factors that are the bases for 

the statutory rates. 3/20/17 Tr. 1843–44, 

1914 (Marx); see also 3/13/17 Tr. 575 

(Katz) (the shadow leads the parties to 

meet the 801(b)(1) objectives). 

However, when the rates are the 

product of settlements rather than a 

Determination by the Judges, they do 

not reflect the Judges’ application of the 

elements of section 801(b)(1). Rather, 

the settlement rates reflect (implicitly) 

the parties’ predictions of how the 

Judges may apply such factors. 

Although the Judges reasonably can, 

and do, accept the parties’ 

understanding of how market forces 

shape their negotiations (indeed, 

economic actors’ agreements are part 

and parcel of the market),68 the Judges 

cannot defer to any implicit 

‘‘mindreading’’ by the parties as to the 

Judges’ application of the elements of 

section 801(b)(1). Rather, the Judges 

have a duty to independently apply the 

statute. Accordingly, the Judges reject 

the idea that rates and terms reached 

through a settlement can be understood 

to supersede—or can be assumed to 

embody—the Judges’ application of the 

statutory elements set forth in section 

801(b)(1). However, if on further 

analysis, the Judges find that provisions 

arising from a settlement reflect the 

statutory principles set forth in section 

801(b)(1), then the Judges may adopt the 

provisions of that settlement if it is 

superior to the evidence submitted in 

support of alternative rates and terms. 

With regard to the alleged impact of 

the shadow, Professor Katz offers a 

perspective. He opines that the so-called 

shadow imbues licensees with 

countervailing power, to offset or 

mitigate the bargaining power of 

licensors who otherwise have the ability 

to threaten to ‘‘walk away’’ from 

negotiations and thus decimate the 

licensees’ businesses. 3/13/17 Tr. 661 

(Katz). The Judges find merit in this 

perspective, because it underscores the 

fact that a purpose of the compulsory 

license is to prevent the licensor from 

utilizing or monetizing the ability to 

‘‘walk away’’ as a cudgel to obtain a 

better bargain. In this limited sense, the 

agreements created under the so-called 

shadow thus are beneficial, to the extent 

that they provide one potential way in 

which to offset the complementary 

oligopoly power of the record 

companies, especially the Majors. 

Indeed, this countervailing power 

argument is consistent with the Judges’ 

‘‘shadow’’ analysis in Web IV, 81 FR, at 

26330–31 (noting the counterbalancing 

effect of the statutory license in 

establishing effectively competitive 

rates).69

Professor Leonard presents yet 

another perspective on the statutory 

benchmarks, arguing that the alleged 

shadow they cast acts as a ‘‘focal point’’ 

around which parties negotiate, with the 

statutory license acting as either a 

ceiling or a floor. 3/15/17 Tr. 1263 

(Leonard). In a second-best market 

where price discrimination is 

economically appropriate, the 

continuation of a rate structure, over 

two rate cycles, might suggest the 

parties’ acceptance of that structure as 

an efficient ‘‘focal point,’’ absent 

sufficient evidence to the contrary. 

However, as the Judges noted in Web IV, 

whatever theoretical appeal there may 

be in this focal point analysis (if any), 

it cannot be credited as an independent 

basis for using an existing statutory rate, 

absent ‘‘a sufficient connection between 

theory and evidence.’’ Id. at 26630. 

1934 Federal Register / Vol. 84, No. 24 / Tuesday, February 5, 2019 / Rules and Regulations 

70 In other words, TCC is not part of a ‘‘lesser-of’’ 

calculation with another metric such as a persubscriber fee. 

71Rates based on a percent-of-revenue (even 

without any alternative rate prongs) are themselves 

a form of price discrimination. See J. Cirace, CBS 

v. ASCAP: An Economic Analysis of a Political 

Problem, 47 Ford. Rev. 277, 288 (1978); W.R. 

Johnson, Creative Pricing in Markets for Intellectual 

Property, 2 Rev. Econ. Res. Copyrt., Issues 39, 40– 

41 (2005). To the extent they incorporate revenuesharing in the underlying licenses between services 

and record companies, percent of TCC rates are also 

a form of price discrimination. 

72As discussed infra, the fact that the 

performance right and the mechanical right are 

necessary complements to the licensees does not, 

however, end the inquiry. As Copyright Owners 

point out, the publishers use mechanical royalties 

in part to fund advances to songwriters or to assure 

their subsequent recoupment. The Judges will, 

therefore, retain the ‘‘Mechanical Floor’’ for the 

upcoming rate period, to ensure the continuation of 

this important source of liquidity to songwriters. 

73The Judges recognize that the reduction of the 

mechanical rate interim calculation by the amount 

of the performance rate in ‘‘Step 2’’ (see 

§ 385.12(b)(2)), acts as an exclusion from royalties 

rather than a deduction from revenue (by analogy, 

just as a tax credit is a subtraction from taxes, 

whereas a tax deduction is a subtraction from 

income). However, there is no statutory or 

regulatory impediment that prohibits this exclusion 

from royalties, especially given the economic 

interrelationship between performance rights and 

mechanical rights, discussed in the text infra. 

74The Shapley analyses are discussed infra, 

section V.D. 

75 Google notes, concerning its proposal, that the 

removal of a cap on TCC ‘‘does leave the services 

exposed to the labels’ market power, and would 

warrant close watching if adopted.’’ GPFF ¶ 73. 

While true, Google fails to note that the services are 

already exposed to the labels’ market power. Record 

companies could, if they so chose, put the Services 

out of business entirely. Uncapping the TCC rate 

prong does not change that. Nor can any decision 

by this tribunal. While the possibility of the record 

companies using their market power in a way that 

harms the Services is a real concern, the Judges 

cannot allow that concern to grow into a form of 

paralysis, where any change from the status quo is 

deemed too dangerous to contemplate. Any increase 

in mechanical royalty rates, whether or not they are 

computed with reference to record company 

royalties, has the potential of leading to a bad 

outcome for the Services. Even maintaining the 

status quo could lead to a bad outcome for the 

Services, as it surely would for the songwriters and 

publishers. Ultimately the Judges must go where the 

evidence leads them and, as with any economic 

exercise, trust in the rational self-interest of the 

market participants. 

D. Greater-Of Percent of Revenue/TCC 

Rate Structure 

In its revised rate proposal Google 

presents an all-in royalty rate for all 

service offerings set as the greater of 

10.5% of revenue and 15% of TCC. TCC 

is one metric used in computing 

mechanical royalties under the 2012 

rates and numerous direct licenses. In 

the 2012 rate structure a percentage of 

TCC is generally combined with 

percentage of revenue in a greater-of 

calculation, but is capped by a fixed 

per-subscriber royalty. See, e.g., 37 CFR 

385.13(a)(3), (b). A number of direct 

licenses in the record mirror this 

approach, or directly incorporate the 

terms of 37 CFR part 385. See, e.g., 

Leonard AWDT ¶ 54 (describing royalty 

calculation methodology in direct 

licenses between [REDACTED] and 

several music publishers, including 

[REDACTED], [REDACTED], and 

[REDACTED]; License Agreement 

between [REDACTED] and 

[REDACTED], Trial Ex. 749, at ¶ 6(a) 

([REDACTED]). 

Several direct licenses between 

[REDACTED] and music publishers base 

royalties on a straight, uncapped 70

percentage of TCC, with no ‘‘greater-of’’ 

prong. See, e.g., Music Publishing 

Rights Agreement between [REDACTED] 

and [REDACTED], Trial Ex. 760, at 

¶ 5(a) (all-in mechanical rate of 

[REDACTED]% of TCC); accord Leonard 

AWDT ¶ 64 (describing terms of 

[REDACTED] direct licenses with music 

publishers including [REDACTED], 

[REDACTED], [REDACTED], 

[REDACTED], and [REDACTED]). Still 

other direct licenses include an 

uncapped TCC metric in a threepronged ‘‘greater-of’’ calculation (along 

with percentage of revenue and a persubscriber fee). See, e.g., [REDACTED] 

Music Publishing Rights Agreement 

with [REDACTED], Trial Ex. 757, at 

¶ 4(a)(ii) and (iii). Some direct licenses 

eschew TCC entirely and compute 

royalties as the greater of a percentage 

of revenue and a per-subscriber fee. See 

Leonard AWDT ¶ 71 (describing terms 

of six agreements with [REDACTED]). 

Dr. Leonard, an expert for Google, 

reviewed and analyzed a number of 

direct licenses that Google and other 

services have entered into with muCsic 

publishers for, inter alia, mechanical 

rights. Dr. Leonard found the 

agreements to be useful benchmarks due 

to the similarity of rights, parties, 

economic circumstances, and time 

period. See 3/15/17 Tr. 1084 (Leonard). 

He found the direct agreements to 

support the reasonableness of Google’s 

proposed rate structure, 

notwithstanding variations among the 

agreements and between many of the 

agreements and Google’s rate proposal. 

At the time, Google was proposing a 

structure that (like other of the Services’ 

proposals) largely followed the statutory 

rate structure, but without a Mechanical 

Floor. Nevertheless, Dr. Leonard’s 

analysis demonstrates that the 

marketplace supports a number of rate 

structures, and that no single structure, 

or element of a structure, is 

indispensable. The Judges find that Dr. 

Leonard’s analysis, and the marketplace 

benchmarks that he relies on, support 

the rate structure that Google proposes 

in its amended rate proposal. 

E. Judges’ Conclusion Concerning Rate 

Structure 

In their rate determination 

proceedings, the Judges are informed, 

but not bound, by the parties’ proposals. 

The Judges’ task is to analyze the record 

evidence and determine a rate structure 

and rates that are reasonable, even 

though they might vary from any one 

party’s proposals. Weighing all the 

evidence and based on the reasoning in 

this Determination, the Judges conclude 

that a flexible, revenue-based rate 

structure is the most efficient means of 

facilitating beneficial price 

discrimination in the downstream 

market.71 The Judges, therefore, reject 

the per-play/per-user rate structures 

proposed by the Copyright Owners and 

Apple. 

The Judges also find that the All-In 

rate is a necessary and proper element 

of a mechanical rate determination and 

conclude it must remain in the rate 

structure for the forthcoming rate 

period. Specifically, the Judges find that 

the deduction of performance royalties 

accounts appropriately for the perfect 

complementarity of the performance 

and mechanical licenses.72 The Judges 

reject the argument that the All-In 

feature is unlawful because the Judges 

do not regulate performance rates. The 

All-In feature does not constitute a 

regulation of the performance rate, but 

rather represents a cost exclusion (or 

deduction) from the mechanical rate. 

The Judges and the parties recognize 

that the royalties otherwise due under a 

revenue-based format may exclude 

certain costs. See 73 CFR 

385.11(Definition of ‘‘Service Revenue,’’ 

paragraph (3) therein).73

Two of the proposed rate structures— 

the Services’ variations on the existing 

structure and Google’s proposed 

structure—have the foregoing elements. 

Of those two, the Judges find that 

Google’s proposal is superior for the 

following reasons. 

First, the use of an uncapped TCC 

metric is the most direct means of 

implementing a key finding of the 

Shapley analyses conducted by experts 

for participants on both sides in this 

proceeding: The ratio of sound 

recording royalties to musical works 

royalties should be lower than it is 

under the current rate structure.74

Incorporating an uncapped TCC metric 

into the rate structure permits the 

Judges to influence that ratio directly.75

Second, an uncapped TCC prong 

effectively imports into the rate 

structure the protections that record 

companies have negotiated with 

services to avoid the undue diminution 

Federal Register / Vol. 84, No. 24 / Tuesday, February 5, 2019 / Rules and Regulations 1935 

76See 4/6/17 Tr. 5215–16 (Leonard); see also 

GPFF ¶ 73 (arguing that ‘‘removing the caps allows 

the TCC prong to flexibly protect against downside 

risks associated with revenue deferment, 

displacement, or attribution issues.’’). 77This is the form of dynamic competition known 

as Schumpeterian competition (named after the 

economist Joseph Schumpeter). Such competition 

emphasizes the importance of the dynamic creation 

of new markets and ‘‘new demand curves,’’ 

recognizing that short-term profit or revenue 

maximization may be inconsistent with the 

rationality of competing for the market in this 

manner. 

78 ‘‘There is beauty in simplicity.’’ 3/23/17 Tr. at 

2855 (Ghose). 

79The Copyright Owners have two overarching 

objections to Google’s revised rate proposal. The 

first is a procedural objection: Google’s revised 

proposal was submitted after all evidence was taken 

and the Copyright Owner’s had no opportunity to 

cross-examine any witness about it. See CO Reply 

to GPFF at 1–2, 18. Google was entitled, under the 

Judges’ procedural regulations, to change its rate 

proposal up to, and including, the filing of 

proposed findings and conclusions. 37 CFR 

351.4(b)(3). Google did so—at the Judges’ request. 

See 4/13/17 Tr. 6019. The Judges find no merit in 

the Copyright Owners’ procedural objection. 

The Copyright Owners also argue that Google’s 

revised rate proposal is without evidentiary 

support. See, e.g., CO Reply to GPFF at 2, 15–18. 

The Judges do not rely on Google’s proposed 

findings. Rather, the Judges rely upon the evidence 

in the record they deem relevant and persuasive. 

The Judges have found sufficient evidence to 

support the rate structure, and the rates within that 

structure, as detailed in this Determination. The 

Determination speaks for itself. 

80See infra, section VI.A. 

81The subpart A benchmark is discussed infra, 

section V.B.3. 

of revenue through the practice of 

revenue deferral.76 The Judges find that 

the present record indicates that the 

Services do seek to engage to some 

extent in revenue deferral in order to 

promote their long-term growth strategy. 

A long-term strategy that emphasizes 

scale over current revenue can be 

rational, especially when a critical input 

is a quasi-public good. Growth in 

market share and revenues is not 

matched by a commensurate increase in 

the cost of such inputs, whose marginal 

cost of production, or reproduction as in 

this case, is zero. It appears to the 

Judges that the nature of the 

downstream interactive streaming 

market, and its reliance on scaling for 

success, results necessarily in a 

competition for the market rather than 

simply competition in the market.77

Revenue deferral argues against 

adopting a pure percent-of-revenue rate 

structure. 

Third, in the absence of Congressional 

guidance as to the meaning of a 

‘‘reasonable rate,’’ the Judges determine 

that, as a matter of policy, transparency 

and administrative rationality are 

factors in determining whether a rate is 

‘‘reasonable.’’ Those who pay and 

receive royalties, those who calculate 

the royalties, and those (like the Judges) 

who are sometimes called upon to 

interpret the regulations implementing 

the royalties, are best served by a rate 

structure that is understandable and 

administrable. Absent compelling 

reasons to adopt a more complex rate 

structure (which are not present in the 

record), simpler is better.78 Google’s 

proposed rate structure reduces the 

Rube-Goldberg-esque complexity and 

impenetrability of the existing, 

settlement-based rate regulations. In 

particular, it merges ten separate rates 

for different service offerings into a 

single rate that would apply to all 

service offerings, thus avoiding the 

potential for confusion and conflict as 

new service offerings emerge that do not 

fall neatly into any of the existing 

categories. 

Fourth, Google’s proposed rate 

structure is supported by voluntary 

agreements that were reached outside 

the context of litigation. They are thus 

free from trade-offs motivated by 

avoiding litigation cost, as distinguished 

from the underlying economics of the 

transaction. The same cannot be said of 

the existing rate structure. While both 

are affected by the ‘‘shadow’’ of the 

compulsory license, the Judges find the 

voluntary agreements more informative 

of the behavior of market participants. 

The Judges adopt Google’s proposed 

rate structure for the foregoing 

reasons.79 However, the Judges modify 

Google’s proposed rate structure by 

including the Mechanical Floor from 

certain configurations in the existing 

rate structure. The Mechanical Floor 

appropriately balances the Service’s 

need for the predictability of an All-In 

rate with publishers’ and songwriters’ 

need for a failsafe to ensure that 

mechanical royalties will not vanish 

either through the actions of the 

Services or the PROs and the Rate Court. 

Testimony of publishers and 

songwriters has established the critical 

role that mechanical royalties play in 

making songwriting a viable 

profession.80

The Judges reject the Services’ 

arguments for eliminating the 

Mechanical Floor. For example, the 

Judges find the Services’ argument that 

the mechanical right has no standalone 

value to be incomplete and, to an extent, 

self-serving. To the music publishers 

and songwriters, the mechanical right 

does have a value in the funding of 

songwriters, a value not provided by the 

performance royalty. By analogy, the 

cost of any publisher input, not just the 

cost of providing liquidity to 

songwriters, such as, for example, the 

cost of heating the buildings in which 

songwriters toil, has no standalone 

value to the Services, yet no one would 

assert that the licensors are not entitled 

to royalties from which they can recover 

their heating costs. Liquidity funding for 

songwriters is a necessity, just as heat is 

a necessity—the complementary nature 

of the rights to the Services is of no 

relevance. 

The Judges also reject Apple’s 

argument that the Mechanical Floor 

should be eliminated because of the 

potential for fragmented musical works 

licenses due to threatened publisher 

withdrawal from PROs, and the creation 

of new PROs. The Services have offered 

no evidence that the introduction of the 

new PRO, Global Music Rights, will 

have any impact on the performance 

royalty rate. As confirmed by recent 

litigation, partial withdrawals are not 

permitted by the rate court, the Second 

Circuit, or the Department of Justice. 

There is no evidence of a trend of 

increasing performance rates. Fractional 

(a/k/a fragmented) licensing has always 

been present in the market. See CORPFF 

at pp. 87–90 (and record citations 

therein). 

Finally, the Judges reject Google’s 

proposed rates within that structure. 

Google’s proposed rates are derived 

from the subpart A benchmark that the 

Judges have rejected. See GPFF ¶¶ 21, 

26–30.81 The Judges look elsewhere in 

the record for reasonable percent-ofrevenue and TCC rates to use in the two 

prongs of Google’s proposed greater-of 

rate structure. 

The Judges’ adoption of a Mechanical 

Floor for the selected streaming services 

satisfies the objectives of section 

801(b)(1). The Mechanical Floor offers 

protection for Copyright Owners, thus 

maximizing the availability of creative 

works to the public. The ‘‘safety net’’ of 

the Mechanical Floor assures a fair 

return to Copyright Owners, serving as 

a counterweight to the All-In rate, 

without an unfair impact on the income 

of the copyright users. The balanced 

protection of the songwriter’s livelihood 

afforded by the Mechanical Floor 

recognizes the contribution of musical 

works to all music delivery 

mechanisms. Finally, the current 

regulations include Mechanical Floor 

rates; the Judges’ retention of those rates 

for streaming services is not disruptive 

to the music industry. 

In the Owners’ Motion, the Copyright 

Owners argued that the Judges’ 

elimination of a subscriber-based 

minimum fee for paid locker services 

and limited downloads could only have 

been an oversight. For all the reasons 

detailed in the Judges’ Order on the 

motions for clarification, the Judges’ 

decision was purposeful. Paid locker 

1936 Federal Register / Vol. 84, No. 24 / Tuesday, February 5, 2019 / Rules and Regulations 

82To be sure, those Services’ witnesses advocated 

for a reduction in the rates, but their 

acknowledgement that the usefulness of the 2012 

structure does not ipso facto demonstrate the 

appropriateness of the 2012 rates is a general point 

that the Judges readily accept. 

83The lack of a perfect identity is essentially 

tautological. If a ‘‘benchmark’’ was identical to the 

target market, it would be the target market. The 

issue for economists and for the Judges is to identify 

the differences, weigh the importance of those 

differences, and then either rely on the benchmark, 

reject or adjust the benchmark so that it is 

probative, or find that the proffered benchmark is 

so inapposite that it, even with any proffered 

adjustments, it must be disregarded. 

84This rate prong is sometimes identified as 

‘‘TCCi,’’ which is an acronym the parties adopted 

for ‘‘Total Content Cost Integrity.’’ 

85Lower percentages apply if the record 

companies’ revenue includes revenue to be ‘‘passed 

through’’ by them to pay mechanical license 

royalties. However, according to Dr. Eisenach, such 

‘‘pass-throughs’’ are not typical. Id. at 82 n.67. 

services and limited offerings are 

licensed uses that are of a nature totally 

different from other streaming services. 

The existing regulations treated them 

differently and afforded them an 

alternative minimum royalty. The 

existing minimum for these services was 

not a Mechanical Floor. 

V. Determining Royalty Rates 

Establishing a rate structure resolves 

only one aspect of the overall rate 

determination. The next issue for the 

Judges to decide is the setting of rates 

within the appropriate rate structure. In 

that regard, it is noteworthy that several 

of the Services’ expert economists have 

asserted that, although the 2012 rate 

structure is an appropriate benchmark, 

the rates within that structure should be 

modified.82 Thus, the Judges must 

consider the record evidence that relates 

to the rates themselves in order to 

determine the rates to be set for the 

forthcoming rate period within the price 

discriminatory rate structure. 

A. Rejection of the Copyright Owners’ 

Approach 

Copyright Owners proposed a single 

per-unit rate (in their greater-of format). 

They did not propose a set of different 

rates (per-unit or otherwise), that would 

be applicable to a rate structure similar 

to the 2012 rate structure. Thus, the 

Judges consider the benchmarking 

approach undertaken by Copyright 

Owners for the purpose of determining 

whether any portions of their 

benchmarking exercise provides 

evidence of rates that the Judges should 

properly incorporate into the 

differentiated rate structure they are 

adopting in this determination. 

Copyright Owners’ proposal for a perunit rate is based on an overarching 

premise: A single musical work has an 

‘‘inherent value.’’ See, e.g., Israelite 

WDT ¶¶ 29, 31, 33, 48; Herbison WDT 

¶ 35; Brodsky WDT ¶ 68. To make that 

principle operational, Copyright Owners 

presented a benchmarking analysis 

through Dr. Eisenach, one of their 

economic expert witnesses. 

1. Dr. Eisenach’s Methodology 

a. Benchmarking 

Dr. Eisenach sought to identify 

benchmarks that support Copyright 

Owners’ per-play and per end-user rate 

for the mechanical license. He began by 

noting that ‘‘an economically valid 

approach for assessing the value of 

intellectual property rights which are 

subject to compulsory licenses is to 

examine market-based valuations of 

reasonably comparable benchmark 

rights—that is, fair market valuations 

determined by voluntary negotiations.’’ 

Eisenach WDT ¶ 8 (emphasis added). In 

selecting potential benchmarks, Dr. 

Eisenach identified what he understood 

to be key characteristics’’ that would 

make a benchmark useful: 

‘‘[U]nderlying market factors . . . ; the 

term or time period covered by the 

agreements; factors affecting the relative 

bargaining power of the parties; and 

differences in the services being 

offered.’’ Id. ¶ 80. 

Dr. Eisenach found useful the license 

terms for the sound recording rights 

utilized by interactive streaming 

services, because they are negotiated 

freely between record companies (a/k/a 

labels) and the interactive streaming 

services. Id. These rates made attractive 

inputs for his analysis because they: (1) 

Relate to the same composite good—the 

sound recording that also embodied the 

musical work; and (2) the interactive 

streaming service licensees were the 

same licensees as in this proceeding. 

Thus, to an important degree, Dr. 

Eisenach found these agreements to 

possess characteristics similar to those 

in the mechanical license market at 

issue in this proceeding. Moreover, Dr. 

Eisenach found that ‘‘[d]ata on the 

royalties paid under these licenses are 

available and allow . . . estimat[ion of] 

the rates actually paid by the 

[interactive] streaming services to the 

labels for sound recordings on both a 

per-play and a per-user basis.’’ Id. 

However, as Dr. Eisenach noted, these 

benchmark agreements related to a 

different right—the right to a license of 

sound recordings—not the right to 

license musical works broadly, or to the 

mechanical license more specifically. 

Thus, as with any benchmark that does 

not match-up with the target market in 

all respects,83 Dr. Eisenach had to 

examine how the rates set forth in the 

benchmark agreements for interactive 

streaming of sound recordings could be 

utilized. Id. More particularly, Dr. 

Eisenach posited that there may be a 

relationship (or ratio) between the 

sound recording royalty rate and the 

musical works royalty rate. To that end, 

he ‘‘examine[d] a variety of markets in 

which sound recording and musical 

works rights are both required in order 

to ascertain the relative value of the two 

rights as actually reflected in the 

marketplace.’’ Id. (emphasis added). 

Through this examination, Dr. 

Eisenach concluded that these proposed 

benchmarks ‘‘establish upper and lower 

bounds for the relative value of sound 

recording and musical works rights . . . 

estimate[d] to be between 1:1 and 

4.76:1.’’ Id. To make these ratios more 

instructive, the Judges note that the 

inverse of these ratios (e.g., 1:4.76 

instead of 4.76:1) can be expressed as a 

percentage. Thus, the ratio of 1:4.76 is 

equivalent to a statement that musical 

works royalties equal 21% of sound 

recording royalties in agreements struck 

in the purported benchmark market. 

More obviously, the 1:1 ratio means 

that, in agreements within that 

purported benchmark market, musical 

works royalties equal 100% of sound 

recording rates. By converting the ratios 

into percentages, it is easier to see that 

the high end of Dr. Eisenach’s 

benchmark range is almost five times as 

large as the low end of the range. 

b. Dr. Eisenach’s Potential Benchmarks 

Dr. Eisenach considered a variety of 

benchmark categories in which the 

licensee was obligated to acquire 

licenses for musical works and licenses 

for sound recordings. His selection and 

consideration of each category of 

benchmark markets are itemized below. 

i. The Current Section 115 Statutory 

Rates 

The current statutory rate structure 

contains several alternate rates 

explicitly calculated as a percentage of 

payments made by interactive streaming 

services to the record companies for 

sound recording rights. Such rates are 

identified in the industry as the ‘‘TCC’’ 

rates, an acronym for ‘‘Total Content 

Cost.’’ Id. ¶ 82.84 In the subpart B 

category, the TCC is 22% for adsupported services and 21% for portable 

subscriptions. Id.; see also 37 CFR 

385.13(b)(2) and (c)(2).85 These 

percentage figures correspond to sound 

recording to musical works royalties of 

4.55:1 and 4.76:1, respectively. 

Dr. Eisenach notes that these statutory 

rates were not set by the Judges 

pursuant to a contested hearing, but 

rather reflect two settlements, one in 

Federal Register / Vol. 84, No. 24 / Tuesday, February 5, 2019 / Rules and Regulations 1937 

86Spotify was launched in the United States in 

the summer of 2011. See 3/20/17 Tr. 1778 (Page). 

87The Judges discuss the issue of the ‘‘shadow’’ 

of the statutory license in section IV.C.3. 

88 Dr. Eisenach finds this 1;1 ratio to be present 

in the two types of Synch agreements he identified. 

One version represents an agreement relating to a 

specific musical work and sound recording 

combination. The other version, a ‘‘Micro-Synch’’ 

agreement, which he describes as ‘‘essentially 

‘blanket’ synch licenses, in that the license grants 

the right to synchronize not just one particular song 

. . . but any song in the publisher’s catalog (or a 

significant portion thereof). . . .’’ Eisenach WDT 

¶ 96. 

2008 and the other in 2012. Id. ¶ 83. 

However, Dr. Eisenach discounts the 

value of these settlement rates for three 

reasons. First, he notes that they were 

established prior to the ‘‘marketplace 

success’’ of Spotify in the interactive 

streaming industry.86 Second, he notes 

that the settlements, although voluntary, 

‘‘were negotiated under the full shadow 

of the compulsory license.’’ Third, he 

finds that, although the settlement 

incorporates rate prongs based on a 

percent of sound recording rates (the 

TCC prongs), those provisions are part 

of a ‘‘lesser of’’ segment of the rate 

structure, and thus capped by 

alternative per subscriber rates. Id. & 

n.70. Thus, Dr. Eisenach concludes: ‘‘In 

my opinion, the evidence . . . indicates 

that the relative valuation ratios implied 

by the current section 115 compulsory 

license . . . represent an upper bound 

on the relative market valuations of the 

sound recording and musical works 

rights.’’ Id. ¶ 92 (emphasis added). (As 

an ‘‘upper bound,’’ these ratios would 

represent the lower bound of the 

reciprocal percentage of the value 

musical works rights relative to sound 

recording rights, again, 21% and 22%.). 

The Judges note that Dr. Eisenach 

identifies the 21% and 22% TCC rates 

within the current rate structure. Thus, 

for example, if the sound recording 

royalty rate for interactive streaming is 

60% of revenue, then, using these TCC 

figures, the implied musical work 

royalty rate is calculated as 12.6% of 

revenue (.21 × .60) (a ratio of 4.76:1), or 

13.2% (.22 × .60) (a ratio of 4.5:1). 

Again, because Dr. Eisenach opines that 

these are upper bounds on the relative 

market valuations,’’ that is the 

equivalent of opining that they 

represent the lower bound of a 

percentage-based royalty calculated via 

this ratio approach. 

ii. Direct Licenses Between Parties 

Potentially Subject to a Section 115 

Compulsory License 

Dr. Eisenach also examined direct 

agreements between record companies 

and interactive streaming services that 

contained rates for sound recordings 

and mechanical royalties, respectively. 

See, e.g., id. ¶¶ 84–91. In such cases, the 

ratio of sound recording to musical 

works royalties ranged tightly between 

4.2:1 and 4.76:1, closely tracking the 

regulatory ratios implicit in the section 

115 TCC. Id. ¶ 92. (The 4.2:1 ratio 

equates to a TCC rate of 23.8%, and the 

4.76:1 ratio equates to a mechanical rate 

of 21%.). 

According to Dr. Eisenach, the 

similarity of these direct contract rate 

ratios to the statutory ratios reflects the 

‘‘shadow of the statutory license,’’ by 

which direct negotiations between 

parties regarding rights that are subject 

to (or can be fashioned to be subject to) 

a statutory license are influenced by the 

presence of statutory compulsory rates 

and/or the prospect of a future rate 

proceeding. 4/4/17 Tr. 4591 (Eisenach) 

(‘‘The underlying problem with looking 

at an agreement negotiated under the 

shadow of a license’’ is that [i]t shifts 

bargaining power from the compelled 

party to the uncompelled party by the 

very nature of the exercise.’’).87

Given these limitations, Dr. Eisenach 

concluded, as he did with regard to the 

actual section 115 rates licenses, that 

‘‘[i]n my opinion, the evidence 

presented . . . indicates that the relative 

valuation ratios implied by the . . . 

negotiations under [the statutory] 

shadow—ranging from 4.2:1 [23.8%%] 

to 4.76:1[21%]—represent an upper 

bound on the relative market valuations 

of the sound recording and musical 

works rights.’’ Eisenach WDT ¶ 92. 

iii. Synchronization Agreements 

Synchronization (Synch) agreements 

are agreements by audio-video 

producers, such as movie and television 

producers, with, respectively, music 

publishers and record companies, 

allowing for the use, respectively, of the 

musical works and the sound recordings 

in ‘‘timed synchronization’’ with the 

movie or television episode. See 

generally D. Passman, All you Need to 

Know About the Music Business 265 

(9th ed. 2015). Dr. Eisenach found these 

Synch Agreements to be a mixed bag in 

terms of their value as a benchmark. On 

the one hand, he recognized that the 

licenses they conveyed ‘‘do not apply to 

music streaming services as such’’ but, 

on the other hand, they ‘‘are negotiated 

completely outside the shadow of the 

compulsory license. . . .’’ Id. ¶ 93. Dr. 

Eisenach notes, from his review of other 

testimony and an industry treatise, that 

these freely negotiated market 

agreements grant the musical 

composition royalty payments equal to 

the corresponding royalty paid for the 

sound recording,’’ which is the 

equivalent of a 1:1 sound recording to 

musical works ratio.88 Id. ¶¶ 94–95 & 

nn.87, 88. 

Dr. Eisenach finds this 1:1 

relationship to be important benchmark 

evidence, concluding: 

The synch and micro-sync examples 

confirm that in circumstances in which 

licensees require both sound recording and 

musical composition copyrights in order to 

offer their service, and where that service is 

not entitled to a compulsory license for either 

right, the sound recording rights and the 

musical composition rights are in many cases 

equally valued, that is, the ratio of the two 

values is 1:1. 

Id. ¶ 98. 

iv. YouTube Agreements 

Dr. Eisenach also examined licenses 

between: (1) YouTube (owned by 

Google) and record companies; and (2) 

YouTube and music publishers, to 

determine their potential usefulness as 

benchmarks. He noted that they provide 

further insight into the relative value of 

sound recordings and musical works. 

He added that, because these licenses 

also include [REDACTED] (which, he 

noted, are not [REDACTED] uses) these 

rights are partially outside the 

purported shadow of compulsory 

licensing. Moreover, these agreements 

essentially grant to YouTube 

[REDACTED], analogous to the 

provision of on-demand streaming by 

the interactive services licensed under 

subpart B. Additionally, Dr. Eisenach 

noted that these YouTube agreements 

met certain standards for a useful 

benchmark, viz. the parties, the 

domestic (U.S.) market and the time 

period all correspond to the parties, 

market and time period involved here. 

Id. ¶ 100. For these reasons, Dr. 

Eisenach concluded that ‘‘for purposes 

of assessing the relative value of the 

sound recording and musical works 

rights, the YouTube agreements 

represent reasonably comparable 

benchmarks for the purpose of assessing 

the relative value of sound recordings 

and musical works rights.’’ Id. 

In his original Written Direct 

Testimony, Dr. Eisenach relied upon 

seven agreements between YouTube and 

several music publishers pertaining to 

[REDACTED]. Id. ¶ 101 n.93. In those 

[REDACTED] agreements, Dr. Eisenach 

found that publishers receive 

[REDACTED] when the video is 

[REDACTED]. However, with regard to 

the revenue received by the record 

companies, Dr. Eisenach could only 

speculate based on public reports as to 

the percent of revenue received by the 

record companies for the sound 

1938 Federal Register / Vol. 84, No. 24 / Tuesday, February 5, 2019 / Rules and Regulations 

89The ‘‘rate court’’ is a short-hand reference to 

the proceedings before designated judges in the U.S. 

District Court for the Southern District of New York, 

who set performance royalty rates, pursuant to 

existing consent decrees between the U.S. 

Department of Justice and, respectively ASCAP and 

BMI. 

90At the relevant time, Pandora operated a 

noninteractive service and only paid the 

performance right royalty, not the mechanical right 

royalty, for the right to use musical works. Because 

the parties agree that the performance right and the 

mechanical right are perfect complements, 

Pandora’s payments for the performance right are 

relevant and probative. 

91 Google’s economic expert, Dr. Gregory Leonard, 

made an important qualification regarding this 

point: At the time a musical work is selected by a 

label for recording by an artist, ex ante recording, 

the label can choose among competing and 

substitutable musical works. Thus, it is only ex post 

recording that the particular musical work that had 

actually been selected is necessary to create a level 

of output (and value) greater than zero. 4/5/17 Tr. 

5180–81 (Leonard). 

recordings embedded in the posted 

YouTube videos. Id. ¶ 102. Thus, he was 

unable to make an informed argument 

in his original written testimony 

regarding the ratio of sound recording 

royalties to music publisher royalties in 

his YouTube [REDACTED] benchmark 

analysis. 

However, after the Judges compelled 

Google to produce in discovery copies 

of the YouTube agreements with the 

record companies, Dr. Eisenach filed 

(with the Judges’ approval) 

Supplemental Written Rebuttal 

Testimony (SWRT) addressing these 

agreements. In that testimony, Dr. 

Eisenach examined 49 YouTube 

licenses with eight record labels and 

four form agreements (under which 

approximately 1,350 independent labels 

are actively licensed), spanning the 

period 2012 to 2019. Eisenach SWRT ¶ 6 

& n.5. Dr. Eisenach identified nine of 

these licenses specifically in his SWRT, 

and noted that YouTube paid to 

[REDACTED] for sound recordings in a 

[REDACTED]—which Dr. Eisenach 

found to be the comparable YouTube 

category—whereas the [REDACTED] 

received [REDACTED]. Id. & Table 1. 

As Dr. Eisenach accurately calculated, 

the [REDACTED] revenue split reflects a 

ratio of [REDACTED]:1, (a musical 

works rate equal to [REDACTED]% of 

the sound recording rate), whereas the 

[REDACTED] revenue split reflects a 

ratio of [REDACTED]:1 (a musical works 

rate equal to [REDACTED]% of the 

sound recording rate). 

v. The Pandora ‘‘Opt-Out’’ Deals 

Dr. Eisenach also examined certain 

direct licensing agreements entered into 

between Pandora and major music 

publishers from 2012 through 2016, to 

determine whether they constituted 

useful benchmarks in this proceeding. 

Id. ¶ 103. Pandora had negotiated these 

direct agreements with major publishers 

for musical works rights after certain 

publishers had decided to ‘‘opt-out,’’ 

i.e., to withdraw their digital music 

performance rights from performance 

rights organizations (PROs), and 

asserted the right to negotiate directly 

with a digital streaming service. As Dr. 

Eisenach acknowledges, the music 

publishers’ legal right to withdraw these 

rights remained uncertain during that 

five year period. Nonetheless, Pandora 

negotiated several agreements with an 

understanding that the rates contained 

in those direct agreements might not be 

subject to rate court review.89

Given this phenomenon, and given 

that the markets and parties involved in 

the Pandora agreements are somewhat 

comparable to the markets and parties at 

issue in this proceeding,90 Dr. Eisenach 

concluded that these agreements 

provided ‘‘significant insight into the 

relative value of the sound recording 

and musical works rights in this 

proceeding.’’ Id. 

Dr. Eisenach compared the musical 

works rates in these ‘‘opt-out’’ 

agreements with the sound recording 

royalty rates paid by Pandora, which he 

obtained from the revenue disclosures 

in Pandora’s Form 10K filed with the 

SEC that provided royalties (‘‘Content 

Costs’’) as a percent of revenue, and he 

also relied on data contained in prior 

rate court decisions. Eisenach WDT 

¶ 125 & Table 6. With this data, he 

calculated that the ratio of sound 

recording: Musical works royalties in 

existing agreements was [REDACTED]:1 

for 2018, i.e., the musical works rate 

equaled [REDACTED]% of sound 

recording royalties. This [REDACTED]% 

ratio would correspond to a mechanical 

rate of [REDACTED], assuming, 

arguendo, the sound recording rate is 

60%. 

Dr. Eisenach also made an estimation 

and forecast, linking the passage of time 

to an assumption that after the Rate 

Court proceedings concluded (and all 

appeals were exhausted) the parties, 

without further legal uncertainty, would 

permanently be ‘‘permitted to negotiate 

freely outside of the control of the rate 

courts.’’ He made this estimation and 

forecast through a temporal linear 

regression, extrapolating from the prior 

[REDACTED] in these Pandora ‘‘opt 

out’’ musical works rates. See Eisenach 

WDT ¶ 129. Dr. Eisenach’s linear 

regression further [REDACTED] the ratio 

to [REDACTED], which would be 

equivalent to [REDACTED] the musical 

works rate, as a percentage of sound 

recording royalties, from the 

[REDACTED]% noted above for actual 

agreements in force in 2018 to 

[REDACTED]%, almost a 

[REDACTED]% [REDACTED] based on 

the extrapolation alone. Id. ¶¶ 104; 128 

& Table 8, Fig. 13. (This [REDACTED]% 

ratio would correspond to a musical 

works rate of [REDACTED], assuming 

the sound recording rate is 60%.) 

However, the assumption behind Dr. 

Eisenach’s regression was not borne out. 

In 2015, the Second Circuit Court of 

appeals affirmed a 2014 decision by the 

Southern District of New York, 

prohibiting such partial withdrawals. In 

re Pandora Media, 785 F.3d 73, 77–78 

(2d Cir. 2015), aff’g 6 F. Supp. 3d 317, 

322 (S.D.N.Y. 2014). Subsequently, in 

August 2016, the Department of Justice 

issued a statement announcing that, 

consistent with these judicial decisions, 

it would not permit partial withdrawals 

under the existing consent decrees. See 

Eisenach WDT ¶ 114, n.109. Moreover, 

there were actual Pandora ‘‘Opt-Out’’ 

agreements that set rates through 2018 

that established a sound recording to 

musical works ratio of [REDACTED]:1, 

that Dr. Eisenach chose to disregard in 

favor of his extrapolated lower ratio. 

Having calculated these five 

benchmarks, Dr. Eisenach applied them 

in two separate methods to estimate the 

mechanical rate to be adopted in this 

proceeding. 

c. Dr. Eisenach’s Ratio Equivalency 

Approach 

Dr. Eisenach testified that ‘‘[f]or music 

users that require both sound recording 

rights and musical works rights, the two 

sets of rights can be thought of in 

economic terms, as perfect complements 

in production: Without both inputs, 

output is zero.’’ Id. ¶ 76 (emphasis 

added).91 Dr. Eisenach also notes that, 

‘‘for interactive streaming services, the 

two categories of rights [sound 

recordings and musical works] are 

further divided into a reproduction 

license [i.e., the mechanical license] and 

a performance license . . . .’’ Id. (Thus, 

the mechanical license and the 

performance license likewise are perfect 

complements with each other and with 

the sound recording license.) 

Federal Register / Vol. 84, No. 24 / Tuesday, February 5, 2019 / Rules and Regulations 1939 

92The affected industries have agreed through 

settlements that interactive services pay mechanical 

royalties but noninteractive services do not. See 

Parness WDT ¶ 7. No party in the present 

proceeding has sought a mechanical license rate for 

noninteractive services. 

93 Dr. Eisenach refers at times to this difference 

in sound recording royalties as the ‘‘implied value 

of the mechanical right.’’ See, e.g., id. ¶ 138. 

However, this difference is only an input for 

deriving the mechanical rate implied by his 

analysis (as noted in the subsequent step), and the 

Judges choose to consider the final rate developed 

by Dr. Eisenach in Method #1 as the ‘‘implied 

mechanical rate’’ he advances through this method. 

94 Dr. Eisenach’s decision to rely on a per play 

calculation that excluded [REDACTED] and all of 

Dr. Eisenach’s challenged data selections, are 

discussed infra in the Judges’ analysis of his 

benchmarking approach and the criticisms levelled 

by the Services. 

95 Dr. Eisenach testified that the [REDACTED]:1 

ratio should be revised [REDACTED] to 

[REDACTED]:1, to reflect the sound recording 

royalty rates in the [REDACTED] licenses he 

examined after the Judges compelled [REDACTED] 

to produce [REDACTED]’s agreements with record 

companies. 

Dr. Eisenach acknowledges that [t]he 

relative value of sound recording [to] 

musical works licenses may depend on 

a variety of factors, and traditionally the 

relationship has differed across different 

types of services and situations.’’ Id. 

¶ 78. Dr. Eisenach eschewed 

unnecessary ‘‘assumptions, 

complexities and uncertainties 

associated with theoretical debates’’ as 

to why the particular existing market 

ratios existed. Id. ¶ 79. Rather, instead of 

‘‘put[ting] forward a general theory of 

relative valuation,’’ he found it 

‘‘sufficient . . . to assume that the 

relative values of the two rights should 

be stable across similar or identical 

market contexts.’’ Id. 

d. Dr. Eisenach’s Two Methods for 

Estimating the Mechanical Rate 

i. Method #1 

Dr. Eisenach’s Method #1 for 

estimating the mechanical rate is based 

on the following premises: 

1. The sound recording royalty paid 

by interactive streaming services is 

unregulated and thus negotiated in the 

marketplace. Eisenach WDT ¶ 16. 

2. The sound recording royalty paid 

by noninteractive services is regulated, 

but, Dr. Eisenach finds the royalties set 

by the Judges in Web III to reflect a 

market rate. 4/4/17 Tr. 4643 (Eisenach); 

see also Eisenach WDT ¶ 136 & n.123. 

3. The interactive streaming services 

require a mechanical license (the license 

at issue in this proceeding), whereas the 

noninteractive services are not required 

to obtain a mechanical licenses.92

4. According to Dr. Eisenach, the 

difference between the rates paid by 

interactive services and non-interactive 

services for their respective sound 

recording licenses equals the value of 

the remaining license, i.e., the 

mechanical license. Id. ¶ 137 (‘‘[T]he 

difference between these two rights is 

akin to a ‘mechanical’ right for sound 

recordings, directly paralleling the 

mechanical right for musical works in 

this proceeding.’’).93

5. The mechanical rate implied by 

this difference in sound recording rates 

must be ‘‘adjust[ed] for the relative 

value of sound recordings [to] musical 

works’’ (as discussed supra). Id. ¶ 140. 

Dr. Eisenach combines these steps 

and expresses his Method #1 in the form 

of an algebraic equation: 

MRMW = (SRIS ¥ SRNIS)/RVSR/MW, 

Where 

MRMW = Mechanical Rate for Musical Works 

SRIS = Sound Recording Rate for Interactive 

Streaming (All In) 

SRNIS = Sound Recording Rate for NonInteractive Streaming (Performance 

Only) 

RVSR/MW = Relative Value of Sound 

Recording to Musical Works Rights. 

Eisenach WDT ¶ 140. 

Dr. Eisenach determined the per play 

rate paid by interactive services by 

identifying certain services and 

‘‘tally[ing] the total payments . . . and 

divid[ing] by the total number of 

interactive streams the service reports.’’ 

Id. ¶ 148. The average sound recording 

per play royalty calculated by Dr. 

Eisenach was $[REDACTED] (or 

$[REDACTED] per 100 plays), when 

excluding [REDACTED]. Id. Table 11.94

The final inputs for Dr. Eisenach’s 

Method #1 have already been identified, 

i.e., the $0.0020 per play (or $0.20 per 

100 plays) royalty rate estimated for 

noninteractive streaming, and the 

several benchmark ratios of sound 

recording: Musical works royalties in 

the markets selected by Dr. Eisenach. 

After Dr. Eisenach inserted the foregoing 

data into the algebraic expression set 

forth above, he presented his data in the 

following tabular form: 

MUSICAL WORKS MECHANICAL PER 100 PLAYS RATE CALCULATION

[Method 1] 

SRIS per 100 SRNIS per 100 Difference RVSR/MW MRMW per 100 

(1) (2) (3) (4) (5) 

$[REDACTED] ................................. $0.20 $[REDACTED] ............................... 1:1 .................................................. $[REDACTED]. 

$[REDACTED] ................................. 0.20 $[REDACTED] ............................... [REDACTED]:1 .............................. $[REDACTED]. 

$[REDACTED] ................................. 0.20 $[REDACTED] ............................... [REDACTED]:1 .............................. $[REDACTED]. 

$[REDACTED] ................................. 0.20 $[REDACTED] ............................... [REDACTED]:1 .............................. $[REDACTED]. 

$[REDACTED] ................................. 0.20 $[REDACTED] ............................... 4.76:1 ............................................. $[REDACTED]. 

See id., Table 12.95 Thus, applying his 

five potential benchmark ratios, Dr. 

Eisenach determined that the 

mechanical works royalty rate the 

Judges should set in this proceeding 

ranged from $[REDACTED] per play to 

$[REDACTED] per play (see column (5) 

above, dividing by 100 to reduce the 

rate from ‘‘per 100’’ to per play). 

ii. Method #2 

Dr. Eisenach describes his Method #2 

as an alternative method of deriving a 

market-derived mechanical royalty. His 

Method #2 ‘‘derive[s] an All-In musical 

works value based on the relative value 

of sound recordings to musical works 

and then remove[s] the amount of 

public performance rights paid for 

musical works, leaving just the 

mechanical rate.’’ Id. ¶ 142. The 

algebraic expression for Method #2 is: 

MRMW = (SRIS/RVSR/MW) ¥ PRMW, 

Where PRMW is the public performance 

royalty rate for musical works, and the 

other variables are as defined and 

described in Method #1. 

Id. 

Dr. Eisenach calculates PRMW, as an 

average of $[REDACTED] per 100 plays 

for the licensees that he included in his 

data analysis. Id. ¶ 156, Table 13. 

Applying all the inputs across the 

various benchmark ratios, the results 

from Dr. Eisenach’s Method #2 can also 

be depicted in tabular form, as set forth 

below: 

1940 Federal Register / Vol. 84, No. 24 / Tuesday, February 5, 2019 / Rules and Regulations 

96 Dr. Eisenach also calculates a per user rate, 

using his Method #2. As he explains, ‘‘this is 

accomplished by calculating All-In publisher 

royalties on a per user basis and subtracting the 

average effective per-user performance royalties to 

publishers, leaving an appropriate rate for 

mechanical royalties.’’ Id. ¶ 159. He finds that the 

sound recording rate per user is $[REDACTED] (the 

per user analog to the $[REDACTED] per 100 plays 

in his per play analysis). Applying the same ratios 

and utilizing similar market data as in his per play 

approach, Dr. Eisenach concludes that a 

‘‘mechanical rate of between $[REDACTED] and 

$[REDACTED] per user reflects the range of relative 

values for sound recordings and musical 

works. . . .’’ Id. ¶ 165. Finally, he notes that, at the 

[REDACTED]:1 ratio (his mid-point of the YouTube 

and Pandora benchmarks, the ‘‘mechanical only’’ 

rate would be $[REDACTED] per user (greater than 

the $1.06 per user rate proposed by Copyright 

Owners.) Id. 

97 Dr. Eisenach eschewed unnecessary 

‘‘assumptions, complexities and uncertainties 

associated with theoretical debates’’ as to why the 

particular existing market ratios existed. Id. ¶ 79. In 

this regard, the Judges understand that Dr. Eisenach 

was following a well-acknowledged principle of 

economic analysis, articulated by the Nobel laureate 

economist Milton Friedman, who famously 

eschewed excessive theorizing that failed to match 

the predictive power of empirical analysis. See M. 

Friedman, The Methodology of Positive Economics, 

reprinted in D. Hausman, The Philosophy of 

Economics at 145, 148–149 (3d ed. 2008). 

MUSICAL WORKS MECHANICAL PER 100 PLAYS RATE CALCULATION

[Method 2] 

SRIS RVSR/MW Ratio adj. (Avg.) PRMW MRMW

(1) (2) (3) = (2) × (1) (4) (5) 

$[REDACTED] ......................... 1:1 ............................................ $[REDACTED] ......................... $[REDACTED] ......................... $[REDACTED]. 

$[REDACTED] ......................... [REDACTED]:1 ........................ $[REDACTED] ......................... $[REDACTED] ......................... $[REDACTED]. 

$[REDACTED] ......................... [REDACTED]:1 ........................ $[REDACTED] ......................... $[REDACTED] ......................... $[REDACTED]. 

$[REDACTED] ......................... [REDACTED]:1 ........................ $[REDACTED] ......................... $[REDACTED] ......................... $[REDACTED]. 

$[REDACTED] ......................... 4.76:1 ....................................... $[REDACTED] ......................... $[REDACTED] ......................... $[REDACTED]. 

See id., Table 14. 

After considering all of his 

benchmarks from both of his methods, 

Dr. Eisenach concluded that ‘‘the 

YouTube and Pandora [Opt Out] 

agreements represent the most 

comparable and reliable benchmarks, 

implying ratios of [REDACTED]:1 and 

[REDACTED]:1, respectively, with a 

mid-point of [REDACTED]:1.’’ Id. ¶ 130 

(The Judges note that converting these 

end-points and mid-point of his range to 

TCC percentages results in a range from 

[REDACTED]% to [REDACTED]% and a 

mid-point of [REDACTED]%.) 96

2. Analysis of Dr. Eisenach’s Benchmark 

Methods 

a. Dr. Eisenach’s Ratio of Sound 

Recordings-to-Musical Works 

The Judges find Dr. Eisenach’s 

attempt to identify comparable 

benchmarks and corresponding ratios of 

sound recording rates to musical works 

rates to be a reasonable first step in 

seeking to identify usable benchmarks. 

The Judges find potentially useful his 

decision to rely on empirics over 

abstract theory, viz., that a tightly 

clustered set of ratios across several 

markets would tend to support applying 

a reasonably central tendency from 

among those ratios to identify a ratio 

that could aid in the identification of 

the statutory rates.97

However, the data that Dr. Eisenach 

identified was not sufficiently clustered 

to establish a predictive ratio within the 

data set. That is, the problem does not 

lie in the analysis, but rather in the 

implications from the data regarding 

ratios of sound recording royalties to 

musical works royalties. The Services 

make this very criticism, noting the 

instability of the ratio across the several 

markets in which Dr. Eisenach 

identified potential benchmarks. See 

SJRPFF ¶ 241 (and record citations 

therein). Apple finds that the wide 

range of ratios is unsurprising, because 

Dr. Eisenach’s benchmarks do not relate 

to the same products and same uses of 

the two rights. Indeed, Apple’s 

[REDACTED], confirming, according to 

Apple, that there is no fundamental 

market ratio that can be applied in this 

proceeding. Dorn WRT ¶¶ 6, 24, 28–29. 

To be sure, this point does not go 

unnoticed by Dr. Eisenach, who focuses 

on the royalty ratios arising from two 

potential benchmarks in the middle of 

his range—the Pandora ‘‘Opt-Out’’ 

agreements and the User Audio 

YouTube agreements. 

The Services assert an additional and 

fundamental criticism of Dr. Eisenach’s 

approach. They note that his use of 

sound recording royalties paid by 

interactive services embeds within his 

analysis the inefficiently high rates that 

arise in that unregulated market through 

the complementary oligopoly structure 

of the sound recording industry and the 

Cournot Complements inefficiencies 

that arise in such a market. See 

Corrected Written Rebuttal Testimony of 

Michael L. Katz, Trial Ex. 886, ¶ 56; 

Marx WRT ¶¶ 137–141; Hubbard CWRT 

¶¶ 6.26–6.27; Leonard WRT ¶¶ 24, 44. 

The Judges agree with this criticism. 

The Judges explained at length in Web 

IV how the complementary oligopoly 

nature of the sound recording market 

compromises the value of rates set 

therein as useful benchmarks for an 

‘‘effectively competitive’’ market. In 

Web IV, the Judges were provided with 

evidence of the ability of noninteractive 

services to steer some performances 

toward recordings licensed by record 

companies that agreed to lower rates in 

exchange for increased plays. Here, the 

Judges were not presented with such 

evidence, likely because an interactive 

streaming service needs to play any 

particular song whenever the listener 

seeks to access that song (that is the 

essence of an interactive service). Thus, 

the Judges have no direct evidence 

sufficient to apply a discount on the 

interactive sound recording rate to 

adjust that potential benchmark in order 

to fashion an effectively competitive 

rate, as required by the ‘‘reasonable 

rate’’ language in section 801(b)(1). 

b. Dr. Eisenach’s Specific Benchmarks 

i. Section 115 Benchmark 

The Services assert that Dr. Eisenach’s 

calculation of a section 115 ‘‘valuation 

ratio’’ of 4.76:1 is incomplete, because 

he limited this statutory ratio to the 

21% and 22%TCC prongs. They note 

that under the percentage-of-revenue 

prong of section 115 (10.5%), this 

statutorily-derived ratio would have 

ranged between 5:1 and 6:1, see 4/5/17 

Tr. 5152 (Leonard), implying a musical 

works rate equal to only 16.67% to 20% 

of sound recording royalty rates. The 

Judges agree that Dr. Eisenach’s 

statutory benchmarks would have been 

more comprehensive if he had included 

the ‘‘valuation ratios’’ derived from this 

headline prong of the present royalty 

rate structure. However, the fact that the 

existing rate structure, on which the 

Services rely in this proceeding, 

includes the potential use of the 21% 

and 22% prongs, demonstrates the 

usefulness of this benchmark as a 

representation of a rate the parties are 

willing to accept. 

ii. Direct Licenses 

The Services disagree with Dr. 

Eisenach’s minimization of the 

relevance of this benchmark. They argue 

that the direct licenses between 

Federal Register / Vol. 84, No. 24 / Tuesday, February 5, 2019 / Rules and Regulations 1941 

98The Copyright Owners also rely on blanket 

(‘‘microsynch’’) licenses by which publishers grant 

their entire catalogs for use in synchronized audiovideo productions, and they also rely on synch 

licenses for mobile and video game applications. 

The Judges’ critique of synch licenses as 

benchmarks is equally applicable to these licenses. 

99As discussed infra, Dr. Leonard makes an 

analogous point with regard to the weaker 

bargaining position of musical works when record 

companies and artists select a song to be recorded. 

Like the movie or television producer who can 

choose among a number of somewhat substitutable 

recordings, a record producer can choose among a 

number of somewhat substitutable musical works. 

interactive services and music 

publishers ‘‘are by far the most directly 

apposite benchmarks used in Dr. 

Eisenach’s analysis,’’ because they, like 

the section 115 rates and terms 

themselves, possess the characteristics 

of a useful benchmark, viz. they: (1) Are 

voluntary; (2) concern the same 

licensors/publisher; (3) relate to the 

same market; and (4) pertain to the same 

rights. See Katz WDT ¶¶ 97–113; 

Leonard AWDT ¶¶ 45–70; see also 4/5/ 

17 Tr. 5152 (Leonard) (noting that, for 

services paying under the percentage-ofrevenue prong under section 115 and 

based on prevailing sound recording 

rates, ‘‘[t]he ratio would be more like 

. . . 5-to-1 to 6-to-1’’). 

The Judges find that these direct 

licenses are as useful, if not more so, 

than the 115 benchmark itself. The socalled ‘‘shadow’’ of section 115 provides 

a default rate for the licensing parties, 

so direct licenses that deviate in some 

manner from the rates in the statutory 

license are revealing a preference for 

other rates and terms that, at least 

marginally, are below the statutory rate. 

Thus, as the Services note, these 

benchmarks are useful, because ‘‘these 

agreements . . . were voluntarily 

entered both in 2008 and 2012, by the 

very same publishers in the same 

markets and for the same rights. . . .’’ 

SJPFF ¶ 261 (and record citations 

therein). More generally, the Judges find 

that the so-called ‘‘shadow’’ of the 

statutory license on a benchmark does 

not disqualify that benchmark as useful 

evidence, though it goes to its weight. 

iii. Synchronization Licenses 

The Services also take issue with Dr. 

Eisenach’s inclusion of synchronization 

licenses in his collection of benchmarks. 

See, e.g., Leonard WRT ¶¶ 37–40 

(testifying that synchronization licenses 

are not comparable for interactive 

streaming licenses because 

synchronization differs in important 

economic respects from streaming); 

Hubbard CWRT ¶¶ 6.31–6.32 (testifying 

on various ‘‘economic characteristics of 

synch licenses, that render the ratio 

between sound recording royalties and 

musical works royalties different 

between synch and interactive 

streaming services’’); Marx WRT 

¶¶ 148–151 (‘‘Synch royalty rates are a 

poor benchmark for streaming royalty 

rates’’). Even Dr. Eisenach 

acknowledged that, at best, the low ratio 

in the synch licenses indicates an 

unusually high musical works royalty 

rate among his collection of 

benchmarks. 4/4/17 Tr. 4671, 4799 

(Eisenach); Eisenach WDT Appx. A–9. 

In a prior proceeding, the Judges 

rejected the synch license benchmark as 

useful ‘‘[b]ecause of the large degree of 

its incomparability.’’ See Phonorecords 

I, 74 FR at 4519. The Judges find that 

nothing in the present record supports 

a departure from that prior finding. The 

lack of comparability remains because 

the synchronization market differs in 

important economic respects from the 

streaming market. See Leonard WRT 

¶ 39. Because synch rights pertain to 

media such as music used in films or in 

television episodes,98 the historical 

equal valuation of publishing rights and 

sound recording rights arises from the 

particular conditions faced in those 

industries. Id. Movie and television 

producers may have a certain musical 

work in mind as a good fit for a 

particular scene in the film. Id. 

However, these producers have the 

option of making their own sound 

recording of that musical work, and for 

this reason, cover songs are quite 

common in films. Id.; see also Ex. 1069, 

Marx WRT ¶ 149 (‘‘Both film and 

television production companies have 

the option of recording their own 

versions of songs, rather than paying 

royalties to use a pre-recorded 

song. . . . This option gives the users of 

synch rights, such as movie producers, 

more bargaining power relative to the 

labels than would be the case with 

streaming services.’’). Thus, the 

contribution to value of the sound 

recording is less vis-a`-vis the musical 

work in the synch market. Leonard WRT 

¶ 39. 

Additionally, in the case of 

synchronization rights, the marketplace 

for sound recording rights is more 

competitive than other music licensing 

contexts because individual sound 

recordings compete against one another 

for inclusion in the final product (e.g., 

a movie or television episode). By 

contrast, in the interactive streaming 

market, services must build a catalog of 

sound recordings and their included 

musical works, so that many works can 

be streamed to listeners. Id.99 That is, in 

the interactive streaming market, the 

sound recordings are ‘‘must have’’ 

complements, not in competition with 

each other. However, in the synch 

market the sound recording of any given 

musical work identified by the movie or 

television produce is a substitute good, 

in competition with any other existing 

or future sound recording of the same 

musical work for inclusion in the movie 

or television show. 

iv. YouTube Licenses 

The Services disagree with Dr. 

Eisenach’s opinion that the YouTube 

licenses on which he relies constitute 

strong benchmarks. As an initial point, 

they note that, from a statutory 

perspective, the video component of the 

YouTube licenses renders those licenses 

inapposite as benchmarks in this 

proceeding. See SJRPFF ¶ 249 (and 

record citations therein) (noting that 

YouTube’s ability to utilize the ‘‘safe 

harbor’’ provisions of 17 U.S.C. 512 

provides YouTube with strong 

negotiating power against publishers 

and labels because the copyright holders 

must identify unauthorized uploadings 

and issue ‘‘take down notices,’’ a 

cumbersome and often futile process). 

The Judges agree that this statutory 

provision significantly alters the 

bargaining landscape between the sound 

recording and the musical works 

licensors, on the one hand, and 

YouTube as the licensee, on the other. 

The Services further maintain that, 

even assuming YouTube licenses are 

appropriate benchmarks, Dr. Eisenach 

has relied on the wrong type of 

YouTube licenses for his benchmark 

analysis. As noted, Dr. Eisenach 

selected the agreements and rates 

pertaining to [REDACTED]. He selected 

this type of YouTube contract because 

neither the musical works license nor 

the sound recording license is subject to 

the section 115 license. See SEJRPFF 

¶ 350 (and record citations therein). 

However, the Services maintain that 

the more appropriate YouTube 

benchmarks would be the agreements 

between YouTube and publisher and 

record companies, respectively, for 

[REDACTED]—agreements that contain 

a [REDACTED] royalty rate, rather than 

the [REDACTED] figure from the 

[REDACTED] YouTube agreements. If 

the Services’ are correct in their 

assertion that the [REDACTED] 

YouTube agreements are the appropriate 

benchmark inputs, the sound recording: 

Musical works ratio (applying the 

[REDACTED] royalty rate) thus 

increases to as low as [REDACTED], 

implying a ratio as high as 

[REDACTED]:1, implying a musical 

works rate of [REDACTED]%, far lower 

than Dr. Eisenach’s calculated YouTube 

royalty of [REDACTED]% (but still 

above Copyright Owners’ proposed 

rate). If the [REDACTED] royalty rate of 

1942 Federal Register / Vol. 84, No. 24 / Tuesday, February 5, 2019 / Rules and Regulations 

100 If the sound recording royalty rate for 

interactive streaming is 60%, as discussed infra, 

this YouTube benchmark equals [REDACTED] × 

0.60 = [REDACTED]%. 

101Pandora’s status as a purely noninteractive 

service prior to 2018 does not decrease the 

relevancy of this benchmark, because: (1) 

Noninteractive and interactive services both pay 

performance royalties; (2) noninteractive services 

historically have not paid mechanical royalties; and 

(3) the performance license and the mechanical 

license are perfect complements. 

[REDACTED]% is applied instead, the 

ratio rises to [REDACTED], or 

[REDACTED]:1, implying a musical 

works rate of [REDACTED]%. 

The Judges find that the static-image 

YouTube rates are more analogous to 

the interactive market, compared with 

the YouTube agreements concerning 

embedded videos. The salient rationale 

in Dr. Eisenach’s analysis is the sound 

recording to musical works ratio, so 

injecting the video as another element of 

value into the mix renders the sound 

recording to musical works ratio too 

difficult to identify with sufficient 

certainty. However, the Services assert 

that, given that the Majors comprise 

[REDACTED]% of the YouTube market, 

the appropriate ratio should be 

[REDACTED], implying the 

[REDACTED]% of sound recording 

percentage identified above. The Judges 

find that it would be proper to weight 

the YouTube benchmark by applying a 

[REDACTED]% weight to 

[REDACTED]%, and a [REDACTED]% 

weight to [REDACTED]%, which results 

in a benchmark rate of [REDACTED]% 

([REDACTED]).100

Finally, the Services take issue with 

Copyright Owners’ assertion that 

YouTube is a competitor to interactive 

streaming services, despite the 

acknowledgements by those services 

that such competition is present. 

Compare CPFF ¶¶ 263–266 (and record 

citations therein) with SJRPFF ¶¶ 263– 

266 (and record citations therein). The 

Judges find that competition does not in 

itself make the rates in those YouTube 

agreements particularly helpful 

benchmarks, because the addition of 

video content creates a bundling of 

value distinguishable from the value of 

interactive streaming alone. However, 

Google’s/YouTube’s acknowledgement 

of the competitive posture of YouTube 

vis-a`-vis interactive streaming services 

renders the ratio of sound recording: 

Musical works royalty ratio in the 

YouTube stati-screen agreements a 

useful benchmark in this proceeding. 

Even in those cases, however, the 

YouTube royalty rates and ratios remain 

imperfect because other relevant factors 

are not necessarily constant. The Judges 

agree that the relatively strong 

bargaining power of the licensee created 

by the DMCA ‘‘safe harbor’’ provisions, 

distinguishes the YouTube market from 

the market for streaming services. 

Copyright Owners seek to minimize this 

lack of comparability by arguing that, 

although YouTube’s relatively strong 

bargaining power depresses the 

copyright holders’ royalties, ‘‘[s]ince the 

DMCA safe harbor applies equally to 

sound recording and musical works 

copyrights, there is no reason to think 

that their relative valuation would be 

affected.’’ Eisenach WRT at 66. 

However, Copyright Owners do not 

provide any factual support for this 

conclusory assumption of a ‘‘relative 

value’’ effect, and the Judges thus 

cannot find with sufficient certainty that 

it in fact is likely that the enhanced 

bargaining position of YouTube affects 

the publishers and the labels equally. 

Accordingly, the Judges do not find the 

YouTube market and licenses to be 

sufficiently analogous to the interactive 

streaming market to make the 

benchmark derived from the YouTube 

analysis to be useful in determining 

rates in this proceeding. 

v. Pandora ‘‘Opt-Out’’ Agreements 

Together with his YouTube 

benchmark, Dr. Eisenach finds the 

Pandora ‘‘Opt-Out’’ agreements to be the 

most useful among the several potential 

benchmarks he examined. The Judges 

agree. The Judges agree with Dr. 

Eisenach that the Pandora ‘‘Opt-Out’’ 

agreements are useful benchmarks. 

These agreements have the level of 

comparability necessary for a 

benchmark to be useful. However, the 

Judges do not agree with Dr. Eisenach’s 

attempt to extrapolate from the actual 

rates in those Opt-Out Agreements. 

Rather, the Judges find that the 

[REDACTED]:1 ratio Dr. Eisenach 

identified for the year 2018 in existing 

agreements is the most useful 

benchmark derived from the ‘‘Opt-Out’’ 

data. As the Services note, Pandora’s 

most recent direct license agreements 

during the ‘‘Opt-Out’’ period with the 

publishers who control many of the 

works embodied in the sound 

recordings performed by Pandora 

provide that publisher royalties will be 

determined [REDACTED].101 This 

resulted in a shift of the sound 

recording: Musical works ratio to 

[REDACTED]:1, implying a musical 

works TCC percentage of 

[REDACTED]%. See Katz CWRT 

¶¶ 101–104; Herring WRT ¶¶ 28–29). 

The Judges reject Dr. Eisenach’s 

identification of a useful trend in the 

shrinking of that ratio (i.e., a growth in 

the musical works royalty percentage). 

His change in the ratio to 

[REDACTED]:1 was driven by 

expectations regarding the likelihood of 

an uncertain change in the legal 

landscape regarding publisher 

withdrawals from performing rights 

organizations. Such uncertain potential 

changes are not well-captured by 

mapping them over a time horizon. 

Moreover, as the Services note and as 

Dr. Eisenach concurs, even assuming 

such a change in relative uncertainty 

could be captured in a regression, other 

regression forms, such as a quadratic 

form, could be used to demonstrate a 

return of the ratio to its prior level (an 

equally plausible future event) rather 

than a continuation of its shorter-term 

increase. See 4/5/17 Tr. 495963 (Katz); 

Katz CWRT ¶¶ 104–107, Table 1, F; 4/ 

4/17 Tr. 4807–08 (Eisenach) (linear form 

of regression not ‘‘material’’). 

c. Dr. Eisenach’s per Play Sound 

Recording Rate 

The Judges also have difficulty relying 

on the data set Dr. Eisenach developed 

for his estimation of a $[REDACTED] 

per play sound recording royalty rate. 

He used that $[REDACTED] per play 

figure in several benchmark ratios. Two 

principal problems with Dr. Eisenach’s 

data are: 

1. The data covered a non-random sample 

of only approximately 15% of all interactive 

plays; and 

2. the data excluded [REDACTED]’s 

[REDACTED] services, large portions of the 

interactive streaming market. Inclusion of 

those [REDACTED] services would have 

reduced his per play rate from $[REDACTED] 

to $[REDACTED]. Inclusion of only 

[REDACTED] service would have reduced the 

$[REDACTED] estimate to $[REDACTED]. 

SJRFF ¶ 22 (and record citations 

therein). 

Dr. Eisenach explained his small data 

sample as resulting in part from his 

deliberate decision to omit several 

sound recording labels [REDACTED], 

which he asserted gave them an 

incentive to allow [REDACTED] to pay 

below-market royalties. Eisenach WDT 

¶ 150. The Judges acknowledge Dr. 

Eisenach’s assertion that this fact could, 

on the margin, drive down the royalties 

paid by [REDACTED] to those labels. 

However, the evidence does not bear 

that out, because the royalty rates 

[REDACTED] pays to these labels are 

comparable to the rates it pays to other 

labels that do not have [REDACTED]. 

More particularly, the [REDACTED] 

contracts with record labels that Dr. 

Eisenach reviewed show the same 

[REDACTED], a rate no lower than the 

rate paid by other interactive streaming 

services. 4/4/17 Tr. 473953 (Eisenach); 

see also, e.g., Trial Ex. 2760 (Digital 

Federal Register / Vol. 84, No. 24 / Tuesday, February 5, 2019 / Rules and Regulations 1943 

102 In the parlance of platform economics, 

Spotify’s ad-supported service provides a multiplatform approach, in which listeners, advertisers, 

sound recording rights holders and musical works 

holders all combine to obtain revenue based on the 

mutual values each brings to that platform. 103Copyright Owners belatedly propose that if the 

Judges intend to include the Spotify ad-supported 

service in the rate structure and rate calculations, 

they should establish (1) separate rates for adsupported services that are not incorporated into 

the calculation of rates set for other services; and 

(2) separate terms for an ad-supported service that 

limit the functionality of the service, to avoid 

potential cannibalization of services paying higher 

royalties. COPCL at 106, n.34. This argument is a 

tacit acknowledgement by Copyright Owners that a 

segmented market might require a differentiated 

rate structure, even as they strenuously dispute the 

appropriateness of such a structure. 

104The provision of a monetarily free-to-the user 

service is a reasonable marketing tool, and the 

Judges are loathe to second-guess the business 

model incorporating that marketing approach, 

especially while it provides royalties to rights 

owners. Also, the Judges do not find it relevant that 

other interactive streaming services have not 

utilized an ad-supported service. There is no record 

evidence regarding why other Services have ceded 

that market to Spotify. 

Product Agreement Specific Terms 

between [REDACTED] and 

[REDACTED], 2013, 

[REDACTED]0005221); Trial Ex. 2765 

(Digital Audio Distribution Agreement 

between [REDACTED] and 

[REDACTED], July 1, 2013, 

[REDACTED]0005548). Further, for 

every dollar in royalties a label 

[REDACTED], the label would 

[REDACTED]. 

With regard to the specific omission 

of data from Spotify’s ad-supported 

service, Copyright Owners make 

additional arguments. They claim that 

the ad-supported service does not reflect 

the actual value of the sound recordings, 

because that service acts as a funnel to 

draw listeners to the subscription 

service. Therefore, Copyright Owners 

maintain, the ad-supported service is 

essentially a loss-leader, with the 

difference between the higher effective 

per play rates for subscription services 

and the lower effective per play rates for 

ad-supported services more in the 

nature of a marketing expense that 

should not be deducted from Dr. 

Eisenach’s royalty calculations. See 

Eisenach WDT ¶ 148, n.127. 

That analysis, however, omits the fact 

that Spotify’s ad-supported service only 

[REDACTED]. See Marx WDT ¶ 55, n.77. 

[REDACTED]. These listeners and the 

advertising revenue they generate are 

real and reflect the WTP of a large swath 

of interactive listeners.102 See Marx WRT 

¶ 115–16 (‘‘[O]ne aspect of the adsupported service is to provide an onramp to paid services, it also has 

another important aspect, namely to 

serve low WTP customers. . . .’’). 

Copyright Owners’ economists err in not 

calculating the impact of Copyright 

Owners’ proposal on ad-supported 

services. Ad-supported services 

currently make up [REDACTED] and 

[REDACTED]% of all streams in the 

industry. The Judges agree with 

Professor Marx that Dr. Eisenach’s 

omission of the Spotify data undercuts 

his analysis.103

The Judges accept, to some degree, 

Copyright Owners’ argument that adsupported services are a marketing tool 

to identify future subscribers. Until 

those subscribers are identified and 

‘‘signed,’’ however, they are not 

subscribers. In that sense, ad-supported 

services may be marketing tools, but 

they do not reduce present royalties 

because the future subscribers have not 

yet been identified. There is no record 

evidence that Spotify’s hard cost saving 

translates directly into royalty revenue 

lost to Copyright Owners. Apparently, 

Copyright Owners argue that their loss 

is in the form of an opportunity cost, 

i.e., losing the opportunity to obtain 

subscription-level royalties from the adsupported listeners. But if Spotify paid 

subscription-level royalties for all adsupported listeners, it would be paying 

an implicit marketing cost that 

inefficiently was allocated to the 

[REDACTED]% or so ad-supported 

listeners who, historically, will not 

become paid subscribers. 

The use of an ad-supported service as 

a ‘‘freemium’’ model serves a dual 

purpose: First, it is an efficient means of 

marketing—segregating listeners 

according to WTP—still allowing them 

to ‘‘experience’’ interactive streaming, 

while, second, simultaneously 

providing ad-revenue-based royalties to 

Copyright Owners. If Spotify substituted 

advertising as a marketing tool, 

Copyright Owners would realize zero 

royalties until the advertising resulted 

in new subscribers.104

d. Analysis of Dr. Eisenach’s Method #1 

The Services criticize Dr. Eisenach’s 

Method #1 calculation as being based 

upon the incorrect assumption that the 

entire difference between interactive 

and noninteractive rates must be 

attributed to the mechanical license 

right. As the Services properly note, 

there are several reasons, all unrelated 

to the mechanical right and license, why 

interactive rates are higher than 

noninteractive rates for musical works 

performance rights. Leonard WRT ¶ 55; 

Katz CWRT ¶¶ 117–118; Hubbard 

CWRT ¶ 6.4; 4/5/17 Tr. 4972–74 (Katz). 

Dr. Eisenach’s Method #1 did not 

account for the presence of the 

ephemeral right in licensing 

noninteractive streaming, which 

accounts for 5% of the noninteractive 

rate. See 4/4/17 Tr. 485152 (Eisenach); 

4/5/17 Tr. 5158–61 (Leonard); see also 

Leonard WRT ¶¶ 55–56. 

Further, there is a difference in the 

performance rights royalty rates PROs 

charge interactive and noninteractive 

services that is not captured by Method 

#1. See, e.g., In re Petition of Pandora 

Media, Inc., 6 F. Supp. 3d at 330. Had 

Dr. Eisenach considered other 

explanations for the difference between 

the All-In sound recording royalty rates 

for interactive and noninteractive 

services, he might well have estimated 

a mechanical rate ‘‘[REDACTED]’’ See 

Katz CWRT ¶ 122. 

The Services also note the impact in 

Method #1 of Dr. Eisenach’s decision to 

omit [REDACTED] data from his 

modeling. The Services contend adding 

the [REDACTED] data to Dr. Eisenach’s 

effective per play rate for sound 

recording results in a per-play rate of 

$[REDACTED]. See 4/4/17 Tr. 4771–74 

(Eisenach). 

Combining the foregoing criticisms, 

the Services conclude: 

If one were to use $[REDACTED] per 

hundred plays for the sound recording rate 

(which includes the [REDACTED] data) (id. 

at 4771–74), reduce that by 12% as the Board 

did in Web IV for complementary oligopoly 

power, increase the $[REDACTED] per 

hundred plays Dr. Eisenach uses for musical 

works performance rights by 60% to account 

for the difference in ASCAP rates identified 

by Judge Cote, and then apply Dr. Eisenach’s 

invalid ‘‘valuation ratio’’ of [REDACTED]:1, 

the result would be $[REDACTED] per 

hundred plays ($[REDACTED] per play), way 

below the $0.15 per hundred plays rate 

($.0015 per play) that Dr. Eisenach attempts 

to validate. 

SJPFF ¶ 279 (and record citations 

therein). 

The Judges agree with the Services 

that Eisenach’s Method #1 does not 

provide a useful benchmark in this 

proceeding. The absence of interactive 

streaming data from [REDACTED] is a 

critical omission. The fact that much of 

that data relates to [REDACTED] 

services [REDACTED] does not justify 

removing the data from a market 

analysis; that service is a part of the 

market. In fact, Copyright Owners’ 

argument proves too much. That is, 

their willingness to distinguish and 

isolate the [REDACTED] service and 

related data actually underscores the 

need for a differentiated/price 

discriminatory rate structure, such as 

the Judges have adopted in this 

proceeding. 

The Judges are less sanguine, 

however, with regard to the Services’ 

argument for a 12% reduction to the 

sound recording rates to reflect the 

complementary oligopoly effect arising 

1944 Federal Register / Vol. 84, No. 24 / Tuesday, February 5, 2019 / Rules and Regulations 

105Here, the ‘‘analogous market’’ is the same as 

the target market across all dimensions, except that 

the benchmark is temporally removed from the 

target, with the rates in the benchmark having been 

formed five years ago. 

106This point is not made to be critical of Dr. 

Eisenach’s approach, but rather to show that the 

Services’ reliance on the 2012 settlement as a 

benchmark shares this similar analytical 

characteristic, typical and appropriate for the 

benchmarking method. (The factual wrinkle here is 

that, hypothetically, the Services could have called 

witnesses and presented testimony regarding the 

negotiations that led to the 2012 (and 2008) 

settlements, but did not, rendering the 2012 

benchmark similar to other benchmarks taken from 

other markets. Mr. Israelite provided some 

testimony on behalf of Copyright Owners regarding 

those negotiations (as discussed supra), but even 

that testimony related to the rate structure, rather 

than to the level of the rates themselves. 

107As noted elsewhere, the Judges find it highly 

informative that the Services agree to a continuation 

of the present rates even though: (1) They are all 

losing money under these rates; and (2) their 

experts suggest much lower rates than the Services 

propose. While the assertions of ‘‘conservatism’’ 

and reasonableness’’ suggest strategic prudence, the 

Services’ acquiescence to these rates indicates that 

year-over-year accounting losses are not of great 

concern—certainly not great enough for the 

Services to rely on their own experts’ opinions to 

advocate for lower rates. Rather, they seem to be 

locked in a battle for market share, in which the 

single survivor, or the several survivors serving 

discrete downstream segments, can acquire the 

market power sufficient to appropriate a sufficient 

share of the surplus, as explained in the discussion 

of the Shapley value. That is, the interactive 

streaming services seemed to be in a Schumpeterian 

competition for the market, not merely in 

competition in the market. Given this finding, the 

Judges do not find that the year-over-year losses 

from the ‘‘must have’’ status of the 

sound recordings in the interactive 

streaming distribution channel. The 

Judges are reluctant to simply import 

the 12% rate reduction from Web IV 

into other determinations, even though 

that figure was used to adjust from 

interactive streaming rates to 

noninteractive streaming rates. The 

specific 12% figure was based on record 

evidence derived from steering 

experiments and agreements analyzed 

in Web IV. 

The Judges agree with the Services 

that it is inaccurate in Method #1 to 

subtract a performance rate that reflects 

the higher interactive performance rate, 

rather than the lower noninteractive 

performance rate. 

e. Analysis of Dr. Eisenach’s Method #2 

The Judges find that Dr. Eisenach’s 

Method #2 does not contain sufficient 

industrywide performance royalty and 

sound recording data to provide a 

meaningful analysis for determining a 

per-user monthly mechanical works 

royalty. The Judges are also troubled by 

the apparent inconsistent use of Rate 

Court established rates in Method #2, 

when Dr. Eisenach had indicated in 

other contexts that rates unshackled 

from Rate Court decisions provide a 

truer indication of market rates. 

The Judges understand that Dr. 

Eisenach omitted [REDACTED] user 

data because of [REDACTED], which is 

itself a function of its [REDACTED] 

service. The Judges recognize that 

combining [REDACTED] user data with 

other interactive streaming services’ 

data would significantly change the 

results, in a manner that Copyright 

Owners find to be anomalous. See 

CORPFF at 183–184 (noting what 

Copyright Owners describe as ‘‘[t]he 

profound impropriety of ‘‘blending’’ 

[REDACTED] rate into Copyright 

Owners’ benchmarking and 

calculations.) However, that seeming 

anomaly actually underscores why the 

Judges find a differentiated rate 

structure to be appropriate. 

The royalty rates paid by all Services 

should be reflective of the differentiated 

WTP of listeners. 

f. Conclusion 

For the foregoing reasons, the Judges 

do not adopt Dr. Eisenach’s proposed 

benchmark rates as the mechanical rates 

for the upcoming rate period. However, 

the Judges do find several of the 

benchmark rates implied by his sound 

recording to musical works ratios to be 

useful guideposts for identifying the 

headline percent-of-revenue rate to be 

incorporated into the rate structure in 

the forthcoming rate period. 

B. Rejection of Services’ 2012-Based 

Proposals 

1. Section 115 Benchmark Rates 

The Services do not examine in detail 

the particular rates within the existing 

rate structure. Rather, they treat the 

rates within that structure as 

benchmarks, i.e., generally indicative of 

a sufficiently analogous market 105 that 

has ‘‘baked-in’’ relevant economic 

considerations in arriving at an 

agreement. Dr. Eisenach did not analyze 

why he chose the levels for the rates and 

ratios on which he relied as benchmarks 

or consider the subjective 

understandings of the parties who 

negotiated his benchmarks. Similarly, 

the Services’ economists elected to rely 

on the 2012 rates as objectively useful 

without further inspection.106

Copyright Owners take the Services to 

task for failing to present evidence of 

the negotiations that led to the prior 

settlements. They argue that, without 

relevant evidence or testimony, the 

Services cannot provide support for 

their proposed rates. The Services take 

a very broad approach in their attempt 

to establish the usefulness of the rate 

levels within the 2012 benchmark. They 

note that music publishers have 

consistently realized profits under these 

rates, including profits from musical 

works royalties. Copyright Owners 

counter that mechanical royalties have 

not created a profit for Copyright 

Owners, and the Services’ assertion of 

overall publisher profitability is based 

on their lumping of performance 

royalties together with mechanical 

royalties. 

The Services maintain that they relied 

on the continuation of the existing rates 

in developing their business models. 

For example, Pandora, the latest entrant 

into the interactive streaming market, 

asserts that it based its decision to enter 

this market on its assumption that 

mechanical royalty rates would not 

increase. Herring WRT ¶ 3. 

The Judges categorically reject this 

argument. The statute is plain in its 

requirement that the rates be established 

de novo each rate period. A party might 

feel confident that past is prologue and 

that the parties will agree to roll over 

the extant rates for another period. A 

party could be sanguine as to its ability 

to make persuasive arguments to keep 

the rates unchanged. A party might 

conclude that the mechanical rate is 

such a small proportion of a licensee’s 

total royalty obligation that its increase 

would be unlikely to alter long-term 

business plans. But for sophisticated 

commercial entities to claim that they 

assumed the rates would remain static 

is incredible. 

The record indicates that an increase 

in the rates might affect different 

interactive streaming services in 

different ways. In particular, there might 

be a dichotomous effect as between 

essentially pure play streaming services 

(such as Spotify and Pandora) and the 

larger new entrants with a wider 

commercial ‘‘ecosystem’’ (such as 

Amazon, Apple and Google). As 

Spotify’s CFO testified: 

The Copyright Owners argue that ‘‘a 

change in market-wide royalty rates such as 

this would affect all participants in a similar 

way,’’ suggesting that the industry as a whole 

could increase prices without affecting their 

relative price points. Rysman WDT ¶ 94. 

However, not all Digital Services use the 

same business model. For example, several 

Digital Services are owned by large corporate 

parents who can use streaming music as a 

‘‘loss leader’’ to build brand awareness, keep 

users in their broader ecosystem, or promote 

other products and/or services. See, e.g., 

Rysman WDT ¶ 29 . . . . The industry has 

already seen a few examples of downward 

pressure on prices from this strategy. See 

WDT ¶ 50. [REDACTED] See WDT ¶ 73. 

McCarthy WRT ¶ 38; see Written Direct 

Testimony of Barry McCarthy, Trial Ex. 

1060, ¶ 50–51 (McCarthy WDT) 

([REDACTED]); McCarthy WRT ¶ 36 

([REDACTED]).107

Federal Register / Vol. 84, No. 24 / Tuesday, February 5, 2019 / Rules and Regulations 1945 

suffered by the Services constitute a serious 

competitive detriment. Accordingly, in setting 

effectively competitive rates, the Judges are more 

concerned with providing the Copyright Owners 

with a rate that appropriately compensates them in 

a manner consistent with the relevant and 

persuasive benchmarks, even if the Services may 

incur a somewhat higher level of accounting losses. 

Alternately stated, the Judges find that it would be 

highly coincidental (and is unsupported by any 

evidence) that the present rate levels establish in 

essence a maximum level of losses the Services 

collectively can sustain, such that a reduction in 

losses is unnecessary but an increase in losses will 

lead to their demise. 

108The Services did not rely on the settlement 

that led to the continuation of these rates into the 

next rate period as a benchmark. The Services 

moved for discovery regarding this most recent 

settlement but the Judges denied that motion on the 

grounds that the new settlement was not a 

benchmark on which the Copyright Owners had 

relied and therefore was not within the scope of 

allowable discovery. See 37 CFR 351.5 (scope of 

discovery limited to materials relevant to the 

responding party’s Written Direct Statement). The 

Copyright Owners did not proffer any evidence 

regarding their most recent settlement. 

109This point is more general in nature. Any item 

that is ‘‘owned’’ creates value in use because it is 

capable of being accessed, not that it is 

continuously accessed. 

The Judges construe this argument as 

an iteration of the ‘‘business model’’ 

argument that they have consistently 

rejected. The Judges cannot and will not 

set rates to protect any particular 

streaming service business model. The 

Judges distinguish between: (1) Business 

models that are necessary reflections of 

the fundamental nature of market 

demand, particularly, the varied WTP 

among listeners; and (2) business 

models that may simply be unable to 

meet dynamic competition. If pure play 

interactive streaming services are unable 

to match the pricing power of 

businesses imbued with the selffinancing power of a large commercial 

ecosystem, nothing in section 801(b)(1) 

permits, let alone requires, the Judges to 

protect those pure play interactive 

streaming services from the forces of 

horizontal competition. Moreover, any 

disruption arising from the disparate 

impact of a rate increase among 

interactive streaming services would not 

constitute ‘‘disruption’’ under Factor D. 

Disruption resulting from competition 

would not upend the structure of the 

industry or generally prevailing 

industry practices; rather it would 

influence particular business models. 

2. The Services’ Subpart A Benchmark 

The Services utilize the rate in extant 

subpart A as an additional benchmark 

for the subpart B rates to be determined 

in this proceeding. Subpart A describes 

the rates record companies pay 

Copyright Owners for the mechanical 

license, i.e., the right to reproduce 

musical works in digital or physical 

formats. The particular subpart A 

benchmark rate on which the Services’ 

rely is the existing rate, which the 

subpart A participants have agreed to 

continue through the forthcoming rate 

period through settlement.108

In support of this benchmark, the 

Services emphasize that the total 

revenue created by the sale of digital 

phonorecord downloads and CDs is 

essentially commensurate with the 

revenues created through interactive 

streaming, indicative of an equivalent 

financial importance to publishers when 

negotiating rates with licensees in 

subparts A and B respectively. See 3/20/ 

17 Tr. 1845 (Marx) (‘‘downloads, in 

particular, are comparable to interactive 

streaming.’’). Also, although the subpart 

A rate is the product of a settlement, the 

Services argue that the rate is a useful 

benchmark because it reflects both the 

industry’s sense of the market rate and 

the industry’s sense of how the Judges 

would apply the section 801(b)(1) 

considerations to those market rates. 3/ 

15/17 Tr. 1184, 1186 (Leonard); 3/20/17 

Tr. 1842–43 (Marx). 

In opposition, Copyright Owners 

argue, for several reasons, that the 

subpart A rates are not proper 

benchmarks. First, they emphasize that 

revenue from the sale of PDDs and CDs 

has been declining over the past several 

years. Second, they note, as the Services 

acknowledge, that the parties are not 

identical; specifically, the licensees in 

subpart A are record companies whereas 

in subpart B the licensees are interactive 

streaming services. See, e.g., 3/15/17 Tr. 

1193 (Leonard). Third, Copyright 

Owners emphasize that the existing 

subpart A rate is itself the product of a 

settlement, rather than a market rate. 

Fourth, and relatedly, they raise their 

overarching argument against any 

purported benchmark rate set in ‘‘the 

shadow’’ of the statutory license, 

because the licensee record companies 

had the option of refusing to settle and 

to seek instead a potentially lower 

statutory rate. 

Copyright Owners note that the 

subpart A settlement establishes a perunit royalty rate of $0.091 per physical 

or digital download delivery (with 

higher per-unit rates for longer songs), 

rendering that rate inapposite as a 

benchmark for the Services’ present 

subpart B proposal. See 3/20/17 Tr. 

1960 (Marx). In support of this position, 

Copyright Owners argue that because 

the subpart A rate is expressed as a 

monetary unit price, Copyright Owners 

have eliminated the risk that retailers’ 

downstream pricing decisions will 

affect the Copyright Owners. More 

specifically, they note that, ‘‘[u]nder the 

subpart A rate structure, the [record 

company] (as licensee) pays the same 

[penny rate] amount in mechanical 

royalties regardless of the price at which 

the sound recording is ultimately sold 

[within the] range of price points for 

individual tracks in the market ranging 

from $0.49 to $1.29 and the mechanical 

penny rate binds regardless of the price 

of the track. COPFF ¶ 727 (citing 

Ramaprasad WDT ¶ 28 & Table 1; 3/20/ 

17 Tr. 1956–58 (Marx)). 

Copyright Owners further attempt to 

distinguish subpart A from subpart B 

based on the fact that downstream 

listeners to PDDs and CDs (and any 

other physical embodiment of a sound 

recording) become owners of the sound 

recording and the musical work 

embodied within it, whereas under 

subpart B the listeners only obtain 

access to the musical works for as long 

as they remain subscribers or registered 

listeners (to a non-subscription service). 

The Judges find this point to be a 

distinction without a sufficient 

economic difference. The Judges note 

with favor the testimony of Professor 

Leonard, who said of the ‘‘ownership vs. 

access’’ distinction that, although it is a 

real legal distinction, it does not reflect 

as fundamental an economic difference 

as might appear on the surface. Leonard 

WRT ¶ 27; 3/15/17 Tr. 1098, 1113 

(Leonard). 

The Judges accept Professor Leonard’s 

economic analogy. Ownership is in 

essence a more comprehensive and 

unconditional form of access. A 

downstream purchaser acquires 

ownership of the digital or physical 

reproduction of a sound recording and 

the embodied musical work for an upfront charge (the purchase price). The 

purchaser then has unlimited free 

access to that sound recording/musical 

work going forward. A subscriber to an 

interactive streaming service pays an 

up-front charge (usually monthly), and 

then likewise has unlimited access to 

the entire catalog of sound recordings 

(and the embodied musical works) for 

each paid period. 

In economic terms, each approach 

contains the features of a ‘‘two-part 

tariff,’’ where the end user pays a fixed 

access fee (an ‘‘option’’ price, i.e., the 

right to use the owned or accessible 

music) and a zero marginal per play 

charge that efficiently corresponds with 

the zero physical marginal cost of 

creating another play of the owned or 

accessible sound recording/musical 

work.109 The salient difference is that 

the subscriber does not get unlimited 

marginal plays for zero additional 

charge. The monthly subscription fee is 

the measure of the marginal cost to the 

1946 Federal Register / Vol. 84, No. 24 / Tuesday, February 5, 2019 / Rules and Regulations 

110The Judges note though that Copyright 

Owners’ appropriate reliance on the different access 

value in subpart A is an argument relating to the 

downstream value, confirming that upstream value 

demand is a ‘‘derived demand,’’ based on values in 

the downstream market. This argument therefore 

further undercuts Copyright Owners’ claim that 

there is an ‘‘inherent value’’ in musical works that 

applies in these proceedings. 

111Professor Ramaprasad also relied on two other 

equivalency ratios, the first from Billboard 

magazine, and the second from another entity, UK 

Charts Company (UK Charts). However, she 

acknowledges that the Billboard ratio combines 

video streaming royalty data with audio streaming 

royalty data, which results in an overestimation of 

the ratio of streams to track sales relative to an 

audio-stream-only analysis. 3/26/17 Tr. 2760–61 

(Ramaprasad). She also acknowledges that UK 

Charts changed its ratio from 100:1 to 150:1 without 

explanation, rendering uncertain that purported 

industry standard. See COPFF ¶ 683 (and record 

citations therein). Also, there was no evidence 

indicating that streaming and download activity in 

the United Kingdom would be comparable to U.S. 

activity. 

listener who streams. Determination of 

the allocation of that marginal cost is 

impossible, however, as the Judges 

recognize that the subscription fee 

allows for access to a large, 

comprehensive repertoire, whereas 

access stemming from the purchase of a 

download, CD, or vinyl record is limited 

to the specific sound recording and 

embodied musical work. For this 

reason, there is less access value in the 

sale of a download or a CD, compared 

to the access value of a subscription to 

a streaming service, rendering the 

subpart A rate at best a guideline as to 

the rates below which the subpart B and 

C rates cannot fall.110

In other respects, the Judges find the 

subpart A settlement to be somewhat 

useful. The licensed right in question is 

identical: The right to reproduce 

musical works for sale into a 

downstream market. Further, the 

licensors, i.e., the music publishers and 

songwriters, are identical. Finally, the 

time period is reasonably recent and 

Copyright Owners have not explained 

whether or how the particular market 

forces in the subpart A market sectors 

have changed since 2012 to make the 

rate obsolete. The usefulness of the 

subpart A rate as a benchmark is 

limited, however, because: (1) The 

access value of downstream services is 

greater than the access value of an 

individual purchase of a sound 

recording/musical work; (2) there is a 

partial difference in economic risk to 

the licensors between a per-unit royalty 

and a royalty based on a percent-ofrevenue (with minima); and (3) the 

licensees in the benchmark market are 

not the same. 

3. The Two Subpart A Benchmarking 

Approaches 

In their first benchmarking exercise, 

the Services attempt to convert the perunit rate in subpart A into a subpart B 

percent-of-revenue rate. To that end, 

they attempt to identify an equivalency 

between a given number of interactive 

streams and a single play of a purchased 

DPD. 

Professor Marx first applies a 

conversion ratio of PDDs to streams of 

1:150, calculated by the RIAA. Second, 

she takes note of an academic study 

which estimated that marketplace 137 

interactive streams was equivalent to 

the sale of one DPD. Marx WDT ¶ 108 

& n.21 (citing L. Aguiar and J. 

Waldfogel, Streaming Reaches Flood 

Stage: Does Spotify Stimulate or Depress 

Music Sales?, (working paper, National 

Bureau of Economic Research, 2015)); 

Katz WDT ¶ 110 (same). Apple’s 

economic expert, Professor Ramaprasad, 

also relied on the Aguiar/Waldfogel 

article to support Apple’s benchmark 

per play proposal. Ramaprasad WDT 

¶ 56, n.102.111

Professor Marx applied this approach 

and formula to Spotify’s revenues. She 

calculated that, given the number of 

songs played on Spotify that were 

longer than five minutes, the perrecording rate in subpart A is 

$[REDACTED]. Dividing that per 

recording rate by 137 yields 

$[REDACTED] royalty per stream. She 

then multiplied that per stream 

‘‘equivalent’’ royalty by the total 

number of streams to estimate a total 

royalty. Professor Marx then divided the 

total royalty by total revenues. Given the 

All-In approach proposed by the 

Services, Professor Marx subtracted 

Spotify’s performance royalty rate of 

[REDACTED]% of revenue to determine 

a mechanical royalty rate of 

[REDACTED]% of revenue using this 

approach. Marx WDT ¶ 112, Fig. 22. 

When she applied the Aguiar/Waldfogel 

137:1 ratio, she identified a musical 

works All-In royalty rate derived from 

subpart A of [REDACTED]% of revenue, 

and a mechanical royalty rate (i.e., after 

subtracting the [REDACTED]% 

performance rate) of [REDACTED]% of 

revenue. 

On behalf of Pandora, Professor Katz 

used the same 1:150 conversion ratio as 

Professor Marx. He calculated a 

mechanical rate implied by the subpart 

A rate of [REDACTED]% of revenue, 

higher than Professor Marx’s implied 

rate, but still lower than the existing 

headline rate of 10.5% in subpart B. 

Katz WDT ¶ 111. 

On behalf of Apple, Professor 

Ramaprasad utilized the same 1:150 

ratio, which she adopted from Billboard 

magazine’s ‘‘Stream Equivalent 

Albums’’ analysis. Ramaprasad WDT 

¶ 84. Because Apple has advocated for 

a per-stream rate, her conversion was 

expressed on a per-stream basis, at 

$0.00061 per stream. Professor 

Ramaprasad noted that this rate was not 

only lower than the $0.0015 per stream 

rate proposed by Copyright Owners, but 

also significantly lower than Apple’s 

own proposed per-stream rate of 

$0.00091. Ramaprasad WDT ¶ 86. When 

Professor Ramaprasad applied the 

Waldfogel/Aguiar 1:137 ratio, expressed 

on a per-play basis, she calculated a rate 

of $0.00066 per stream for interactive 

streaming, which she noted was even 

lower than the per-stream rate of 

$0.00091 Apple had proposed. 

The Judges do not base any 

conclusions on this ‘‘conversion’’ 

approach. Copyright Owners express 

numerous criticism of the ratio 

approach, and many of those criticisms, 

each on its own merit, serve to discredit 

the ratio approach. First, the Services 

and Apple simply adopted the 

equivalence ratios without defining 

what ‘‘equivalence’’ means. For 

example, the RIAA used the concept to 

identify albums that were sufficiently 

popular to garner ‘‘gold’’ or ‘‘platinum’’ 

awards. That use, absent other evidence, 

does not indicate that the conversion 

ratio is appropriate for rate-setting 

purposes. See generally Rysman WRT 

¶ 96; 3/23/17 Tr. 2775–76 (Ramaprasad). 

Second, and relatedly, the experts who 

relied on the Aguiar/Waldfogel article 

did not verify that the input data that 

was used by the authors was 

appropriate for the purposes for which 

it has been relied upon in this 

proceeding. See 3/20/17 Tr. 1945–46 

(Marx); 3/23/17 Tr. 2789–90 

(Ramaprasad). Third, the Aguiar/ 

Waldfogel article appears not to 

specifically address two issues that 

would make the equivalency ratio 

meaningful: (a) What happens to the 

download behavior of an individual 

who adopts streaming; and (b) how the 

availability of streaming alters the 

consumption of a particular song. See 

Rysman WRT ¶ 97. Fourth, the experts 

for the Services and Apple ignore that 

Aguiar and Waldfogel conducted an 

additional analysis described in the 

same article on which they rely. In that 

second analysis, the authors compared 

the weekly data from Spotify for the 

period April to December 2013 with 

weekly data from Nielson on digital 

download sales for the same songs 

during the same overlapping time 

period. That approach, which Aguiar 

and Waldfogel called their ‘‘matched 

aggregate sales’’ analysis, yielded a ratio 

of 43:1, implying a much higher 

Federal Register / Vol. 84, No. 24 / Tuesday, February 5, 2019 / Rules and Regulations 1947 

112Of course, because copies of musical works 

(embodied in copies of sound recordings) are nonrivalrous quasi-public goods, licensing a copy to 

licensees in one platform does not prevent the 

licensing of another copy to licensees on a different 

platform. The equalization of returns for such goods 

relates to the elimination of opportunity costs. 

113The ‘‘Shapley Analysis’’ or ‘‘Shapley Models’’ 

are so called based on the work of Nobel Economics 

Prize winner, Dr. Lloyd S. Shapley. 

114The Judges will revisit the Shapley Analyses 

in evaluating factors B and C under section 

801(b)(1). 

mechanical rate for streaming. See 

COPFF ¶¶ 663–64 (and record citations 

therein). 

The Services and Apple offer 

insufficient evidence to overcome these 

criticisms of their ‘‘equivalence’’ 

approach to applying the subpart A 

rates in this proceeding. Accordingly, 

the Judges do not rely on these 

‘‘equivalence’’ approaches in this 

determination. 

By contrast, the Services’ second 

subpart A benchmarking approach, 

utilized by both Professor Marx and Dr. 

Leonard, is more straightforward; it does 

not require a conversion of downloads 

into stream-equivalents. Rather, under 

this approach, Professor Marx simply 

divides the effective per-unit download 

royalty of $.096 by the average retail 

price of a download, $1.10, to calculate 

an All-In musical works royalty percent 

of [REDACTED]%. Subtracting Spotify’s 

[REDACTED]% performance rate nets a 

mechanical works rate of [REDACTED]. 

In similar fashion, given an average CD 

price of $1.24 per song, she finds that 

the All-In musical works rate equals 

[REDACTED]%. Subtracting Spotify’s 

[REDACTED]% performance rate nets 

an ‘‘effective’’ mechanical royalty rate of 

[REDACTED]% under this approach. 

Thus, she concludes that the Services’ 

proposal in general, and Spotify’s 

proposal in particular, are conservative 

and reasonable, because those proposals 

provide for substantially higher royalty 

rates than suggested by this subpart A 

benchmark analysis. Marx WDT ¶¶ 113– 

114 & Fig. 23. 

Dr. Leonard did a similar calculation. 

He found that, applying the subpart A 

rates expressed as a percentage of 

revenue, interactive streaming services 

would pay an All-In rate to Copyright 

Owners of 8.7% of revenue, based on 

the average retail price of digital 

downloads in 2015. Leonard AWDT 

¶ 42. Dr. Leonard further calculated that, 

expressed as a percentage of payments 

to the record labels (rather than total 

downstream revenues) the subpart A 

settlement reflects a payment of 14.2% 

of sound recording royalties, when 

compared to payments to record labels 

in 2015. Leonard AWDT ¶ 46. 

Using updated 2016 data, which 

lowered the DPD retail price to $.99, Dr. 

Leonard calculated an ‘‘effective’’ 

percentage royalty rate of 9.6%. 3/15/17 

Tr. 1108–09 (Leonard). Dr. Leonard then 

adjusted this result to make it 

comparable to Google’s proposal, which 

seeks a reduction of up to 15% of 

certain costs incurred to acquire 

revenues. Adjusting for this cost 

reduction, Dr. Leonard concludes that 

the equivalent percent of revenue (after 

deducting similar costs) in subpart A 

was 10.2% in 2015 and 11.3% in 2016. 

Id. at 1109. 

Copyright Owners do not dispute the 

calculations made by Professor Marx 

and Dr. Leonard. However, their general 

criticisms of the overall concept of using 

subpart A as a benchmark, discussed 

and rejected below, are equally 

applicable to this second approach. 

The Judges find that the subpart A 

benchmark determined by this second 

approach is useful—not to establish the 

appropriate benchmark—but to 

incorporate into the development of a 

zone of reasonableness of royalty rates 

within the rate structure adopted by the 

Judges in this proceeding. The subpart 

A rates satisfy important criteria for a 

useful benchmark: The licensors are the 

same in the benchmark and target 

market; the rights licensed are the same 

in both markets; the time period of the 

rates in both markets is proximate; and 

the amount of revenue realized by the 

licensors in both markets is comparable. 

Additionally, the second approach is 

straightforward—simply converting a 

per unit price into a percent of revenue. 

Finally, the Judges take note of a point 

made by Professor Marx: Copyright 

Owners, like any seller/licensor, would 

rationally seek to equalize the rate of 

return from each distribution channel, 

i.e., from licensing rights to sell DPDs/ 

CDs under subpart A and from licensing 

interactive streaming services under 

subpart B. As she explains: 

This principle of equalizing rates of return 

across different platforms has some 

similarities with that underlying the 

approach of W. Baumol and G. Sidak, ‘‘The 

Pricing of Inputs Sold to Competitors,’’ . . . . 

They propose an efficient component pricing 

rule whose purpose is to ensure that the 

bottleneck owner (in our case, the copyright 

holder) should get compensation for access 

from all downstream market participants, 

whether existing or new entrants, that leaves 

him as well off as he would have been absent 

entry. 

Marx WDT ¶ 104, n.118. 

The Judges first identified this 

principle in Web IV, through a colloquy 

with an economic witness, and it 

remains persuasive in this proceeding. 

See Web IV, 81 FR at 26344 (Economic 

expert, Professor Daniel Rubinfeld, 

acknowledging as ‘‘a fundamental 

economic process of profit 

maximization . . . [licensors] would 

want to make sure that the marginal 

return that they could get in each sector 

would be equal, because if the marginal 

return was greater in the interactive 

space than the noninteractive . . . you 

would want to continue to pour 

resources, recordings in this case, into 

the [interactive] space until that 

marginal return was equivalent to the 

return in the noninteractive space.’’). 

Further, the Judges only recently 

credited this ‘‘efficient component 

pricing rule’’/opportunity cost approach 

in SDARS III.112

C. Rejection of Apple’s Proposed Rate 

Apple proposes an All-In per-unit rate 

of $0.00091 per play. However, that rate 

is premised on two analytical factors 

that the Judges have rejected in this 

proceeding. First, as a single, per-play 

rate, Apple’s proposal fails to reflect the 

variable WTP in the market, rendering 

it a less efficient upstream royalty rate. 

Second, Apple’s proposed $0.00091 perplay rate is derived from the subpart A 

conversion ratio approach that the 

Judges rejected in this proceeding. 

D. Deriving Royalty Rates From Shapley 

Analyses 

The Judges look to the Shapley 

analyses 113 utilized by the Professors 

Marx and Watt and, to a lesser extent, 

the ‘‘Shapley-inspired’’ analysis utilized 

by Professor Gans, as one means of 

deriving a reasonable royalty rate (or 

range of reasonable royalty rates).114

The Judges defined and described the 

Shapley value in a prior distribution 

proceeding: ‘‘[T]the Shapley value gives 

each player his ‘average marginal 

contribution to the players that precede 

him,’ where averages are taken with 

respect to all potential orders of the 

players.’’ Distribution of 1998 and 1999 

Cable Royalty Funds, 80 FR 13423, 

13429 (Docket No. 2008–1) (March 13, 

2015) (citing U. Rothblum, 

Combinatorial Representations of the 

Shapley Value Based on Average 

Relative Payoffs, in The Shapley Value: 

Essays in Honor of Lloyd S. Shapley 121 

(A. Roth ed. 1988)); see Expert Report of 

Joshua Gans, Trial Ex. 3028, ¶ 64 (Gans 

WDT) (‘‘The Shapley value approach 

. . . models bargaining processes in a 

free market by considering all the ways 

each party to a bargain would add value 

by agreeing to the bargain and then 

assigns to each party their average 

contribution to the cooperative 

bargain.’’); Marx WDT ¶ 144 (‘‘The idea 

of the Shapley value is that each party 

should pay according to its average 

contribution to cost or be paid according 

1948 Federal Register / Vol. 84, No. 24 / Tuesday, February 5, 2019 / Rules and Regulations 

115Unlike in public utility regulation, the 

Shapley Analysis considers the costs of all input 

providers whose returns will be determined. In 

traditional public utility rate regulation, the utility 

is a monopoly and thus the only provider of a 

regulated input. 

116Content costs, as opposed to non-content 

costs, are not deducted because the content costs 

comprise the surplus to be allocated in terms of 

royalties paid and residual (if any) that remains 

with the interactive streaming (and substitute) 

services. The non-content costs, as discussed infra, 

must be recovered by each input provider as part 

of its Shapley value, because entities must recover 

costs to the extent their share of revenues allows 

such recovery. 

117Professor Marx was limited to the Warner data 

for non-content costs because, among all major 

holders of musical works and sound recording 

copyrights, ‘‘only Warner . . . breaks down its cost 

by geographic region and by source in enough detail 

to estimate the amounts needed.’’ Marx WDT 

¶¶ 149–150. 

to its average contribution to value. It 

embodies a notion of fairness.’’); Written 

Rebuttal Testimony of Richard Watt, 

Trial Ex. 3034, ¶ 23 (Watt WRT) (‘‘The 

Shapley model is a game theory model 

that is ultimately designed to model the 

outcome in a hypothetical ‘fair’ market 

environment. It is closely aligned to 

bargaining models, when all bargainers 

are on an equal footing in the process.’’). 

1. Shapley Models 

A Shapley Analysis requires the 

economic modeler to identify 

downstream revenues available for 

division among the parties. The 

economic modeler must also input costs 

that each provider must recover out of 

downstream revenues, in order to 

identify the residue, i.e., the Shapley 

‘‘surplus,’’ available for division among 

the parties. A Shapley Model is costbased, similar to a public utility-style 

rate-setting process, which identifies a 

utility’s costs to be recovered before 

determining an appropriate rate of 

return.115 In the present case, Copyright 

Owners and the Services have applied 

this general approach in different ways, 

and each challenges the appropriateness 

of the other’s model. 

To summarize the differences in their 

approaches, Professor Marx utilizes a 

Shapley Model that purposely alters the 

actual market structure in order to 

obtain results that intentionally deviate 

from the market-based distribution of 

profits. She makes these alterations in 

her model to determine rates she 

identifies as reflecting a ‘‘fair’’ division 

of the surplus (Factor B) and 

recompense for the parties’ relative roles 

(Factor C). By contrast, Professor Watt’s 

‘‘correction’’ of Professor Marx’s model 

rejects her alteration of the market 

structure. Rather, he maintains that the 

incorporation of ‘‘all potential orders of 

the players’’ in her model (as in all 

Shapley Models) already eliminates the 

hold-out power of any input provider 

who might threaten to walk away from 

a transaction. 

Professor Gans, like Professor Watt, 

does not attempt to alter the market 

structure. However, Professor Gans 

concedes that he is not attempting to 

derive Shapley values from a ground–up 

analysis. Rather, Professor Gans takes as 

a given Dr. Eisenach’s estimation that 

record companies receive a royalty of 

$[REDACTED] per play from interactive 

streaming services. Since Professor Gans 

identifies musical works and sound 

recordings as perfect complements, he 

assumes that the musical works 

licensors would receive the same profit 

as the record companies (but not the 

same royalty rate, given their different 

costs). Because this is not a Shapley 

ground-up approach, which would 

require estimating the input costs of all 

three input providers—the record 

companies, the music publishers, and 

the interactive streaming services, 

Professor Gans candidly acknowledged 

on cross-examination that he did not 

perform a full-fledged Shapley Analysis. 

He describes his methodology as a 

‘‘Shapley-inspired’’ approach. 3/30/17 

Tr. 4109 (Gans). 

a. Professor Marx’s Shapley Analysis 

Professor Marx testified that, as an 

initial matter ‘‘[t]he Shapley value 

depends upon how [the modeler] 

delineate[s] the entities contributing to 

a particular outcome.’’ Marx WDT ¶ 145. 

More particularly, Professor Marx 

delineated the entities in a manner that 

she claimed to ‘‘adjust[ ] the model for 

monopoly power.’’ 3/20/17 Tr. 1862–63 

(Marx). She modeled the downstream 

interactive streaming services as a 

combined single service and added to 

her model other distribution types as 

another form of downstream 

distribution to account for the potential 

opportunity cost of interactive 

streaming. By modeling the downstream 

market in this manner, Professor Marx 

artificially, but intentionally, treated the 

Services as a single service, a device to 

countervail the allegedly real market 

power of the collectives (the music 

publishers and the record companies 

respectively) that owned the other 

inputs. Professor Marx concluded the 

publishers’ and record companies’ must 

be offset to establish a fair division of 

the surplus and a fair rate. See 3/20/17 

Tr. 1865, 1907 (Marx). 

With regard to the upstream market of 

copyright holders, Professor Marx 

utilized two separate approaches. In her 

self-described ‘‘baseline’’ approach, she 

‘‘treat[ed] rights holders as one 

upstream entity, reflecting the broad 

overlap in ownership between 

publishers and record labels.’’ Marx 

WDT ¶¶ 146, 162. In her ‘‘alternative’’ 

approach, she uncoupled the two 

collectivized copyright holders, 

grouping the songwriters/publishers, on 

the one hand, and the recording artists/ 

record companies, on the other. Id. The 

two purposes of her alternative 

approach were: (1) To separately 

allocate surplus and indicate rates for 

musical works (the subject of this 

proceeding); and (2) to illuminate the 

additional ‘‘bargaining power’’ of each 

category of copyright holder when these 

two categories of necessary 

complements arrive separately in the 

input market under the Shapley 

methodology. 3/20/17 Tr. 1883–84 

(Marx). 

i. Professor Marx’s Baseline Approach 

Professor Marx noted the undisputed 

principle that ‘‘[t]he calculation of the 

Shapley value depends on the total 

value created by all the entities together 

and the values created by each possible 

subset of entities.’’ Marx WDT ¶ 147. 

Equally undisputed is the 

understanding that ‘‘[t]hese values are 

functions of the associated revenue and 

costs.’’ Id. 

The surplus to be divided (from 

which rates can be derived) is realized 

at the downstream end of the 

distribution chain when revenues are 

received from retail consumers. That 

surplus can be measured as the profits 

of the downstream streaming services 

(and the alternative services in her 

model), i.e., their ‘‘revenue minus . . . 

non-content costs.’’ 116 The total 

combined value created by the delivery 

of the sound recordings through the 

interactive (and substitutional) 

streaming services consists of: (1) The 

aforementioned profits downstream 

(i.e., service revenue ¥ non-content 

cost) minus (2) ‘‘the copyright owners’ 

non-content costs. Simply put, 

‘‘surplus’’ reflects the amount of retail 

revenue that the input providers can 

split among themselves after their noncontent costs (i.e., the costs they do not 

simply pay to each other) have been 

recovered. 

In her Shapley Analysis, Professor 

Marx relied on 2015 data from Warner/ 

Chappell for her music publisher noncontent cost data and its ownershipaffiliated record company, Warner 

Music Group, for record company noncontent costs.117 Utilizing the Warner 

cost data and extrapolating to the entire 

industry, Professor Marx estimated that 

‘‘Musical Work Copyright Holders’ Total 

Non-Content Costs’’ equaled $424 

million; and ‘‘Sound Recording 

Copyright Holders’ Total non-content 

Federal Register / Vol. 84, No. 24 / Tuesday, February 5, 2019 / Rules and Regulations 1949 

118Because her baseline approach combines 

sound recording and musical works licensors into 

a single entity, Professor Marx does not break out 

separate royalties for musical works performances 

or mechanical licenses. However, she recommends 

that the mechanical rate should be lowered based 

on this finding. Professor Marx does specifically 

estimate the musical works rate under her 

Alternative approach. 

costs equaled $2.605 billion (more than 

six times musical works’ copyright 

holders’ non-content costs). Total 

licensors’ upstream non-content costs 

totaled $3.028 billion. Id. ¶ 150, Fig. 26. 

Turning to the downstream 

distribution outlets, Professor Marx 

identified and relied on Spotify’s 2015 

revenue and cost data from for 

interactive streaming services; for the 

alternative distribution modes, she 

relied on Pandora’s and Sirius XM’s 

revenue and cost data. Id. ¶ 152 & 

nn.149–52. Using that data, Professor 

Marx estimated interactive streaming 

revenue of $[REDACTED] billion; and 

(2) interactive streaming profit of 

$[REDACTED]. For the alternative 

distributors (Pandora and Sirius XM), 

she estimated (1) revenues of $8.514 

billion; and (2) profits of $3.576 billion. 

The total downstream revenue, 

according to Professor Marx, equaled an 

estimated $10.118 billion. Id. ¶ 153 & 

Fig. 27. 

Professor Marx noted some degree of 

substitution between interactive 

streaming services and alternative 

distribution channels (e.g., noninteractive internet radio and satellite 

radio). Id. ¶ 154. She opined that ‘‘it is 

difficult to determine the exact value of 

this substitution effect,’’ so she reported 

a range of Shapley value calculations 

that corresponded to ‘‘a range of 

possible substitution effects.’’ Id. 

These data were inputs into Professor 

Marx’s Shapley algorithm, i.e., assigning 

value to each input provider for each 

potential order of arrival among these 

categories of providers to the market. 

The multiple values were summed and 

averaged as required by the Shapley 

methodology to arrive at the ‘‘Shapley 

value,’’ which accounts for each entity’s 

revenues and (non-content) costs under 

each possible ordering of marketarrivals. 

Based on the foregoing, Professor 

Marx estimated that the total royalty 

payment due from the Services to 

Copyright Owners would range from 

$[REDACTED] million to $[REDACTED] 

million, depending on varying 

assumptions as to the substitution 

between interactive services and 

alternate delivery channels. This range 

of revenues reflected a ‘‘percent of 

revenue’’ paid by interactive streaming 

services to all copyright holders 

(musical works and sound recordings) 

ranging from [REDACTED]% to 

[REDACTED]%. Id. ¶¶ 159–160. 

Professor Marx then noted that this is 

well below the combined royalty rate of 

[REDACTED]% Spotify pays for musical 

works and sound recording rights, 

indicating that the actual combined 

royalty payments are clearly too high. 

Id. ¶ 161.118

ii. Professor Marx’s Alternative 

Approach 

Professor Marx also performed an 

‘‘alternative’’ Shapley Analysis in which 

she modeled the upstream market as two 

entities: ‘‘a representative copyright 

holder for musical works and a 

representative copyright holder for 

sound recordings.’’ Id. ¶ 163. In all other 

respects, Professor Marx’s methodology 

was the same as in her baseline 

approach. See id. ¶ 199, App. B. 

Under the alternative approach with 

two owners of collective copyrights 

upstream, interactive streaming 

services’ total royalty payments range 

from [REDACTED]% to [REDACTED]% 

of service revenue. Id. Sound recording 

copyright holders’ total royalty income 

under this alternative approach ranged 

from [REDACTED]% to [REDACTED]% 

of revenue. Id. Professor Marx explained 

that this higher range of combined 

royalties arose from the fact that 

splitting the copyright holders into two 

creates two ‘‘must-haves’’ providing 

each upstream entity with more ‘‘market 

power and consequently higher payoffs 

than the baseline calculation.’’ Id. ¶ 164, 

n.153. By splitting the upstream 

licensors into two categories (record 

companies and songwriters/publishers), 

Professor Marx calculated that ‘‘musical 

work copyright holders’ total royalty 

income as a percentage of revenue 

ranges from [REDACTED]% to 

[REDACTED]%.’’ Id. ¶ 163. By way of 

comparison, Spotify actually pays 

[REDACTED]% of its revenue for 

musical works royalties (i.e., All-In 

royalties). Accordingly, Professor Marx 

concludes that ‘‘[b]ecause this 

proceeding is about mechanical rates, 

the fairness component of 801(b) factors 

suggests that interactive streaming’s 

mechanical rates should be reduced 

from their current level.’’ Id. ¶ 161. 

iii. Copyright Owners’ Criticisms 

Copyright Owners criticize Professor 

Marx’s model for ‘‘failing to accurately 

reflect realities of the market, where 

current observed market rates for sound 

recording royalties alone are 

approximately 60% of service revenue. 

See Watt WRT ¶ 23; Written Rebuttal 

Testimony of Joshua Gans, Trial Ex. 

3035, ¶¶ 19, 28 (Gans WRT); see also 

COPFF ¶ 741. More technically, 

Copyright Owners object to Professor 

Marx’s joinder of the sound recording 

and musical works rights holders as a 

single upstream entity in her ‘‘baseline’’ 

model, claiming that combination had 

the undisputed effect of lowering 

Shapley values, and hence royalties, 

available to be divided between the two 

categories of rights holders. Gans WRT 

¶ 21; Watt WRT App. 3 at 2 (in real 

world, as opposed to stylized Shapleyworld, rights holders would not jointly 

negotiate with licensees); see also 

COPFF ¶ 742. Further, Professor Gans 

questions Professor Marx’s rationale for 

her joint negotiation assumption, viz., 

the overlapping ownership interests of 

record companies and music publishers. 

Gans WRT ¶ 21. 

The Judges find this criticism of 

Professor Marx’s baseline approach to 

be appropriate, in that it was not 

necessary to combine the two rights 

holders in a Shapley Analysis. As 

Professor Watt explained in his separate 

criticism, there is no need to collapse 

the rights holders into a single 

bargaining entity to eliminate holdout 

power by the respective rights holders, 

because the ‘‘heart and soul’’ of the 

Shapley Model is exclusion of the 

holdout value that any input supplier 

could exploit in an actual bargain. 3/27/ 

17 Tr. 3073 (Watt). He emphasized that, 

because the Shapley Model incorporates 

all possible ‘‘arrivals’’ of input 

suppliers, it eliminates from the 

valuation and allocation exercise the 

effect of an essential input supplier 

holding out every time or arriving 

simultaneously with another input 

supplier (or apparently creating Cournot 

Complement inefficiencies). Id. at 3069– 

70. 

However, the foregoing criticism does 

not pertain to Professor Marx’s second 

Shapley Model—her ‘‘Alternative’’ 

model—in which she maintains the two 

separate rights holders for musical 

works and sound recordings. Marx WDT 

¶ 146, n.153; 3/20/17 Tr. 1871–72 

(Marx). With regard to this Alternative 

model, Copyright Owners level a more 

general criticism of Professor Marx’s 

approach that does pertain to her 

Alternative model (as well as her 

Baseline model). They assert, through 

both Professors Gans and Watt, that 

Professor Marx wrongly distorted the 

actual market in yet another manner— 

by assuming the existence of only one 

interactive streaming service—rather 

than the presence of competing 

interactive streaming services. Watt 

WRT ¶¶ 25, 32 n.19, 17; Gans WRT 

¶¶ 55–56; see also COPFF ¶ 755. By this 

change, they argue, Professor Marx 

inflated the Shapley surplus attributable 

1950 Federal Register / Vol. 84, No. 24 / Tuesday, February 5, 2019 / Rules and Regulations 

119Although at first blush it would seem more 

appropriate for Professor Marx to have directly 

adjusted the copyright holders’ market power by 

breaking them up into several entities each with 

less bargaining power, such an approach would 

make Shapley modeling less tractable (by increasing 

the number of arrival alternatives in the algorithm), 

compared with the practicality of equalizing market 

power by inflating the power of the streaming 

services (by reducing them to a single 

representative agent). For example, in Professor 

Marx’s ‘‘alternative’’ Shapley Model, she models 

four entities, two upstream (musical works holders 

and sound recording holders), and two downstream 

(the representative single streaming service and a 

single alternate distribution outlet). With these four 

entities, the number of different arrival orders is 4! 

(factorial), or 24. If Professor Marx instead had 

broken the musical works copyright holders and the 

sound recording copyright holders respectively into 

two entities, the number of total entities would 

have increased from 4 to 6. The number of arrival 

orders would then have increased from 24 to 720. 

120See infra, section VI.B. Although the Judges 

find a market power adjustment relevant in a 

section 801(b)(1) Factor B and C analysis, it is not 

a consideration when determining a rate that 

reflects ‘‘effective competition.’’ An effectively 

competitive rate need not adjust for market power 

because such a rate does not include consideration 

of these two factors or their public utility style 

legislative history antecedents. 

121TCC percentage is the reciprocal of the sound 

recording to musical work royalty ratio, expressed 

as a percentage. Thus, 1/[redacted] = [redacted] 

(rounded) or [REDACTED]%. 

122Modeling the market as having two upstream 

suppliers of complementary inputs (i.e., a musical 

works copyright owner and a sound recordings 

copyright owner) produces the result that Professor 

Gans assumed in his analysis: The upstream 

suppliers reap equal profits, though their royalties 

differ due to differences in their cost structures. 

Professors Marx, in her ‘‘alternative approach,’’ and 

Watt, in his ‘‘Shapley Model with 3 Streaming 

Services, models the market in this way. Marx WDT 

¶ 201 (Figure 33 in Appendix B) (fifth column 

shows identical Shapley values for both upstream 

to the interactive streaming services 

compared to the actual proportion they 

would receive in the market. 

According to Professor Gans, this 

simplified assumption belies the fact 

that the market is replete with many 

substitutable interactive streaming 

services, whose competition inter se 

reduces each service’s bargaining 

power. The problem, he opines, is that 

to the extent the entities being 

combined are substitutes for one 

another–such as alternative music 

services–then combining them ignores 

the effects of competition between them, 

thereby inflating their combined share 

of surplus from the joint enterprise (i.e. 

their Shapley value). Gans WRT ¶ 21. 

Professor Marx does not deny that she 

intentionally elevated the market power 

of the services by combining them in the 

model as a single agent. However, she 

explained that she made this adjustment 

to offset the concentrated market power 

that the rightsholders possess, separate 

and apart from any holdout power, 

which the Shapley ordering algorithm 

would address. Thus, Professor Marx 

explained that her alteration of market 

power apparently was designed to 

address an issue—market power—that 

the Shapley Analysis does not address. 

3/20/17 Tr. 1863 (Marx) (‘‘I want a 

model that represents a fair outcome in 

the absence of market power, so I am 

going to have to be careful about how 

I construct the model that I am not 

putting in market power into the 

model.’’).119

Professor Gans testified that Professor 

Marx’s approach was erroneous because 

Shapley values are meant to incorporate 

market power asymmetries, not to 

eliminate them. Gans WRT ¶ 31 

(Shapley values incorporate market 

power asymmetries). However, the 

Judges note that Professor Gans 

acknowledged that in an Australian 

legal proceeding, he too combined 

multiple downstream entities into a 

single entity in his Shapley Model in 

‘‘comparison’’ to two upstream rights 

holders. 3/30/17 Tr. 4179 (Gans). 

Additionally, Professor Watt has 

authored and published an article (cited 

at Gans WDT ¶ 65, n.36) in which he too 

‘‘artificially’’ equalized market power 

between rights holders and licenses 

(radio stations) in the same manner. See 

R. Watt, Fair Copyright Remuneration: 

The Case of Music Radio, 7, 25, 35 

(2010) 7 Rev. of Econ. Res. on Copyright 

Issues 21, 25, 35 (2010) (‘‘artificially’’ 

modeling the ‘‘demand side of the 

market as a single unit, rather than 

individual radio stations . . . thereby 

. . . add[ing] (notionally) monopsony 

power to the demand side’’ to offset the 

monopoly power of the input supplier). 

In essence, the import of this criticism 

is not the faithfulness of Professor 

Marx’s testimony to the Shapley Model; 

rather, it pertains to her decision to 

include an adjustment for market power 

asymmetry that seeks to equalize market 

power as between Copyright Owners 

and the streaming services. Her 

adjustment is consistent with testimony 

by Professor Katz, who cautioned that a 

Shapley Analysis takes the parties’ 

market power as a given, locking-in 

whatever disparities exist. 4/15/15 Tr. 

4992–93 (Katz). 

The Judges agree with Professor Watt 

and find that the Shapley Analysis, 

taking the number of sellers in the 

market as a given, eliminates the ‘‘holdout’’ problem that would otherwise 

cause a rate to be unreasonable, in that 

it would fail to reflect effective (or 

workable) competition. However, 

Professor Marx’s Shapley Model also 

attempts to eliminate a separate factor— 

market power—that she asserts renders 

a market-based Shapley Analysis 

incompatible with the objectives of 

Factors B and C of section 801(b)(1). The 

Judges will consider the appropriateness 

of Professor Marx’s adjustment for 

market power in their discussion of 

these two factors.120 For purposes of 

deriving a reasonable (and effectively 

competitive) rate prior to application of 

the 801(b)(1) factors, it is sufficient to 

note that Professor Marx’s adjustment is 

not inconsistent with the traditional 

Shapley Analysis (as both Professors 

Watt and Gans have acknowledged in 

their work outside of this proceeding), 

and does not disqualify her Shapley 

value analysis from further 

consideration. 

Professor Marx’s alternative approach 

yielded a musical works royalty rate of 

between [REDACTED]% and 

[REDACTED]% of service revenue. 

3/20/17 Tr. 1885 (Marx). In that 

alternative model, Professor Marx found 

that Spotify’s total royalties for musical 

works and sound recordings combined 

would range from [REDACTED]% to 

[REDACTED]% of total revenue, 

meaning that payments for sound 

recording rights would be 

approximately [REDACTED]% to 

[REDACTED]% of total revenue. Id. The 

ratio of sound recording royalties to 

musical works royalties under Professor 

Marx’s model is no lower than 

[REDACTED]% to [REDACTED]%, or 

[REDACTED]:1. Stated as a percentage 

of sound recording royalties (i.e., TCC), 

musical works royalties would thus be 

[REDACTED]%.121

b. Professor Gans’s ‘‘Shapley-Inspired 

Approach’’ 

On behalf of Copyright Owners, 

Professor Gans presented a model that 

he described as ‘‘inspired’’ by the 

Shapley approach, but not per se a 

Shapley Analysis. 3/30/17 Tr. 4109 

(Gans). At a high level, his Shapleyinspired approach attempted to 

determine the ratio of sound recording 

royalties to musical works royalties that 

would prevail in an unconstrained 

market. After calculating that ratio, he 

estimated what publisher mechanical 

royalty rates would be in a market 

without compulsory licensing by 

multiplying the benchmark sound 

recording rates by this ratio. Gans WDT 

¶ 63. 

Professor Gans began his analysis 

with two critical assumptions: (1) 

Publishers and record companies must 

have equal Shapley values (i.e., must 

recover equal profits from total surplus), 

because musical compositions and 

sound recording performances are 

perfect complements and essential 

components of the streamed 

performance; 122 and (2) record 

Federal Register / Vol. 84, No. 24 / Tuesday, February 5, 2019 / Rules and Regulations 1951 

providers); Trial Ex. 2619, at 8 (Appendix 3 to Watt 

WRT) (‘‘Since there are only two players in this 

game, and each would have veto rights over the 

business, the net surplus would be shared equally 

between them.’’). 

123 [redacted] × 0.81 = 0.0025 (rounded). 

124Professor Gans multiplies the per play rate by 

81% but the per user rate by 80%. Compare Gans 

WDT ¶ 78 with Gans WDT ¶ 85. The rate derived 

by Professor Gans was the 80% figure. Gans WDT 

¶ 77, Table 3, line 17. This discrepancy has no 

impact on the relevance of his analysis. 

125 [REDACTED] (rounded). 

126 [REDACTED] (rounded). 

127At present, record companies receive 

approximately 60% of total interactive streaming 

revenue, substantially higher than the 

[REDACTED]% calculated by Professor Watt. He 

explains that the reason for this difference is clear; 

the mechanical rate is artificially depressed by 

regulation, allowing the sound recording rate (set in 

an unregulated market) to appropriate a larger share 

of the royalties, given the perfect complementarity 

of the two rights. Watt WRT ¶ 36. 

company profits from interactive 

streaming services are used as 

benchmark Shapley values. Gans WDT 

¶ 77. The royalties that result from 

Professor Gans’s analysis will differ, 

given the different level of costs 

incurred by music publishers and 

record companies respectively. See 

Gans WDT ¶¶ 23, 71, 74, 76; Gans WRT 

¶¶ 15–17; see also 3/30/17 Tr. 3989 

(Gans). 

Echoing Dr. Eisenach, Professor Gans 

found these assumptions critical 

because agreements between record 

companies and interactive streaming 

services are freely negotiated, i.e., they 

are not set by any regulatory body or 

formally subject to an ongoing judicial 

consent decree and, accordingly, are 

also not subject to any regulatory or 

judicial ‘‘shadow’’ that arguably might 

be cast from such governmental 

regulation in the market. Accordingly, 

Professor Gans uses the profits arising 

from these unregulated market 

transactions to estimate what the 

mechanical rate for publishers would be 

if they too were also able to freely 

negotiate the rates for the licensing of 

their works. See Gans WDT ¶ 75. 

Professor Gans utilized data from 

projections in a Goldman Sachs analysis 

to identify the aggregate profits of the 

record companies and the music 

publishers, respectively. See 3/30/17 Tr. 

4017 (Gans). Given his assumption that 

sound recordings and musical works 

were both ‘‘essential’’ inputs and thus 

able to claim an equal share of the 

profits, Professor Gans posed the 

question: ‘‘[H]ow much revenue do we 

need to hand to the publishers so that 

they end up earning the same profits as 

the labels? Id. at 4018. 

He found that, for the music 

publishers to recover their costs and 

achieve profits commensurate with 

those of the record companies under his 

approach, the ratio of sound recording 

royalties to musical works royalties 

derived from his Shapley-inspired 

analysis was 2.5:1 (which attributes 

equal profits to both classes of rights 

holders and acknowledges the higher 

costs incurred by record companies 

compared to music publishers). See 

Gans WDT ¶ 77, Table 3. 

As noted, Professor Gans made a key 

assumption, treating as accurate Dr. 

Eisenach’s calculation of an effective 

per play rate for sound recordings of 

$[REDACTED]. Given those two inputs 

(the 2.5:1 ratio and the $[REDACTED] 

per play rate) Professor Gans’s approach 

indicated a market-derived musical 

works per play royalty rate of 

$[REDACTED] (rounded). Id. ¶ 78, Table 

3. However, because the musical works 

royalty is comprised of the mechanical 

rate and the performance rate paid to 

PROs (not to publishers), Professor Gans 

had to subtract the performance rate. He 

determined that the percent of revenues 

attributable to mechanical royalties was 

81% of the total musical works 

royalties, under his approach. Thus, he 

estimated a mechanical royalty rate of 

$[REDACTED].123 well above the 

Copyright Owners’ proposed $0.0015 

statutory per play rate, and thus 

confirming the reasonableness of the 

Copyright Owners’ proposal. Id. ¶ 78. 

On this basis, Professor Gans also 

concluded that his Shapley-inspired 

approach supports the Copyright 

Owners’ per-user rate proposal. 

Applying the Shapley -based ratio of 

2.5:1 to the benchmark per-user rate 

negotiated by the labels of 

$[REDACTED] per user per month, and 

after subtracting the value of the 

performance rights royalty, Professor 

Gans obtains an equivalent publisher 

mechanical rate of $[REDACTED] 

(rounded) per user per month (i.e., 

($[REDACTED]/2.5) × 80%124). Id. ¶ 85. 

The Judges do not accept the rates 

derived by Professor Gans’s Shapleyinspired model, because of its 

assumption and use of the 

$[REDACTED] per play sound recording 

interactive rate. Dr. Eisenach’s 

$[REDACTED] per play sound recording 

rate is not supported by the weight of 

the evidence. Moreover, the record 

company profits are inflated by the 

inefficient rates created through the 

Cournot Complements problem that 

affects the agreements between record 

companies and streaming services, as 

noted by the Services’ experts in this 

proceeding, and as the Judges noted in 

Web IV. 

However, the Judges find the ratio of 

sound recording to musical work 

royalties that Professor Gans derived 

from his analysis to be informative. 

Professor Gans computed this ratio 

based on an assumption of equal 

Shapley values between musical works 

and sound recording copyright owners. 

The Judges find this assumption to be 

reasonable and confirmed by Professor 

Marx’s Shapley Analysis. The Judges 

also find Professor Gans’s reliance on 

financial analysts’ projections for the 

respective industries to be reasonable. 

Expressed as a percentage of sound 

recording royalties, Professor Gans’s 

2.5:1 sound recordings to musical works 

royalty ratio yields a musical works 

royalty rate of 40% of TCC. 

c. Professor Watt’s Shapley Analysis 

As a rebuttal witness, Professor Watt 

testified regarding purported defects in 

Professor Marx’s Shapley Model. In 

addition, he presented alternative 

modeling intended to apply an adjusted 

version of Professor Marx’s Shapley 

Model. 

Professor Watt found that Professor 

Marx’s approaches contained several 

flaws and methodological issues. See 

3/27/17 Tr. 3057 (Watt). Accordingly, 

he, like Professor Gans, attempted to 

adjust her modeling in a manner that, in 

his opinion, generated ‘‘decent, 

believable results.’’ Id. at 3058. 

In his Shapley Model adjusting 

Professor Marx’s analysis, Professor 

Watt found that at least [REDACTED]% 

of interactive streaming revenue should 

be allocated to the rights holders (as 

distinguished from a range of 

[REDACTED]% to [REDACTED]% of 

total revenues going to rights holders 

under Professor Marx’s analysis). Of this 

[REDACTED]%, [REDACTED]% should 

be retained by the musical works 

copyright holders and [REDACTED]% 

should be allocated to record 

companies. Expressed as percentages of 

revenue, musical works copyright 

owners would receive 

[REDACTED]%125 of total interactive 

streaming revenue while record 

companies would receive 

[REDACTED]%.126 See Watt WRT ¶ 35; 

3/27/17 Tr. 3083, 3115–16 (Watt).127

The ratio of sound recording to musical 

works royalties under Professor Watt’s 

analysis is thus [REDACTED]% to 

[REDACTED]%, or [REDACTED]:1. 

Expressed as a percentage of sound 

recording royalties, musical works 

royalties would be [REDACTED]%. 

2. Deriving a Royalty Rate 

Professors Marx, Gans, and Watt 

reached conclusions that were broadly 

consistent insofar as they all found that 

the ratio of sound recording to musical 

1952 Federal Register / Vol. 84, No. 24 / Tuesday, February 5, 2019 / Rules and Regulations 

128TCC percentage is the reciprocal of the sound 

recording to musical work royalty ratio, expressed 

as a percentage. 129Professor Watt identified [REDACTED]%—the 

arithmetic mean of these two numbers—as his 

preferred figure. 130The royalty rate is computed using the 

formula Rmw = Rt ÷ (1 + r) where Rmw is the musical 

work royalty rate, Rt is the combined royalty rate 

for musical works and sound recordings, and r is 

the ratio of sound recording to musical work 

royalties. 

131The royalty rate is computed using the 

formula Rsr = Rt ÷ (1 + 1/r) where Rsr is the musical 

work royalty rate, Rt is the combined royalty rate 

for musical works and sound recordings, and r is 

the ratio of sound recording to musical work 

royalties. 

132More specifically, Professor Watt calculates 

that, for each dollar that the statutory rate holds 

down fair market musical works royalties, 

[REDACTED] cents is captured by the record 

companies (and [REDACTED] cents is captured by 

the streaming services). Watt WRT ¶ 23, n.13 & 

App. 3. 

works royalty rates should decline. The 

following table summarizes these 

experts ratios, expressed both as ratios 

and percentages, and includes for 

comparison the actual ratio of sound 

recording to musical works royalties 

paid by Spotify, as well as the ratio 

implied by the prevailing headline 

percent of revenue rates for musical 

works and sound recordings. 

SOUND RECORDING TO MUSICAL WORKS RATIOS AND TCC PERCENTAGES

Scenario Ratio TCC percentage 128

Watt Shapley Analysis ................................................................................................... [REDACTED]:1 ................... [REDACTED] 

Gans Shapley-inspired Analysis .................................................................................... [REDACTED]:1 ................... [REDACTED] 

Marx Shapley Analysis .................................................................................................. [REDACTED]:1 ................... [REDACTED] 

Spotify Actual ................................................................................................................. [REDACTED]:1 ................... [REDACTED] 

Headline Percent of Revenue Rates ............................................................................. 5.71:1 ................................. 17.5 

All of the experts’ ratios are well 

below the current ratio of approximately 

[REDACTED]:1 for Spotify, and 

approximately 5.71:1 comparing the 

10.5% headline rate to an average sound 

recording rate of approximately 60% of 

revenue. Accordingly, under their 

respective Shapley Models, Professors 

Marx, Gans, and Watt appear to be in 

general agreement that the ratio of 

sound recording to musical works 

royalties should decline. 

Both Professor Marx’s and Professor 

Watt’s models show lower combined 

royalties being paid by services than are 

currently paid in the marketplace. 

Professor Marx’s model produces 

combined royalties of between 

[REDACTED]% and [REDACTED]% of 

service revenue, while Professor Watt’s 

model produces combined royalties of 

between [REDACTED]% and 

[REDACTED]%.129 Even the highest of 

these values is less than [REDACTED]. 

The discrepancy in total royalties 

between the models and the real world 

is explained, in part, by the absence of 

supranormal complementary oligopoly 

profits in the Shapley Model, and the 

presence of those profits in the actual 

market. In addition, the total royalties 

paid in Professor Marx’s model are 

lowered still further by her decision to 

equalize bargaining power between the 

content providers and services by 

modeling the services as a single entity. 

Even with lower combined royalties, 

the models also show musical works 

royalties at or above the prevailing 

headline rate of 10.5%. Mathematically 

that is possible only because the models 

also yield lower royalties for sound 

recordings at all levels of total royalties. 

The following tables show the 

percentage revenue royalty rates for 

musical works and sound recordings 

that are produced by applying the 

experts’ ratios to the different levels of 

total royalties. The final column shows 

the rates yielded by applying the ratios 

to Spotify’s total royalty obligation of 

[REDACTED]%. 

IMPLIED MUSICAL WORK ROYALTY (% OF REVENUE) BASED ON RATIO AND TOTAL ROYALTIES 130

Expert Ratio TCC 

% 

[REDACTED] 

% 

[REDACTED] 

% 

[REDACTED] 

% 

[REDACTED] 

% 

[REDACTED] 

% 

[REDACTED] 

% 

Watt ................................................... [REDACTED] [REDACTED] [REDACTED] [REDACTED] [REDACTED] [REDACTED] [REDACTED] [REDACTED] 

Gans .................................................. [REDACTED] [REDACTED] [REDACTED] [REDACTED] [REDACTED] [REDACTED] [REDACTED] [REDACTED] 

Marx .................................................. [REDACTED] [REDACTED] [REDACTED] [REDACTED] [REDACTED] [REDACTED] [REDACTED] [REDACTED] 

IMPLIED SOUND RECORDING ROYALTY (% OF REVENUE) BASED ON RATIO AND TOTAL ROYALTIES 131

Expert Ratio TCC 

% 

[REDACTED] 

% 

[REDACTED] 

% 

[REDACTED] 

% 

[REDACTED] 

% 

[REDACTED] 

% 

[REDACTED] 

% 

Watt ................................................... [REDACTED] [REDACTED] [REDACTED] [REDACTED] [REDACTED] [REDACTED] [REDACTED] [REDACTED] 

Gans .................................................. [REDACTED] [REDACTED] [REDACTED] [REDACTED] [REDACTED] [REDACTED] [REDACTED] [REDACTED] 

Marx .................................................. [REDACTED] [REDACTED] [REDACTED] [REDACTED] [REDACTED] [REDACTED] [REDACTED] [REDACTED] 

Professor Watt explains the 

discrepancy between the sound 

recording royalty rates yielded by the 

Shapley Analysis and the higher rates 

that exist in the market: 

[The reason] my predicted fraction of 

revenues for sound recording royalties is 

significantly less than what is observed in the 

market [is] simple. The statutory rate for 

mechanical royalties in the United States is 

significantly below the predicted fair rate, 

and the statutory rate effectively removes the 

musical works rightsholders from the 

bargaining table with the services. Since this 

leaves the sound recording rightsholders as 

the only remaining essential input, 

bargaining theory tells us that they will 

successfully obtain most of the available 

surplus. 

Watt WRT ¶ 36.132

Applying the ratios derived from the 

experts’ models to the higher total 

royalties that prevail in the marketplace 

would yield musical works royalty rates 

higher than the models predict. For 

example, based on Professor Marx’s 

lowest estimate of overall royalties of 

[REDACTED]%, her [REDACTED]:1 

Federal Register / Vol. 84, No. 24 / Tuesday, February 5, 2019 / Rules and Regulations 1953 

133 [REDACTED] (rounded). 134 [REDACTED] 135The target TCC rate is computed using the 

formula TCC = 1 ÷ ((Rt/Rmw)¥1), where Rt is the 

combined royalty rate in the marketplace 

([REDACTED]%), and Rmw is the musical work 

royalty rate yielded by the Shapley value analysis. 136The evidence in Web IV revealed that the 

record companies’ strategy has been to 

‘‘[REDACTED].’’ Web IV (restricted version) at 63. 

137 Judge Strickler expresses concern that an 

increase in the mechanical rate might prompt the 

record companies to create (or acquire) their own 

streaming services, rather than accept a lower 

royalty rate from the existing Services. It is wellestablished that it is not the Judges’ role to protect 

the current players in the industry. Companies— 

even major players in the industry—enter and exit 

the market regularly. That market fluidity is not the 

sort of disruption the Judges consider under the 

fourth 801(b)(1) factor. 

138The Judges note that Professor Watt’s insight 

applies not only to a Shapley-derived TCC rate, but 

to any rate structure that results in an increase in 

what services pay for musical works. Bargaining 

theory instructs that the services and the record 

companies will take into account any increase in 

the statutory royalties that the services must pay. 

ratio (or [REDACTED]% TCC 

percentage) would yield percent-ofrevenue rates for musical works of 

[REDACTED]%.133 Using Spotify as an 

example, however, actual combined 

royalties for musical works and sound 

recordings are approximately 

[REDACTED]% of revenue. That same 

[REDACTED]:1 ratio would yield a 

percent-of-revenue rate for musical 

works of [REDACTED]%.134 or nearly 

[REDACTED] percentage points higher 

than the model. 

This is problematic because the sound 

recording rate against which the TCC 

rate would be applied is inflated both by 

the existence of complementary 

oligopoly conditions in the market for 

sound recordings and what Professor 

Watt describes as the record companies’ 

ability to obtain most of the available 

surplus due to the music publishers’ 

absence from the bargaining table. In 

order to derive usable TCC rates from 

the Shapley Analyses the Judges must 

address these two issues. 

The Judges find that the problem of, 

in essence, importing complementary 

oligopoly profits into the musical works 

rate through a TCC percentage can be 

avoided by reducing the TCC 

percentage. Specifically, the TCC 

percentage should be reduced to a level 

that produces the same (noncomplementary-oligopoly) percentage 

revenue rate when applied to the 

existing [REDACTED]% combined 

royalty as the Shapley-produced TCC 

percentage yields when applied to the 

theoretical combined royalties in the 

model. For example, Professor Watt’s 

Shapley Analysis produces a 

[REDACTED]:1 sound recording to 

musical work ratio, or a [REDACTED]% 

TCC percentage. At his preferred 

combined royalty rate of 

[REDACTED]%, the implied musical 

works rate is [REDACTED]% of revenue. 

The TCC rate that produces the same 

[REDACTED]% of revenue rate under 

existing conditions would be 

[REDACTED]%.135 These adjusted TCC 

rates are summarized in the following 

table. 

Expert TCC from model 

Adjusted TCC 

using [REDACTED]% combined royalties 

Adjusted TCC 

using [REDACTED]% combined royalties 

Adjusted TCC 

using [REDACTED]% combined royalties 

Adjusted TCC 

using [REDACTED]% combined royalties 

Adjusted TCC 

using [REDACTED]% combined royalties 

Watt ....................................................... [REDACTED]% [REDACTED]% [REDACTED]% [REDACTED]% [REDACTED]% [REDACTED]% 

Gans ...................................................... [REDACTED]% [REDACTED]% [REDACTED]% [REDACTED]% [REDACTED]% [REDACTED]% 

Marx ...................................................... [REDACTED]% [REDACTED]% [REDACTED]% [REDACTED]% [REDACTED]% [REDACTED]% 

As to the issue of applying a TCC 

percentage to a sound recording royalty 

rate that is artificially high as a result of 

musical works rates being held 

artificially low through regulation, the 

Judges rely on Professor Watt’s insight 

(demonstrated by his bargaining model) 

that sound recording royalty rates in the 

unregulated market will decline in 

response to an increase in the 

compulsory license rate for musical 

works. 

[T]he reason why the sound recording rate 

is so very high is because the statutory rate 

is very low. And if you increase the statutory 

rate, the bargained sound recording rate will 

go down. 

3/27/17 Tr. 3090 (Watt). Professor 

Watt’s bargaining model predicts that 

the total of musical works and sound 

recordings royalties would stay ‘‘almost 

the same’’ in response to an increase in 

the statutory royalty. Id. at 3091. 

As must-have suppliers in an 

unregulated market, record companies 

are in a position to walk away from 

negotiations with the Services and, 

effectively, put them out of business. 

That they have not done so 

demonstrates that it is not in their 

economic interest to do so.136 The 

decline in sales of physical copies and 

permanent digital downloads, along 

with the growth of streaming, is a 

powerful economic motivation for 

record companies to pursue deals with 

the Services that ensure the continued 

survival and growth of the music 

streaming industry. In negotiating those 

deals both sides will be cognizant of the 

effect on the Services’ content cost of a 

decision by this body. 

In his separate opinion, Judge 

Strickler expresses concern that ‘‘if 

mechanical royalty rates were to 

increase to a level that significantly 

reduced the profits of the record 

companies from streaming, there is no 

evidence in the record in this 

proceeding that indicates whether the 

record companies would decide to 

maintain the current vertical structure 

of the market and docilely accept such 

a revenue loss.’’ 137 The Judges 

acknowledge the concern articulated by 

Judge Strickler, but note that it applies 

potentially to any rate increase for 

musical works that reduces record 

company streaming profits.138 Just as 

the Judges have noted that there is no 

evidence to suggest that the current 

level of short-term losses is the 

maximum that the Services can absorb 

in their Shumpeterian competition for 

market share, they note that there is no 

basis to assume that record companies 

will head for the exits if their profits 

from streaming drop below current 

levels. At bottom, this concern goes not 

to the decision whether or not to 

increase the mechanical rate, or to adopt 

a particular rate structure, but to the 

magnitude of any rate increase, and 

measures that should be taken to reduce 

any disruption the increase might cause 

to the industry. The Judges take both 

concerns into account in this 

Determination. 

The foregoing exercise produced a 

broad range of potential rates: TCC rates 

ranging from [REDACTED]% to 

[REDACTED]%, which correspond to 

implied percent of revenue rates from 

[REDACTED]% to [REDACTED]%. The 

Judges narrow that range by reference to 

the strength of the evidence supporting 

the numbers underlying those rates. 

Professor Watt testified that the data 

Professor Marx used in her Shapley 

model was derived from 2015 Spotify 

financials and, as a result, understated 

current downstream revenue. Watt WRT 

¶¶ 37, 43–44. In addition, Professor 

Marx included a number of items as 

downstream costs that, in Professor 

Watt’s view, should be excluded from 

1954 Federal Register / Vol. 84, No. 24 / Tuesday, February 5, 2019 / Rules and Regulations 

139By contrast, Professor Marx had ample 

opportunity to critique Professor Gans’s report. See 

Marx WRT ¶¶ 73–75. Her criticism focuses on his 

decision not to use the Shapley model to determine 

the division of surplus between the downstream 

services and the upstream copyright owners. Id. 

¶ 74. She does not challenge the specific ratio of 

sound recording to musical works royalties that he 

derives from his model and that the Judges use 

here. 

140When it issued an interim rule, the Copyright 

Office concluded that in a determination turning 

upon a conclusion of ‘‘when a DPD is an incidental 

DPD,’’ the Judges should make that determination 

‘‘in the context of a factual inquiry . . . if such a 

determination proves to be relevant.’’ 73 FR 66173, 

66179 (Nov. 7, 2008). 

141The Register noted that the regulation the 

Judges adopted as part of a settlement among the 

parties ‘‘overstates the scope of the section 115 

license with respect to interactive streams.’’ 74 FR 

at 4539. By way of clarification, the Register noted 

that ‘‘an interactive stream that delivers a 

reproduction of a sound recording that qualifies as 

a DPD is, for purposes of the license, an incidental 

DPD.’’ Id. (‘‘a stream—whether interactive or noninteractive—may or may not result in a DPD 

depending on whether all the aforementioned 

criteria are met.’’). 

the model. Id. ¶¶ 57–59. The net effect 

of understating downstream revenue 

and overstating downstream costs is to 

drive down the amount of surplus 

allocated to the upstream content 

providers. Id. ¶ 42. Although Professor 

Marx addressed the reasons for her 

decision to use 2015 cost and revenue 

data in her model, she did not address 

the effect that her choice had on 

allocation of surplus, or attempt in any 

way to correct for it. See 3/20/17 Tr. 

1880–81, 1906–08 (Marx). The Judges 

find that the total royalty values 

produced by Professor Marx’s models 

understate what would be a fair 

allocation of surplus to the upstream 

content providers. Consequently, the 

Judges view Professor Marx’s top value 

for total royalties ([REDACTED]%) to 

constitute a lower bound for total 

royalties in computing a royalty rate. 

As Professor Watt’s total royalty 

figures were presented as rebuttal 

testimony, Professor Marx, on behalf of 

the services, did not have an 

opportunity to rebut them. The Judges 

give them weight only to the extent of 

viewing his lowest figure 

([REDACTED]%) as an upper bound for 

total royalties in computing a royalty 

rate. 

In a similar vein, Professor Marx did 

not have an opportunity to rebut 

Professor Watt’s [REDACTED]:1 sound 

recording to musical work royalty ratio. 

Professor Watt derived that ratio using 

data from Professor Marx’s model, yet 

produced vastly different results. See 

Trial Ex. 2619, at 9 (Appendix 3 to Watt 

WRT). The reason for this disparity in 

outcome was not adequately explored or 

explained. The Judges give Professor 

Watt’s [REDACTED]:1 ratio no 

weight.139

The Judges are left with the following 

potential royalty rates. 

Expert TCC from model 

Adjusted TCC 

using [REDACTED]% combined royalties 

Implied percent of 

revenue rate using 

[REDACTED]% 

Adjusted TCC 

using [REDACTED]% combined royalties 

Implied percent of 

revenue rate using 

[REDACTED]% 

Gans ........................................................................................ [REDACTED]% [REDACTED]% [REDACTED]% [REDACTED]% [REDACTED]% 

Marx ........................................................................................ [REDACTED]% [REDACTED]% [REDACTED]% [REDACTED]% [REDACTED]% 

The Judges find, therefore, that the 

zone of reasonable rates ranges from 

[REDACTED]% to [REDACTED]% of 

TCC, or, expressed as equivalent percent 

of revenue rates, [REDACTED]% to 

[REDACTED]%. Taking into 

consideration the totality of the 

evidence presented in this proceeding, 

the Judges select [REDACTED]% of 

TCC/[REDACTED]% of revenue as the 

most appropriate rate within that zone 

of reasonableness. 

E. Other Royalty Rates 

1. Royalty Rate for Incidental Digital 

Phonorecord Deliveries 

The Act requires the Judges in setting 

phonorecord mechanical license royalty 

rates and terms to distinguish between 

(i) digital phonorecord deliveries where 

the reproduction or distribution of a 

phonorecord is incidental to the 

transmission which constitutes the 

digital phonorecord delivery, and (ii) 

digital phonorecord deliveries in 

general. 17 U.S.C. 115(c)(3)(C), (D). The 

extant regulations do not mention 

incidental DPDs, but provide that a 

limited download is ‘‘a general digital 

phonorecord delivery under 17 U.S.C. 

115(c)(3)(C) and (D).’’ 37 CFR 385.11 

(and incorporated into § 385.21). It 

appears the parties’ 2012 Settlement 

terms failed to make the distinction the 

statute requires of the Judges. 

Legislative history leading up to the 

enactment of the Digital Performance 

Right in Sound Recording Act of 1995 

describes incidental DPDs as the 

transmission of copies that are made 

solely to facilitate streaming, i.e., via a 

transmission system ‘‘designed to allow 

transmission recipients to hear sound 

recordings substantially at the time of 

transmission.’’ See S. Rep. No. 104–138, 

at 39 (1995). If the recipient does not 

retain those copies for subsequent 

playback, then the copies are considered 

‘‘incidental deliveries.’’ Id. Copies 

retained for subsequent playback, 

whether ‘‘limited’’ or ‘‘permanent’’ fall 

into the category of ‘‘general 

phonorecord delivery.’’ Id. Further, if a 

transmission system supports retention 

of digital phonorecords for subsequent 

playback, but the transmission recipient 

chooses not to do so, then the initial 

delivery could be consider incidental. 

Id. 

The Copyright Office explored the 

question of identifying incidental DPDs 

in an extended rulemaking 

proceeding.140 During the study of the 

issue, Services identified potentially 

incidental copies at the service offering 

level (variously called ‘‘server-, root-, 

encoded-, or cached-’’ copies) as well as 

at the end user level (often called 

‘‘buffer’’ copies). The question, 

however, remained unresolved. In 

Phonorecords I, the Judges adopted the 

2008 Settlement which included ‘‘an 

incidental digital phonorecord delivery’’ 

in the definition of ‘‘Interactive 

Stream.’’ 74 FR at 4529. After a finding 

of legal error by the Register of 

Copyrights (Register),141 the Judges 

deleted the reference. See 74 FR 6832, 

6833 (Feb. 11, 2009). The distinction 

did not reappear in the Phonorecords II 

adoption of the 2012 Settlement. See 78 

FR 67938, 67943 (Nov. 13, 2013). 

The record in this proceeding is 

devoid of factual evidence that demands 

the rate distinction. The Judges 

conclude, however, that they may, 

indeed must, address the distinction as 

a matter of law. Reviewing the 

legislative history, the statutory 

language, and the history of study of the 

issue by the Copyright Office, the Judges 

conclude that classification of an 

incidental DPD is a function of a 

Service’s technological functionality 

and, to some extent, an end user’s 

subsequent conduct. 

In the context of interactive streaming 

and similar modes of delivery where 

there is no general DPD, the royalty 

rates in this determination covering that 

mode of delivery are, de facto, the 

royalty rates for the incidental DPDs 

that enable the activity. To the extent 

Federal Register / Vol. 84, No. 24 / Tuesday, February 5, 2019 / Rules and Regulations 1955 

142The rates for permanent digital downloads and 

limited downloads set by the parties to the March 

2017 subpart A settlement do not distinguish 

between incidental DPDs and DPDs in general. The 

Judges deem those rates to cover all DPDs, 

incidental and general, that result from those modes 

of delivery. 

143The so-called subpart C service offerings 

included limited offerings, mixed service bundles, 

music bundles, paid locker services, and purchased 

content locker services. 

144The 1976 Act applied section 801(b)(1) and its 

four-factor test to new licenses. The lone existing 

statutory license carried forward into the 1976 Act 

from the 1909 Copyright Act and made subject to 

this standard was the mechanical license at issue 

in this proceeding. 

145Thus, the Judges reject Copyright Owners’ 

argument that the first three itemized section 

801(b)(1) factors per se reflect the same forces that 

shape the rate set in the marketplace. See 4/4/17 Tr. 

4589, 4666 (Eisenach). 

any of the configurations covered by the 

royalty rates set in this determination 

entail both incidental and general DPDs, 

the royalty rate is for all DPDs, 

incidental or general, that result from 

the activity.142

2. Royalty Rates for Non-Revenue 

Bearing Service Offerings 

In the 2012 rates and terms, the 

parties essentially rolled forward the 

rate structure first constructed in the 

2008 Settlement. In 2012, the parties 

created a separate aggregation of service 

offerings in a new subpart C143 to the 

regulations, agreeing to rates and terms 

similar to those to which they agreed in 

subpart B for interactive streams and 

limited digital downloads. Based on the 

evidence in this record, it appears 

limited offerings, and bundled service 

offerings are not different in kind from 

interactive streaming and limited 

downloads. No party offered compelling 

evidence to establish the necessity for 

segregating the current subpart C service 

offering configurations from current 

subpart B service offering 

configurations. 

In their review of the current and 

proposed rates and terms, however, the 

Judges see a basis to distinguish 

promotional or non-revenue producing 

offerings from revenue-producing 

offerings. In some instances locker 

services—particularly purchased 

content locker services—are free to the 

user and produce no revenue for the 

Service separate from the purchase price 

for the content. In some instances, a 

service may transmit a sound recording 

embodying a musical work that fits the 

definition of a promotional offering; that 

is, a sound recording that a Record 

Company makes available at no cost to 

the service and for a limited period. The 

Services’ transmissions of those sound 

recordings are made solely for the 

purpose of promoting a particular sound 

recording, an album, or the artist 

performing the musical work. Record 

companies distributing promotional 

recordings bear responsibility, if any 

there be, for the licensing of the 

embodied musical work. In other 

instances, a Service might offer a free or 

reduced-price subscription to its 

streams, or modified versions of its 

subscription-based services, to entice 

free users to become paying subscribers 

after the free trial period. When services 

choose to deliver no-cost or nonrevenue bearing offerings qualifying as 

promotional, ‘‘free trial,’’ or no-charge 

locker services, the Services will not 

pay mechanical musical works royalties. 

Neither shall the Services deduct the 

costs of those service offerings from 

service revenue, for purposes of 

calculating royalties payable on a 

percent of service revenue. 

VI. The Four Itemized Factors in 

Section 801(b)(1) 

The Copyright Act requires that the 

Judges establish ‘‘reasonable’’ rates and 

terms for the section 115 license. In 

addition, section 801(b)(1) instructs the 

Judges to set these rates ‘‘to achieve the 

following objectives’’: 

Factor A: To maximize the availability of 

creative works to the public; 

Factor B: To afford the copyright owner a 

fair return for his or her creative work and 

the copyright user a fair income under 

existing economic conditions; 

Factor C: To reflect the relative roles of the 

copyright owner and the copyright user in 

the product made available to the public with 

respect to relative creative contribution, 

technological contribution, capital 

investment, cost, risk, and contribution to the 

opening of new markets for creative 

expression and media for their 

communication; and 

Factor D: To minimize any disruptive 

impact on the structure of the industries 

involved and on generally prevailing 

industry practices. 

17 U.S.C. 115(c), 801(b)(1).144

The four itemized factors in section 

801(b)(1) require the Judges to exercise 

‘‘legislative discretion’’ in making 

independent policy determinations that 

balance the interests of copyright 

owners and users.’’ SoundExchange, 

Inc. v. Librarian of Cong., 571 F.3d 

1220, 1224 (D.C. Cir. 2009); see 

Recording Indus. Ass’n Am. v. CRT, 662 

F.2d 1, 8–9 (D.C. Cir. 1981) 

(‘‘Phonorecords 1981 Appeal’’) 

(analyzing identical factors applied by 

predecessor rate-setting body and 

holding that statutory policy objectives 

of 801(b)(1) ‘‘invite the [Board] to 

exercise a legislative discretion in 

determining copyright policy in order to 

achieve an equitable division of music 

industry profits between the copyright 

owners and users’’). 

The four factors ‘‘pull in opposing 

directions,’’ leading to a ‘‘range of 

reasonable royalty rates that would 

serve all these objectives adequately but 

to differing degrees.’’ Phonorecords 

1981 Appeal, 662 F.2d at 9. (D.C. Cir. 

1981) (citations omitted). Certain factors 

require determinations ‘‘of a judgmental 

or predictive nature,’’ while others call 

for a broad fairness inquiry. Id. at 8 

(citations & quotations omitted). 

Accordingly, the Judges are ‘‘free to 

choose’’ within the range of reasonable 

rates . . . within a ‘zone of 

reasonableness.’ ’’ Id. at 9 (citations 

omitted). 

In prior rate determination 

proceedings, the Judges have 

undertaken the ‘‘reasonableness’’ 

analysis followed by consideration of 

the four itemized factors. They followed 

that approach in this proceeding. The 

Judges conclude, however, that their 

consideration of the four itemized 

section 801(b)(1) factors in this 

proceeding also provides further 

support for their findings regarding a 

reasonable rate structure and reasonable 

rates. 

The D.C. Circuit recently reiterated 

the relationship between the 801(b) 

standard and market-based rates by 

contrasting that standard with the 

willing buyer/willing-seller standard set 

forth in 17 U.S.C. 114(f)(2)(B). The court 

noted that the two standards are 

distinguishable by the fact that, unlike 

section 114(f)(2)(B), section 801(b)(1) 

does not focus on unregulated 

marketplace rates. SoundExchange, Inc. 

v. Muzak LLC, 854 F.3d 713, 715 (D.C. 

Cir. 2017). However, to the extent 

market factors may implicitly address 

any (or all) of the four itemized factors, 

the reasonable, market-based rates may 

remain unadjusted. If the evidence 

suggests that market-based rates fail to 

address any (or all) of these four 

itemized policy factors, the Judges may 

adjust the reasonable, market-based rate 

appropriately. See Determination of 

Rates and Terms . . . , 73 FR 4080, 

4094 (Jan. 24, 2008) (SDARS I) (applying 

same factors, holding ‘‘[t]he ultimate 

question is whether it is necessary to 

adjust the result indicated by 

marketplace evidence in order to 

achieve th[e] policy objective[s].’’).145

A. Factor A: Maximizing Availability of 

Creative Works to the Public 

Factor A provides that rates and terms 

should be determined to ‘‘maximize the 

availability of creative works to the 

public.’’ 17 U.S.C. 801(b)(1)(A). Of 

particular importance, this provision 

unambiguously links the upstream rates 

1956 Federal Register / Vol. 84, No. 24 / Tuesday, February 5, 2019 / Rules and Regulations 

146For present purposes, marginal cost includes 

opportunity cost as well as marginal production 

cost, regarding the marginal cost of distributing 

copies of the musical works (embodied in 

interactively streamed sound recordings). 

147To be clear, this ‘‘harm’’ is not conclusive 

evidence that such static market power is harmful, 

or even inefficient, on balance, in a dynamic sense. 

A monopoly may be more efficient in reducing unit 

costs because of necessary scale (such as a natural 

monopoly) or because of superior production 

techniques. And again, when marginal production 

costs (of copies) are essentially zero, exercise of 

market power by copyright owners (including 

owners of collectivized repertoires such as record 

companies, music publishers and PROS) can be 

necessary to induce the production of copyrighted 

goods (such as musical works and sound 

recordings), because without production there is 

nothing to be copied. But these efficiencies only 

demonstrate why such market power should not be 

dissipated, and are not relevant to the narrower 

issues at hand: how to maximize the availability of 

goods and to set reasonable rates given the 

otherwise beneficial existence of such market 

power. 

148With regard to Factor A as it relates to 

Copyright Owners’ proposal, Professor Marx also 

notes the supply-side ‘‘Cournot Complements’’ 

problem created by Copyright Owners’ reliance on 

the unregulated sound recording market. This is a 

problem because rates in such a ‘‘must have’’ 

unregulated market can be even higher than 

monopoly rates, thereby depressing the quantity 

supplied—contrary to a goal of maximizing the 

availability of musical works. See 4/7/17 Tr. 5532 

(Marx). 

and terms that the Judges are setting 

with the downstream market, in which 

‘‘the public’’ is listening to sound 

recordings that embody musical works. 

In the SDARS I Determination, the 

Judges made a general statement, 

attributed to an expert economic 

witness, Dr. Ordover, that ‘‘[w]e agree 

. . . that ‘voluntary transactions 

between buyers and sellers as mediated 

by the market are the most effective way 

to implement efficient allocations of 

societal resources.’ ’’ SDARS I, 73 FR at 

4094 (quoting from Written Direct 

Testimony of Janusz Ordover at 11). 

However, as the Judges’ present 

discussion of the economics of this 

market should make plain, they do not 

agree that such a broad statement 

captures all the economic realities of the 

market. In fact, Professor Ordover’s full 

testimony in SDARS I demonstrates that 

he based his statement on the same 

particular aspects of the pricing of 

copies of intellectual property (such as 

musical works or sound recordings) that 

the Services’ expert witnesses and the 

Judges have identified in this 

proceeding. 

On behalf of the Services in the 

present proceeding, Professor Marx 

approaches Factor A in a manner that is 

at once novel (for these proceedings) 

and consistent with fundamental and 

relevant economic principles. 

Specifically, she asserts that 

maximization of the availability of 

musical works (embodied in sound 

recordings) to the public, through 

interactive streaming, requires that the 

combined ‘‘producer surplus’’ and 

‘‘consumer surplus’’ be maximized, 

because that leads to listening by all 

segments of the public regardless of 

their WTP. In Professor Marx’s analysis 

‘‘producer surplus’’ means ‘‘the amount 

by which the total revenue received by 

a firm for units of its product exceeds 

the total marginal cost. . . .’’ A 

Schotter, Microeconomics: A Modern 

Approach at 389 (2009).146 The 

‘‘consumer’ surplus’’ means ‘‘[t]he 

difference between what the consumer 

would be willing [and able] to pay and 

what the consumer actually has to pay.’’ 

Mansfield & Yohe, at 93. 

When a perfectly competitive market 

is in equilibrium (or tending that way) 

‘‘the sum of consumer surplus . . . and 

producer surplus . . . is maximized.’’ 

Schotter, at 420. By contrast, if a market 

is not perfectly competitive because the 

sellers have some degree of market 

power, then the level of output is 

somewhat restricted, producer surplus 

is increased and consumer surplus is 

decreased—with a portion of the overall 

surplus redistributed to producers/ 

sellers. Another portion lost as ‘‘a pure 

‘deadweight’ loss . . . the principal 

measure of the allocation of harm’’ 

arising from the exercise of market 

power. Mansfield & Yohe, supra, at 499; 

see Schotter, at 398 (accepted definition 

of ‘‘deadweight loss’’ is ‘‘[t]he dollar 

measure of the loss that society suffers 

when units of a good whose marginal 

social benefits exceed the marginal 

social cost of providing them are not 

produced because of the profitmaximizing motives of the firm 

involved.’’).147

As the foregoing definitions imply, 

the two surpluses are measured by 

reference to a single equilibrium price. 

However, when Copyright Owners, like 

any sellers, are able to price 

discriminate, they enlarge the total 

value of the combined surpluses, 

diminish the ‘‘deadweight loss’’ and 

appropriate the larger, combined 

surplus for the producers. See H. 

Varian, Intermediate Microeconomics: A 

Modern Approach 462–63 (2010) (With 

price discrimination, ‘‘[j]ust as in the 

case of a competitive market, the sum of 

producer’s and consumer’s surplus is 

maximized [but with] the producer . . . 

getting the entire surplus generated in 

the market. . . .’’). 

Professor Marx marshals these 

microeconomic principles to explain 

why the 2012 Settlement rate structure 

tends to incentivize and support the 

maximization of musical works 

available to the public under Factor A. 

Marx WDT ¶¶ 119–122, 123–133. As 

she testified at the hearing: 

[H]aving different means of price 

discrimination is going to allow greater 

efficiency to be achieved [i]f we have a way 

for low willingness to pay consumers to 

access music, for example, student discounts, 

family discounts or ad-supported streaming, 

where low-willingness-to-pay consumers can 

still access music in a way that still allows 

some monetization of that provision of that 

service. 

3/20/17 Tr. 1894–95 (Marx) (emphasis 

added); see Marx WDT ¶ 12 (‘‘An 

economic interpretation of [F]actor A is 

that the royalty structure should 

‘‘maximize the pie’’ of total producer 

and consumer surplus. . . .’’). 

Professor Marx contends that the 

price discriminatory rate structure is 

superior to a per play model in 

maximizing the availability of musical 

works to the public: 

The subscription model provides an 

efficiency benefit because the price of a play 

is equal to the marginal cost of roughly 

zero—a subscriber faces the true marginal 

cost of playing a song over the internet and 

thus consumes music at the efficient level. 

When subscribers face a per-play royalty cost 

of zero, interactive streaming services have 

the appropriate incentive to encourage music 

listening at the margin. 

In contrast, if interactive streaming services 

faced a positive per-play royalty cost, they 

would have a diminished incentive to attract 

and retain high-use consumers, the very type 

of consumers who create the most social 

surplus through their listening. They would 

also have an incentive to discourage music 

listening among the high-use consumers they 

retain. The higher the level of per-play 

royalties is, the more this incentive might 

affect the behavior of interactive streaming 

services. 

Id. at ¶¶ 130–131 & n. 135.148

Professor Marx’s analysis is based on 

an understanding that maximizing the 

availability of musical works is a 

function of incentives to distributors 

and a function of downstream demand. 

She notes, however, that the variable, 

percent-of-revenue rate structure is 

consistent with agreements in the 

unregulated upstream sound recording 

market, where record companies license 

sound recordings to these same 

interactive streaming services. She 

notes: 

Ironically, given the preference of . . . 

Copyright Owners’ economists for market 

outcomes, . . . they support a proposal that 

would tend to eliminate [REDACTED] 

interactive streaming, which the unregulated 

sound recording side of the market has 

facilitated. [Copyright Owners’] proposal 

would also completely do away with 

percentage-of-revenue rates that form a key 

part of unregulated rates negotiated between 

Federal Register / Vol. 84, No. 24 / Tuesday, February 5, 2019 / Rules and Regulations 1957 

149 Justin Kalifowitz, founder and CEO of an 

independent music publisher, testified that 

‘‘[q]uality songwriting cannot be relegated to a parttime hobby; it is a calling and a career.’’ Witness 

Statement of Justin Kalifowitz, Trial Ex. 3022, ¶ 14 

(Kalifowitz WDT). 

150Album sales provided songwriters income 

from ‘‘album cuts,’’ i.e., songs that were not hits, but 

provided royalty income from album sales. In the 

current singles market that dominates download 

sales, hit singles get sold (and provide royalty 

income), but lesser-known tracks generally have 

much lower sales and royalties. 3/23/17 Tr. 2938– 

40 (Herbison). Similarly, interactive streaming 

permits listeners to stream individual songs, even 

if they were released as part of an album. 

Noninteractive streaming of albums is not permitted 

without a waiver of the sound recording 

performance complement. 17 U.S.C. 114(d)(2)(C)(i), 

j(13)(A)). 

151The Judges do not discount the quality of 

existing songs. Indeed, music publishers continue 

to market the ‘‘old standards’’ to young performers. 

The Judges do not measure availability of creative 

works by looking at music publishers’ profits or by 

counting recycled songs contributing to those 

profits. Maximizing the availability of creative 

works includes, if not focuses on, new creative 

works. 

music labels and interactive streaming 

services. 

Marx WRT ¶ 84 (emphasis added). 

Beyond Professor Marx’s theoretical 

arguments, Dr. Leonard notes that the 

existing (price-discriminatory) rate 

structure that has existed for two rate 

periods. He contends there is no 

evidence that songwriters as a group 

have diminished their supply of musical 

works to the public. In fact, he notes 

that the music publishing sector has 

been profitable throughout the present 

rate period. 3/15/17 Tr. 1120 (Leonard). 

Dr. Leonard is correct that there is no 

evidence in the record that songwriters 

as a group have diminished their supply 

of musical works to the public. No 

participant performed such an empirical 

study. Nevertheless, there is ample, 

uncontroverted testimony that 

songwriters have seen a marked decline 

in mechanical royalty income over the 

past two decades, and that this decline 

has rendered it increasingly difficult for 

non-performing songwriters (i.e., 

songwriters with income from 

songwriting only and not from 

performing or recording music) to earn 

a living practicing their craft. For 

example, Mr. Steve Bogard, a successful 

veteran songwriter from Nashville, 

testified that ‘‘I have written many songs 

that have become hits and continue to 

do so. However, over the past few years, 

my income has not reflected my 

continued success because the 

interactive streaming services are paying 

a fraction of what I earn from physical 

sales and permanent downloads.’’ 

Witness Statement of Steve Bogard, 

Trial Ex. 3025, ¶ 32 (Bogard WDT). Lee 

Thomas Miller, another successful 

Nashville-based songwriter, when asked 

to describe the mechanical royalty 

income he earns from on-demand 

streaming, stated ‘‘[i]t is so insignificant 

that we rarely even scroll down and 

look at the line items. . . . [Y]ou look 

at these numbers of millions of spins 

and then you look at the tens of dollars 

that they pay.’’ 3/28/17 Tr. 3517–18 

(Miller). 

Mechanical royalties play a critical 

role in enabling professional 

songwriters to write songs as a full-time 

occupation.149 Professional songwriters 

have traditionally subsisted on a 

‘‘draw,’’ a periodic advance against 

future mechanical royalties that music 

publishers pay out like a salary. See 3/ 

23/17 Tr. 2931 (Herbison). ‘‘In many 

cases, the advances we pay our 

songwriters are their main source of 

income to cover living expenses, 

allowing them to dedicate as much of 

their time as possible to songwriting 

instead of having to take other work to 

make ends meet.’’ Witness Statement of 

Justin Kalifowitz, Trial Ex. 3022, ¶ 15 

(Kalifowitz WDT). If the mechanical 

royalties from which music publishers 

can recoup advances decrease, so too do 

the advances that music publishers are 

willing to pay out. ‘‘[I]n the non-digital 

era, those draws for brand new writers, 

it wasn’t uncommon for them to be in 

the $20,000, $30,000 range when those 

dollars meant more, 20 years ago. Today 

the standard is $12,000.’’ 3/23/17 Tr. 

2932 (Herbison). 

The decline in royalties has 

diminished some music publishers’ 

willingness to make or continue 

publishing agreements with songwriters: 

The availability of publishing deals has 

significantly decreased. It is alarming that in 

Nashville there are so many fewer 

songwriters than there were just a few years 

ago. Most estimates say that there are less 

than one-quarter of the number of 

professional songwriters than there were just 

10 years ago. Many songwriters in Nashville 

who earned a full-time living from royalty 

payments are no longer signed to publishing 

deals. 

Bogard WDT ¶ 41. Diminished 

availability of publishing deals means 

fewer new songwriters entering the 

profession: 

Publishers cannot afford to sign as many 

songwriters as they did in the past. Music 

publishers typically invested in younger 

writers who might not produce immediate 

results and then recouped their money when 

those writers started earning royalties on 

album cuts. Now, when they do sign writers, 

music publishers increasingly turn to 

recording artist and producer writers, so they 

can hedge their bets with a better chance of 

recordings being released. 

Bogard WDT ¶ 42; see also Witness 

Statement of Liz Rose, Trial Ex. 3024, 

¶ 20 (Rose WDT) (‘‘we used to sign more 

songwriters and give them five or six 

years to hone their craft . . . but we 

can’t afford to do that anymore’’). 

Development of those songwriters who 

are fortunate enough to sign publishing 

deals is also suffering. 

When I first arrived in Nashville, 

experienced and established songwriters 

would invite young, talented songwriters to 

write with them. This was a very 

illuminating experience for the young 

songwriters and helped them grow into better 

professionals. It also gave the established 

writer new ideas and influences. Today, a 

professional non-performing songwriter 

cannot simply try to write a great song alone 

or with co-writers who are also professional 

songwriters, then hope that an artist records 

it. 

Now, an established songwriter cannot 

mentor young songwriters if he or she wants 

to maintain his living. Veteran songwriters, 

such as myself, simply do not have time. 

Instead, I spend three to four days a week 

with young recording artists who already 

have record deals and need help writing their 

songs. These recording artists are sometimes 

very talented songwriters, but it often takes 

the craft and art of the professional writer to 

turn their thoughts into commercial songs. 

Id. ¶¶ 44–45; see also Witness Statement 

of Lee Thomas Miller, Trial Ex. 3023, at 

¶ 6 (L. Miller WDT) (‘‘Publishers can 

simply not afford to ‘develop’ as many 

writers as they once did.’’). 

To be sure, not all of the diminution 

of mechanical royalty income has been 

a result of the shift from physical 

product and permanent downloads to 

streaming. Digital piracy, and the 

unbundling of the album 150 have 

played significant parts in reducing 

songwriter income. See 3/23/17 Tr. 

2937, 2940–41 (Herbison). It is not 

within the Judges’ authority to roll back 

the clock, as it were, and remedy every 

economic force that has diminished 

songwriters’ income over the past two 

decades. Nevertheless, the Judges find 

that the evidence in this proceeding 

supports a conclusion that the existing 

rates for mechanical royalties from 

interactive streaming are a contributing 

factor in the decline in songwriter 

income, and that this decline has led to 

fewer songwriters. If this trend 

continues, the availability of quality 

songs will inevitably decrease.151

Copyright Owners, principally 

through the rebuttal testimony of 

Professor Watt, argue that Professor 

Marx has made a fundamental error in 

equating the maximizing of availability 

of musical works with a maximization 

of the sum of the producer and 

consumer surplus. Watt WRT ¶ 10. 

According to Professor Watt, ‘‘A better 

understanding of criterion A is that the 

royalty payments should ensure that a 

1958 Federal Register / Vol. 84, No. 24 / Tuesday, February 5, 2019 / Rules and Regulations 

152The record does not address an assessment of 

the advertising interruption cost. Advertising in 

today’s technological environment is often 

informative, especially when it is targeted to 

specific listeners, adding some measure of value, 

rather than cost, to the listener. 

153This point appears to raise a question: How 

could Copyright Owners and their economic 

experts argue against a rate structure that inures to 

their benefit as well? The answer is: They do not. 

As stated supra, they advocate for a rate set under 

the bargaining room theory, through which 

mutually beneficial rate structures can still be 

negotiated, but not subject to the ‘‘reasonable rate’’ 

and itemized factor analysis required by law. In 

those negotiations, as Dr. Eisenach candidly 

acknowledged, Copyright Owners would have a 

different threat point to use in order to obtain better 

rates and terms. 

plentiful supply of works is forthcoming 

into the future. . . .’’ Id. To accomplish 

that end, Professor Watt argues the rates 

should be set to ensure that ‘‘creators 

are given the correct incentives to 

continue to create and make available 

valuable works.’’ Id. 

Professor Watt argues that even if the 

rates and rate structure are designed to 

maximize consumer and producer 

surplus, that maximization would not 

inform the Judges as to whether that 

result satisfies Factor A. Rather, 

according to Professor Watt 

In effect, a royalty structure is simply a 

way in which producer surplus, once 

created, is shared between the interactive 

streaming firms and the copyright holders, 

but in and of itself, the structure does not 

determine the size of either producer or 

consumer surplus. Consumer surplus and 

producer surplus are both entirely 

determined by the interplay of the demand 

curve for the product in question (here, 

interactive music streaming) and the way the 

product is priced by the interactive streaming 

industry to its consumers. That is, regardless 

of the structure of the royalty payments, the 

‘‘size of the pie’’ is determined by the 

unilateral decisions made by interactive 

streaming firms about their pricing to 

consumers. 

Watt WRT ¶ 11. 

Professor Watt also attempts to decouple the upstream and downstream 

rate structures by analogizing interactive 

streaming to a retail restaurant offering 

of an ‘‘all you can eat buffet.’’ He 

concludes that a retailer, such as an 

interactive streaming service or a buffet 

restaurant, can pay for inputs (musical 

works or food) per-unit while still 

charging an up-front access fee ($9.99 

per monthly subscription or $9.99 for a 

buffet meal). By this analogy, Professor 

Watt purports to demonstrate that 

interactive streaming services do not 

require non-unit royalty rates to serve 

their downstream listeners. Id. ¶ 12. 

Professor Watt asserts that Spotify’s 

claim that listeners to it ad-supported 

service do not pay a marginal positive 

price is inaccurate. He notes that 

listening to advertising that interrupts 

the music imposes a time-related/ 

annoyance cost that the listeners must 

accept.152 This suggests to Professor 

Watt that per-unit pricing (at least in a 

non-monetary manner) indeed is 

possible downstream. Id. ¶ 13. 

Professor Watt further opines that any 

positive marginal cost pricing of songs 

by interactive streaming services on 

subscription plans necessarily would be 

offset by a reduction in the up-front 

subscription price. He suggests that this 

consequence would not necessarily be 

deleterious for the streaming service 

because ‘‘[w]ith the reduction in the 

fixed fee (along with the positive perunit price), it becomes entirely possible 

that consumers who were not initially 

in the market now find it to be in their 

interests to join the market, consuming 

positive amounts of streamed music 

where previously they consumed none.’’ 

Id. ¶ 15. 

In their affirmative case regarding 

Factor A, Copyright Owners argue that 

‘‘availability maximization’’ should be 

considered through the lens of the 

creators, who seek high rates as a signal 

to spur creation and would see low rates 

as a disincentive. 

In undertaking a Factor A evaluation, 

the Judges are cognizant of the double 

meaning of ‘‘availability’’ of creative 

works in a tiered market such as the 

music streaming business at issue in 

this proceeding. On the one (upstream) 

hand, maximizing availability of 

creative works might refer to 

encouraging artists to produce more 

prolifically. On the other (downstream) 

hand, maximizing availability might 

refer to encouraging more entry into the 

music streaming business to maximize 

options for end-users and, presumably 

expand the overall consumption of 

music. The Judges must weigh the 

impact of their rate decisions so as not 

to favor one interpretation of availability 

of creative works over the other. 

With regard to the downstream 

market, the Judges find that Professor 

Marx’s analysis of how a price 

discriminatory model maximizes 

availability is correct. Price 

discrimination not only serves low WTP 

listeners, but it also indirectly serves 

copyright owners, by incentivizing 

interactive streaming services to 

increase the total revenue that price 

discrimination enables. Any seller or 

licensor would prefer to maximize its 

revenue, and a rate structure that will 

effect such maximization thus would be 

the best structural inducement. For 

purposes of applying Factor A, a rate 

structure that better increases revenues, 

ceteris paribus, should induce more 

production of musical works, a result 

that Copyright Owners should desire.153

By contrast, to equate ‘‘availability’’ 

solely with a higher rate would produce, 

ultimately, a lower surplus. The Judges 

find that Copyright Owners have taken 

a cramped and unrealistic view of 

incentives created by price 

discrimination. Although a per-unit rate 

structure with higher royalty rates might 

have an immediate superficial appeal, 

the consequence will most assuredly be 

lower revenues both downstream and 

upstream. 

The Judges find that the objective of 

maximizing the availability of musical 

works downstream to the public is 

furthered by an upstream rate structure 

that enhances the ability of the 

interactive streaming services to engage 

in downstream price discrimination 

(‘‘down the demand curve,’’ increasing 

revenue for both Copyright Owners and 

the interactive streaming services). 

In sum, the Judges are persuaded that 

Professor Marx’s analysis of Factor A is 

consistent with the purpose of that 

statutory objective and sound economic 

theory. An upstream rate structure 

based on monetizing downstream 

variable WTP will facilitate beneficial 

price discrimination. In turn, that price 

discrimination will allow for more 

affordable access ‘‘down the demand 

curve,’’ making musical works available 

to more members of the public. The rate 

structure determined by the Judges, in 

which both rate prongs monetize 

downstream variable WTP, satisfies 

Factor A. 

Although largely anecdotal and 

unsupported by sophisticated surveys, 

studies, or economic theories, the 

uncontroverted evidence from 

songwriters and publishers should not 

go unheeded. That evidence points 

strongly to the need to increase royalty 

rates to ensure the continued viability of 

songwriting as a profession. The rate 

determined by the Judges represents a 

44% increase over the current headline 

rate, and thus satisfies the Factor A 

objective in this respect as well. 

B. Factors B and C: Fair Income and 

Returns and Consideration of the 

Parties’ Relative Roles 

Factor B directs the Judges to set rates 

that ‘‘afford the copyright owner a fair 

return for his or her creative work and 

the copyright user a fair income under 

existing economic conditions.’’ Factor 

C, instructs the Judges to weigh ‘‘the 

relative roles of the copyright owner and 

copyright user in the product made 

available to the public,’’ across several 

dimensions. 17 U.S.C. 801(b)(1)(B), (C). 

Federal Register / Vol. 84, No. 24 / Tuesday, February 5, 2019 / Rules and Regulations 1959 

154Public utility-style regulation, especially in 

1967 when Congress was working on copyright 

reform legislation, was classic rate-of-return 

regulation. Essentially, the regulator would 

establish the utility’s costs and determine the rate 

charged to customers (or rates charged to different 

customers), sufficient to provide the utility with a 

reasonable rate of return. See generally Decker, 

Modern Economic Regulation at 104 (2014). 

155See Hearing on S. 597, Subcomm. on Patents, 

Trademarks and Copyrights of the S. Committee on 

the Judiciary (Mar. 20–21, 1967). 

156Economics experts in the present proceeding 

for both Copyright Owners and the Services 

acknowledge that microeconomic principles (preShapley values) do not provide insights as to what 

constitutes ‘‘fairness.’’ See, e.g., 3/30/17 Tr. 3991 

(Gans) (‘‘fairness . . . is not a topic that is sitting 

in an economics textbook somewhere.’’); 3/20/17 

Tr. 1830 (Marx) (‘‘Fairness is not a notion that has 

a unique definition within economics.’’); 1128–29 

(Leonard) (‘‘economists . . . typically don’t do 

‘fair’ ’’); 4/13/17 Tr. 5919 (Hubbard) (‘‘Economists 

aren’t philosophers. I can’t go to the biggest picture 

meaning of ‘fair’. . . .’’). Rather, economists 

attempt to identify ex ante ‘‘fairness’’ by identifying 

fair processes in the workings of and structure of 

markets, in bargaining, and in the efficiency of 

outcomes generated by these processes, although 

their understanding of what constitutes a fair 

‘‘process’’ varies. See, e.g. 3/13/17 Tr. 555 (Katz) 

(‘‘[T]he most useful or practical way of thinking 

about it here was really to focus on whether the 

process is fair’’ . . . [and] a conception that’s often 

used in economics is that a process is fair if it’s . . . 

competitive or the outcome of a competitive market. 

A competitive bargaining process is fair. And so 

that’s the—the central notion of fairness that I used 

here.’’); 3/15/17 Tr. 1129 (Leonard) (‘‘My concept of 

fair . . . and what I think a lot of economists would 

say is that if you have . . . a negotiation between 

two parties and there are no . . . constraints such 

as holdup . . . and there’s no market power . . . 

again I hesitate to use the word, so maybe I’ll put 

it in quotes, would be fair.); Eisenach WDT ¶ 24 (‘‘a 

rate set at the fair market value by definition 

provides fair returns and incomes to both the 

licensee and licensor.’’) 

157The Shapley approach, named for Nobel 

Memorial Prize winner Dr. Lloyd Shapley, 

represents a method for identifying fair outcomes, 

previously unaddressed in microeconomics. 

Congress did not apply the Shapley value approach, 

perhaps because this methodology, although 

developed in 1953, was not yet widespread in the 

economic literature in 1967. 

158See supra, section V.D.1. 

159See supra, section V.D.2. 

160 It is likely the Services have made and will 

make business decisions that defer accounting 

profits. The Judges’ approach offers no criticism of 

the Services’ business decisions; rather, the Judges 

attempt to assure a structure that permits the 

Services’ competitive tactics without penalizing the 

creators of the works they exploit. 

Congress included Factors B and C in 

section 801(b)(1) to establish a legal 

standard for the Judges to use to move 

their determination of new rates for 

existing licenses beyond a strictly 

market-based analysis. In an attempt to 

pass constitutional muster, Congress 

crafted statutory language that 

paralleled public utility-style regulatory 

principles.154 According to 1967 

Congressional testimony, these 

principles were ill-suited for setting 

rates that equitably divided 

compensation for the ‘‘relative roles’’ of 

licensors and licensees in order to 

provide a ‘‘fair’’ outcome.155 However, 

as the parties’ economic experts make 

clear in their approaches to Factors B 

and C in this proceeding, the discipline 

of economics has evolved since Mr. 

Nathan criticized as economically 

impossible any regulatory attempt to 

equitably divide creative 

contributions.156

In the present proceeding, the parties’ 

economic experts agreed on the 

propriety of joint consideration of 

Factors B and C either through a 

Shapley value analysis or an analysis 

‘‘inspired’’ by the Shapley valuation 

approach.157 See Marx WDT ¶¶ 11–2 

(considering ‘‘a ‘fair return’ according to 

. . . relative contributions (factors B 

and C)’’ because of the use of ‘‘[a]n 

economic interpretation of factors B and 

C . . . a commonly used economic 

approach, the Shapley value, which 

. . . operationalizes the concept of fair 

return based on relative 

contributions.’’); Watt WRT ¶ 22 (‘‘I 

agree with Dr. Marx’s assertion that the 

Shapley model is a very appropriate 

methodology for finding a rate that 

satisfies factors B and C of 801(b); see 

also Gans WDT ¶¶ 65 n. 35, 67 (noting 

the Shapley approach provides for a 

‘‘fair allocation’’ as among input 

suppliers to reflect ‘‘the contributions 

made by each party.’’). The Judges 

concur with this joint analysis. 

The Judges used Shapley analyses to 

derive royalty rates in this 

Determination, and discussed the 

experts’ respective Shapley (or Shapleyinspired) models in that context.158 To 

summarize briefly, Professors Marx, 

Gans, and Watt’s analyses all produced 

a lower ratio of sound record to musical 

work royalties than exists under current 

conditions, implying that a fair 

allocation of surplus between those two 

groups would be more even than under 

the current market structure. Professors 

Marx’s and Watt’s Shapley analyses also 

pointed to a lower overall percentage of 

service revenue being directed to 

copyright royalties than exists under the 

current rate structure. Due, in part, to 

her decision to design the model to 

equalize bargaining power between 

copyright owners and users, Professor 

Marx’s model produced lower overall 

royalties for copyright owners than 

Professor Watt’s model. 

The Judges have determined a rate 

that is computed based on the highest 

value of overall royalties predicted by 

Professor Marx’s model and the ratio of 

sound recording to musical work 

royalties determined by Professor Gans’s 

analysis.159 The Judges find that these 

rates are consistent with the experts’ 

analyses and constitute a fair allocation 

of revenue between copyright owners 

and services. The Judges’ analysis with 

regard to Factors B and C demonstrates 

(whether that analysis was undertaken 

as part of the reasonable rate analysis or 

as a separate analysis), that there is no 

basis to depart from the Judges’ 

determination of the reasonable rate 

structure and rates as set forth supra. 

C. Factor D: Avoidance of Disruption 

The last itemized factor of section 

801(b)(1) directs the Judges ‘‘to 

minimize any disruptive impact on the 

structure of the industries involved and 

on generally prevailing industry 

practices.’’ 17 U.S.C. 801(b)(1)(D). In 

Phonorecords I, 74 FR at 4525, the 

Judges reiterated their understanding of 

Factor D, concluding that a rate would 

need adjustment under Factor D if that 

rate 

directly produces an adverse impact that is 

substantial, immediate and irreversible in the 

short-run because there is insufficient time 

for either [party] to adequately adapt to the 

changed circumstance produced by the rate 

change and, as a consequence, such adverse 

impacts threaten the viability of the music 

delivery service currently offered to 

consumers under this license. 

Id. The Judges adopt and apply in this 

Determination the same Factor D test. 

Copyright Owners and Apple 

advocate a complete abandonment of 

the current rate structure. The upshot of 

each proposal is a dramatic swing in 

royalties: Increases under Copyright 

Owners’ proposal and decreases under 

Apple’s proposal. For all the reasons 

detailed in this Determination, the 

Judges do not adopt either of the perunit rate structures these parties 

advocate. The Judges decline to make 

the requested changes in rate structure 

not because the structure is different 

and unfamiliar, but because of the 

dramatic, disruptive effects of the 

proposed per-unit rate structures. 

The Services advocate essentially the 

rate structure that now exists. See SJPFF 

at 1. The Judges’ proposed rate structure 

adopts some attributes of the existing 

rate structure, incorporating the 

economically reasonable features and 

abandoning unsupported features that 

unduly fracture and complicate the rate 

structure. 

The record shows that interactive 

streaming services are failing to realize 

an accounting profit under the current 

structure and nothing the Judges do in 

this proceeding will change the 

Services’ business models to change that 

circumstance.160 The Services remain in 

business and new streaming services 

enter the market despite the existence of 

1960 Federal Register / Vol. 84, No. 24 / Tuesday, February 5, 2019 / Rules and Regulations 

161Copyright Owners argue that the services 

could attempt to cut their non-content costs in 

order to remain sustainable. They suggest that the 

services emulate Sirius XM, which successfully 

reduced its non-content costs as a percent of 

revenue. See Rysman WDT ¶¶ 98–100. However, as 

Spotify’s CFO, Mr. McCarthy notes, Sirius and XM 

(the pre-merger predecessors to Sirius XM) ‘‘nearly 

bankrupted themselves and merged in order to 

survive.’’ McCarthy WRT ¶ 42. Moreover, not only 

were Sirius XM’s content costs lower as a percent 

of revenue, but also its ‘‘costs declined as a 

percentage of revenue as they grew their subscriber 

base. . . . Their costs declined as they achieved 

scale.’’ Id. Once again, the necessity of scale 

remains paramount. 

chronic accounting losses. The Services’ 

inability to become profitable will 

persist based on the record, under 

existing competitive conditions. As Mr. 

Pakman testified: [N]o current music 

subscription service—including 

marquee brands like Pandora, Spotify 

and Rhapsody—can ever be profitable, 

even if they execute perfectly. . . .’’ 

Testimony of David B. Pakman, Trial 

Ex. 696, ¶ 23 n.5 (citation omitted) 

(Pakman WDT). Although Mr. Pakman 

blames the lack of profitability (in part) 

on the level of mechanical royalties, the 

Judges find, based on the Services’ own 

acknowledgement, that the lack of 

profitability is a function of a lack of 

scale (which is another way of 

indicating that market share is divided 

among too many competing interactive 

streaming services). Id. Lowering 

mechanical royalties to provide the 

Services profitability, in the face of the 

acknowledged problem of a lack of 

scale, would constitute an unwarranted 

subsidy to these services at the expense 

of Copyright Owners.161

Although the Services have indicated 

their ability to withstand short-term 

losses as they compete for scale/market 

share, the record also indicates that 

there is a limit to such losses, however 

imprecise and unknown, beyond which 

services will be unable to attract capital 

and survive until the long run market 

de ́nouement. As Dr. Leonard testified, 

‘‘[REDACTED] is relevant and suggests 

[REDACTED].’’ Leonard AWDT ¶ 101 

n.151. This testimony reflects the wellunderstood principle that ‘‘[t]here is no 

specific time period . . . that separates 

the short run from the long run.’’ R. 

Pindyck & D. Rubinfeld, 

Microeconomics at 190 (6th ed. 2005). 

Thus, although the Services appear able 

to withstand current rates, a rate 

increase of the magnitude sought by 

Copyright Owners would run the very 

real risk of preventing the services from 

surviving the ‘‘short-run,’’ threatening 

the type of disruption Factor D is 

intended to prevent. 

While the reasonable rate determined 

by the Judges does not present the same 

risk of disruption as the rates sought by 

the Copyright Owners, it does represent 

a not insubstantial increase of 

approximately 44% over the current 

headline rate. In order to mitigate the 

risk of short-term market disruption, 

and to afford the services sufficient 

opportunity ‘‘to adequately adapt to the 

changed circumstance produced by the 

rate change,’’ the Judges will phase in 

the new rate in equal annual increments 

over the rate period. Thus, the rates for 

the 2018–2022 rate period shall be the 

greater of the percent of revenue and 

percent of TCC rates in the following 

table: 

2018 2019 2020 2021 2022 

Percent of Revenue ............................................................. 11.4 12.3 13.3 14.2 15.1 

Percent of TCC .................................................................... 22.0 23.1 24.1 25.2 26.2 

The Judges’ rate structure continues to 

produce an All-In rate, from which the 

portion for the mechanical rights is 

derived. The two rights are perfect 

complements. Without sufficient 

evidence to establish independent 

respective values, any attempt to 

segregate the two could result in 

disruptive unintended consequences. In 

the rate structure the Judges adopt, they 

attempt to ensure that no one of the 

myriad licenses required for the public 

to enjoy broadcast music swallows up 

payment for any other license. 

VII. Terms 

Before enactment of the Copyright 

Royalty and Distribution Reform Act of 

2004, the Register held exclusive 

authority to set terms for use of the 

section 115 compulsory license(s). In 

the 2004 Act, Congress gave the Judges 

authority to set ‘‘reasonable rates and 

terms of royalty payments’’ for section 

115 licenses, as well as terms 

establishing ‘‘requirements by which 

copyright owners may receive 

reasonable notice of the use of their 

works under . . . section [115], and 

under which records of such use shall 

be kept and made available. . . . ’’ See 

17 U.S.C. 115(c)(3)(D), 801(b)(1). The 

Register retained authority to regulate 

‘‘notice of intention to obtain the section 

115 license and requirements regarding 

monthly payment and monthly and 

annual statements of account. . . .’’ See 

Final Order, Division of Authority 

Between the Copyright Royalty Judges 

and the Register of Copyrights under 

Section 115 Statutory License, 73 FR 

48396, 48397 (Aug. 19, 2008) (Register’s 

Rulemaking Opinion). In adopting 

terms, the Judges may adopt ‘‘additional 

terms ‘necessary to effectively 

implement the statutory license.’ ’’ Id. at 

48398. In this Determination the Judges’ 

cleave to the division of authority 

between them and the Register, 

declining to adopt terms any of the 

participants proposed that might 

impinge on the Register’s authority. 

The extant regulations for the section 

115 license have developed over time. 

Participants in prior proceedings crafted 

the regulations to codify the structure 

and terms of their settlements. The most 

recent regulatory amendment occurred 

in November 2017, when record labels 

and Copyright Owners negotiated a 

settlement relating to the use of musical 

works embodied in physical 

phonorecords, permanent digital 

downloads and ringtones, the so-called 

‘‘subpart A’’ configurations. 

With the Judges’ determination to 

change section 115 rate structures and 

to realign service offerings for rate 

purposes, the regulatory terms must 

likewise change. Further, beginning in 

2013–14 with the Web IV determination, 

the Judges launched an initiative to 

simplify copyright royalty regulations, 

by eliminating duplication and, to the 

extent possible, using plain English. The 

regulations codifying the terms of the 

present determination are no exception. 

To standardize the part 385 regulations, 

the Judges begin with a reorganization 

that consolidates all regulations of 

general application in a new subpart A. 

In this Determination, it is not the 

Judges’ intention to change the agreed 

terms for extant subpart A. The Judges 

do, however, move some of the agreed 

subpart A regulations to the new 

subpart A regulations of general 

application. Further, given the changes 

in rate structures effected by this 

determination, the Judges now include 

Music Bundle configurations in the 

same regulatory category as the 

constituent parts of the music bundle, 

viz., physical phonorecords, permanent 

digital downloads, and ringtones. 

Federal Register / Vol. 84, No. 24 / Tuesday, February 5, 2019 / Rules and Regulations 1961 

Regulations specific to physical 

phonorecords, PDDs, and ringtones 

adopted by agreement together with 

regulations specific to Music Bundles 

will now appear in subpart B. 

New subpart C includes all streaming 

service offerings that are revenue 

bearing, including offerings that the 

Services market at discounted prices, 

such as annual subscriptions, family 

plans, or student plans. Regulations for 

promotional streams and service 

offerings for which the Licensee 

receives no consideration and that are 

free to the end-user are contained in 

subpart D. 

A. Definitions 

1. Service Revenue 

Participants in the present proceeding 

disagree on the definition of Service 

Revenue to be used in setting a base for 

application of the percent of revenue 

prong in the greater-of rate structure. 

Copyright Owners’ proposed per-unit 

rate structure obviates the need for a 

Service Revenue definition; 

consequently it does not include one. 

Pandora seeks an express exclusion of 

revenue from a Services’ products 

outside the purview of the section 115 

license, e.g., Pandora’s linked concert 

ticket sales app, TicketFly. Pandora PFF 

84. Pandora also seeks to expand the 

current deduction from gross revenues 

for the costs associated with producing 

advertising revenue by permitting a 

similar deduction for such costs of 

doing business as credit card fees, app 

store fees, and carrier service billings. 

Id. PFF 85; see Herring WDT ¶ 63. 

Interestingly, Amazon joins in this 

request even though Amazon 

[REDACTED]. See Amazon PFF ¶ 107 

(and record citations therein). 

For the Judges, it is almost axiomatic 

that revenues from product offerings 

unrelated to the section 115 license 

should not be included in the revenue 

base for calculation of section 115 

royalties. On the other hand, the section 

115 revenues should not be diminished 

by such costs of doing business as 

paying app store and carrier service fees 

and commissions or credit card fees. 

The Judges will retain the cost-ofrevenue-production deduction for 

marketing to create advertising revenue 

but decline to deduct other 

administrative costs from the revenue 

base. 

Amazon and Pandora also ask for 

adjustments to per-subscriber 

calculations to accommodate 

discounted service offerings, such as 

discounted annual subscriptions, family 

plans, and student accounts. See, e.g., 

Amazon PCL ¶¶ 36–39; Pandora PFF 

¶ 83. The rationale offered by the 

Services is that discounts for a family 

group or for a student build the ultimate 

customer base, by orienting the 

discounted service users to their 

particular formatting and increasing 

user comfort and convenience. Id. 

Copyright Owners urge the Judges to 

require the Services to pay the same 

royalty rate for discounted offerings as 

they pay for full-price subscription 

offerings. 

Relying on their rationale for choosing 

a percent-of-revenue rate structure 

rather than a per-unit rate structure, the 

Judges recognize that the Services are, to 

some extent, focusing more on growth of 

market share than growth of revenue. 

But the Judges also recognize that 

marketing reduced rate subscriptions to 

families and students is aimed at 

monetizing a segment of the market 

with a low WTP (or ability to pay) that 

might not otherwise subscribe at all. 

The Services, as they work toward 

profitability, are likely to continue to 

market aggressively to users with the 

WTP full subscription prices and to 

monetize other users in hopes of getting 

them into the ‘‘funnel’’ for full-price 

subscriptions. 

2. Fraudulent Streams 

Apple, Google, Pandora, and Spotify 

seek inclusion of a definition of 

‘‘fraudulent streams’’ in the section 115 

regulations to avoid royalty payments 

for them. Google proposes defining a 

fraudulent stream in terms of the origin 

of the request with an alternative 

quantitative limitation. See Google Inc.’s 

Amended Proposed Rates and Terms at 

3. Spotify combines the two criteria. See 

Spotify’s PFF/PCL at 115. Apple revised 

its original quantitative definition to a 

reasonableness determination delegated 

to the Service. See Apple Inc. Proposed 

Rates and Terms at 2. 

In light of technological developments 

that permit non-human streaming of 

sound recordings for purposes other 

than consumer listening, the Judges 

concur that these non-consumer streams 

should not be counted in determining 

the allocation of royalties. Accordingly, 

a definition of Fraudulent Stream is 

appropriate. The Judges conclude that 

the definition should establish a 

quantitative measure, removing the 

subjective determinations of the various 

Services from the equation. 

3. Royalty-Bearing Streams 

Apple led the Services in asking for 

a definition of ‘‘Play’’ that eliminates 

from any per-play calculation a stream 

lasting fewer than 30 seconds. Apple 

contends including these partial plays 

are not indicative of true consumer 

demand. See Ghose WDT ¶¶ 54, 60. Mr. 

Vogel, testifying for Spotify asserted that 

counting streams of under 30 seconds 

affords a substantial windfall to 

Copyright Owners. Written Rebuttal 

Testimony of Paul Vogel, Trial Ex. 1068, 

¶ ¶ 39–40 (Vogel WRT). Pandora and 

Spotify join in the request to add a 30- 

second threshold to the definition of 

‘‘Play.’’ Apple contends that the time 

threshold is a feature of [REDACTED]. 

Apple PFF ¶ 240. Copyright Owners 

argue against the proposal arguing that 

the definition for section 115 should 

align with that adopted for 

noninteractive streaming licenses under 

section 114. 

The Judges’ rate structure in this 

proceeding does not stand on a per-play 

base. Nonetheless, the section 115 

regulations must clarify that allocation 

of mechanical royalties is based on the 

relative number of plays of a Copyright 

Owners’ works. Copyright Owners 

advocate for a per-unit rate structure 

that reflects demand. The Judges cannot 

find that a partial play of a work 

signifies consumer demand; in fact, a 

skip-though might indicate just the 

opposite consumer conclusion. The 

Judges adopt the definition of ‘‘Play’’ 

that exempts streams of under 30 

seconds for tracks that are, in their 

entirety longer than 30 seconds. 

4. Pass-Through Licenses 

The extant regulations provide 

alternative measures in the calculus for 

finding the greater-of all-in royalty pool 

or, in some instances, the measure of the 

lesser-of prong to be used to determine 

the greater-of royalty pool. The 

difference is in the percent-of-TCC 

depending on whether the record 

company’s licenses are ‘‘pass-through’’ 

or not. The parties offered minimal 

evidence on the topic. Pandora 

proposed to eliminate the distinction as 

‘‘unnecessary.’’ Pandora PFF ¶ 79. 

Pandora’s conclusion is consistent with 

Professor Eisenach’s observation that 

the pass-through rate is rarely used. 

Eisenach WDT ¶ 82 n.67. 

The Judges find the separate passthrough TCC rate is unnecessary and 

decline to include one in the 

regulations. 

B. Offerings 

1. Limited Downloads and Interactive 

Streaming 

The Judges do not alter definitions 

identifying Limited Downloads and 

Interactive Streaming, as the settling 

parties defined those service offerings in 

the 2012 Settlement. The Judges do, 

however, add other offering 

1962 Federal Register / Vol. 84, No. 24 / Tuesday, February 5, 2019 / Rules and Regulations 

162 ‘‘Mixed service bundles’’ are a product 

package that includes music access together with a 

non-music product, such as Internet services. A 

‘‘music bundle’’ refers to packaging different music 

access configurations in a single music sale for a 

single price, such as authorizing a PDD with the 

purchase of a CD. 

163The Judges heard no testimony regarding adsupported locker services, but to the extent they 

exist, the conclusions for subscription paid locker 

services apply equally to ad-supported locker 

services. 

configurations to those configurations to 

enlarge the rate category. 

2. Mixed Bundles 

In the current regulations based on 

the 2012 Settlement, mixed service 

bundles regulated in current subpart C 

and are differentiated from music 

bundles in the same subpart. Compare 

37 CFR 385.21 (definition of ‘‘mixed 

service bundle’’) with id. (definition of 

‘‘music bundle’’).162 The rate structures 

for the two bundle types, with one 

exception, and the rates for the two 

bundle types are identical. The 

difference between the bundle 

calculations occurs at the final step, 

allocation of the payable royalty pool. 

For mixed service bundles, the payable 

royalty pool is allocated to musical 

works rightsholders on the basis of 

relative number of plays. For music 

bundles, which include up to three 

service configurations, the payable 

royalty pool is subdivided by 

configuration (CD, PDD, ringtone) and 

the per-play allocation is calculated for 

each configuration separately. 

Copyright Owners proposed 

combining regulations for mixed bundle 

offerings with the regulations for their 

component parts. The Judges conclude 

that the differences in kind between 

mixed offerings including streaming and 

a mixed music offering including only 

currently regulated configurations are 

sufficient to separate them. Mixed 

bundles will be subject to the streaming 

rate structure, with allocation allowed 

based on the relative values of music 

streaming and any other bundled 

offering. 

3. Music Bundles 

The Judges now include Music 

Bundles with the regulations adopted 

for physical phonorecords, permanent 

downloads, and ringtones—the three 

potential components of a ‘‘music 

bundle.’’ Each separate offering within 

the bundled configuration shall be 

subject to the rate agreed by the parties 

that proposed the subpart A settlement, 

as applicable to that component part. 

4. Lockers 

In the existing regulations, Paid 

Locker Services and Purchased Content 

Locker Services are both royalty-bearing 

configurations. In the present 

proceeding, the only evidence regarding 

locker services was expository. To the 

extent Services offered a purchased 

content locker service, the evidence was 

that those Services are exiting the arena. 

For example, Apple described its 

Purchased Content Locker Service as a 

non-remunerative service that it is 

phasing out and no longer marketing. 

See, e.g., Apple PCL 52. 

For Purchased Content Locker 

Services that do not generate revenue 

for the Service, no royalty should 

accrue. For Paid Locker Services, a 

Service receives subscription 

payments 163 and subscription revenues 

for those offerings are part of the service 

revenue to which the percent-of-revenue 

calculation applies. 

5. Family and Student Plans 

The Judges adopt here a greater-of rate 

structure that measures a percent of 

service revenue against a percent of 

TCC. The basic rate calculations are 

straightforward. The Judges also adopt a 

Mechanical Floor for Offerings that 

currently have a Mechanical Floor 

alternative. In the present proceeding, 

the Judges adopt a Mechanical Floor for 

certain configurations. For purposes of 

determining that minimum rate, should 

the need ever arise, the parties ask for 

clarification regarding subscriber 

counts. 

The Services presented evidence of 

three subscription variations: 

Discounted annual subscriptions, family 

subscriptions, and student 

subscriptions. A discounted annual 

subscription is no different from any 

subscription for purposes of calculating 

the per-subscriber minimum mechanical 

rate. 

As an example, Spotify proposed, 

albeit for a different purpose in a 

different rate structure, that family 

accounts be treated as 1.5 subscribers 

per month and student accounts be 

treated as .5 subscriber per month. See, 

e.g., Spotify Second Amended Proposed 

Rates and Terms at 16. Copyright 

Owners’ rate proposal is based not on 

subscribers, but on end users, which 

they define to include any person who 

streams at least one play during an 

accounting period, apparently without 

regard to that user’s subscription status. 

For purposes of calculating a 

Mechanical Floor rate, the Judges adopt 

the Services’ proposal, in the form 

articulated by Spotify. Family accounts 

are to be counted as 1.5 subscribers and 

student accounts are to be counted as .5 

subscriber. 

6. Unremunerated Offerings 

No party in this proceeding offered 

evidence or argument against 

continuing the zero royalty rate for 

promotional streams, as they are defined 

in the regulations. The Judges accept the 

agreed definition in the extant 

regulations, with substantial editing to 

eliminate unnecessary complexity, and 

adopt the agreed zero rate for 

promotional streams. 

In addition, the Judges include in the 

new subpart D regulations other 

offerings for which a Service receives no 

remuneration. Free trial subscriptions 

and purchased content locker services 

that are free to the user and not 

associated with any revenue (such as 

advertising revenue) bear a royalty rate 

of zero. 

C. Reporting and Auditing 

Among the areas open to the Judges 

for rulemaking are notice and 

recordkeeping, to the extent the Judges 

find it necessary to augment the 

Register’s reporting rules. The Judges’ 

regulations must be supported by record 

evidence and may include guidance on 

how payments are made and when, 

accounting practices, audits, and 

acceptable deductions from royalties. 

See Register’s Rulemaking Opinion at 

48398. With respect to the section 115 

licenses, the Register’s regulations 

address licensees’ Notice of Intent to 

obtain a section 115 license, details of 

the licensees’ monthly payments, and 

specifications for licensees’ monthly 

and annual Statements of Account. Id. 

at 48397. 

In the present proceeding, the parties’ 

proposed terms by and large described 

rate structures and calculations of 

payable rates. Given the rate structure 

the Judges adopt, many of the parties’ 

proposed terms are inapplicable. Some 

participants did propose rule changes 

that are appropriate even with the new 

rate structure and that would 

appropriately augment the Register’s 

rules. In some instances, however, the 

parties’ regulatory proposals are 

proffered as part of their legal argument 

but are not supported by factual 

evidence in the record. 

The Judges include in the part 385 

regulations provisions that augment the 

part 210 statement of information 

Services must record and retain with 

regard to promotional and trial 

streaming offerings. The Judges decline 

to adopt other changes to part 210 

requested by Spotify. The Judges will 

forward those change requests to the 

Register of Copyrights for such 

consideration as the Register deems 

appropriate. 

Federal Register / Vol. 84, No. 24 / Tuesday, February 5, 2019 / Rules and Regulations 1963 

164Passage of the Hatch-Goodlatte Music 

Modernization Act (MMA) introduces further 

changes in the administration of the section 115 

license. Under the MMA, the Register and the 

Judges are required to make sweeping changes to 

applicable regulations. Rather than attempt to adapt 

the regulations the Judges adopt based on the record 

before them in this proceeding, the Judges will 

engage in a notice and comment rulemaking 

procedure to conform all affected regulations to the 

provisions of the MMA. 

165 ‘‘TCC’’ is shorthand for ‘‘Total Content Cost,’’ 

the cryptic industry terminology used to measure 

royalties paid by interactive streaming services to 

music publishers for musical works, as a percent of 

these services’ payment to record companies for 

sound recording licenses. 

166As this Dissent was initially written, the 

Majority Opinion was not final and therefore the 

page citations had been left blank. Page numbers are 

now included. 

167However, Google proposed rates that were 

well below the rates adopted by the majority. See 

GPFF ¶ 4 (proposing the greater of 10.5 percent of 

service revenue or 15 percent of TCC). In the event 

these rates are deemed too low by the Judges (as has 

occurred), Google requests that the Judges abandon 

this structure and adopt instead the 2012 rate 

structure, because that structure ‘‘still adhere[s] to 

the Sec. 801(b) factors by setting sustainable, fair 

rates that would not disrupt the industry.’’ Id. ¶ 8. 

D. Late Fees 

The Act expressly authorizes the 

Judges to include in a determination 

‘‘terms with respect to late 

payment . . .’’ provided the late 

payment terms in no way interfere with 

other rights or remedies of copyright 

holders. 17 U.S.C. 801(c)(7). In the 

extant regulations, only subpart A 

contains a provision for late fees. The 

Judges did not previously include late 

fee provisions in prior subparts B and C 

because the settling parties did not 

include those provisions. In the present 

proceeding, Copyright Owners asked the 

Judges to adopt late fee provisions for 

all royalty payments. Copyright Owners 

contend that adding the late fee 

provision to all section 115 royalties 

simply ‘‘clarifies’’ the intention of the 

parties that settled on rates and terms in 

2012. 

The Judges cannot divine the 

intentions or missed opportunities of 

parties not before them. On the other 

hand, the Judges are aware that section 

115 establishes a royalty due date and 

assigns to the Register of Copyrights 

authority to develop regulations 

detailing payment procedures. See 17 

U.S.C. 115(c)(5). Rate terms under other 

sections of the Act require licensees to 

pay a late fee, if warranted. The Judges 

see no reason for Copyright Owners to 

receive late fees for ‘‘subpart A’’ 

activities, but forego late fees for other 

licensed activities. A late fee provision 

is now included in the subpart 

containing regulations of general 

application and applies to all section 

115 royalties. 

E. Part 210 Regulations 

The Register’s rules are codified in 

part 210 of 37 CFR. The Judges decline 

to adopt proposed changes that 

encroach on the settled part 210 

regulations. The Judges defer to the 

Copyright Office for terms that are the 

responsibility of and under the 

authority of the Register of Copyrights. 

VIII. Conclusion 

The section 115 phonorecords license 

has a long history. Application of the 

license has changed significantly as the 

methods of musical works delivery have 

evolved.164 While the current market, 

increasingly dominated by digital 

streaming, cannot be characterized as 

immature, it cannot either be 

characterized as stable. 

Determination of royalty rates and 

terms for the section 115 license is 

complex and arduous, and reasonable 

people can differ as to the best 

approach—as evidenced by the issuance 

of a dissenting opinion in this 

proceeding. Judge Strickler’s dissent 

follows this majority opinion and the 

regulatory terms codifying the 

Determination are set out below this 

SUPPLEMENTARY INFORMATION section. 

In this market, with the evidence 

before them, the Judges have attempted 

to establish royalty rates and terms that 

compensate songwriters and music 

publishers and offer to licensees 

appropriate returns and incentives for 

continued development. The rates and 

terms established in this Final 

Determination shall supplant existing 

rates and terms effective as of January 1, 

2018. 

The Register of Copyrights may 

review the Judges’ Determination for 

legal error in resolving a material issue 

of substantive copyright law. The 

Librarian shall cause the Judges’ 

Determination, and any correction 

thereto by the Register, to be published 

in the Federal Register no later than the 

conclusion of the 60-day review period. 

Suzanne M. Barnett, 

Chief Copyright Royalty Judge. 

Jesse M. Feder, 

Copyright Royalty Judge. 

Dated: November 5, 2018 

DISSENTING OPINION OF 

COPYRIGHT ROYALTY JUDGE DAVID 

R. STRICKLER 

I respectfully dissent from the 

Majority Opinion, for the reasons set 

forth below. 

II. The Majority Opinion Lacks an 

Adequate Basis in the Record 

A. The Rate Structure Adopted by the 

Majority was not proposed during the 

Proceeding. 

The Majority Opinion establishes an 

all-in rate and rate structure for 

performances and mechanical 

reproductions, equal to the greater of the 

percent of total service revenue and 

Total Content Cost (TCC), as set forth in 

the following table: 

2018 

(percent) 

2019 

(percent) 

2020 

(percent) 

2021 

(percent) 

2022 

(percent) 

Percent of Revenue ............................................................. 11.4 12.3 13.3 14.2 15.1 

Percent of TCC 165 ............................................................... 22.0 23.1 24.1 25.2 26.2 

See Majority Opinion, supra at 1.166

The Majority does not deny that this 

rate structure was never proposed by 

any party during the proceeding. In fact, 

this rate structure was only proposed 

after the hearing, when the record had 

already been closed. More particularly, 

this rate structure was proposed posthearing by Google, Inc. (Google) in an 

amended rate proposal, which Google 

supported in its Proposed Findings of 

Fact and Conclusions of Law (GPFF). 

See GPFF ¶ 4.167 (However, the majority 

expressly asserts that, although they 

selected this rate structure after 

consideration of Google’s post-hearing 

amended rate proposal, they ‘‘did not 

rely’’ on Google’s post-hearing proposal. 

Majority Opinion at 37 n.39) 

The fact that the two prongs in this 

rate structure were not combined as the 

only two parts of a rate structure 

proposed by any party during the 

hearing is critical. The gravamen of this 

proceeding was the issue of how to 

combine different proposed rate prongs 

(and discard others) in order to establish 

a rate structure that meets the statutory 

requirements that the structure be 

‘‘reasonable’’ and that it address the four 

itemized statutory objectives. See 17 

U.S.C. 801(b)(1). The majority has 

selected two rates that, although parts of 

1964 Federal Register / Vol. 84, No. 24 / Tuesday, February 5, 2019 / Rules and Regulations 

168A party is entitled to ‘‘revise its . . . requested 

rate at any time during the proceeding up to, and 

including, the filing of the proposed findings of fact 

and conclusions of law.’’ 37 CFR 351.4(b)(3). 

However, nothing in the regulations permits the 

amendment to create a new rate structure that was 

not supported by the evidence at the hearing. 

Otherwise, a party could subvert the entire 

adversarial process by inserting a new proposal 

after the record had closed. 

169Tying the section 115 mechanical license 

royalty to another rate is analogous to what a 

country does when it adopts a ‘‘currency board,’’ 

giving up its own sovereignty over the value of its 

currency by tying it to the value of another 

currency. Here, the majority has relinquished its 

‘‘sovereignty’’ over the setting of rates over the five 

year rate term, 2018–2022. 

other proposals made during the 

proceeding, were never combined in 

this manner during the hearing. Because 

it is the combination of rates that is 

crucial, the majority erred by plucking 

two rates from the record, combining 

them post-hearing, and then wrongly 

declaring that this ‘‘mash-up’’ was 

actually based on the record. 

Copyright Owners filed a post-hearing 

submission that calls these matters to 

the Judges’ attention, in connection with 

Google’s identical rate structure 

contained in its amended rate proposal 

submitted after the record had 

closed.168 Copyright Owners’ Reply to 

Google’s Proposed Findings of Fact and 

Conclusions of Law (CORPFF-Google). 

In their submission, Copyright Owners 

correctly noted the absence of an 

evidentiary record to support the 

combination of a percent-of-revenue rate 

and a TCC rate. See CORPFF-Google at 

p. 2 (‘‘Google’s new proposal is not only 

unsupported by any evidence, it is 

divorced from the evidence in the 

record [and] neither Dr. Leonard 

[Google’s expert witness] nor any other 

expert opined on the new proposal, let 

alone provide a basis for assessing its 

reasonableness.’’). As a substantive 

matter, Copyright Owners describe this 

mix-and-match rate structure as a 

Frankenstein’s Monster. Id. at pp. 2, 17. 

Using a different analogy, they argue 

that this jury rigged rate structure is 

nothing more than an unlitigated, posthearing selection of one rate from 

‘‘Column A’’ and another from ‘‘Column 

B.’’ Id. at p. 15. 

Because this particular rate structure 

was not proffered at the hearing, the 

parties had no ability to mount a 

challenge to it during the proceeding. 

The statute and the Judges’ regulations 

set forth in detail how the parties must 

present evidence, testimony and 

arguments. See 17 U.S.C. 803(b)(6); 37 

CFR 351.1 through 351.15. At the 

hearing in this proceeding (as in all rate 

proceedings), the parties submitted 

detailed written testimonies, engaged in 

extensive direct and cross-examination 

of witnesses, including expert economic 

witnesses, who supported and attacked 

the rate proposals made a part of the 

record. It must come as quite a shock 

when, after all that testimony, evidence 

and analysis has been presented, the 

majority decides to ignore the parties’ 

rate proposals presented at the hearing 

and create a new combination that no 

party had presented. I do not think the 

majority can overcome this problem by 

relying on the fact that the two elements 

of the majority’s new rate structure 

appeared in different rate proposals, 

because, again, the key issue in this 

proceeding was how to establish a rate 

structure that combined various rate 

prongs. 

This shock to the parties is not 

speculative, and the inappropriateness 

of using an amended rate proposal to 

inject untested rate structures was 

clearly articulated by Copyright Owners’ 

counsel at oral argument. As counsel 

explained: 

[Google] decided it would be a good idea 

to give you something simple. . . . I agree 

that they are allowed to change their 

proposal, but when I talk about the inability 

to address all the depth, no one has been able 

to analyze it. They haven’t run numbers, 

right? There are no forecasts for this 

proposal. [N]o one has been able to test out 

what this proposal would do. So that’s why 

I say it is difficult to address it all because 

we weren’t given an opportunity to have our 

experts test out the structure. 

6/7/17 Tr. 6275–76 (Copyright Owners’ 

Closing Argument). 

The majority’s error in creating and 

adopting its own rate structure 

(identical in structure to Google’s posthearing structure) has created a real risk 

of economic harm that the parties were 

not able to address at the hearing. As 

discussed below, this risk of harm 

extends not only to Copyright Owners, 

but also to the interactive streaming 

services, a fact acknowledged by Google, 

the proponent of this rate structure, as 

explained below. 

B. The Majority Opinion Causes Injury 

to Licensees and Licensors 

1. Injury to Licensees (the Services) 

The crucial aspect of the majority’s 

rate structure, absent from any rate 

proposal presented at the hearing, is the 

use of an uncapped TCC prong in a 

greater of rate structure. Because the 

TCC prong will be triggered when it is 

greater than the percent-of-revenue 

prong, the mechanical royalty rate will 

be determined by reference to whatever 

rate has been established by the record 

companies for sound recording 

royalties. However, it is undisputed that 

the record companies, by statutory 

design, have the unfettered legal ability 

to set their sound recording royalty 

rates, allowing them to exercise their 

economic power to demand rates that 

embody their ‘‘complementary 

oligopoly’’ status, as previously 

described by the Judges. See Web IV, 81 

FR 26316, 26333–34 (May 2, 2016). 

Accordingly, whenever the record 

companies demand and obtain a higher 

sound recording royalty rate, under the 

majority’s rate structure, the services’ 

section 115 mechanical royalty rate 

must increase as well.169

Although it proposed such a 

structure, Google candidly identified 

this exact risk arising from an uncapped 

TCC. Specifically, Google 

acknowledged: 

Having no cap on TCC . . . leaves the 

services exposed to the labels’ market power, 

and would warrant close watching if adopted 

. . . . 

Google PFF ¶ 73 (emphasis added). But 

obvious and crucial questions arise: 

Who would do the ‘‘watching’’? When 

would such watching occur? Congress 

directed the Judges to be the 

‘‘watchers,’’ and Congress instructed 

that the ‘‘watching’’ should occur only 

through rate proceedings, scheduled at 

specified intervals. The majority has not 

adequately addressed Google’s candid 

warning as to the risk of an uncapped 

TCC, to the extent it has even addressed 

the issue at all. 

The injury to the services from the 

majority’s uncapped TCC rate structure 

is easily demonstrated. For example, as 

discussed infra, the unregulated sound 

recording royalty rate charged to 

interactive streaming now ranges from 

approximately [REDACTED] % TO 

[REDACTED] % of total service revenue. 

With a TCC of 26.2% (the majority’s 

TCC rate in 2022) the TCC prong would 

equal as much as [REDACTED] % (i.e., 

[REDACTED]). However, if the 

unregulated record companies 

demanded 70% of revenue as sound 

recording royalty payments, the 

mechanical rate would then rise to 

18.34% (i.e., .70 × .262). This would be 

a [REDACTED] % increase in the 

mechanical rate, arising from the 

exercise of the absolute discretion and 

self-interest of the record companies. 

Moreover, the total royalty cost to the 

service paying these royalties would be 

[REDACTED] %, leaving the service 

with only [REDACTED] % of revenue to 

fund the rest of its operations. 

It is important to distinguish the TCC 

rate in the 2012 benchmark, advocated 

in this Dissent, with the TCC rate in the 

Majority Opinion. Under the 2012 

benchmark, the TCC is capped in a 

‘‘lesser of’’ prong, such that, if the prong 

in which the TCC is set forth should be 

Federal Register / Vol. 84, No. 24 / Tuesday, February 5, 2019 / Rules and Regulations 1965 

170 It may be the case that sound recording rights 

and the musical works rights should be placed on 

an equal regulatory (or deregulatory) footing. 

However, that is the role of Congress, not the 

Judges, and the Judges cannot fix the disparity in 

the regulatory structure by simply ceding to the 

record companies the power to set mechanical 

royalty rates (And even if the Judges could 

accomplish this, they certainly could not do so 

absent a record, and after the record had closed). 

triggered, it generally cannot exceed a 

specified per-subscriber rate, thus 

placing a limit on the reliance on the 

effect of the record companies’ market 

power. See, e.g., 37 CFR 385.13(a)(2) 

and (3). This has been a tradeoff the 

services have been willing to accept, 

because they have agreed to settlements 

in 2008 and again in 2012 incorporating 

this constrained use of TCC. However, 

they never accepted a complete deferral 

to the sound recording rate as an 

uncapped measure of the mechanical 

rate for all tiers of service. 

The majority apparently responds to 

this problem of record company 

influence and market power with a 

figurative shrug. First, the majority 

concedes that Google’s expressed 

concern is ‘‘true,’’ but irrelevant, 

because the record companies could put 

the services out of business with high 

rates at any time, even without the 

imposition of the TCC prong. Majority 

Opinion, supra at 35 n. 75. But this 

point ignores the fact that, at present, 

the record companies do not have to be 

concerned with a reduction of their 

royalties because of the linking of those 

royalties to the mechanical license 

royalties. That is new and, as explained 

infra, the record companies may decide 

to keep their rates high despite the 

increase in mechanical rates, or decide 

it is in their interest to avoid a reduction 

in royalty revenue by creating a 

completely different paradigm for 

streaming, by which the record 

companies move the streaming service 

in-house and effectively destroy the 

existing services. Is this speculative? Of 

course it is, but that is precisely the 

problem. As Copyright Owners’ counsel 

stated in closing argument, and as 

Google intimated in its post-hearing 

filing, the potential impact of the record 

companies’ responses to such a rate 

structure, given their market power, 

needed to be tested at the hearing, 

which, of course, it was not. 

Then, in what may reasonably be 

characterized as a combination of 

naivete ́ and wishful thinking, the 

majority notes that the parties simply 

‘‘must . . . trust in the rational selfinterest of the market participants.’’ Id. 

at 36 n.75. But Congress delegated the 

authority to set mechanical royalty rates 

to the Judges and, as noted in both the 

Majority Opinion and this Dissent, the 

section 801(b)(1) standards and 

objectives are not to be determined 

simply by reference to the market, let 

alone by a referral to a market actor 

economically adverse to the parties in 

this proceeding.170

2. Injury to Licensors (Copyright 

Owners) 

The Majority Opinion’s rate structure 

would jeopardize Copyright Owners as 

well, as they note in their post-hearing 

filing in response to Google. In that 

reply, Copyright Owners take note of the 

new risks—unaddressed at the 

hearing—that they would face under 

such a structure: 

—record companies could acquire the 

streaming services, and then set low 

internal sound recording royalty rates 

(transfer prices) that would amount to 

‘‘sweetheart’’ deals intended to diminish 

the royalties paid to Copyright Owners; 

—services could start their own record 

companies, and then engage in the same 

transfer pricing/’’sweetheart’’ deals that 

include low sound recording royalties; 

—record companies could grant sound 

recording licenses in exchange for equity 

interests in services (short of outright 

acquisition) and then agree to accept lower 

royalty rates than would exist in the 

absence of the equity payments, thus 

reducing mechanical license royalties. 

CORPFF-Google at pp. 2–3, 24, 40, 44. 

Also of great importance to Copyright 

Owners, a rate structure limited to a 

percent of revenue or a TCC rate does 

nothing to protect Copyright Owners 

from the potential displacement, 

deferment, bundling or attribution 

indeterminacy of a revenue-based 

structure. That is, even a TCC prong is 

a revenue-based prong, but under that 

prong the task of calculating ‘‘revenue’’ 

is delegated to the record companies, 

over whom the Judges have no control. 

Google claims that its proposed 

structure (and, by extension, the 

majority’s structure) does protect against 

the problems that can arise under a 

revenue-based royalty. GPFF ¶¶ 67, 72 

(‘‘Because record labels will always 

protect their own interest, this prong 

ensures that, through that process, they 

also protect the interest of Copyright 

Owners . . . . Today, Copyright 

Owners still recognize the virtue of the 

TCC structure in protecting their 

interest . . . .’’). 

However, Copyright Owners rightly 

note that they obtain no legal protection 

under such a TCC prong. In making this 

argument regarding displacement and 

deferral of revenue, Copyright Owners 

lay out comprehensively all the 

problems inherent in an uncapped TC 

prong set in a greater of rate structure, 

such as adopted in the majority opinion: 

The notion that Google’s TCC prong will 

provide protection from revenue gaming, 

deferral and displacement, and other revenue 

prong problems is unsupported and 

speculative. Relying on just the TCC to solve 

those admitted problems leaves the 

Copyright Owners’ protection from such 

problems entirely outside the statute . . . . 

[REDACTED] are what protects the Copyright 

Owners from price-slashing by the services. 

What is left unanswered . . . is . . . how can 

it be reasonable to ask the Judges to set a rate 

that does not itself provide for a fair return 

. . . but simply puts the Copyright Owners’ 

fair return in the hands of the labels to 

negotiate terms that will adequately protect 

the publishers and songwriters as well? The 

labels do not have a mandate to ensure that 

the Services provide a fair return to the 

Copyright Owners, and cannot be directed to 

ensure such. Indeed, labels may not have the 

same incentives as songwriters and 

publishers to negotiate such protections in 

their deals. To wit, a label could make an 

agreement with a service that includes only 

a revenue prong in exchange for equity or 

some other consideration that it may never 

include in the applicable revenue subject to 

the TCC. . . . [W]hat if Google purchased one 

or more record labels and did not have to pay 

any label royalties? Or what if Spotify chose 

to avail itself of the compulsory license to 

create its own master recordings embodying 

musical works—which it is already doing 

[COPFF ¶ 396]—and chose to compensate 

itself for its use of the master recordings on 

a sweetheart basis (or not at all)? Or what if 

one or more labels decided to enter the 

interactive streaming market and did not 

have to pay themselves royalties? In each 

case, the Copyright Owners’ protection—the 

protection that the Services admit the 

Copyright Owners need and is provided by 

the TCC—would be gone. 

CORPFF-Google at 39–41 (emphasis in 

original). 

I cannot improve upon Copyright 

Owners’ statement of the problems they 

face from an uncapped TCC rate prong 

in a greater of structure. 

The majority however dismisses this 

argument, stating (as noted supra) that 

they do not rely on ‘‘Google’s revised 

rate proposal.’’ Majority Opinion at 37 

n.39. However, that response misses the 

point: Google’s argument is the same as 

the majority’s argument with regard to 

rate structure. Because one is deficient 

as a consequence of not having been not 

presented and tested at the hearing— 

failing to afford the parties the ability to 

cross-examine witnesses and present a 

rebuttal case—then the other is deficient 

as well. 

C. The Majority Misunderstands the 

Record 

The majority pins its novel rate 

structure not on any party’s proposals, 

but rather on the direct mechanical 

license agreements entered into 

[REDACTED] and a single license 

entered into by a non-participant and 

1966 Federal Register / Vol. 84, No. 24 / Tuesday, February 5, 2019 / Rules and Regulations 

171There is no record evidence that Microsoft 

continues to operate an interactive streaming 

service. 172 I note that Google’s economic expert, Dr. 

Leonard, did not testify in support of the rate 

structure for which the majority and Google have 

advocated for the first time post-hearing. In fact, he 

opined that the 2012 rate structure (without the 

Mechanical Floor) was the best rate structure for the 

2018–2022 rate period. 

173The Shapley value approach is described in 

more detail, infra. 

174 I will return to this crucial assumption 

presently. 

175Another Shapley value expert for Copyright 

Owners, Professor Gans, does not concede that the 

‘‘see-saw’’ effect will occur. Rather, he testified that 

the services might simply raise downstream prices 

or pay the higher royalties out of higher profits 

(which to date do not exist). Gans WRT ¶ 32. This 

opinion only underscores the tenuous nature of the 

see-saw hypothesis. 

176The record companies would have to accept 

substantial losses in royalty income. According to 

the RIAA, interactive streaming revenues for 2015 

totaled $1.604 billion. See Marx WDT ¶ 153 & App. 

B.1.b (citing RIAA figures). The extent of this 

assumed loss by record companies, absent any 

evidence, makes the assumption of the see-saw 

effect completely unreasonable. 

peripheral licensee, Microsoft.171 See 

Majority Opinion, supra, at 34. 

However, the majority recognizes that 

many other interactive streaming 

agreements with music publishers 

contain different rate structures, 

including the rate structure consistent 

with the 2012 benchmark. Id. 

But the majority’s rationale for relying 

on the [REDACTED] (and Microsoft) 

agreements to support its rate structure 

is bewildering. The majority, relying on 

the testimony of Dr. Leonard, writes that 

the ‘‘marketplace supports a number of 

rate structures and that no single 

structure or element of a structure is 

indispensable.’’ Id. at 34. The majority’s 

reliance on this point is bewildering 

because it (rightly) praises a market with 

multiple rate structures as support for 

its adoption of a single rate structure. 

This makes no sense. 

Moreover, the ‘‘marketplace’’ of 

which the majority speaks so 

approvingly is not an unregulated 

market. Rather, it is a ‘‘marketplace’’ 

that has flourished for a decade, as 

discussed infra in this Dissent, while the 

2012 benchmark (and its fundamentally 

identical economic antecedent, the 2008 

rate structure) were in place. It is this 

regulated ‘‘marketplace,’’ with its multitiered rate structure, that has enabled 

creation of the multiplicity of rates that 

the majority lauds. Unwittingly the 

majority has adopted the perverse 

notion that ‘‘no good deed goes 

unpunished,’’ by relying on the benefits 

of the 2012 benchmark as a basis to 

eliminate it! Perhaps the more 

appropriate adage to follow should be: 

‘‘If it ain’t broke, don’t fix it.’’ 172

D. The Majority Makes the Heroic 

Assumption that the Major Record 

Companies will Docilely Accept 

Millions of Dollars in Lost Revenue, by 

Agreeing to Accept Lower Sound 

Recording Royalties 

The majority is sanguine as to the 

impact of the uncapped TCC prong rate 

in its proposed rate structure, because it 

has confidence that the major record 

companies will recognize that they have 

no choice but to decrease their royalty 

rates and reduce their revenues by 

millions of dollars, in order to subsidize 

the section 115 royalty rate increases 

adopted in the Majority Opinion. The 

complacency of the majority is based on 

the application of the Shapley value 

approaches modeled by experts for the 

services and for Copyright Owners. 

To summarize,173 the Shapley models 

estimate a ‘‘surplus’’ of revenue from 

downstream revenues, after all the noncontent costs of the market participants 

are recovered, that is available to be 

distributed among the services and the 

input providers, i.e., the record 

companies (who provide the sound 

recordings) and the music publishers 

(who provide the music works). The 

division of that surplus is determined 

by an algorithm that measures and 

averages the value of each party’s 

contribution to the creation of the 

surplus, over all possible arrival 

sequences in the marketplace. 

As the majority correctly notes, the 

parties’ Shapley value models all 

predict that the ratio of sound recording 

royalties to musical works royalties 

should decrease from current levels. 

However, the majority is merely 

assuming that the sound recording rates 

will adjust downward. They base their 

assumption on the testimony of 

Professor Watt, who identified what 

another economic witness (Professor 

Katz, for Pandora) described as the ‘‘seesaw’’ effect. Simply put, this effect 

arises from the assumption that the 

interactive streaming services must be 

permitted to retain enough revenue to 

survive,174 but, beyond that, the 

suppliers of the two ‘‘must have’’ inputs 

can negotiate in a free market to share 

equally the remainder of the surplus 

generated by downstream revenue. 

(They receive different percentages of 

total revenue because, although their 

share of the Shapley surplus is equal, 

they have different non-content 

costs).175

In this see-saw paradigm, the present 

ratio of sound recording: musical works 

royalties is too high at present, 

according to the Shapley valuations, 

because the mechanical royalty has been 

set under section 115 at too low a rate, 

allowing the record companies to 

appropriate the remainder of the 

surplus, i.e., more than the percentage 

suggested by the Shapley approach. 

According to the majority and the 

Shapley experts, applying the Shapley 

values would eliminate this regulatory 

effect and, the ratio of sound recording 

royalties to musical works royalties 

theoretically then should fall, with the 

fall in the ratio arising from a significant 

reduction in sound recording royalties 

and an increase in musical works rates. 

But theory must meet reality. As I 

note in greater detail infra in connection 

with my own analysis of the Shapley 

approach, no witness could state 

whether this see-saw effect would 

occur, and there were no witnesses from 

the record companies who testified that 

the record companies would impotently 

acquiesce to a significant loss in 

royalties to accommodate the diversion 

of a huge economic surplus away from 

them and to the Copyright Owners.176

I am unwilling to adopt the 

hypothetically plausible idea of a seesaw effect impacting the division of this 

surplus, when there is simply no 

evidence that such an adjustment would 

occur. Given the $1.604 billion in 

interactive streaming revenue reported 

by RIAA, I cannot merely assume that 

the record companies would acquiesce 

to a substantial reduction in royalty 

revenue, rather than seek some other 

market structure in which to protect this 

revenue, such as, for example, 

resurrecting the idea of establishing or 

otherwise integrating their own 

streaming services. The Services’ 

experts, and Apple’s expert, testified 

that any purported see-saw effect was 

indeterminate with regard to its impact 

on the interactive streaming services. 

See 4/5/17 Tr. 4944–45 (Katz) 

(acknowledging the possibility that a 

mechanical royalty rate increase would 

affect sound recording royalties in the 

future but not immediately, and that 

there is no reliable estimate of the size 

of any such adjustment); 4/7/17 Tr. 

5515–5516(Marx) ((stating that there 

would ‘‘[m]aybe [there would] be some 

adjustment on the sound recording side 

. . . . [H]ow those negotiations play 

out, I think it’s complicated and hard to 

guess’’); 4/5/17 Tr. 5704–05 (Ghose) 

(‘‘[I]t’s quite likely that the streaming 

service will want to maintain their 

royalties and their revenues at the 

current levels. And so, you know, to me 

it seems like an extreme statement that 

the entire increase in publisher profits 

will come at the expense of the 

streaming services.’’). And, to repeat, 

Copyright Owners own Shapley value 

expert, Professor Gans, suggests that the 

Federal Register / Vol. 84, No. 24 / Tuesday, February 5, 2019 / Rules and Regulations 1967 

177The majority dismisses the risk of the 

destruction of the present market structure as not 

the type of disruption that the Judges may consider. 

Majority Opinion at 74 n.137. However, the 

majority finds that it must implement its 44% rate 

increase incrementally over five years, because a 

more sudden implementation would be disruptive 

under the statutory standard. It seems apparent that 

establishing a rate structure that cedes control to the 

record companies who can increase the mechanical 

rate at will is at least as disruptive to the industry. 

Moreover, the disruption is not merely to one 

business, but rather to every service and every 

service business model now in operation. (Recall 

that even Google, who claims to support this rate 

structure, acknowledges that the services are subject 

to abuse from the record companies’ market power, 

and Google puzzlingly calls on ‘‘someone’’ to 

‘‘watch’’ the situation.) Moreover, as Copyright 

Owners point out, as discussed supra, even they 

face significant risk from this structure. Indeed, this 

rate structure is an ‘‘equal opportunity disrupter.’’ 

178This point needs to be distinguished from the 

case where the parties voluntarily agree to 

recognize the perfect complementarity between 

inputs, such as in the ‘‘All-In’’ context, and deduct 

the cost of the perfectly complementary 

performance right when calculating the mechanical 

license. In the ‘‘All-In’’ case, the parties’ prior 

agreement is part and parcel of the useful 2012 

benchmark adopted in this Dissent, and the 

licensors are essentially the same underlying 

entities. 

burden will fall on the services, not the 

record companies. 

To convince itself of the unlikelihood 

of such results, the majority notes that, 

as a matter of economic theory, given 

the present interactive streaming market 

structure, the record companies already 

have the economic power to put 

streaming services out of business, 

because the market in which record 

companies and interactive streaming 

services negotiate is unregulated. 

Indeed, the record companies’ strategy 

has been to ‘[REDACTED].’’ Web IV, 

supra, at 63 (restricted version). 

But the static nature of this 

assumption is not reasonable in this 

context. It may be reasonable to assume, 

given the royalty revenue allocations 

now present in the interactive streaming 

market, that the record companies 

would continue to find it in their selfinterest to maintain the existence of 

interactive streaming services. However, 

if mechanical royalty rates were to 

increase significantly, there is no 

evidence in the record in this 

proceeding that indicates whether the 

record companies would decide to 

maintain the current vertical structure 

of the market and docilely accept such 

a revenue loss. For example, they could 

create their own streaming services 

(perhaps learning the lessons from the 

failed Pressplay and MusicNet attempts 

of the past). Or, they could adopt what 

Professor Gans suggests, maintain the 

sound recording royalty rates, thereby 

hastening a more immediate exit of 

streaming services from the market, or 

reduce their potential for success, 

making them ripe for acquisition by 

record companies at distress prices.177

In any event, from an evidentiary 

perspective, there is no reason why the 

Judges should either indulge in or 

dismiss such speculation. There is 

absolutely no evidence that such a 

significant shift in royalty distribution 

would occur, nor is there sufficient 

evidence as to the potential 

consequences of such a draconian 

reallocation of revenue. Accordingly, I 

cannot agree with a rate structure that 

implicitly depends on the voluntary 

reduction in royalty income of by an 

unregulated input provider to whom the 

majority has ceded control over the 

statutory rates. 

E. The Majority Denigrates the Parties’ 

Ten- Year Rate Structure as a ‘‘RubeGoldberg-esque’’ Device. 

The majority disparages the parties’ 

ten year rate structure, spanning two 

settlements, as ‘‘Rube-Goldberg-esque.’’ 

Moreover, the majority characterizes the 

existing structure as ‘‘impenetrable.’’ 

That is a remarkable statement, given 

that the parties have operated under the 

structure for a decade—clearly they 

know how to penetrate the language and 

understand its meaning. It may be true, 

as discussed in more detail infra, that 

some songwriters and others may find 

the calculation of their royalties to be 

difficult to understand. However, the 

creative artists can utilize the services of 

their agents—the NMPA and others—to 

answer any questions that may arise. It 

seems close to hubris for any jurist to 

dismiss a decade-long voluntary rate 

structure, one that the parties have 

extended by agreement, as 

‘‘impenetrable,’’ merely because the 

jurist finds the structure too difficult to 

understand. 

The majority also indicates that it has 

the power to make certain that the 

regulations it adopts are sufficiently 

simple and understandable. Such a 

common sense point cannot be 

disputed, but it is misapplied here. 

Again, the proof of the pudding is in the 

eating, so to speak; the parties have 

operated under the existing rate 

structure for a prolonged period, belying 

any concern that the Judges should 

adopt regulations that are simpler, and 

reject those that are more complicated. 

Moreover, as noted infra (in response to 

the same ‘‘complexity’’ argument made 

by Copyright Owners), the issue of 

regulatory complexity is not a factor or 

objective in the rate-setting process 

under section 801(b)(1). Thus, if the 

2012 rate structure otherwise is best 

suited to effectuate the statutory 

objectives as compared with the other 

alternatives, there is no basis for the 

complexity of the structure to override 

the specific application of the express 

statutory factors. 

III. The Majority Opinion is Legally 

Erroneous 

A. The Majority has not ‘‘Determined’’ 

Statutory Rates 

Pursuant to 17 U.S.C. 801(b)(1), the 

Judges have the duty to make a 

determination’’ of rates that are 

‘‘reasonable’’ and that are calculated to 

achieve four itemized sets of objectives. 

The majority’s two-pronged rate 

proposal fails to discharge this duty. 

Rather, the majority has adopted a rate 

structure that is indeterminate, allowing 

the record companies, especially the 

major record companies with ‘‘must 

have’’ repertoires, to set the mechanical 

rates that are paid under section 115. 

Merely setting the ratio between 

sound recording royalty rates and 

mechanical royalty rates is not the same 

as actually making a ‘‘determination’’ 

setting the rates. As noted in Section I, 

supra, pegging the regulated mechanical 

royalty rate to the unregulated sound 

recording royalty rate through the 

‘‘greater of’’ uncapped TCC prong leaves 

the statutory mechanical rate 

indeterminate. Nothing in section 

801(b)(1) permits the setting of an 

indeterminate rate that becomes 

determined only when an unregulated 

private party sets its own rates.178

B. The Majority Decision Unlawfully 

Delegates to Private Entities, 

Unrepresented in this Proceeding (the 

Record Companies), the Ability to Set 

the Section 115 Royalty Rates 

The majority’s adoption of an 

uncapped TC C prong in a greater of 

structure constitutes an improper 

delegation of a statutory duty to the 

record companies, who are private 

entities. However, the majority has not 

cited any authority supporting such a 

private delegation, nor has it suggested 

that its uncapped TCC presents an issue 

regarding the delegation of duties. 

The Supreme Court and the D.C. 

Circuit have established a ‘‘private 

nondelegation doctrine,’’ which 

prohibits the delegation of statutory 

duties to private entities. Carter v. 

Carter Coal Co., 298 U.S. 238 (1936); 

Ass’n of Am. R.R.s v. U.S. Dep’t of 

Transp., 721 F.3d 666, 675 (D.C. Cir. 

2013), vacated and remanded sub nom. 

Dep’t of Transp. v. Ass’n of Am. R.Rs., 

1968 Federal Register / Vol. 84, No. 24 / Tuesday, February 5, 2019 / Rules and Regulations 

179The Supreme Court vacated and remanded the 

case, after granting certiorari, holding that Amtrak 

was not in fact a private entity. 180The majority’s concern for ‘‘transparency,’’ 

expressed as a criticism of the parties’ workable ten 

year rate structure, disappears in connection with 

it delegation of rate-setting to the record companies. 

The definition of revenue, the handling of bundled 

products and the exclusion of certain consideration 

from royalties will remain opaque to the Judges and 

to Copyright Owners. 

135 S.Ct. (2015) (Railroad v. DOT). In 

Railroad v. DOT, the D.C. Circuit struck 

down a statute that explicitly delegated 

regulatory authority to Amtrak, 

allegedly a private entity, to develop 

standards to evaluate passenger service 

quality. Id. at 673–677. The Association 

of American Railroads had challenged 

the delegation of authority to Amtrak, 

claiming it was a private entity and that 

the holding in Carter Coal precluded the 

delegation of such authority to a private 

entity. The D.C. Circuit agreed that this 

express grant of authority by Congress to 

a private entity was unconstitutional 

under the private nondelegation 

doctrine. Id.179

If Congress cannot expressly delegate 

statutory and regulatory power to a 

private entity, then, a fortiori, a 

subordinate administrative agency, the 

Copyright Royalty Board, cannot (or at 

least should not) be able to implicitly 

delegate statutory and regulatory 

authority to private entities. Yet in this 

case, the majority has implicitly made 

such a subdelegation, yoking the 

mechanical royalty rates paid by 

interactive streaming services to the 

rates set by record companies, an 

unregulated sector of the music 

industry. Thus as explained supra, the 

level of rates can rise at the unfettered 

discretion of the record companies, to 

the detriment of the streaming services, 

and the measurement of royalties can 

lead to the diminution of the royalty 

base, to the injury of Copyright Owners, 

through the record companies’ unbound 

right to define ‘‘revenue’’ and to 

compartmentalize consideration (e.g., 

through equity instead of royalties).180

Not only does the private delegation 

of section 115 rate-setting authority via 

the pegging of that rate to the 

unregulated sound recording royalty 

rate appear to violate the private nondelegation doctrine, it also appears to be 

inconsistent with the Judges’ expansive 

powers under Chevron U.S.A. Inc. v. 

Nat’l Resources Defense Council, 467 

U.S. 837 (1984). Under the Chevron 

doctrine, courts defer to administrative 

agencies for three broad reasons: First, 

the agencies are presumed to have 

technical expertise. Second, as arms of 

the government, they are politically 

accountable. Third, an express 

delegation of authority by Congress to a 

public agency is an expression of 

legislative intent as to how a statute 

should be applied. See K. Brown, Public 

Law and Private Lawmakers, 93 Wash. 

U. L. Rev. 616, 655–57 (2016). 

However, when an agency in turn 

delegates its powers to private entities, 

such as the record companies, these 

rationales disappear. With regard to the 

first rationale, technical expertise, the 

record companies certainly have 

expertise in the area of music royalty 

rate-setting. However, that expertise is 

married to an intention—indeed, a 

fiduciary obligation—that they seek to 

maximize their own profit, even if that 

maximization ‘‘conflict[s] with the 

legislative mandates of Congress,’’ such 

as the standards set forth in section 

801(b)(1). See id. at 655. As for the 

second rationale, private entities, such 

as the record companies in this context, 

‘‘are not beholden to the democratic 

process,’’ and the public therefore ‘‘has 

no legal mechanism’’ to hold them 

accountable. Thus, the second Chevron 

rationale is inapplicable. See id. at 657. 

Finally, with regard to the third basis for 

Chevron deference, legislative intent, 

private entities do not have the interest 

in filling in the interstices of ambiguous 

statutory authority by ascertaining the 

public interest. See id. at 658. Indeed, as 

corporations, their duty is to their 

shareholders, which, to state the 

obvious, is not the same as the public 

interest expressed in section 801(b)(1). 

In the present case, the private 

delegation is even more problematic. 

The record companies to whom implicit 

rate-setting authority has been delegated 

are not in any sense neutral. In relation 

to the interactive streaming services, the 

record companies are licensors, seeking 

payment from the interactive streaming 

services. In relation to Copyright 

Owners, they are competitors for royalty 

revenue, in the sense that both the 

record companies and music publishers 

are input providers who compete for the 

downstream revenue generated by the 

interactive streaming services. It is hard 

to imagine that the Majority Opinion 

would (or should) be afforded Chevron 

deference, when the structure it creates 

smacks too much of the fox guarding not 

one but two henhouses. 

Of course, a full evaluation of these 

legal issues, by the parties and the 

Judges, was skirted, because no party 

proposed during the hearing a rate 

structure with an uncapped TCC. If this 

structure had been proposed, the parties 

would most certainly have fully briefed 

the issue in their proposed Conclusions 

of Law and Reply Proposed Conclusions 

of Law. Alas, they were not given that 

opportunity, and the majority has acted 

without the aid of the parties’ input. 

There is a better approach. As set 

forth in full infra, I have presented an 

Alternative Dissenting Determination. 

ALTERNATE DISSENTING 

DETERMINATION 

IV. INTRODUCTION 

The Copyright Royalty Judges (Judges) 

commenced the captioned proceeding to 

set royalty rates and terms to license the 

copyrights of songwriters and 

publishers in musical works made and 

distributed as physical phonorecords, 

digital downloads, and on-demand 

digital streams during the rate period 

January 1, 2018, through December 31, 

2022. See 81 FR 255 (Jan. 5, 2016). 

Below, I set forth my alternative 

analysis, rate structure and rates, in the 

form of a comprehensive alternative 

determination. 

V. ALTERNATIVE DETERMINATION 

OF RATE STRUCTURE AND RATES 

In this alternative determination, I 

would establish the section 115 royalty 

rate structure, and rates, for the period 

2018 through 2022, by adopting the 

2012 settlement as the appropriate 

benchmark, thereby maintaining the 

same structure and rates as now exist 

under the current regulations. My 

decision in this regard is based on a 

comparative analysis of that benchmark 

and other benchmarks, and a 

consideration of other record evidence 

submitted by the parties, as fully set 

forth herein. 

Additionally, had the record evidence 

not included the 2012 rate structure and 

rates as a designated benchmark, I 

nonetheless would have established for 

the 2018–2022 period the same rate 

structure and rates as now exist, 

pursuant to the Judges’ authority to 

adopt the existing rates and rate 

structure when they find that those 

prevailing provisions better satisfy the 

statutory standards than any other 

proposed structures and rates properly 

discernible from the record evidence. 

Music Choice v. Copyright Royalty Bd., 

774 F.3d 1000, 1009 (D.C. Cir. 2014). 

A. Background 

1. Statute and Regulations 

The Copyright Act (Act) establishes a 

compulsory license for use of musical 

works in the making and distribution of 

phonorecords. 17 U.S.C. 115. 

Phonorecords licenses now include 

physical and digital sound recordings 

embodying the protected musical works 

as well as digital sound recordings that 

may be streamed on demand by a 

listener. 

The Section 115 compulsory license, 

created in 1909, reflected Congress’s 

Federal Register / Vol. 84, No. 24 / Tuesday, February 5, 2019 / Rules and Regulations 1969 

181Because of this history, and the fading 

importance of mechanical piano rolls, this license 

is often referred to as the ‘‘phonorecords’’ license, 

but still also remains identified, synonymously, as 

the ‘‘mechanical’’ license. In point of fact, vinyl 

records, CDs, tapes and any other physical 

reproductions would still constitute ‘‘mechanical’’ 

reproductions. 

182See H.R. Rep. No. 94–1476 at 111 (1976); 17 

U.S.C. chapter 8 (1978). In 1993, Congress abolished 

the CRT and replaced it with copyright arbitration 

royalty panels (CARPs). Copyright Royalty Tribunal 

Reform Act of 1993, Public Law No. 103–198, 107 

Stat. 2304. In turn, Congress abolished the CARP 

system and replaced it with proceedings before the 

Copyright Royalty Judges. Copyright Royalty and 

Distribution Reform Act of 2004, Public Law No. 

108–419, 118 Stat. 2341. 

183The United States Court of Appeals for the 

District of Columbia Circuit affirmed the CRT. 

Recording Industry Ass’n. of America v. Copyright 

Royalty Tribunal, 662 F.2d 1 (D.C. Cir. 1981) (1981 

Phonorecords Appeal) (remanded on other 

grounds). 

184The Librarian initiated the 1976 proceeding 

during the period after the termination of the CRT 

and the inception of the CRB, a time during which 

controversies regarding royalty rates and terms were 

referred to privately retained arbitrators under the 

CARP program, 

attempt to balance the exclusive rights 

of owners of copyrighted musical works 

with the public’s interest in accessing 

protected works. In 1897, Congress 

extended copyright protection for the 

benefit of rightsholders to the 

performance of their musical 

compositions. Act of Jan. 6, 1897, 54th 

Cong., 2d Sess. Ch. 4, 29 Stat. 481 

(1897). However, at the dawn of the 

20th century, the standardization and 

commercialization of a prior 

technological advance roiled the 

musical works markets. That period saw 

the expansion of the manufacture and 

sale of piano rolls—a system of 

perforated notations that could be used 

in conjunction with ‘‘player pianos’’—to 

play music automatically. 

The copyright implications of this 

commercial advancement were 

adjudicated in a 1908 Supreme Court 

decision, White-Smith Music Publishing 

Co. v. Apollo Co., 209 U.S. 1 (1908). 

That decision held that piano rolls did 

not embody a system of notation that 

could be read and therefore were not 

‘‘copies’’ of musical works within the 

meaning of the existing copyright laws, 

but rather were merely parts of devices 

for mechanically performing the music. 

Id. at 17. Thus, the owners of otherwise 

copyright-protected musical works 

lacked such protection vis-a`-vis piano 

rolls. 

In reaction to that decision, Congress 

expanded the rights of musical works 

copyright owners to include the right to 

make ‘‘mechanical’’ reproductions, such 

as piano rolls, that embody musical 

works. However, Congress made that 

right subject to a compulsory license 

because of concern about monopolistic 

control of the piano roll market by the 

makers of piano rolls (and another 

burgeoning invention, phonorecords). 

17 U.S.C. 1 (1909); see also H.R. Rep. 

No. 60–2222, at 9 (1909).181

Specifically, under the 1909 legislation, 

upon payment of a royalty rate of 2¢ per 

‘‘mechanical,’’ any person was 

permitted to manufacture and distribute 

a reproduction of a musical work. 

Congress revised the mechanical 

license in its broader 1976 revision of 

the copyright laws. Among the various 

changes relating to the phonorecords 

license, Congress directed licensees to 

provide copyright owners with a pre-use 

written ‘‘notice of intention,’’ in order to 

obtain the Section 115 license. The 1976 

revisions to the Copyright Act retained 

the then extant royalty fee of 2.75¢ per 

phonorecord (or 0.5¢ per minute of 

playing time or fraction thereof, 

whichever amount was larger). 

However, the 1976 revision also created 

a new entity, the Copyright Royalty 

Tribunal (CRT), to conduct periodic 

proceedings to adjust the rate.182

In 1995, Congress passed the Digital 

Performance Right in Sound Recordings 

Act (DPRA), Public Law No. 104–39, 

109 Stat. 336, extending the mechanical 

license to ‘‘digital phonorecord 

deliveries’’ (DPDs) (emphasis added), 

which the statute defines as each 

individual delivery of a phonorecord by 

digital transmission of a sound 

recording which results in a specifically 

identifiable reproduction by or for any 

transmission recipient of a phonorecord 

of that sound recording, regardless of 

whether the digital transmission is also 

a public performance of the sound 

recording or any nondramatic musical 

work embodied therein. 17 U.S.C. 

115(d). Accordingly, the license now 

covers DPDs, in addition to physical 

copies, such as compact discs (CDs), 

vinyl records and cassette tapes. 

A proceeding to determine reasonable 

royalty rates and terms for the section 

115 mechanical license is commenced 

by the Judges on the schedule provided 

by 17 U.S.C. 803(b)(1)(A)(i)(V). 

Although a contested hearing may 

ultimately be necessary, the Act strongly 

encourages negotiated settlements 

among interested parties. See 17 U.S.C. 

115(c)(3)(E)(i) (‘‘License agreements 

voluntarily negotiated at any time 

between one or more copyright owners 

. . . and one or more persons entitled 

to obtain a compulsory license . . . 

shall be given effect in lieu of any 

determination . . . .’’); 17 U.S.C. 

803(b)(3) (requiring a ‘‘Voluntary 

Negotiation Period’’); 17 U.S.C. 

803(b)(6)(C)(x) (requiring a settlement 

conference prior to a hearing). 

As currently configured, the 

applicable regulations are divided into 

three subparts. Subpart A regulations 

govern licenses for reproductions of 

musical works (1) in physical form 

(vinyl albums, compact discs, and other 

physical recordings), (2) in digital form 

when the consumer purchases a 

permanent digital copy (download) of 

the phonorecord, and (3) inclusion of a 

musical work in a purchased telephone 

ringtone. Subpart B regulations govern 

licenses for interactive streaming and 

limited downloads. Subpart C 

regulations govern limited offerings, 

mixed bundles, music bundles, paid 

locker services, and purchased content 

locker services. 

2. Prior Proceedings 

In 1980, the CRT conducted the first 

contested proceeding to set rates for the 

Section 115 compulsory license. The 

CRT increased the then-existing rate by 

more than 45%, from 2.75¢ rate per 

phonorecord to 4¢ per phonorecord. 45 

FR 63 (Jan. 2, 1980).183 By 1986, the 

CRT had increased the mechanical rate 

to the greater of 5¢ per musical work or 

.95¢ per minute of playing time or 

fraction thereof. 46 FR 66267 (Dec. 23, 

1981); see also 37 CFR 255.3(a)–(c). The 

next adjustment of the Section 115 rates 

was scheduled to begin in 1987. 

However, the parties entered into a 

settlement that the CRT adopted, setting 

the rate at 5.25¢ per track beginning on 

January 1, 1988, and established a 

schedule of rate increases generally 

based on positive limited percentage 

changes in the Consumer Price Index 

every two years over the next 10 years. 

See 52 FR 22637 (June 15, 1987). The 

rate increased until 1996, when the rate 

was set at the greater of 6.95¢ per track 

or 1.3¢ per minute of playing time or 

fraction thereof. See 37 CFR 255.3(d)– 

(h). 

The rates set by the CRT pursuant to 

the 1987 settlement were set to expire 

on December 31, 1997. The Librarian of 

Congress announced a negotiation 

period for owners and users of the 

section 115 license in late 1996, during 

which the parties reached a settlement 

regarding rates for a ten-year period to 

end in 2008.184 Under the settlement, 

(ultimately adopted by the Librarian), 

the rate for physical phonorecords was 

set at 7.1¢ per track beginning on 

January 1, 1998, and a schedule was 

established for fixed rate increases every 

two years over the next 10-year period 

with the rate beginning on January 1, 

2006, being the larger of 9.1¢ per track 

or 1.75¢ per minute of playing time or 

fraction thereof. See 37 CFR 255.3(i)– 

(m); see also 63 FR 7288 (Feb. 13, 1998). 

1970 Federal Register / Vol. 84, No. 24 / Tuesday, February 5, 2019 / Rules and Regulations 

185That is, the Judges in Phonorecords I 

recognized that the existing rate structure and rates 

were sufficient to cover all products at issue, a 

result that this Dissent likewise would accomplish. 

But, a fortiori, in the present case this result is also 

backed by an evidentiary record supporting the 

continuation of the existing structure and rates, 

because the present regulatory structure has been 

presented by the Services as a benchmark, rather 

than as a default position. 

186Pub. L. No. 108–419, 118 Stat. 2341. 

187The Phonorecords I settlement agreement 

contained a clause stating that ‘‘[s]uch royalty rates 

shall not be cited, relied upon, or proffered as 

evidence or otherwise used in the Proceeding,’’ 

where ‘‘the Proceeding’’ was a defined term 

meaning Phonorecords I. Trial Ex. 6013, 

Phonorecords I Agreement at Sec. 3. By contrast, 

the Phonorecords II settlement agreement did not 

contain such a clause that would preclude reliance 

on the evidentiary value of the Phonorecords II 

royalty rates. See Trial Ex. 6014, Phonorecords II 

Agreement at Sec. 5.5 (including a full-integration 

clause of the Phonorecords II wrapper agreement). 

I find this distinction important, because it 

demonstrates that the parties to the 2012 settlement 

understood the evidentiary value of the 

Phonorecords II settlement in the next section 115 

proceeding, i.e., this proceeding. 

188 Initial Participants were: Amazon Digital 

Services, LLC (Amazon); Apple, Inc. (Apple); 

Broadcast Music, Inc. (BMI); American Society of 

Composers, Authors and Publishers (ASCAP); 

David Powell; Deezer S.A. (Deezer); Digital Media 

Association (DiMA); Gear Publishing Company 

(Gear); George Johnson d/b/a/GEO Music Group 

(GEO); Google, Inc. (Google); Music Reports, Inc. 

(MRI); Pandora Media, Inc. (Pandora); Recording 

Industry Association of America, Inc. (RIAA); 

Rhapsody International Inc.; SoundCloud Limited; 

Spotify USA Inc.; ‘‘Copyright Owners’’ comprised 

of National Music Publishers Association (NMPA), 

The Harry Fox Agency (HFA), Nashville 

Songwriters Association International (NSAI), 

Church Music Publishers Association (CMPA), 

Songwriters of North America (SONA), Omnifone 

Group Limited; and publishers filing jointly, 

Universal Music Group (UMG), Sony Music 

Entertainment (SME), Warner Music Group (WMG). 

189The settling parties were: NMPA, NSAI, HFA, 

UMG, and WMG. As part of the settlement 

agreement, UMG and WMG withdrew from further 

participation in this proceeding. 

190See 81 FR 48371 (Jul. 25, 2016). 

191Three parties filed comments. American 

Association of Independent Music (A2IM), Sony 

Music Entertainment (Sony), and George Johnson 

dba GEO Music Group (GEO). A2IM urged adoption 

of the settlement and Sony approved of all but one 

provision of the settlement. GEO objected to the 

settlement. 

192See 82 FR 15297 (Mar. 28, 2017). 

193By stipulation of the participants, the Judges 

also accepted and considered written testimony 

from six additional witnesses who did not appear. 

Amazon designated and other participants 

counterdesignated testimony from the 

Phonorecords I proceeding, which was admitted as 

Exhibits 321 and 322. 

The rates adopted for DPDs for the 10- 

year period were the same as those set 

for physical phonorecords, and the rates 

for incidental DPDs were deferred until 

the next scheduled rate proceeding. See 

37 CFR 255.5, 255.6; see also 64 FR 

6221 (Feb. 9, 1999). 

In 2006, with expiration of the 

previous settlement term nearing, the 

Judges commenced a proceeding to 

adjust the mechanical rates under 

section 115. On January 26, 2009, they 

issued a Determination, effective March 

1, 2009. In that Determination, the 

Judges noted that the parties had settled 

their dispute regarding rates and terms 

for conditional downloads, interactive 

streaming and incidental digital 

phonorecord deliveries (i.e., rates in the 

new subpart B). Mechanical and Digital 

Phonorecord Delivery Rate 

Determination, 74 FR 4510, 4514 (Jan. 

26, 2009) (Phonorecords I). The parties 

who negotiated the settlement included 

the NMPA and DiMA, the trade 

association representing its member 

streaming services. Testimony of Rishi 

Mirchandani, Trial Ex. 1, ¶ 59 

(Mirchandani WDT). 

With regard to the subpart A rates, the 

Judges in Phonorecords I rejected the 

parties’ proffered benchmark evidence, 

and instead adopted the existing rates 

and rate structure, holding as follows: 

Based on the evidence before us, we 

conclude that no single benchmark offered in 

evidence is wholly satisfactory with respect 

to all of the products for which we must set 

rates. . . . [W]e are not persuaded that the 

. . . existing rate . . . now in effect for 

nearly three years is . . . inappropriate. 

Phonorecords I at 4522 (emphasis 

added). 

Thus, in the first (and only) litigated 

section 115 proceeding before the 

Judges, they adopted the existing rates 

and structure for the subsequent rate 

period, rather than rates and a structure 

that were proposed by the parties, 

because the Judges were concerned that 

the parties’ proposals would not be 

appropriate for all of the products at 

issue.185

In 2013, the Judges adopted a 

settlement that carried forward the 

existing rates and added a new subpart, 

subpart C, which, as noted supra, covers 

several newly regulated categories— 

‘‘limited offerings, mixed service 

bundles, music bundles, paid locker 

services and purchased content locker 

services.’’ Adjustment of Determination 

of Compulsory License Rates for 

Mechanical and Digital Phonorecords, 

78 FR 67938 (Nov. 13, 2013) 

(Phonorecords II). Once again, the 

settling parties included the trade 

associations for the licensors and 

licensees, NMPA and DiMA, 

respectively. Mirchandani WDT ¶ 59. 

The present section 115 proceeding 

thus is the third since the Judges were 

given jurisdiction under the Copyright 

Royalty and Distribution Reform Act of 

2004.186 In the Phonorecords II 

settlement, the parties agreed that any 

future rate determination for subparts B 

and C configurations presented to the 

Judges would be a de novo rate 

determination. See 37 CFR 385.17, 

385.26 (2016). However, they did not 

agree that the existing rate structure or 

rates could not be considered as the 

bases for future rate determinations.187

B. The Present Proceeding 

In response to the Judges’ notice 

regarding the present proceeding, 21 

entities filed Petitions to Participate.188

The participants engaged in negotiations 

and discovery. On June 15, 2016, some 

of the participants 189 notified the 

Judges of a partial settlement with 

regard to rates and terms for physical 

phonorecords, permanent digital 

downloads, and ringtones—the services 

covered by the extant regulations found 

in subpart A of part 385. The Judges 

published notice of the partial 

settlement 190 and accepted and 

considered comments from interested 

parties.191

On October 28, 2016, NMPA, 

Nashville Songwriters Association 

International (NSAI), and Sony Music 

Entertainment (SME) filed a Motion to 

Adopt Settlement Industry-Wide. The 

motion asserted that SME, NMPA, and 

NSAI had resolved the issue raised by 

SME in response to the original notice. 

The Judges evaluated the remaining 

objection to the settlement filed by 

George Johnson dba GEO Music Group 

(GEO) and found that GEO had not 

established that the settlement 

agreement ‘‘does not provide a 

reasonable basis for setting statutory 

rates and terms.’’ See 17 U.S.C. 

801(b)(7)(A)(iii). As a part of the second 

settlement, Sony withdrew from this 

proceeding. The Judges published the 

agreed subpart A regulations as a Final 

Rule on March 28, 2017.192

During the course of the proceeding, 

the Judges dismissed some participants 

and other participants withdrew. 

Remaining participants at the time of 

the hearing were NMPA and NSAI, 

representing songwriters and publisher 

copyright owners (collectively 

Copyright Owners), and GEO, the pro se 

songwriter/copyright owner. Licensees 

of the copyrights appearing at the 

hearing were Amazon Digital Services, 

LLC (Amazon), Apple Inc. (Apple), 

Google, Inc. (Google), Pandora Media, 

Inc. (Pandora), and Spotify USA Inc. 

(Spotify) (collectively referred to as the 

Services). 

Beginning on March 8, 2017, the 

Judges conducted a twenty-one day 

hearing that concluded on April 13, 

2017. During the course of the hearing, 

the Judges heard oral testimony from 37 

witnesses,193 and admitted over 1,100 

exhibits. The participants submitted 

Federal Register / Vol. 84, No. 24 / Tuesday, February 5, 2019 / Rules and Regulations 1971 

194Nothing in § 351.4 permits the Judges to credit 

an amended rate proposal that is not adequately 

supported by the record evidence. 

195Until late 2016, Pandora operated as a 

noninteractive streaming service, arguably not 

subject to the compulsory license for mechanical 

royalties, but Pandora recently began offering more 

interactive features, including a full on-demand 

tier. Introductory Memorandum to the Written 

Direct Statement of Pandora Media, Inc. at 1–2; 

Written Direct Testimony of Christopher Phillips at 

8 (Phillips WDT). 

196Amazon Prime is a $99- per-year service that 

offers Amazon customers access to a bundle of 

services including free two-day shipping, video 

streaming, photo storage and e-books, in addition to 

Prime Music. Expert Report of Glenn Hubbard, 

November 1, 2016 at 15 (Hubbard WDT). 

197Mirchandani WDT at 5. 

198 3/15/17 Tr. 1315–16 (Mirchandani). 

199 Google’s experience with music licensing 

dates at least far back as 2006, when it acquired 

YouTube. Levine WDT at 3. Google’s music services 

were part of Google’s Android Division but were 

recently combined within the YouTube business 

unit. Id. at 3–4. 

200According to Ms. Levine, labels historically 

have not passed through mechanical rights to 

subscription services so the lower percentages are 

irrelevant. Levine WDT at n.5. 

201The implications of the different perspectives 

on industry profit and losses are considered infra 

in this Dissent. 

Proposed Findings of Fact (PFF) and 

Proposed Conclusions of Law (PCL) on 

May 12, 2017, and Replies to those 

filings on May 26, 2017. On June 7, 

2017, counsel for the parties made their 

closing arguments. 

Under 37 CFR 351.4(b)(3), a 

participant may amend its rate proposal 

at any time up to and including the time 

it files proposed findings and 

conclusions.194 In this proceeding, 

Copyright Owners, Google, Pandora and 

Spotify each filed an amended rate 

proposal with its filing of a PFF and 

PCOL. 

The parties delivered closing 

arguments on June 7, 2017. 

C. Overview of the Licensing Parties 

1. The Licensees: The Streaming 

Services 

Many diverse enterprises have 

launched new music streaming services 

to meet growing consumer demand for 

streaming. Currently, there are at least 

31 music streaming services available 

from 20 identifiable providers. Some of 

the well-known of these include: 

Amazon, Apple, Google (and its recently 

acquired YouTube), Deezer (partnered 

with Cricket/AT&T), iHeartRadio, 

Napster, Pandora, SoundCloud, Spotify, 

and Tidal (partnered with Sprint). 

Written Rebuttal Testimony of Jim 

Timmins, Trial Ex. 3036, ¶ 20 (Timmins 

WRT). Most of the companies entering 

the on-demand streaming music market 

have done so recently. Id. ¶ 21. In the 

last five years, new entrants to the 

market have initiated at least five 

interactive streaming services, joining 

Spotify which launched in the United 

States in 2011. Id. ¶ 22. 

By one estimate, as of 2016 there were 

[REDACTED] million United States ondemand subscribers: Spotify accounted 

for [REDACTED] million, [REDACTED] 

Apple Music (4 million), Rhapsody and 

Tidal (2 million each), and all others 

accounting for the remaining 4 million. 

Written Testimony of Michael L. Katz 

(On behalf of Pandora Media, Inc.) ¶ 34, 

Table 1 (Katz WDT). According to 

Spotify, as of June 2016, it had 

approximately [REDACTED] million 

monthly average users (MAU) in the 

United States, of which [REDACTED] 

million were subscribers, with 

apparently [REDACTED] million users 

of Spotify’s ad-supported service. 

Written Direct Testimony of Barry 

McCarthy (On behalf of Spotify USA 

Inc.) ¶ 6 (McCarthy WDT). 

Some of the services that offer music 

streaming are pure-play music 

providers, such as Spotify and 

Pandora.195 Others, such as Amazon, 

Apple Music, and Google Play Music, 

are part of wider economic 

‘‘ecosystems,’’ in which a music service 

is one part of a multi-product, multiservice aggregation of activities, 

including some that are also related to 

the provision of a retail distribution 

channel for music. For example, 

Amazon is a multi-faceted internet retail 

business. Amazon offers a buyers’ 

program for an annual fee (Amazon 

Prime) that affords loyalty benefits to 

members, such as free or reduced rate 

shipping or faster delivery on the 

products it markets. For its music 

service, Amazon bundles interactive 

streaming at no additional cost with its 

Prime Membership, [REDACTED].196 In 

addition to the Prime Music service, 

Amazon’s U.S.-based business also 

includes an online store to purchase 

CDS and vinyl records, a digital 

download store, a purchased content 

locker service, Amazon Music 

Unlimited (a full-catalog subscription 

music service), and Amazon Music 

Unlimited for Echo (a full-catalog 

subscription service available through a 

single Wi-Fi enabled Amazon Echo 

device).197 In launching Prime Music, 

Amazon relied on the Section 115 

license as it did for Amazon Music 

Unlimited and Amazon Music 

Unlimited for Echo.198

Google describes its Google Play 

offerings as its ‘‘one-stop-shop’’ for the 

purchase of Android apps. The Google 

Play Store allows users to browse, 

purchase, and download content, 

including music. Google Play Music is 

Google Play’s entire suite of music 

services. Google Play Music, launched 

in 2011, is bundled with the YouTube 

Red video service subscription.199 See 

Expert Report of Jui Ramaprasad 

November 1, 2016 at Table 2, and ¶ 62, 

n.105 (Ramaprasad WDT). It includes 

several functionalities: (1) Music Store; 

(2) a cloud-based locker service; (3) an 

on-demand digital music streaming 

service; and (4) a Section 114 compliant 

non-interactive digital radio service (in 

the U.S.). Written Direct Testimony of 

Zahavah Levine, Trial Ex. 692, ¶ 43 

(Levine WDT). 

The largest services entered direct 

agreements with publishers to license 

their musical works. The terms of those 

licensing agreements varied. For 

example, Apple agreed to [REDACTED] 

with the major publishers that includes 

a minimum [REDACTED]. Expert Report 

of Jeffrey A. Eisenach, Ph.D. ¶¶ 84–92 

(Eisenach WDT). In these agreements, 

[REDACTED]. Id. ¶ 87 n.79. 

Google’s practice is to [REDACTED]. 

Levine WDT ¶¶ 51–52.200

There is conflicting evidence about 

whether the market for streaming 

services is faring poorly financially or 

performing about the same as other 

emerging industries. See, e.g., Timmins 

WRT ¶¶ 16–17; Levine WDT ¶ 16 

(‘‘streaming music services generally 

remain unprofitable businesses’’ with 

content acquisition costs (primarily 

music royalties) being ‘‘the biggest 

barrier to profitability.’’) For example, 

Spotify, one of the largest pure-play 

streaming services, has reportedly 

[REDACTED]. Katz WDT ¶ 65. 

Nevertheless, some estimates place 

Spotify’s market value at more than $8 

billion, suggesting perhaps, investors’ 

expectation of future profits. Expert 

Report of Marc Rysman, Ph.D. ¶ 150 

(Rysman WDT).201

2. The Licensors: Publishers and 

Songwriters 

The four largest publishers—Sony/ 

ATV ([REDACTED] percent), Warner/ 

Chappell ([REDACTED] percent), 

Universal Music Publishing Group 

(UMPG) ([REDACTED] percent), and 

Kobalt Music Publishing ([REDACTED] 

percent)—collectively accounted for just 

over 73 percent of the top 100 radio 

songs tracked by Billboard as of the 

second quarter in 2016. Katz WDT ¶ 46. 

In addition, there are several other 

significant publishers, including BMG 

and Songs Music Publishing, and many 

thousands of smaller music publishers 

and self-publishing songwriters. Id. 

Songwriters have three primary 

sources of ongoing royalty income, 

which they generally share with music 

publishers: mechanical royalties, 

1972 Federal Register / Vol. 84, No. 24 / Tuesday, February 5, 2019 / Rules and Regulations 

202Another revenue source is folio licenses, 

lyrics, and musical notations in written form. Katz 

WDT at 31. 

203References to the Register’s Report are 

incorporated herein to provide background 

information. This Dissent is not based on factual 

information or opinion contained therein, as that 

document is not record evidence in this proceeding. 

204The 1976 Act applied section 801(b)(1) and its 

four-factor test to new licenses. The mechanical 

license at issue in this proceeding is the lone 

existing statutory license carried forward into the 

1976 Act from the 1909 Copyright Act and made 

subject to the 801(b)(1) standards. 

205 In the present proceeding, the parties’ 

arguments combine both approaches. For example, 

as discussed infra, the issue of ‘‘rate structure’’ is 

analyzed by the parties as a marketplace issue, 

which places it in the analytical ‘‘reasonable rate’’ 

box, and also as a Factor B and Factor C issue, 

affecting the analysis of ‘‘fair’’ return and income 

and the ‘‘relative roles’’ of the parties. Thus, in this 

Dissent, I shall also on occasion apply the same 

analyses to certain ‘‘reasonable rate’’ and ‘‘itemized 

factor’’ issues. 

synchronization (‘‘synch’’) royalties, 

and performance royalties.202 See Katz 

WDT ¶ 41; Copyright and the Music 

Marketplace: A Report of the Register of 

Copyrights at 69 (Feb. 2015) (Register’s 

Report).203 Songwriters who are also 

recording artists receive a share of 

revenues from their record labels for the 

fixing of the musical work in a sound 

recording. Sound recording royalties 

include those from the sale of physical 

and digital albums and singles, sound 

recording synchronization, and digital 

performances. Id. Recording artists can 

also derive income from live 

performances, sale of merchandise, and 

other sources. Id. at 69–70. 

The shift in consumption from 

physical sales to streaming coincided 

with a reallocation of publisher revenue 

sources. In 2012, 30% of U.S. publisher 

revenues came from performance 

royalties and 36% from mechanical 

royalties, with the rest coming from 

synch royalties and other sources. See 

Register’s Report at 70. By 2014, 52% of 

music publisher revenues came from 

performance royalties, while 23% came 

from mechanical royalties, with the 

remainder coming from synch royalties 

and other sources. Id at 71, n.344. By 

one estimate, mechanical license 

revenues from interactive streaming 

services accounted for only 

[REDACTED] percent of total music 

publishing revenues in 2015. Katz WDT 

¶ 42. 

It is noteworthy that the shift from 

mechanical royalties to performance 

royalties coincided with the shift from 

sales of phonorecords, DPDs, and CDS, 

for which no performance royalty is 

required, to the use of interactive 

streaming, for which a performance 

royalty and a mechanical royalty are 

both required. Further (as discussed 

more fully infra), the latter is reduced 

pursuant to an ‘‘All-In’’ formula that 

reflects the perfect complementarity of 

the performance and mechanical 

licenses (i.e., neither license has any 

value to an interactive streaming service 

without the other). Additionally, 

noninteractive streaming pays only a 

performance royalty but no mechanical 

royalty, providing a further basis for 

mechanical royalties to be a smaller 

percentage of the publishers’ total 

revenues, assuming growth in 

noninteractive streaming. See Services’ 

Joint Proposed Findings of Fact and 

Conclusions of Law ¶¶ 271, 283 

(SJPFF).) 

Total publishing revenue declined by 

[REDACTED] percent between 2013 and 

2014, but then increased by 

[REDACTED] percent between 2014 and 

2015. Katz WDT ¶ 58. The largest 

publishers, Sony/ATV, UMPG, and 

Warner Chappell, [REDACTED], earning 

a combined $[REDACTED] million from 

U.S. publishing operations for that year. 

Id. ¶ 59. 

D. The Rate-Setting Standards in 

Section 801(b)(1) 

1. The Legal Basis for the Four Itemized 

Objectives 

The Copyright Act requires that the 

Judges establish ‘‘reasonable’’ rates and 

terms for the Section 115 license. In 

addition, section 801(b)(1) instructs the 

Judges to set these rates ‘‘to achieve the 

following objectives’’: 

Factor A: To maximize the availability of 

creative works to the public; 

Factor B: To afford the copyright owner a 

fair return for his or her creative work and 

the copyright user a fair income under 

existing economic conditions; 

Factor C: To reflect the relative roles of the 

copyright owner and the copyright user in 

the product made available to the public with 

respect to relative creative contribution, 

technological contribution, capital 

investment, cost, risk, and contribution to the 

opening of new markets for creative 

expression and media for their 

communication; and 

Factor D: To minimize any disruptive 

impact on the structure of the industries 

involved and on generally prevailing 

industry practices. 

17 U.S.C. 115(c) and 17 U.S.C. 

801(b)(1).204

In the 1981 Phonorecords Appeal, the 

D.C. Circuit noted the interplay among 

these four objectives: 

[T]he statutory factors pull in opposing 

directions, and reconciliation of these 

objectives is committed to the Tribunal as 

part of its mandate to determine 

‘‘reasonable’’ ‘ royalty rates . . . . [T]he 

Tribunal was not told which factors should 

receive higher priorities. To the extent that 

the statutory objectives determine a range of 

reasonable royalty rates that would serve all 

these objectives adequately but to differing 

degrees, the Tribunal is free to choose among 

those rates, and courts are without authority 

to set aside the particular rate chosen by the 

Tribunal if it lies within a ‘‘zone of 

reasonableness.’’ 

Id. at 9. 

When applying the foregoing 

standards, the Judges are not required to 

establish rates that are mathematically 

precise, given the nature of the statutory 

task and the controlling legal 

precedents. Nat’l Cable Television Ass’n 

v. Copyright Royalty Tribunal, 724 F.2d 

176, 182 (D.C. Cir. 1983) (‘‘Ratemaking 

generally is an intensely practical 

affair. . . . The Tribunal’s work 

particularly, in both ratemaking and 

royalty distribution, necessarily 

involves estimates and approximations. 

There has never been any pretense that 

the CRT’s rulings rest on precise 

mathematical calculations; it suffices 

that they lie within a ‘zone of 

reasonableness.’ ’’) (citations omitted). 

The Judges also have discretion as to 

whether and how they choose to 

integrate their application of the 

‘‘reasonable rate’’ standard with their 

analysis of the four itemized factors in 

section 801(b)(1). They may: (1) 

establish a ‘‘reasonable rate’’ as an 

initial step, and then apply the four 

itemized factors; or (2) integrate their 

analysis of the four itemized factors into 

a single ‘‘reasonable rate’’ approach— 

even beginning that approach with a 

consideration of the four factors. 

Compare Recording Industry Ass’n of 

America, Inc. v. Librarian of Congress, 

176 F.3d 528, 533 (D.C. Cir. 1999) 

(approving of the latter approach) with 

Phonorecords I (applying the former 

approach, explaining that ‘‘the issue at 

hand in analyzing the section 801(b) 

factors is whether these [four] policy 

objectives weigh in favor of divergence 

from the results indicated by the 

benchmark marketplace evidence.’’) 73 

FR at 4094 (Jan. 24, 2008) (quoting 

SDARS I).205

2. The Economic Basis for the Four 

Itemized Objectives 

The legal and regulatory process of 

setting statutory royalty rates and terms 

has long been informed by economics. 

See, e.g., W. Blaisdell, Study No. 6, The 

Economic Aspects of the Compulsory 

License, U.S. Senate Subcommittee on 

Patents, Trademarks and Copyrights 

(October 1958) (Senate Study). This is 

certainly true with regard to the 

establishment of the standards set forth 

in section 801(b)(1). The legislative 

history in the long build-up to the 

adoption of these standards is 

highlighted by dueling economic 

Federal Register / Vol. 84, No. 24 / Tuesday, February 5, 2019 / Rules and Regulations 1973 

206This overarching criticism of the existence of 

statutory license was echoed in the present 

proceeding by NMPA’s President, David Israelite. 3/ 

29/17 Tr. 3677 (acknowledging that he ‘‘always 

disapproved of the compulsory licensing system, 

ever since [he] knew about it.) (Israelite); see also 

Witness Statement of David M. Israelite ¶ 55 

(Israelite WDT) (‘‘I feel it is important . . . to 

express my view that [the compulsory license] is no 

longer necessary . . . .’’). 

207The Judges note that this unique ‘‘personal 

service’’ aspect of the business is less economically 

significant when, as is typical, published songs are 

collected and owned by large publishing firms, and 

such firms each price their repertoires jointly 

through blanket licenses. 

208The standards apparently were adopted to 

ensure the constitutionality of the delegation of 

rate-setting by Congress to an administrative body. 

See SDARS I, 73 FR at 4082 (citing Hearings on H.R. 

2223 before the Subcomm. on Courts, Civil 

Liberties, and the Administration of Justice of the 

House Comm. on the Judiciary, 94th Cong., 1922 

(1975)). 

positions taken in Congressional 

testimony in 1967 by the licensors, 

through the NMPA and its economic 

witness, Robert R. Nathan, and by the 

licensees, the RIAA, through their 

counsel, Thurman Arnold, Esq., a wellknown advocate of strong antitrust 

enforcement. See Hearing on S. 597, 

Subcomm. on Patents, Trademarks and 

Copyrights of the S. Committee on the 

Judiciary (Mar. 20–21, 1967) (Senate 

Hearing). 

Mr. Nathan expressed incredulity that 

the songwriting industry would even be 

subject to a compulsory mechanical 

licensing scheme. Id. at 382.206 Mr. 

Nathan did not see any basis for treating 

this license differently than how ‘‘we 

generally function under competitive 

marketplace bargaining arrangements 

whereby most entities in our economy 

bargain for that which goes into the 

creation of goods and services and also 

bargain the price for which those goods 

and services are sold.’’ Id. 

Thus, in his 1967 testimony, Mr. 

Nathan advocated that Congress 

eliminate the compulsory license and 

the statutory rate. Importantly for the 

present proceeding, he specifically 

urged Congress (if it did not eliminate 

the compulsory license) to resist 

replacing the fixed statutory fee with a 

regulatory standard to be implemented 

by a quasi-adjudicatory body, as one 

might regulate a public utility. He 

explained to Congress: ‘‘[O]ne might ask 

. . . whether the music publishing 

industry has any characteristics of a 

public utility. I submit . . . that there is 

nothing in the music publishing 

industry which gives [it] the 

characteristics or the elements of a 

public utility . . . .’’ Id. at 383. Mr. 

Nathan noted what he understood to be 

a key distinction: Unlike traditional 

public utilities like ‘‘railroad systems’’ 

or ‘‘streetcar lines,’’ the songwriting and 

publishing industry is ‘‘a creative and 

non-standardized area,’’ and 

‘‘[m]onopoly and public utility aspects 

are just not prevalent in this industry.’’ 

Id. 

The opposing position of the 

licensees, expressed by Mr. Arnold on 

behalf of the RIAA, contained the seeds 

of the standard ultimately adopted in 

section 801(b)(1). As Mr. Arnold 

testified, the statute should include, 

inter alia, ‘‘accepted standards of 

statutory ratemaking,’’ including a rate 

‘‘that insures the party against whom it 

is imposed a reasonable return on . . . 

investment’’ and ‘‘that divides the 

rewards for the respective creative 

contributions of the record producers 

[as licensees] and the copyright owners 

. . . equitably between them.’’ Id. at 

469. 

Mr. Nathan criticized this approach 

on two fronts. First, he argued that the 

‘‘personal service’’ nature of the 

songwriting and publishing industry 

precluded application of a ‘‘reasonable 

rate of return’’ requirement for the 

setting of the compulsory royalty 

rate.207 Second, with regard to the 

division of the ‘‘rewards’’ proposed in 

Mr. Arnold’s testimony, Mr. Nathan 

stated that ‘‘I have never in all my 

experience encountered this novel 

concept of dividing rewards for creative 

contributions as a meaningful and 

relevant standard of ratemaking.’’ Id. at 

1093–94. 

This 1967 dispute was never resolved. 

Rather, the issue languished until 1980, 

when, Congress abandoned the 

statutorily-fixed rate and substituted a 

regulatory rate-setting process. 

However, the post-1967 legislative 

history did not elucidate how rates set 

under the new statutory standard were 

to be related (if at all) to marketplace 

rates, either as a matter of law or a 

matter of economic policy. F. Greenman 

& A. Deutsch, The Copyright Royalty 

Tribunal and the Statutory Mechanical 

Royalty: History and Prospect, 1 

Cardozo Arts & Ent. L.J. 1, 53, 59 

(1982).208

3. The ‘‘Bargaining Room’’ Rate-Setting 

Theory Under Section 801(b)(1) 

a. The Bargaining Room Theory in 

Historical Context 

A corollary to the debate regarding the 

standard to be established in section 

801(b)(1) was another dispute: whether 

the statutory rates and terms should be 

set pursuant to what was coined the 

‘‘bargaining room theory’’ of rate-setting. 

This theory was summarized by Mr. 

Nathan: When setting a statutory or 

regulatory rate, the rate-setter should 

allow for ‘‘opening up of the bargaining 

range [with] a higher ceiling so that 

more bargaining can take place,’’ which 

would ‘‘permit competitive bargaining 

. . . .’’ Senate Hearing at 384, 421. In 

fact, Mr. Nathan and the NMPA were 

quite specific as to how the rate-setter 

should determine the range for 

bargaining under this theory: ‘‘[T]he rate 

should be high enough to allow and 

encourage private negotiation, but not 

so high as to make the compulsory 

licensing provision meaningless . . . .’’ 

Id. at 417. 

Before the Senate Judiciary 

Committee, the RIAA’s attorney, Mr. 

Arnold, asserted that incorporating the 

bargaining room theory into the new 

statute would flaunt the purpose of a 

compulsory license: 

[T]o set a statutory rate so high as to promote 

negotiations by a record manufacturer and a 

publisher below that statutory rate violates 

and contradicts the very purpose of imposing 

the compulsory license on the music 

publisher. 

Senate Hearing at 468. 

The bargaining room theory would 

permit different pairings of licensors 

and licensees to enter into agreements at 

varying rates below the statutory rate. 

Indeed, a CBS Records witness before 

the Senate Judiciary Committee 

acknowledged that ‘‘[a] higher ceiling 

would permit wider variation in royalty 

rates. . . . ’’ Id. at 417 (emphasis 

added). Further, Mr. Nathan explained 

this commercial desire for a variety of 

rates in somewhat more formal 

economic terms: ‘‘[A] prudent 

businessman . . . merely wants to price 

his goods on the apparent willingness of 

the consumer to pay.’’ Id. at 419 

(emphasis added). 

The House Judiciary Committee adopted 

the bargaining room theory in its report: 

The committee is setting a statutory rate at 

the high end of a range within which the 

parties can negotiate, now and in the future, 

for actual payment of a rate that reflects 

market values at the time, but one that is not 

so high as to make it economically 

impractical for record producers [as 

licensees] to invoke the compulsory license 

if negotiations fail. 

H.R. Rep. at 21. 

Despite movement in the House, in 

the event, the language in section 

801(b)(1) as enacted did not address the 

bargaining room theory, but rather set 

forth the aforementioned requirement 

for the establishment of ‘‘reasonable’’ 

rates and for the achievement of the 

objectives set forth in Factors A through 

D. As two attorneys who were involved 

in the process of crafting section 

801(b)(1) wrote in their exhaustive 

history of the process: 

The most significant elements of the 

statutory criteria may be what they omit. 

1974 Federal Register / Vol. 84, No. 24 / Tuesday, February 5, 2019 / Rules and Regulations 

209A ‘‘threat point’’ or ‘‘disagreement point’’ is a 

concept from bargaining (game) theory (specifically, 

in the Nash bargaining model) representing the 

value point at which a party will walk away from 

negotiations—thereby affecting the value of the 

ultimate bargain. See SDARS II, 74 FR 23054, 

23056–57 (April 7, 2017) (summarizing the Nash 

model). 

They do not include any explicit mention of 

the standard . . . adopted by the House 

Judiciary Committee in 1967 that the 

statutory rate should be at the high end of a 

range within which the parties can negotiate 

. . . for an actual payment of a rate that 

reflects market values and . . . not so high 

. . . as to make it economically impractical 

for record producers to invoke the 

compulsory license if negotiations fail. 

Greenman & Deutsch, supra, at 59. 

In 1981, the CRT ruled that, as a 

matter of law, the language in section 

801(b)(1) precluded the use the 

bargaining room approach to ratesetting. Adjustment of Royalty Payable 

under Compulsory License for Making 

and Distributing Phonorecords, 46 FR 

10466, 10478 (1981). On appeal, the 

D.C. Circuit affirmed the CRT’s decision 

to eschew this approach. 1981 

Phonorecords Appeal, supra. However, 

the D.C. Circuit’s affirmance was not 

based on the CRT’s conclusion that the 

‘‘bargaining room’’ approach was 

impermissible as a matter of law. 

Rather, the appellate court held that the 

CRT had exercised its lawful statutory 

discretion—in the form of a policy 

determination—to reject the use of the 

‘‘bargaining room’’ approach. Id. at 37. 

With regard to the legal question as to 

whether the ‘‘bargaining room’’ theory 

could be applied by the rate-setter, the 

D.C. Circuit held that ‘‘the statutory 

criteria . . . do not explicitly address 

the bargaining room question, and that 

dispute can only be resolved through 

the [CRT’s] articulation of principles 

that flesh out the statutory notions of 

‘reasonable’ rates and ‘fair’ returns.’’ Id. 

at 36. As the authors of the historical 

article noted, this appellate ruling 

preserved for future litigants the right to 

advocate for a policy change to allow for 

an implementation of the ‘‘bargaining 

room’’ approach under section 

801(b)(1). Greenman & Deutsch, supra, 

at 64. Those ‘‘future litigants’’ have 

arrived in this proceeding. 

b. The Bargaining Room Theory in the 

Present Proceeding 

In the present case, the parties 

disagree on the issue of whether the 

Judges should apply the bargaining 

room theory of rate-setting in this 

determination. Compare Copyright 

Owners’ Reply to Services’ Joint 

Proposed Findings of Fact and 

Conclusions of Law at 146 (CORPFF–JS) 

(‘‘Copyright Owners . . . contend that 

. . . [the] bargaining room theory [is a] 

quite permissible consideration[ ] under 

801(b)(1) analysis . . .’’) with Services’ 

Joint Reply to the Copyright Owners’ 

Proposed Findings of Fact and 

Conclusions of Law at 28 (SJRPFF–CO) 

(‘‘[a] rate creating ‘bargaining room’ 

under which copyright users must try to 

make private deals [is] inconsistent with 

Section 801(b)(1) . . .’’). In further 

support of their argument in favor of the 

bargaining room theory, Copyright 

Owners emphasize the inability of the 

Judges (or anyone) to identify present 

market rates precisely, let alone over the 

five year rate period. Proposed 

Conclusions of Law of Copyright Owners 

¶ 89 (COPCOL) (‘‘the compulsory 

license set by the Judges cannot possibly 

contemplate every single business 

model that may develop in the ensuing 

time.’’). Their reasoning is a reprise of 

the original argument for the bargaining 

room theory: If the statutory rate is set 

below market rates, then the parties will 

never negotiate upward toward the 

market rates, because the licensees will 

always prefer to invoke the right to use 

the licensed work at the below-market 

statutory rates. However, if the Judges 

set the statutory rate above what they 

find to be market rates, different 

licensees who each have a maximum 

willingness to pay (WTP) below such a 

statutory rate would seek to negotiate 

lower rates with the licensors. In 

response to such requests to negotiate, 

according to this argument, Copyright 

Owners would respond by negotiating 

various lower rates for those licensees, 

provided lower rates were also in the 

self-interest of Copyright Owners. 4/3/ 

17 Tr. 4431 (Rysman). 

I find, as a matter of policy, that the 

bargaining room theory is not applicable 

to the setting of rates in the present case. 

Rather, I agree with the policy decision 

in Phonorecords I that the rate setting 

policies made explicit in section 

801(b)(1) are best discharged if the 

Judges identify rate structures and rates 

that reflect the standards set forth in the 

statutory provision. Indeed, if the Judges 

were to supplant the statutory factors 

with a theory leading to rates 

intentionally designed to substitute 

discretionary bargaining, the parties 

would essentially be returned to a 

purely market-based rate-setting 

approach. See 3/21/17 Tr. 2194 

(Hubbard) (adoption of the ‘‘bargaining 

room theory’’ would ‘‘extensively’’ shift 

bargaining power to the Copyright 

Owners); see also 3/13/17 Tr. 569 (Katz) 

(‘‘the statutory proceeding . . . ‘‘help[s] 

offset the possible asymmetries’’ in 

bargaining power). 

Notably, section 801(b)(1) does not 

require the Judges even to attempt to set 

market rates, or to use market rates to 

establish ‘‘reasonable’’ rates under the 

statute. Music Choice, 774 F.3d, supra, 

at 1010. (‘‘Copyright Act permits, but 

does not require, the Judges to use 

market rates to help determine 

reasonable rates’’) (emphasis added). 

Moreover, as noted supra, the Judges are 

required to consider not only the 

reasonableness of the rates, but also how 

the four itemized factors listed in 

section 801(b)(1) bear on the 

reasonableness of the rates, i.e., the 

maximization of the public 

‘‘availability’’ of musical works, ‘‘fair’’ 

return, ‘‘fair’’ income and ‘‘minimize[d] 

. . . disruptive impact.’’ These are not 

factors necessarily implicated or fully 

addressed by a market-based analysis. If 

the Judges were to adopt wholesale the 

bargaining room theory, they would 

eliminate the value of those extramarket factors. Finally, as Dr. Eisenach 

conceded, adoption of the bargaining 

room theory would alter the parties’ 

respective ‘‘threat points’’ (a/k/a 

‘‘disagreement points’’) in the ‘‘Nash 

context,’’ increasing Copyright Owners’ 

bargaining power as compared with the 

non-application of the bargaining room 

approach. 4/4/17 Tr. 4846–47 

(Eisenach).209

In addition, an application of the 

bargaining room theory would be 

inconsistent with another purpose of 

statutory licensing—the minimization of 

transaction costs. If each interactive 

streaming service were required to 

negotiate separately with each music 

publisher, the process would diminish 

the transaction cost savings, which is an 

important reason for statutory licensing. 

See 4/6/17 Tr. 5233 (Leonard) (‘‘the 

point of having this kind of compulsory 

licensing setting is to reduce 

transactions cost and to . . . prevent the 

exercise of market power and prevent 

disruption in the marketplace.’’); 4/13/ 

17 Tr. 5901 (Hubbard) (most listeners 

demonstrate low WTP such that ‘‘notion 

of negotiation with [that] entire long tail 

is a lot of transactions costs . . . which 

would seem to me to be at odds with the 

801(b) factors. . . . [I]t . . . would seem 

to subvert the very purpose of this 

hearing to just suggest wholesale private 

renegotiation.’’). 

On balance, based on the foregoing, I 

do not accept and will not apply the 

bargaining room theory to establish 

either the rate structure or the zone of 

reasonable rates. 

E. The Present Rate Structure and Rates 

Subpart B sets forth mechanical 

royalty rates in connection with the 

delivery and offering of interactive 

streams and/or limited downloads. 

Federal Register / Vol. 84, No. 24 / Tuesday, February 5, 2019 / Rules and Regulations 1975 

210This summary is set forth in the Amended 

Expert Witness Statement of Dr. Gregory Leonard, 

Google’s economic expert witness. See Amended 

Expert Witness Statement of Dr. Gregory K. Leonard 

¶ 25 (Leonard AWDT). I find Dr. Leonard’s format 

to be particularly useful, but I note that all the 

parties clearly and consistently summarized the 

existing rate structure. See also, e.g., Israelite WDT 

¶ 28. 

211To be clear, these alternative percentages 

reflect percent of payments to record companies for 

sound recording rights, unregulated and set in the 

market, not the percent of revenue received by the 

interactive streaming services. That is, these are the 

so-called ‘‘TCC’’ rates. 

212This is the so-called ‘‘Mechanical Floor’’ rate, 

discussed infra. 

213The regulations also describe how the royalty 

revenue collected shall be allocated among musical 

works that had been played on the interactive 

streaming services. That allocation is made on a per 

play basis, and, under the parties’ proposals in this 

proceeding, that general allocation principle would 

remain unchanged. Compare Copyright Owners’ 

Proposal at B–14–15 with, e.g., Second Amended 

Proposed Rates and Terms of Spotify USA Inc. at 

12–13 (Spotify’s Proposal). 

214As under subpart B, collected royalties under 

subpart C are allocated on a per play basis. The 

Services, and Apple, do not propose a change in 

this regard. Copyright Owners, given their proposal 

that subpart C be eliminated, would utilize the 

subpart B allocation methodology for the service 

offerings now in subpart C. 

215Pandora had not begun its interactive 

streaming service at the time of the hearing. 

However, since November 2015, Pandora asserts 

that it has entered into direct licenses with 

thousands of music publishers that cover the 

mechanical rights that are at issue in this 

proceeding. Written Direct Testimony of Michael 

Herring ¶ 49 (Herring WDT). See, e.g., PAN Dir. Exs. 

6–7. Many of those deals bundle interactive 

streaming (for which mechanical and performance 

rights are required) and noninteractive streaming 

(for which, arguably, no mechanical license is 

required). Katz WDT ¶ 105. 

There are three product distinctions 

within the subpart B rate structure: 

(a) Nonportable vs. Portable Services 

(b) Unbundled vs. Bundled Services 

(c) Subscription vs. Ad-Supported Services 

37 CFR 385.13. 

Copyright Owners provide a helpful 

and more specific summary of these 

categories: 

(a) ‘‘standalone non-portable 

subscription—streaming only’’ services (i.e., 

tethered to a computer); 

(b) ‘‘standalone non-portable 

subscription—mixed’’ (i.e., both streaming 

and limited download) services; 

(c) ‘‘standalone portable’’ subscription 

streaming and limited download services 

(i.e., accessible on mobile or other Internetenabled devices); 

(d) ‘‘bundled subscription services’’ which 

are streaming and limited download services 

bundled with another product or service; and 

(e) ‘‘free [to the end user] nonsubscription/ 

ad-supported services.’’ 

Copyright Owners’ Written Direct 

Statement, Proposed Rates and Terms at 

B–3 (Copyright Owners’ Proposal) 

(quoting 37 CFR 385.13). 

More granularly, the present subpart 

B rate structure and rates and for 

interactive streaming and limited 

downloads, as agreed to by the parties 

in their 2012 settlement, are set forth in 

full at 37 CFR 385.12 and 385.13, and 

are summarized below: 210

1. Calculate the ‘‘All-In’’ Publishing 

Royalty for the Service Offering 

a. maximum of 10.5% of service 

revenue and the following minimum 

royalties based on the type of service: 

(i) Standalone Non-Portable 

Subscription, Streaming Only: 

—lesser of 22% of service payments for 

sound recording rights 211 and $0.50 

per subscriber per month. 

(ii) Standalone Non-Portable 

Subscription, Mixed Use: 

—lesser of 21% of service payments for 

sound recording rights and $0.50 per 

subscriber per month. 

(iii) Standalone Portable Subscription, 

Mixed Use: 

—lesser of 21% of service payments for 

sound recording rights and $0.80 per 

subscriber per month. 

(iv) Bundled Subscription Services: 

—21% of service payments for sound 

recording rights. 

(v) Free Non-Subscription/AdSupported Services: 

—22% of service payments for sound 

recording rights. 

2. Subtract Applicable Performance 

Royalties [the ‘‘All-In’’ Calculation] (i.e., 

subtract from the result in the previous 

step the ‘‘total amount of royalties for 

public performance of musical works 

that has been or will be expensed 

pursuant to public performance licenses 

in connection with uses of musical 

works through such offering.’’) 

3. Compare the maximum of the result 

from the previous steps and the 

following mechanical-only per 

subscriber royalty floors based on the 

type of service: 212

(a) Standalone Non-Portable 

Subscription, Streaming Only: $0.15 per 

subscriber per month. 

(b) Standalone Non-Portable 

Subscription, Mixed Use: $0.30 per 

subscriber per month. 

(c) Standalone Portable Subscription, 

Mixed Use: $0.50 per subscriber per 

month. 

(d) Bundled Subscription Services: 

$0.25 per active subscriber per month. 

(e) Free Non-Subscription/AdSupported Services: Not Applicable.213

Subpart C of part 385 sets forth the 

royalty structure and rates for licensing 

mechanical rights for five categories: 

limited offerings, mixed service 

bundles, music bundles, paid locker 

services, and purchased content locker 

services. The present subpart C rate 

structure, established consensually in 

the 2012 settlement, are set forth at 37 

CFR 385.20 through 385.26. As 

succinctly summarized by Dr. Leonard 

(see Leonard AWDT ¶ 26), the structure 

and rates are as follows: 

1. Calculate the ‘‘All-In’’ Publishing 

Royalty for the Service Offering 

a. Maximum of the applicable 

percentage of service revenue based on 

the type of service: 

(i) Mixed Service Bundle: 11.35% of 

service revenue. 

(ii) Music Bundles: 11.35% of service 

revenue. 

(iii) Limited Offering: 10.5% of 

service revenue. 

(iv) Paid Locker Service: 12% of 

incremental service revenue. 

(v) Purchased Content Locker: 12% of 

service revenue. 

and 

b. The applicable ‘‘All-In’’ minimum, 

also based on the type of service: 

(i) Mixed Service Bundle: 21% of 

service payments for sound recording 

rights. 

(ii) Music Bundles: 21% of service 

payments for sound recording rights. 

(iii) Limited Offering: 21% of service 

payments for sound recording rights 

(subject to a further minimum payment 

of $0.18 per subscriber per month). 

(iv) Paid Locker Service: 20.65% of 

service payments for sound recording 

rights (subject to a further minimum 

payment of $0.17 per subscriber per 

month). 

(v) Purchased Content Locker: 22% of 

any incremental service payments to 

record companies for sound recording 

rights (above the otherwise applicable 

payments for permanent digital 

downloads and ringtones). 

2. Subtract Applicable Performance 

Royalties 

Subtract from the result in the 

previous step the ‘‘total amount of 

royalties for public performance of 

musical works that has been or will be 

expensed pursuant to public 

performance licenses in connection 

with uses of musical works through 

such subpart C offering.’’ 214

At the time of the hearing, the 

services paid the following subpart B 

mechanical rates: 215

1976 Federal Register / Vol. 84, No. 24 / Tuesday, February 5, 2019 / Rules and Regulations 

216Written Direct Testimony of Kelly Brost. 

217Written Rebuttal Testimony of Leslie M. Marx. 

218Written Direct Testimony of Rob Wheeler. 

219Written Direct Testimony of Leslie M. Marx. 

220A ‘‘private good is ‘‘one that is both 

excludable and rival in consumption,’’ i.e., the 

supplier can prevent non-payers from consuming 

the good, and each unit of the good cannot be 

consumed by more than one person simultaneously. 

P. Krugman & R. Wells, Microeconomics at pp. G– 

2, G–7 (2d ed. 2009). The distinction between a 

private good and a public good is discussed infra. 

Licensee/service Rate prong Rate Reg or direct contract Source 

Amazon Unlimited for Echo [REDACTED] .................... $[REDACTED] .................. § [REDACTED] .................. Brost WDT,216 Ex. 18 (HX 

20). 

Amazon Prime ................... [REDACTED] .................... $[REDACTED] .................. § [REDACTED] .................. Marx 217 WRT ¶ 40. 

Apple Music ....................... Not Applicable ................... [REDACTED] .................... Direct contracts ................. Wheeler 218 WDT ¶¶ 10, 

12; HX 1432, HX 1434, 

HX 1435. 

[REDACTED] ..................... [REDACTED] .................... [REDACTED] .................... [REDACTED] .................... Leonard AWDT ¶ 52 et 

seq. 

Spotify/Ad-Supported ........ [REDACTED] .................... [REDACTED] .................... § [REDACTED] ..................

§ [REDACTED] ..................

Marx WDT 219 ¶ 83. 

Spotify Subscription ........... [REDACTED] .................... $[REDACTED] .................. § [REDACTED] .................. Marx WDT ¶ 76. 

F. The Economic Framework for 

Analyzing the Rate Structure Issues 

The parties’ proposals are based on 

varying explicit and implicit 

assumptions regarding the economic 

principles that underlie the licensing of 

musical works. During the hearing, the 

parties have urged the Judges to apply 

certain economic principles, often 

imploring the Judges to recognize that 

the economic underpinnings of their 

arguments can be found in the teachings 

of a generic introductory ‘‘Economics 

101’’ course. See, e.g., 3/8/17 Tr. 133 

(Copyright Owners’ Opening 

Statement); 3/14/17 Tr. 920 (Herring); 4/ 

13/17 Tr. 5917 (Lane). I generally agree 

that, particularly with regard to the rate 

structure, it is helpful to ‘‘begin at the 

beginning’’—i.e., with basic economic 

principles—so that the subsequent 

analyses are grounded in some basic 

concepts. 

Basic economic theory teaches that 

supply and demand determine an 

equilibrium market price. See, e.g., W. 

Nicholson & C. Snyder, Microeconomic 

Theory at 10 (10th ed. 2008) (‘‘[D]emand 

and supply interact to determine the 

equilibrium price and the quantity that 

will be traded in the market.’’); see also 

Final Rule and Order, Determination of 

Reasonable Rates and Terms for the 

Digital Performance of Sound 

Recordings, Docket No. 96–5 CARP 

DSTRA, 63 FR 25394, 25404 (May 8, 

1998) (‘‘CARP PSS 1998’’) (noting that 

‘‘price [is] set in the marketplace 

according to the laws of supply and 

demand. . . .’’); Eisenach WDT ¶ 34 

(‘‘the interplay between supply and 

demand results in a market price.’’) 

With regard to the supply of an 

‘‘ordinary private good’’ in a perfectly 

competitive market,220 it is well 

understood that there is typically a 

positive correlation between price and 

quantity (causing the well-known 

upward slope of a supply curve). See, 

e.g., C. Byun, The Economics of the 

Popular Music Industry at 74 (2016) 

(‘‘The firm’s supply curve is upward 

sloping, since the relationship between 

price and quantity supplied by the firm 

is positive.’’) This positive correlation is 

the consequence of several factors. 

Among those factors is the increasing 

marginal physical cost of inputs 

required to create the product. Marx 

WDT ¶ 38 n.39 (‘‘ ‘Marginal cost’ is 

defined as the increase in total cost 

resulting from an additional unit of 

output.’’). The marginal cost of inputs 

generally increases because, inter alia, 

inputs are scarce and a seller must pay 

more for each unit of an input as it 

becomes more scarce, or if additional 

units are less productive. See Krugman 

& Wells, Microeconomics at 312–13 (2d 

ed. 2009). Additionally, input sellers 

must consider the opportunity cost of 

supplying an input to a particular buyer, 

i.e., any revenue foregone by selling that 

scarce input to that particular buyer 

rather than to another buyer who was 

willing to pay a higher price. See E. 

Mansfield & G. Yohe, Microeconomics at 

242 (11th ed. 2004) (‘‘opportunity cost’’ 

of an input is ‘‘the value of that input 

if it were employed in its most valuable 

alternative use.’’). 

In this proceeding, the products being 

licensed by Copyright Owners to the 

interactive streaming services for 

distribution are collections (repertoires) 

of additional copies of a song embodied 

in a sound recording—not the original 

or first copy of the song or the sound 

recording. The marginal physical cost of 

such additional digital copies of a 

musical work embodied in a sound 

recording is essentially zero. See 

Written Rebuttal Testimony of Marc 

Rysman, Ph.D. ¶ 71 (Rysman WRT) 

(‘‘Intellectual property commonly may 

have little to no marginal costs to 

reproduce. . . .’’); Marx WDT ¶ 117 

(‘‘the marginal costs of providing rights 

to a particular musical work and 

streaming it to the consumer are 

effectively zero); Written Rebuttal 

Testimony of Richard Watt (Ph.D.) (On 

behalf of the NMPA and the NSAI) ¶ 44 

n.48 (Watt WRT) (considering reliable 

Professor Marx’s conclusion that ‘‘[a] 

marginal cost of zero is a close 

approximation of true costs of 

delivery.’’); Expert Rebuttal Report of 

Glenn Hubbard, February 15, 2017 

¶ 4.20 (Hubbard WRT) (‘‘copyrighted 

music work . . . has zero marginal 

production costs’’); Rebuttal Expert 

Witness Statement of Dr. Gregory K. 

Leonard ¶¶ 6, 95 (Leonard WRT) 

(acknowledging ‘‘the zero marginal cost 

of a stream’’); Corrected Written 

Testimony of Michael L. Katz (On behalf 

of Pandora Media, Inc.) ¶ 26 (Katz 

CWRT) (‘‘The creation and distribution 

of musical works has . . . zero or nearzero marginal costs.’’); 3/30/17 Tr. 

4085–40866, (Gans) (agreeing that the 

‘‘marginal physical cost’’ of ‘‘additional 

electronic versions of sound recordings 

. . . embody[ing] musical works is 

zero); see generally W. Landes, 

Copyright in R. Towse, A Handbook of 

Cultural Economics at 100 (2d ed. 2011) 

(‘‘[T]he cost of reproducing the 

[copyrighted] work that additional users 

can be added at a negligible or even zero 

cost.’’) So, there is an important basic 

distinction between the marginal 

physical costs associated with creating 

additional units of ordinary private 

goods and additional digital copies of 

songs/sound recordings. 

With regard to demand, there is a 

negative correlation between price and 

quantity (causing the equally wellknown downward slope of a demand 

curve). See, e.g., Krugman & Wells, 

supra, at 63–64. This negative 

correlation is also the consequence of 

several factors. For present purposes, 

two factors are pertinent. First, a buyer’s 

demand is a function of the benefit the 

buyer realizes from acquiring the good— 

what economists term ‘‘utility.’’ Second, 

buyers’ ability to satisfy their desire for 

Federal Register / Vol. 84, No. 24 / Tuesday, February 5, 2019 / Rules and Regulations 1977 

221Thus, it is important to keep in mind that 

WTP incorporates ‘‘Ability To Pay,’’ when 

evaluating the distinctions among the interactive 

streaming services’ various tier offerings and the 

issue of price discrimination. See C. Sunstein, 

Willingness to Pay vs. Welfare, 1 Harv. L. & Pol. 

Rev. 303, 310 (2007) (noting the ‘‘need to make a 

distinction . . . between WTP and ability to pay 

. . . . When . . . people show a low WTP, it may 

be because their ability to pay is low [b]ut their low 

WTP does not demonstrate that they would gain 

little in terms of welfare from receiving the relevant 

good.’’) (emphasis in original). 

222When discussing consumer demand, 

economists often leave implicit the distinction 

between the budget constraint, which reveals an 

ability (or inability) to pay, and the WTP, by 

combining both in the WTP phrase. In this Dissent, 

I shall use the WTP phrase in its combined form, 

unless distinction is of some importance in this 

proceeding. 

223These two aspects of demand are reflected in 

the present proceeding by the services’ attempts to 

design a ‘‘range of products’’ with different ‘‘price 

points’’ (reflecting consumers’ varying budget 

constraint/WTP) and ‘‘features to accommodate 

preferences’’ (reflecting differences in utility). See, 

e.g., Phillips WDT 16 (describing Pandora’s design 

of its new interactive streaming offerings). 

224 Importantly, this economic interdependency 

exists as a matter of law as well as economics in 

this proceeding. Section 801(b)(1)(A) explicitly 

makes the link between the upstream and 

downstream markets relevant to the setting of 

upstream rates in this proceeding, by instructing the 

Judges to set upstream rates that ‘‘maximize the 

availability of creative works to the public,’’ i.e., to 

the downstream listeners. 

225 If the market is imperfect, i.e., if the seller has 

some market power, then the positive price will 

exceed marginal cost. 226There are other particular requirements that 

must be satisfied for a market to be perfectly 

competitive such that the resulting price reflects 

these fair market efficiencies. See Mansfield & 

Yohe, supra at 290–91 (Perfect competition 

requires: (1) Homogeneous products across sellers; 

(2) no seller or buyer is so large as to affect the 

product price (i.e., all participants are price-takers 

rather than price-makers; (3) all resources are 

completely mobile across markets, i.e., they can 

freely enter or exit the market); and (4) all market 

participants (consumers, producers and input 

suppliers) have ‘‘perfect knowledge’’ of all relevant 

information. 

utility is constrained by their ability to 

pay—what economists call a ‘‘budget 

constraint.’’ To simplify somewhat, the 

point where a buyer’s utility and ability 

to pay intersect represents a point on 

the buyer’s demand curve, indicating 

his or her ‘‘Willingness to Pay’’ 

(WTP).221 See Byun, supra at 26–27 (The 

demand curve represents a mapping of 

all such points, reflecting both (1) the 

‘‘intuitive’’ idea that the more expensive 

a good, the greater its ‘‘budget’’ impact, 

lowering the quantity demanded; and 

(2) diminishing marginal ‘‘utility,’’ as 

reflected in the buyer’s willingness to 

pay [(WTP)] for additional units of the 

good); see also Pindyck & Rubinfeld, 

supra, at 83, 140 (‘‘[P]references and 

budget constraints . . . determine how 

individual consumers choose how much 

of each good to buy . . . choos[ing] 

goods to maximize the satisfaction they 

can achieve, given the limited budget 

available to them.’’ . . . [C]onsumers’ 

demand curves for a commodity can be 

derived from information about their 

tastes . . . and from their budget 

constraints.’’).222 The market demand 

curve for an ordinary private good is the 

horizontal sum of all quantities 

demanded at each price reflected in the 

demand curves of all potential buyers. 

Byun, supra, at 27; Pindyck & Rubinfeld, 

supra, at 141.223

Importantly for the present 

proceeding, changes along the demand 

curve (i.e., changes in quantity 

demanded in response to changes in 

price) must be distinguished from 

changes in demand, i.e., shifts of the 

entire demand curve representing a 

different quantity demanded at each 

price. A movement ‘‘down the demand 

curve’’ would reflect an increase in new 

buyers whose WTP was equal to the 

lower price as the demand curve 

descends, i.e., whose WTP was less than 

higher prices along the demand curve. 

By contrast, an upward shift of the 

entire demand curve can be the 

consequence of several factors, 

including a reduction in the price of a 

competing (substitute) good and a 

change in consumer tastes. To reiterate, 

this distinction between an increase in 

quantity demanded and an increase in 

demand is of particular importance in 

this proceeding, as will be evident as I 

compare and contrast the parties’ 

economic arguments. See Krugman & 

Wells, supra, at 66–67 (‘‘[W]hen you’re 

doing economic analysis, it’s important 

to make the distinction between changes 

in the quantity demanded, which 

involve movements along a demand 

curve, and shifts of the demand 

curve.’’). 

It is also important—especially in this 

proceeding—to distinguish markets 

vertically. There are two markets 

implicated in this proceeding. There is 

the upstream market for the sale and 

purchase of inputs, here, licenses for the 

collected copies (entire repertoires) of 

musical works embodied in the 

streamed sound recordings. There is 

also the downstream market for the sale 

and purchase of the final product, 

comprised of both (1) the right to listen 

to a given sound recording/musical 

work; and (2) an ‘‘option’’ value,’’ i.e., 

a right to access a large repertoire of 

sound recordings/musical works. The 

dynamics of these two markets are 

different, yet they are economically 

intertwined. They are economically 

different in certain obvious ways, in that 

the upstream market consists of 

licensors and licensees whereas the 

downstream market is comprised of 

streaming services and listeners 

(subscribers or users) with the markets 

exhibiting different degrees of (inter 

alia) competition, market power, 

homogeneity and preferences among the 

participants in each market. However, 

they are interdependent as well, because 

the upstream demand of the interactive 

streaming services for musical works 

(and the sound recordings in which they 

are embodied)—known as ‘‘factors’’ of 

production or ‘‘inputs’’—is derived from 

the downstream demand of listeners to 

and users of the interactive streaming 

services. This interdependency causes 

upstream demand to be characterized as 

‘‘derived demand.’’ See Krugman & 

Wells, supra, at 511 (‘‘[D]emand in a 

factor market is . . . derived demand 

. . . [t]hat is, demand for the factor is 

derived from the [downstream] firm’s 

output choice.’’).224

In perfectly competitive markets for 

ordinary private goods, prices tend 

toward an ‘‘equilibrium’’ price where 

there is an intersection between 

quantity demanded (on the demand 

curve) and the quantity supplied (on the 

supply curve). In that market, the 

positive price equals both marginal cost 

and marginal benefit.225 That price 

would allow for a reasonable estimation 

of a per unit price that economists 

would be able to identify, in terms of 

economic efficiency, as a fair market 

price. See, e.g., G. Niels, H. Jenkins & J. 

Kavanagh, Economics for Competition 

Lawyers ¶ 1.4.7 (2d ed. 2016) (The 

‘‘equilibrium price’’ reflects ‘‘allocative 

efficiency’’ on the demand side and 

‘‘productive efficiency’’ on the supply 

side.’’); Nicholson & Snyder, supra at 

469–72 (‘‘[P]erfectly competitive 

markets lead to efficiency in the 

relationship between production 

[supply] and preferences 

[demand]. . . .’’) 226

This snapshot of a perfectly 

competitive market for an ordinary 

private good is described in the typical 

‘‘Economics 101’’ course. However, 

because (as noted supra) the marginal 

physical cost of supplying an additional 

copy of a song/sound recording is 

essentially zero, at least one key 

condition for efficient per-unit pricing 

does not exist. A price above zero would 

not reflect allocative efficiency, because 

price must equal marginal cost to create 

such efficiency. However, at a price of 

zero—that is, equal to marginal cost—no 

supplier would have an economic 

incentive to incur the cost of producing 

the original version of the musical work. 

As one scholar has summarized: 

There is a conflict between the competing 

goals of ensuring access to intellectual 

1978 Federal Register / Vol. 84, No. 24 / Tuesday, February 5, 2019 / Rules and Regulations 

227This point highlights a particular distinction 

between private goods and products with public 

good characteristics (discussed infra), upending the 

‘‘economic efficiency’’ principles of for private 

goods markets taught in an ‘‘Economics 101’’ class. 

See C. Yoo, Copyright and Public Good Economics: 

A Misunderstood Relation,’’ 155 U. Pa .L. Rev. 635, 

638 (2007) (There is ‘‘an interesting inversion of the 

conditions for the efficient allocation of private 

goods. For private goods, consumers pay the same 

price and signal the different valuations that they 

place on the good by purchasing different 

quantities. For pure public goods, consumers 

consume the same quantity of production and 

signal the intensity of preferences by their 

willingness to pay different prices.’’). This principle 

is particularly applicable in response to the 

argument that economic efficiency is fostered by 

per-unit pricing in the market at issue in this 

proceeding. 

228This non-rival aspect of streamed music is not 

only a theoretical underpinning of the interactive 

markets, but also is the crucial basis for the 

services’ plans (discussed infra) to achieve ‘‘scale’’ 

and, ultimately, profitability, as discussed infra. See 

generally J. Haskel & S. Westlake, Capitalism 

without Capital at 66 (2017) (‘‘From an economic 

point of view, scalability derives from . . . what 

economists call ‘non-rivalry.’ ’’). 

229This Billboard measure tracks songs played on 

AM–FM terrestrial radio broadcasters, which are 

not required to license the works or the sound 

recordings they play. 

230The sound recording market is also highly 

concentrated. See Marx WDT ¶ 149 (‘‘The three 

major labels, Sony Music Entertainment, Inc., 

Warner Music Group, and Universal Music Group 

(‘UMG’), account for roughly 65% of US recording 

industry revenue.’’). Also, the performance rights 

collectives are highly concentrated, with ASCAP 

and BMI representing over 90% of the songs 

available for licensing in the United States. See 

Register’s Report at 20. 

property at a price equal to marginal cost and 

providing incentives for the production of 

information. Finding the balance between 

access and incentives arising from the free 

access and exclusive rights norms is 

characterized as the static/dynamic dilemma 

or the short-run/long-run dilemma. 

D. Barnes, The Incentive/Access 

Tradeoff, 9 Nw. J. Tech. & Intell. Prop. 

96, 96 (2010). 

The distinction between normal 

private goods and intellectual property 

applies specifically in the markets for 

musical works and sound recordings. As 

a Canadian scholar recently explained: 

For normal goods and services, the optimal 

level of consumption is generally considered 

to be the level achieved when the price of the 

good is equal to its marginal production 

cost. . . . This level corresponds to what 

economists call a first-best optimum, which 

requires that fixed costs be covered one way 

or another. A competitive market is generally 

the preferred mechanism for defining and 

achieving an optimal level of production and 

consumption for normal goods. 

With information goods or assets, the 

problem is somewhat more difficult since the 

same unit . . . think of a musical work or 

sound recording . . . can be listened to and 

enjoyed many times by many different users 

or consumers now and in the future as 

consumption does not destroy or alter the 

unit in question. 

M. Boyer, The Competitive Market 

Value of Copyright in Music: A Digital 

Gordian Knot, Toulouse School of 

Economics Working Paper at 18 (Sept. 

2017) (emphasis added).227

Economists have analyzed and 

modeled this conundrum, utilizing 

approaches beyond those in a basic 

‘‘Economics 101’’ classroom. See P. 

Samuelson, Aspects of Public 

Expenditure Theories, 40 The Rev. of 

Econ. & Statistics, 332, 336 (1958) 

(when attempting to price additional 

copies of public goods with marginal 

costs approximating zero ‘‘the easy 

formulas of classical economics no 

longer light our way.’’). 

Copies of intellectual property goods, 

including especially electronic copies, 

are understood not to be ‘‘private’’ 

goods as in the simple model sketched 

supra, but rather are ‘‘quasi- public 

goods.’’ A ‘‘public good’’ has two 

characteristics. First, it has a zero 

marginal production cost (formally, they 

are ‘‘non-rivalrous in consumption,’’ 

because consumption of one unit does 

not prevent another unit from being 

consumed). Second, the provider of the 

public good cannot prevent 

consumption of the good by non-payers 

(formally, ‘‘non-excludability’’). See 

Nicholson & Snyder, supra, at 679. A 

‘‘quasi-public good’’ (sometimes called 

an ‘‘impure public good’’ or a ‘‘mixed 

good’’) possesses only one of these two 

public goods characteristics. See, e.g., G. 

Dosi & J. Stiglitz, The Role of 

Intellectual Property Rights in the 

Development Process, with Some 

Lessons from Developed Countries: An 

Introduction at 6, Inst. of Economics, 

Laboratory of Economics and 

Management, Working Paper 2013/23 

(Nov. 2013) (defining a quasi-public 

good as one where either ‘‘it is . . . hard 

to exclude others’’ or, ‘‘even if it were 

possible, it is inefficient to do so.’’). In 

the market at issue in this proceeding, 

one person’s accessing of a streamed 

copy of sound recording (and the 

musical work embodied within it) on an 

interactive streaming service is not in 

rivalry with another person’s listening 

to a copy of the same sound recording/ 

song (i.e., one person’s listening does 

not cause a marginal increase in 

physical cost to the licensors),228 but the 

licensors can exclude any person from 

listening who does not subscribe to or 

register with the interactive streaming 

service. When piracy is uncontrolled, 

copies of sound recordings (and the 

musical works embodied therein) 

resemble pure public goods. When 

piracy is reduced, these reproductions 

are more in the nature of quasi-public 

goods, because they are still not 

rivalrous in consumption. 

An additional complexity: The 

products supplied in the market 

(upstream and downstream) in this 

proceeding are not simply individual 

copies of discrete musical works. 

Rather, the product is the collection of 

repertoires of musical works, 

collectivized (through ownership, 

administration and distribution) by the 

music publishers and, in final 

(downstream) delivery), through the 

major record companies (and a 

constellation of smaller publishers). 

These collective activities are highly 

concentrated among only a few such 

publishers. As noted supra, the four 

largest publishers—Sony/ATV 

([REDACTED] percent), Warner/ 

Chappell ([REDACTED] percent), 

Universal Music Publishing Group 

(UMPG) ([REDACTED] percent), and 

Kobalt Music Publishing ([REDACTED] 

percent)—collectively accounted for just 

over 73 percent of the top 100 radio 

songs tracked by Billboard 229 as of the 

second quarter in 2016. Katz WDT ¶ 46. 

The collective nature of the principal 

music publishers is further made clear 

from the testimony of their witnesses in 

this proceeding. See Witness Statement 

of Peter Brodsky ¶ 5 (Brodsky WDT) 

(Sony/ATV Music Publishing owns and 

administers ‘‘the largest catalog of 

musical compositions in the world, with 

over [REDACTED] songs written by 

[REDACTED] of songwriters’’); Witness 

Statement of David Kokakis ¶ 10 

(Kokakis WDT) (UMPG owns and 

administers [REDACTED] 

compositions); Witness Statement of 

Gregg Barron ¶ 5 (BMG owns and 

administers [REDACTED] 

compositions); Witness Statement of 

Annette Yocum ¶ 8 (Warner/Chappell 

owns and administers [REDACTED] 

compositions).230

The mechanical license thus is in the 

nature of a blanket license 

(notwithstanding that the interactive 

streaming service must first serve a 

Notice of Intention (NOI) on the 

copyright owner in order to utilize the 

statutory mechanical license in 

connection with each individual song). 

17 U.S.C. 115(b); 37 CFR 201.18). Much 

of the economic value of a collection of 

millions of copyrights within one 

publishing umbrella lies in the 

economizing on transaction costs— 

allowing large entities to administer the 

copyrights. See generally S. Besen, S. 

Kirby and S. Salop, An Economic 

Analysis of Copyright Collectives, 78 

Va.L.Rev. 383 (1992); R. Watt, Copyright 

Collectives: Some Basic Economic 

Theory, reprinted in R. Watt (ed.), 

Federal Register / Vol. 84, No. 24 / Tuesday, February 5, 2019 / Rules and Regulations 1979 

231The economic concept of a collective 

organization is broader than the more common and 

narrow conception of ‘‘collection societies’’ as 

limited to PROs. See A. Katz, Copyright Collectives: 

Good Solution, But for Which Problem, at 2, n.7, 

reprinted in R. Dreyfuss & D. Zimmerman (eds.) 

Working Within the Boundaries of Intellectual 

Property Law (2010) (‘‘The term ‘copyright 

collectives’ encompasses various types of 

organizations, with different mandates, structures, 

forms of governance and regulatory oversight.’’). 

232When large publishing houses or major record 

labels control large swaths of the market, and their 

products are ‘‘must haves,’’ they are 

‘‘complementary oligopolists’’ rather than 

monopolists, a difference that leads to supranormal 

pricing and greater inefficiencies than arise from 

monopoly. See Web IV, 81 FR 26316, 26348 (May 

2, 2016). 

233To repeat, the ‘‘opportunity cost’’ of using an 

input is the foregone value of the most highlyvalued alternative use of that input. See generally 

Pindyck & Rubinfeld, supra, at 689 (defining 

‘‘opportunity cost’’ as the ‘‘[c]ost associated with 

opportunities that are foregone when a firm’s 

resources are not put to their best alternative use.’’). 

234 It should be noted that Professor Watt 

decidedly rejects the applicability of welfare 

economics as a tool with regard to Factor A of 

section 801(b)(1)—unless ‘‘availability’’ were to be 

equated with ‘‘use’’ of copyrighted musical works. 

See id. at 3033. 

235The ‘‘Theory of the Second Best’’ was 

originally developed more than sixty years ago. See 

R. G. Lipsey and K. Lancaster, The General Theory 

of Second Best, 24 Rev. Econ. Stud. 11 (1956–1957). 

236As Professor Marx notes, the first theorem of 

welfare economics provides ‘‘that the allocation of 

resources is efficient in a general equilibrium with 

perfect competition, and in a perfectly competitive 

market, price equals firms’ marginal cost. Marx 

WDT ¶ 116 n.129 (citing B. Douglas Bernheim and 

Michael D. Whinston, Microeconomics 561–62, 

601–02). 

Handbook on the Economics of 

Copyright at 168–170 (2014).231

However, along with the efficiencies 

of collective ownership comes the 

market power of the collective. As has 

been noted: 

In so much as copyright law establishes a 

. . . monopoly of each copyright holder in 

his or her own item of intellectual property, 

copyright collectives imply an even larger 

monopoly situation for entire specific types 

of intellectual property in general. Exactly 

how this monopoly power affects social 

welfare is a natural point of discussion. . . . 

[T]here are social costs involved when a 

natural monopoly 232 is run by only one firm, 

since that firm will not sell its output at the 

socially optimal price, but rather at the pure 

profit maximizing price. It is for this reason 

that most natural monopolies are subject to 

heavy regulation. . . . The administration 

and marketing of intellectual property has 

many aspects of a natural monopoly. . . . 

The fact that unregulated copyright 

collectives do not achieve a social optimum 

establishes strong theoretical foundations for 

arguing that such collectives should be 

regulated. 

R. Watt, Copyright and Economic 

Theory: Friends or Foes at 163, 190 

(2000); see also C. Handke, The 

Economics of Collective Copyright 

Management at 9, reprinted in Watt, 

Handbook of the Economics of 

Copyright, supra (entities controlling a 

collection of copyrights are natural 

monopolies). 

Thus, the ‘‘product’’ that is licensed 

to interactive streaming services can be 

modeled not merely as the individual 

musical work or sound recording, but 

also as access to copies of a large 

repertoire of songs. Such access can be 

offered through various delivery 

channels, such as interactive streaming, 

noninteractive streaming and satellite 

radio. 

At this point of analysis, therefore, the 

concept of ‘‘opportunity cost’’ is of 

particular importance.233 When a 

collective sets the royalty rate to be paid 

by a distribution channel to provide 

such downstream access, in order to 

maximize profits, it must: (1) Consider 

potential royalty revenue from the 

various distribution channels; (2) 

determine whether these distribution 

channels/licensees serve overlapping 

downstream listeners; (3) minimize 

opportunity costs by attempting to 

equalize (on the margin) royalty revenue 

paid by such overlapping licensees; (4) 

refuse licenses to distributor categories 

that would ‘‘cannibalize’’ higher royalty 

revenues from other distribution 

channels; and (5) identify the 

distribution channels that provide 

access to listeners who would not 

otherwise pay for a higher-priced 

distribution channel because of their 

low WTP (i.e., distribution channels and 

listeners that do not cause 

‘‘substitution’’ or ‘‘cannibalization’’). 

For the category of services that fall in 

number (5) above, licensors would 

negotiate a royalty without regard to 

opportunity cost (i.e., without fear of 

‘‘substitution’’ or ‘‘cannibalization’’), 

because no such opportunity costs 

would be present. Compare Expert 

Report of Joshua Gans on Behalf of 

Copyright Owners ¶ 50 (Gans WDT) 

(‘‘The opportunity cost of licensing 

musical works to a given interactive 

streaming service depends on the 

royalty income lost as a result of doing 

so. There are numerous potential 

sources of that lost royalty income, 

including lost revenue from another 

interactive streaming service (that may 

pay higher rates), as well as lost 

physical sales, downloads and radio/ 

webcasting revenue.’’) with Hubbard 

WRT ¶ 4.3 (‘‘a songwriter’s opportunity 

cost of licensing to a service that is both 

market expanding and that does not 

‘‘cannibalize’’ users from other services 

is relatively low.’’). 

Thus, the simple ‘‘Economics 101’’ 

model—which suggests a simple single 

per-unit price—is not applicable. (‘‘We 

are not in Kansas anymore,’’ or, to 

repeat Professor Samuelson’s elegant 

phraseology, ‘‘the easy formulas of 

classical economics no longer light our 

way.’’). Accordingly, to analyze the 

parties’ proposed rate structures, the 

Judges must consider economic models 

informed by the economic principles 

that reflect these market realities. 

Fortunately, the Judges hardly are 

operating in a vacuum, either in a 

theoretical or practical sense, given the 

testimony provided by the economic 

witnesses in this proceeding. 

One analytical approach to the issues 

raised by the economics of copyrights 

involves the application of concepts 

from the sub-field of ‘‘welfare 

economics.’’ As one of Copyright 

Owners’ economist-experts noted, the 

pricing issue raised in this proceeding 

invokes principles from the branch of 

this sub-discipline. 3/27/17 Tr. 3032 

(Watt) (defining ‘‘welfare economics’’ 

informally as ‘‘what economists use 

when we talk about efficiency and we 

talk about producer/consumer surplus 

and things like that.’’) 234; see also 

Pindyck & Rubinfeld, supra, at 590 

(defining ‘‘welfare economics as the 

‘‘normative evaluation of markets and 

economic policy.’’). A core principle of 

welfare economics, and thus of 

economics writ large, is the ‘‘theory of 

the second best.’’ 235 Simply stated—and 

in a manner applicable here—the theory 

provides: ‘‘When it is not possible to 

obtain the most desirable economic 

outcome in a situation—marginal cost 

pricing in this case—society has to 

compromise and accept the next most 

desirable outcome.’’ A. Schotter, 

Microeconomics: A Modern Approach at 

427–428 (2009) (emphasis added).236 It 

is accurate to state that the Judges’ 

practical task in this case is to 

determine a rate structure and rates that 

are economically ‘‘second best’’ in this 

economic context and satisfy the legal 

requirements of section 801(b)(1). 

Because the theory of the second best 

by its very nature does not provide for 

a single ‘‘first best’’ outcome, it provides 

ammunition for all economic experts in 

this proceeding to use to take pot shots 

at the models and proposals put forth by 

their adversaries. If no alternative is 

‘‘first best,’’ then each suffers from some 

imperfection or market distortion 

compared with the unattainable ‘‘first 

best’’ outcome in a perfectly competitive 

market. But because the ‘‘first best’ 

solution is unattainable, levying such 

criticisms is akin to shooting fish in a 

barrel. 

The salient criticisms, and the 

difficult task for this tribunal, involve 

1980 Federal Register / Vol. 84, No. 24 / Tuesday, February 5, 2019 / Rules and Regulations 

237Even in the case of an ordinary private good 

with increasing marginal costs, sellers will prefer to 

price discriminate, increasing the ‘‘producer 

surplus’’ and shrinking the ‘‘consumer surplus,’’ if 

they can identify the WTP of different segments of 

the demand curve and can avoid after-market 

arbitrage (i.e., avoiding low WTP buyers re-selling 

to higher WTP buyers and thus depriving sellers of 

the benefits of price discrimination). See Nicholson 

& Snyder, supra, at 503 (‘‘whether a price 

discrimination strategy is feasible depends crucially 

on the inability of buyers of the good to practice 

arbitrage.’’). Further, sellers of cultural goods 

generally use price discrimination when they have 

excess supply and temporally-limited demand. See 

W. Baumol, Applied Welfare Economics, in R. 

Towse, A Handbook of Cultural Economics at 26 

(1st ed. 2003) (noting that for theatres ‘‘[s]olvency 

generally requires price discrimination,’’ thereby 

avoiding the economic loss arising from ‘‘halfempty theatres’’). Moreover, even sellers of all sorts 

of goods, and even in a competitive market, will 

find it rational to attempt to use price 

discrimination whenever it becomes apparent that 

marginal sales at lower prices to low WTP buyers 

will at least cover some fixed costs. See W. Baumol, 

Regulation Misread by Misread Theory: Perfect 

Competition and Competition-Imposed Price 

Discrimination at 6 (2005) (‘‘[U]nder competitive 

conditions the firm will normally be forced to adopt 

discriminatory pricing wherever . . . feasible. . . . 

[U]niform pricing is not to be taken as the normal 

characteristic of equilibrium of the competitive 

firm.’’). Thus, the ‘‘general’’ per-unit pricing 

presented in Economics 101 may not be quite so 

ubiquitous, placing any per-unit pricing proposal in 

this proceeding on even more tenuous grounds. 

238Thus, in contrast with the Majority Opinion, 

this Dissent does not attempt to arbitrarily select 

disparate elements from the record to create, posthearing, a rate structure that was not subject to this 

adversarial process. 

weighing various ‘‘second best’’ 

alternatives, as presented through—and 

limited by—the record, to identify the 

rate structure that better satisfies the 

statutory criteria, as construed by the 

D.C. Circuit and prior applicable 

determinations and decisions by the 

Judges, their predecessors, the Librarian 

and the Register. See 17 U.S.C. 

803(a)(1). 

At the theoretical extremes are two 

unacceptable approaches to rate-setting: 

(1) setting price equal to the marginal 

physical cost of copying, which is zero; 

and (2) setting price on a per unit basis 

that exceeds marginal physical cost. In 

the chasm between these two 

inadequate approaches exist many 

alternative rate structures with varying 

rates for various segments of the market. 

In general terms, these alternative ratesetting structures are forms of ‘‘price 

discrimination,’’ which, in the broadest 

sense, means simply a departure from a 

single, per-unit price. See, e.g., H. 

Varian, Intermediate Microeconomics: A 

Modern Approach 462 (2010) (defining 

‘‘price discrimination’’ as’’[s]elling 

different units of output at different 

prices’’). For example, rates based on a 

percent-of-revenue (even without any 

alternative rate prongs) are themselves a 

blunt form of price discrimination. J. 

Cirace, CBS v. ASCAP: An Economic 

Analysis of a Political Problem, 47 Ford. 

Rev. 277, 288 (1978) (‘‘A license fee 

based upon a percentage of gross 

revenue is discriminatory in that it 

grants the same number of rights to 

different licensees for different total 

dollar amounts, depending upon their 

ability to pay [and] [t]he effectiveness of 

price discrimination is significantly 

enhanced by the all-or-nothing blanket 

license.’’); W.R. Johnson, Creative 

Pricing in Markets for Intellectual 

Property, 2 Rev. Econ. Rsch. Copyrt. 

Issues 39, 40–41 (2005) (identifying 

revenue sharing licenses as a form of 

price discrimination).237

The Judges have utilized a price 

discriminatory approach previously to 

reflect a segmented marketplace. In Web 

IV, the Judges set three different per 

play royalty rates for sound recording 

licenses for noninteractive services 

pursuant to section 114; one rate for adsupported services; a higher rate for 

subscription services; and a lower rate 

for educational broadcasters. See Web 

IV, supra, 81 FR at 26346, 26405, 

Likewise, in the rate court, the royalty 

rate paid to songwriters for 

performances on noninteractive services 

is lower than the rate paid for 

performances on interactive services. 

See In re Pandora Media, 6 F.Supp.2d 

317, 360 (S.D.N.Y. 2014), aff’d sub nom 

Pandora Media, Inc. v. ASCAP, 785 F.3d 

73 (2d Cir. 2015) (setting noninteractive 

performance royalties paid by 

noninteractive services below the rate 

by interactive services, and noting that 

‘‘[i]f there was one principle regarding 

rate structure on which the parties 

agreed at trial it was that the rate for 

customized radio should be set below 

the rate for on-demand interactive 

services.’’). 

Perfect price discrimination (i.e., 

‘‘first-degree’’ price discrimination) is 

essentially not possible. (For example, a 

senior discount may be afforded to a 

millionaire who has a WTP, based in 

part on income, far above the price 

imputed in his or her senior discount.) 

See generally Nicholson & Snyder, 

supra, at 505 (‘‘First-degree price 

discrimination poses a considerable 

information burden for the monopoly— 

it must know the demand function for 

each potential buyer.’’). However, the 

existence of any imperfection, whether 

in a price discriminatory royalty or any 

royalty, is not indicative of the 

unacceptability of the price structure as 

an appropriate benchmark or statutory 

rate structure. Rather, such 

imperfections must be weighed against 

the imperfections in any other proffered 

pricing structure. Thus, when a 

regulator is tasked with rate-setting, the 

process inescapably requires the use of 

informed judgment in order to consider 

the competing benefits and costs of any 

proposed rate structures and levels. See 

generally 1 A. Kahn, The Economics of 

Regulation 198 (1970) (‘‘The decision 

about what kinds of modifications 

second-best considerations recommend 

can be made only by looking at the facts 

in each individual case. No set of 

economic principles can substitute for 

the use of judgment in their 

application.’’). In the present context, 

that judgment is informed through the 

adjudicatory process that places the 

economic experts of the licensors and 

licensees in an adversarial proceeding, 

revealing the strengths and weaknesses 

of their approaches, through direct and 

rebuttal written testimony, direct and 

cross-examination, and inquiries from 

the Judges.238

I consider these various approaches in 

the context of the foregoing economic 

principles. 

G. The Parties’ Proposals 

1. The Services (i.e., excluding Apple) 

The Services propose respective rates 

and rate structures that—while varying 

in their particulars—share a number of 

common elements. Broadly, the Services 

propose a rate structure that in the main 

continues the current rate structure. 

More particularly, the Services’ 

proposals share the following core 

elements: 

(1) the rate should continue be set as an 

‘‘All-In’’ rate for musical works licenses, i.e., 

a mechanical rate that permits all services to 

deduct royalties paid to the same rights 

holders and their agents for performing 

rights; 

(2) the rate should continue to be 

structured as a percentage of revenue, subject 

to certain minima; and 

(3) the ‘‘All-In’’ headline rates should 

continue, with the subpart B headline rate 

maintained at 10.5% of revenue. 

However, the Services propose that the 

‘‘Mechanical Floor’’ in the existing rate 

structure be discontinued. 

The principle additional and differing 

particulars of the rate structures 

proposed by each Service are set forth 

below. 

a. Amazon 

In its May 11, 2017 ‘‘Proposed Rates 

and Terms’’ (Amazon Proposal), 

Amazon proposes that the rate structure 

as currently set forth in the applicable 

regulations should rollover into the 

2018–2022 rate period, except as 

otherwise proposed by Amazon. 

Amazon Proposal at 1. In that regard, 

the following elements comprise the 

core structure of Amazon’s proposed 

Federal Register / Vol. 84, No. 24 / Tuesday, February 5, 2019 / Rules and Regulations 1981 

239The Google Amended Proposal amended its 

original proposal filed on November 1, 2016. Google 

originally proposed a subpart B rate structure that 

generally followed the existing structure. Google 

Written Direct Statement, Introductory 

Memorandum at 3 (Nov. 1, 2016). 

240 Google’s post-hearing proposal appears to 

have been an impetus for the majority to invent its 

own post-hearing structure of rates, albeit different 

in its particulars even from Google’s post-hearing 

proposal. 

241As noted supra, ‘‘TCC’’ is an industry acronym 

for ‘‘Total Content Cost.’’ 

242 Google describes this proposed change as a 

change in the definition of ‘‘Service Revenue,’’ 

unlike Amazon, which described its proposed 15% 

discount as a change in rates. The difference is 

mathematically irrelevant, and, for the sake of 

completeness and consistency, these 15% discount 

proposals are treated here as proposed changes in 

rates. 

243 Google’s proposed single 10.5% TCC rate does 

not include the ‘‘Mechanical-Only Floor’’ that 

Pandora and Spotify expressly seek to eliminate. 

The ‘‘Mechanical-Only’’ Floor, found in 37 CFR 

385.15, ensures that music publishers and 

songwriters will receive no less than a fixed persubscriber amount of between $0.25 and $0.50, 

regardless of the amount that remains after 

deduction of musical works performance royalties 

from the ‘‘All-In’’ rate. 

244The Pandora Amended Proposal superseded 

its original proposal filed on November 1, 2016, by 

adding definitions (for ‘‘fraudulent streams’’ and 

‘‘play’’) that do not directly relate to the royalty 

rates. See Pandora Media, Inc.’s Proposed Findings 

of Fact and Conclusions of Law Appx. C (Pandora 

PFFCOL). 

245Pandora does not expressly describe this 

change as a change in rates per se. 

246The Copyright Owners’ rate proposal would 

apply the subpart A rates to so-called ‘‘music 

bundles’’ (‘‘offerings of two or more Subpart A 

products to end users as part of one transaction’’) 

which are currently covered by subpart C. Id. at 3 

nn. 2 & 4. 

247Copyright Owners’ original proposal defined 

‘‘end user’’ as any person who ‘‘had access’’ to a 

standalone music service. Id. at 8–9. However, 

Copyright Owners narrowed their proposed 

definition of ‘‘end user’’ to include any person who 

(a) pays a fee for access to a standalone music 

Continued 

rate structure that would constitute 

changes in the current regulations: 

• The per subscriber minimum and/or 

subscriber-based royalty floors for a ‘‘family 

account’’ should equal 150% of the per 

subscriber minimum and/or subscriber-based 

royalty floor for an individual account. 

• A student subscription account discount 

of 50% should be included in the regulations 

to the per subscriber minimum and 

subscriber-based royalty floor that would 

otherwise apply under the current 

regulations. 

• A discount for annual subscriptions 

equal to 16.67% of the minimum royalty rate 

(or rates) and subscriber-based royalty floor 

(or floors) that would otherwise apply under 

§ 385.13. 

• A 15% discount to the minimum royalty 

rate (or rates) and subscriber-based royalty 

floor (or floors) to reflect a service’s actual 

‘‘app store’’ and carrier billing costs, not to 

exceed 15% for each. 

Amazon Proposal at 1–2. 

b. Google 

As noted supra, in its May 11, 2017 

‘‘Amended Proposed Rates and Terms’’ 

(Google Amended Proposal),239 Google 

proposes a rate structure that combines 

certain elements, eliminates other 

elements and uses specific rates, 

together in a combination that was not 

presented at the hearing.240

Specifically, the Google Amended 

Proposal set forth a rate structure that 

‘‘eliminat[es] . . . different service 

categories’’ and replaces them with ‘‘a 

single, greater-of rate structure between 

10.5% of net service revenue and an 

uncapped 15-percent TCC component.’’ 

Id. at 1.241 Similar to one of Amazon’s 

proposals, Google also seeks a discount 

in rates for ‘‘carrier billing costs’’ and 

‘‘app store commissions,’’ plus ‘‘credit 

card commissions’’ and ‘‘‘similar 

payment process charges,’’ all not to 

exceed 15%. Id. at 6 (for subpart B); 26 

(for subpart C).242

Google also proposed a new rate of 

13% of the record company’s total 

wholesale revenue from the music 

bundle in accordance with GAAP for 

the provision of music bundles under 

subpart C, where the record company is 

the licensee. Google Amended Proposal 

at 33–34. Additionally, Google proposed 

a new royalty of 15% ‘‘of the applicable 

consideration expensed by the service, 

if any . . . incremental to the applicable 

consideration expensed for the right to 

make the relevant permanent digital 

downloads and ringtones.’’ Id. at 34.243

However, Google is in favor of the 

general elements of the Services’ 

proposal, set forth supra, if the Judges 

were to: (a) reject its amended proposal 

in toto, see Google’s Proposed Findings 

of Fact and Conclusions of Law ¶ 8 

(Google PFF); or (b) adopt Google’s 

amended proposal but incorporate a 

TCC rate greater than the 15% proposed 

by Google. See id. ¶ 47. 

c. Pandora 

In its May 11, 2017 ‘‘Proposed Rates 

and Terms (As Amended)’’ (Pandora 

Amended Proposal),244 Pandora seeks 

the following changes from the current 

regulations: 

• Elimination of the alternative 

computation of subminimums I and II now 

in § 385.13 and in § 385.23 (for subparts B 

and C respectively) ‘‘in cases in which the 

record company is the Section 115 licensee.’’ 

• A broadening of the present ‘‘not to 

exceed 15%’’ reduction of ‘‘Service 

Revenues’’ in § 385.11 to reflect, in toto, an 

exclusion of costs attributable to ‘‘obtaining’’ 

revenue, ‘‘including [but not expressly 

limited to] credit card commissions, app 

store commissions, and similar payment 

process charges.’’ 245

• A discount on minimum royalties for 

student plans ‘‘not to exceed 50%’’ off 

minimum royalty rates set forth in § 385.13. 

Id. at 1, 7. 

d. Spotify 

In its May 11, 2017 ‘‘Second 

Amended Proposed Rates and Terms’’ 

(Spotify’s Second Amended Proposal), 

Spotify seeks the following changes 

from the current regulations: 

• For all licensed activity, the 

‘‘mechanical-only’’ royalty floor should be 

removed, i.e., removed from 

§§ 385.12(b)(3)(ii) and 385.13(a)(1) & (3) for: 

(a) standalone non-portable subscriptionstreaming only; and (b) standalone portable 

subscriptions service. 

• A broadening of the present ‘‘not to 

exceed 15%’’ reduction of ‘‘Service 

Revenues’’ in § 385.11 to reflect, in toto, an 

exclusion of the actual costs attributable to 

‘‘obtaining’’ revenue, ‘‘including [but not 

expressly limited to] credit card 

commissions, app store commissions similar 

payment process charges, and actual carrier 

billing cost.’’ 

2. Apple 

Apple proposed that the Services pay 

or $0.00091 for each non-fraudulent 

stream of a copyrighted musical work 

lasting 30 seconds or more. Apple Inc. 

Proposed Rates and Terms (as amended) 

at 3–4. Apple proposed defining a use 

as any play of a sound recording or a 

copyrighted work lasting 30 seconds or 

more. Additionally, Apple proposed an 

exemption for a ‘‘fraudulent stream,’’ 

which it proposes be defined as ‘‘a 

stream that a service reasonably and in 

good-faith determines to be fraudulent.’’ 

Id. at 2. 

For paid locker services, Apple 

proposes a $0.17 per subscriber fee, also 

as a component of an ‘‘All-In’’ musical 

works royalty rate that would include 

the ‘‘Subpart C’’ royalty, the mechanical 

royalty, and the public performance 

royalty. Id. at 7–8. For purchased 

content locker services, Apple proposes 

a zero royalty fee. Id. at 7. 

3. Copyright Owners 

The Copyright Owners proposed that 

the Judges adopt a unitary greater-of rate 

structure for all interactive streaming 

and limited downloads that are 

currently covered by Subparts B and 

C.246 Copyright Owners’ Amended 

Proposed Rates and Terms, at 3 (May 11, 

2017) (Copyright Owners’ Amended 

Proposal). The proposal was structured 

as the greater of a usage charge and a 

per-user charge. Specifically, each 

month the licensee would pay the 

greater of (a) a per-play fee ($0.0015) 

multiplied by the number of interactive 

streams or limited downloads during 

the month and (b) a per-end user 247 fee 

1982 Federal Register / Vol. 84, No. 24 / Tuesday, February 5, 2019 / Rules and Regulations 

service offering licensed activity during the relevant 

accounting period, or (b) makes at least one play of 

licensed activity during the relevant accounting 

period. This would apparently have the effect of, for 

example, excluding as an ‘‘end user’’ any Amazon 

Prime member or listener to Spotify’s ad-supported 

service who did not listen to any song in the 

accounting period. Copyright Owners’ Amended 

Proposal at 8. 

248Copyright Owners’ per-unit proposal contains 

two prongs in a greater-of structure. The first is a 

per-play prong, and the second is a per-user prong. 

The greater-of proposal is considered infra. 

($1.06) multiplied by the number of end 

users during the month. Id. at 8. The 

license fee would be for mechanical 

rights only, and would not be offset by 

any performance royalties that the 

licensee paid for the same activity (i.e., 

the existing ‘‘All-In’’ aspect of the rate 

structure would be eliminated). Id. 

H. The Structure of the Rates for the 

Forthcoming Rate Period 

1. Per-Play or Percent of Revenue (with 

Minima) 

a. Copyright Owners’/Apple’s Argument 

for a Per-Unit Rate 248

Copyright Owners and Apple 

emphasize that a per play royalty rate 

structure, as compared with a percent of 

revenue-based structure, provides 

transparency and simplicity in reporting 

to songwriters and publishers, because 

it requires only one metric besides the 

rate itself—the number of plays, making 

it much easier to calculate and report, 

and for songwriter/licensors to 

understand. See, e.g., Rysman WDT 

¶ 56; Wheeler WDT ¶ 19; Expert Report 

of Anindya Ghose November 1, 2016 

¶¶ 83–84 (Ghose WDT); Ramaprasad 

WDT ¶ 41; Brodsky WDT ¶ 76; 3/22/17 

Tr. 2476–78 (Dorn); 3/22/17 Tr. 2855–56 

(Ghose). Relatedly, Copyright Owners 

argue that a transparent metric tied to 

actual usage is superior because, under 

the alternative percent-of-revenue 

approach, services can manipulate 

revenue through bundling, discounting, 

and accounting techniques. Licensors 

also note that licensees’ might defer 

service revenues and emphasize 

increasing market share rather than 

profits. Rysman WDT ¶¶ 43–45. 

Copyright Owners and Apple contrast 

their proposed per play approaches with 

the current rate structure, which they 

characterize as cumbersome and 

convoluted. They emphasize that under 

the current rate structure, the services 

must perform a series of different greater 

of and lesser of calculations, depending 

on a service’s business model, to 

determine which prong of the rate 

structure is operative. Proposed 

Findings of Fact of Copyright Owners 

¶ 16 (COPFF) (and record citation 

therein). Copyright Owners assert that 

because of this complexity, publishers 

and songwriters cannot easily verify the 

accuracy of data the services input 

when calculating royalty payments. See 

Brodsky WDT ¶ 76; Ghose WDT ¶¶ 80, 

81, 82; Ramaprasad WDT ¶¶ 4, 38, 42– 

44; Rysman WDT ¶ 57; 3/23/17 Tr. 2865 

(Ghose); 3/22/17 Tr. 2477–78 (Dorn). 

Beyond the issue of complexity, 

Copyright Owners and Apple argue that 

interactive streaming services do not 

need the present upstream rate structure 

in order to adopt any particular 

downstream business model. Rather, 

Copyright Owners and Apple assert that 

a per-play structure would establish a 

level of equality in the royalty rates 

across these services, without regard to 

business models, and the services could 

price downstream in whatever manner 

they choose. But regardless of the 

downstream pricing structure, 

songwriters and publishers would be 

paid on the same transparent, fixed 

amount—without advantaging any one 

business model over another. See, e.g., 

3/23/17 Tr. 2849, 2863 (Ghose) 

Thus, Copyright Owners and Apple 

maintain that a royalty based on the 

number of plays aligns the 

compensation paid to the creators of the 

content with the actual demand for and 

consumption of their content. Ghose 

WDT ¶ 84; Rysman WDT ¶¶ 9, 58; 

Testimony of David Dorn ¶ 33 (Dorn 

WDT). 

Copyright Owners further argue that 

the present rate structure’s failure to 

measure royalties based on per play 

consumption is counterintuitive, 

because it permits a decreasing effective 

per play rate even as the quantity of 

songs that listeners ‘‘consume’’ via 

interactive streaming is increasing. 

Israelite WDT ¶ 39. Copyright Owners 

note, for example, that listening to 

[REDACTED] increased from 

[REDACTED] streams in July 2014 to 

[REDACTED] streams in December 

2016, a fifteen-fold increase in the 

number of streams. Hubbard WRT, Ex. 

1; id. at WRT ¶ 2.22; 4/13/17 Tr. 5971– 

72 (Hubbard). However, 

contemporaneously [REDACTED] 

mechanical royalty payments to the 

Copyright Owners only increased 

[REDACTED]. (Hubbard WRT ¶ 3.9; 4/ 

13/17 Tr. 5971–73 (Hubbard). The 

upshot, Copyright Owners assert, is that, 

as streaming consumption increased 

dramatically from 2014 to 2016, the 

effective per stream mechanical 

royalties paid by [REDACTED] to 

Copyright Owners decreased from 

[REDACTED]to [REDACTED]. 4/13/17 

Tr. 5972–73 (Hubbard). 

Finally, Copyright Owners assert that 

a per-unit rate is appropriate because a 

musical work has an ‘‘inherent value.’’ 

See, e.g., Israelite WDT at 10; ¶¶ 29(B), 

30, 31(C); Brodsky WDT ¶ 68 At the 

hearing, NMPA’s president, Mr. Israelite 

explained how he construes the 

‘‘inherent value’’ of a musical work: 

‘‘[W]homever owns an individual 

copyright is the one to define it. I think 

that would be the most appropriate 

definition of it. What someone is willing 

to license it for would be that inherent 

value to that owner. That would be my 

view. . . . That would be the market 

value.’’ 3/29/17 Tr. 3707 (Israelite). 

b. The Services’ Arguments in 

Opposition to a Per-Play Rate Structure 

The Services make several arguments 

in opposition to the use of a proposed 

per-play royalty rate. The overarching 

theme of these arguments is that an 

inflexible ‘‘one size fits all’’ rate 

structure would be ‘‘bad for services, 

consumers, and the copyright owners 

alike.’’ Services’ Joint Proposed Findings 

of Fact and Conclusions of Law at p. 89 

(SJPFF). 

First, they argue that an upstream perplay rate would not align with the 

downstream demand for ‘‘all-you-caneat’’ streaming services. As Professor 

Marx testified, a per stream fee 

introduces a number of distortions and 

inefficiencies, encouraging a capping of 

downstream plays and reduces 

incentives for services to meet the 

demand of consumers ‘‘who are going to 

stream a lot of music.’’ Marx WDT 

¶¶ 130–131. In this vein, Pandora’s then 

president, Michael Herring, noted that a 

per-play consumption-based model 

where the revenue is fixed per user 

creates uncertainty and volatility 

around prospective margins, and the 

uncertainty discourages investment and 

hampers profitability. 3/14/17 Tr. 894– 

95 (Herring). Mr. Herring notes that this 

a general economic problem that occurs 

when a retail subscription business has 

fixed subscription revenues per 

customer but costs that are variable and 

unpredictable because the downstream 

quantity of units accessed are 

themselves variable and unpredictable. 

Written Rebuttal Testimony of Michael 

Herring ¶ 17 (Herring WRT); 3/14/17 Tr. 

894–98 (Herring). See also Mirchandani 

WDT ¶ 39 (one-size-fits-all rate is not 

‘‘offering agnostic’’ as Copyright Owners 

claim, but rather is ‘‘offering 

determinative.’’) 

Second, the Services argue that there 

is no ‘‘revealed preference’’ in the 

marketplace for musical works and 

sound recordings for a per-play royalty, 

as opposed to a percent of revenue 

royalty (with minima). In particular, 

they point out that mechanical royalties 

have never been set on a per play basis. 

See Herring WRT ¶ 19. The Services 

Federal Register / Vol. 84, No. 24 / Tuesday, February 5, 2019 / Rules and Regulations 1983 

249This analysis also underscores the inaccuracy 

of Copyright Owners’ claim that each stream of a 

musical work has ‘‘inherent value.’’ See, e.g., 

Israelite WDT ¶ 39 (It ‘‘makes no sense’’ if ‘‘[e]ach 

service effectively pays to the publisher and 

songwriter a different per-play royalty.’’) But in 

reality, Copyright Owners understand that each 

musical work also contributes to a different value— 

access value (what economists call ‘‘option 

value’’)—when the musical works are collectivized 

and offered through an interactive streaming 

service, resulting in different effective per play rates 

paid by services if the per user prong is triggered. 

To explain this inconsistency, Copyright Owners 

note the existence of a second ‘‘inherent value’’— 

the access or option value noted above—not created 

by the songwriter in his or her composition—but 

rather created by the publisher to provide a separate 

value for the user—who inherently values access to 

a full repertoire. But these two purportedly 

‘‘inherent’’ values are inconsistent (which is why 

there are two prongs in the proposal) and, given the 

heterogeneity of listeners, neither value is 

homogeneous throughout the market. 

also point to the direct licenses 

interactive services regularly enter into 

with music publishers, PROs and record 

companies—[REDACTED]. SJPFF 

¶¶ 174–75 (and record citations 

therein). They acknowledge that some of 

the agreements with record companies 

contain alternative per-user prongs, 

id.¶ 175, but they note that this is 

consistent with the existing rate 

structure which already contains a per 

subscriber minima, but not a per play 

prong. Further, the Services note that 

[REDACTED]. See 3/23/17 Tr. 2857 

(Ghose); see also 3/22/17 Tr. 2479 

(Dorn) (Apple paying [REDACTED] rate 

under direct licenses with publishers). 

Third, the Services discount the 

argument that Copyright Owners’ 

proposed rate structure is superior to 

the present rate structure because the 

latter is too complicated or 

cumbersome. They characterize this 

criticism as ‘‘overblown,’’ and further 

take note that the detailed nature of the 

structure is designed to ameliorate any 

problems associated with the use or 

calculation of a revenue-based headline 

rate, by the inclusion of per subscriber 

and TCC minima. SJPFF ¶ 174. They 

further note that section 801(b)(1) does 

not list as a criteria or objective that the 

rates must be simple or easy for 

songwriters to understand, or otherwise 

‘‘transparent.’’ Services’ Joint Reply to 

Apple Inc.’s Findings of Fact and 

Conclusions of Law at 34, 36 (SJRPFF– 

A). Thus, they argue, the Judges cannot 

jettison an otherwise appropriate rate 

structure because some unquantified 

segment of the songwriting community 

might be uncertain as to how their 

royalties were computed. 

Finally, separate from these 

arguments against per-play rate 

proposals, the Services note a vexing 

problem related to Apple’s specific 

proposal: How to convert the typical 

percent-of-revenue performance royalty 

into a per play rate in order to subtract 

it from Apple’s proposed per play 

mechanical rate, so as to calculate the 

‘‘All-In’’ rate? (This problem is 

irrelevant to Copyright Owners’ 

proposal, because they propose the 

elimination of the ‘‘All-In’’ provision in 

the rate structure.) The Services note 

that Apple Music’s Senior Director, 

David Dorn, was unable to explain how 

this calculation would be made. See 3/ 

22/17 Tr. 2508–09 (Dorn). Thus, the 

Services assert that Apple’s proposal 

would introduce ‘‘more complexity, not 

less.’’ SJRPFF–A at 34. 

2. An Issue within the Per-Unit 

Approach: Copyright Owners’ 

‘‘Greater-Of’’ Rate Proposal 

Copyright Owners propose a ‘‘greater 

of’’ per-unit structure, whereby the 

royalty would equal the greater of 

$.0015 per play and $1.06 per-end user 

per month. In support of this approach, 

Copyright Owners assert that it 

establishes a value for each copy that is 

independent of the services’ business 

models and pricing strategies. Rysman 

WDT ¶ 89. They argue that the greater 

of structure is not any more complicated 

than a per play rate alone—and much 

less complicated than the 2012 rate 

structure—because adding a per-user 

royalty rate to the structure requires 

only one additional metric for royalty 

calculation—the number of users. 

Brodsky WDT ¶ 76. Copyright Owners 

also assert that their greater-of structure 

is a usage-based approach, aligned with 

the value of the licensed copies because 

each rate tier is tied to a ‘‘particular 

use,’’ as it couples rates with usage and 

consumption. CORPFF–JS at p. 22. 

Finally, Copyright Owners note that in 

music licensing agreements it is not 

uncommon to find royalty rates set in a 

greater of formula that includes a per 

user and a per play prong (as well a 

percent-of-revenue prong). See 

CORPFF–JS at p. 97 (and record 

citations therein). 

The services (i.e., including Apple) 

assert that the greater-of aspect of 

Copyright Owners’ rate proposal would 

lead to absurd and inequitable results, 

well above the rates established under 

Copyright Owners’ per-play rate prong. 

This point is explained in detail by 

Professor Ghose, one of Apple’s 

economic expert witnesses. Professor 

Ghose explains that under Copyright 

Owners’ greater of structure, interactive 

streaming services would pay under the 

per-user prong if the average number of 

monthly streams per user was less than 

707. 4/12/17 Tr. 5686–5687 (Ghose). 

Thus, such a service would be required 

to pay the $1.06 per user rather than 

$0.0015 per stream. Id. at 5687. As an 

example, Professor Ghose used a 

hypothetical scenario in which a service 

had one user who listened to 300 

streams in a given month. Under 

Copyright Owners’ $0.0015 per play 

prong, the service would pay $ 0.0015 

× 300, equal to $.45 in royalties. Under 

its per user prong, the service would 

pay a royalty of $1.06 for the one user, 

which is an effective per play rate of 

1.06 ÷ 300, which equals effectively $ 

0.0035 per play, more than two times 

the $0.0015 rate under the stated per 

play prong. 4/12 Tr. 5687 (Ghose). 

Importantly, Apple argues from the 

record evidence that Professor Ghose’s 

example is representative, because 

services monthly streams have 

historically been less than 707. More 

granularly, relying on data in Dr. 

Leonard’s written rebuttal testimony, 

Apple contends that the annual 

weighted average number of streams 

per-month per-user across current 

Subpart B and Subpart C services has 

always been below [REDACTED] in each 

year from 2012 to 2016. See Leonard 

WRT Ex. 3b. More particularly, the 

number of monthly per user streams for 

each of those five years was 

[REDACTED] (in 2012), [REDACTED] 

(in 2013), [REDACTED] (in 2014), 

[REDACTED] (in 2015) and 

[REDACTED] (in 2016). Id. 

Additionally, the average number of 

streams per-month per-user has 

exceeded 707 (which would trigger the 

per play prong) [REDACTED] according 

to the service-by-service data. Id. 

(Deezer averaged [REDACTED] streams 

in 2014 and Tidal averaged 

[REDACTED] streams in 2016. Id.) 

Apple argues that this historical data 

indicates that the services would 

consistently pay more than the $0.0015 

per play rate. See Apple Inc.’s Findings 

of Fact and Conclusions of Law ¶ F284 

(Apple PFF).249

According to Apple, even Copyright 

Owners’ own expert, using different 

data, found that [REDACTED] services 

he reviewed would have been required 

to pay under the per-user prong in 

December 2015, if the Copyright 

Owners’ proposal had been in effect. 

Rysman WRT ¶ 87, Table 1. In like 

fashion, Professor Rysman’s data for 

December 2014 data indicated that 

[REDACTED] services would have been 

required to pay under the per-user 

prong. Id. at Table 2. 

Professor Ghose expands the 

hypothetical scenarios in an attempt to 

1984 Federal Register / Vol. 84, No. 24 / Tuesday, February 5, 2019 / Rules and Regulations 

demonstrate what he considers to be the 

absurdity of Copyright Owners’ greaterof approach, as depicted in his chart, reproduced below: 

Copyright Owners do not dispute 

these analyses. Rather, they make two 

points. First, they claim that the binding 

nature of the per user prong is not 

problematic, because the [REDACTED]. 

See Copyright Owners’ Reply to Apple’s 

Proposed Findings of Fact and 

Conclusions of Law at 104 (CORPFF–A). 

I find this argument to be a nonsequitur, because sound recording rates 

in this context certainly have no bearing 

on the present issue, and Copyright 

Owners also do not indicate which 

prong would otherwise apply in those 

sound recording licenses. In fact, a 

review of the citations in CORPFF–A at 

104 reveals that [REDACTED]. See 

COPFF ¶ ¶ 72, 91–92, 95. 

Second, as noted supra, Copyright 

Owners attempt to support what appear 

to be absurd effective per play rates by 

explaining that the per user rates reflect 

the value of access to the repertoires, as 

opposed to the value of an individual 

stream—again, what economists refer to 

as an ‘‘option price. See CORPFF–A at 

104–105 (and citations therein). I agree 

that this access or option value is real. 

However, when such a value is inserted 

into a greater-of rate formula—where the 

access value is supplanted by the per 

play value, and vice versa– the pricing 

resembles a game of ‘‘heads I win, tails 

you lose.’’ Moreover, as noted supra, the 

marginal physical cost of an additional 

stream is zero, so it is economically 

inefficient to marry a per play fee to a 

per user fee in a greater of approach. Cf. 

Leonard 3/15/17 Tr. 1122–23 (Leonard) 

(efficient pricing would utilize an upfront fee and a zero per play fee 

thereafter). 

None of the parties presented any 

economic or policy analysis of such a 

‘‘greater-of’’ formula aside from its 

witnesses’ own testimonies. Further, I 

did not identify any such academic or 

industry analyses of this ‘‘greater-of’’ 

approach. However, the Copyright 

Board of Canada has criticized this type 

of rate structure in the following 

manner, which I find persuasive: 

[A] ‘‘greater-of’’ tariff [i.e., rate] would not 

be fair and equitable, because it would 

provide an undue advantage to [licensors] on 

two counts. To be fair and equitable, a tariff 

should neither overcompensate nor 

undercompensate rights owners. If set 

correctly, neither a per-play rate nor a 

percentage-of-revenue rate will tend to do so, 

to the extent that each captures a (different) 

measure of usage. On the other hand, a tariff 

set at the greater of those two rates is hedged 

in favor of the collective. It may prevent 

undercompensation if a service has low 

revenues; it does not prevent 

overcompensation in the case of a highrevenue service that uses few sound 

recordings. A greater-of formulation also 

burdens users with an unfair share of risks. 

[Licensors] benefit[ ] if there are high 

revenues and a large number of plays, if there 

are high revenues and a small number of 

plays, and if there are low revenues and a 

large number of plays. Only if there are low 

revenues and a small number of plays does 

the user benefit. By contrast, either a per-play 

or a percentage-of-revenue tariff, with or 

without a minimum fee, allocates risk 

between [licensors] and the users more 

evenly. 

Copyright Board of Canada, Statement 

of Royalties . . . Re:Sound Tariff 8— 

Non-interactive and Semi-interactive 

Webcasts 2009–2012, Decision of the 

Board at 27–28 (May 16, 2014). 

I recognize that the 2012 rate structure 

also contains a greater-of formula. 

Importantly, though, the alternative 

prong is not a per play prong, avoiding 

the unfairness identified in the 

Canadian Judges’ opinion. Also, the 

2012 greater-of structure was a 

negotiated bargain, indicating a 

revealed preference among all potential 

alternatives. Moreover, the alternative to 

the percent-of-revenue prong is itself a 

‘‘lesser-of’’ formulation, dampening the 

impact of the ‘‘greater-’’of’’ structure. 

Thus, the 2012 rate structure has the 

effect of moderating the negative impact 

of a greater of formulation such as 

proposed by Copyright Owners by 

keeping rates, calculated on either 

prong, on bases and at levels the parties 

agreed were acceptable. 

In sum and as explained supra, many 

economic trade-offs must be weighed in 


ER05FE19.015</GPH>
Federal Register / Vol. 84, No. 24 / Tuesday, February 5, 2019 / Rules and Regulations 1985 

250Except when they do not. As noted supra, the 

Services seek the elimination of the ‘‘Mechanical 

Floor,’’ a significant departure from the existing 

structure. I discuss that issue elsewhere in this 

Dissent. 

251Professor Hubbard further notes that he 

identified no empirical evidence in the record of 

any opportunity costs incurred by Copyright 

Owners as a consequence of the extant rate 

structure, and that the survey results obtained by 

the Klein Survey support his claim that 

substitution/cannibalization is not a material 

economic factor. 4/13/17 Tr. 5918 (Hubbard). This 

issue is discussed in greater detail infra. 

establishing pricing in this second-best 

scenario. Some rate structures tend to 

balance the several factors and thus are 

reasonable, whereas others may tend to 

favor one side of the transaction over 

the other and do not meet the standard 

of reasonableness. Copyright Owners’ 

greater-of approach represents such a 

one-sided structure, and accordingly I 

would reject this structure. 

3. The Services’ Argument for a 

Percent-of-Revenue Structure (with 

Minima) 

a. The Services’ General Benchmark 

Returning to the issue of per-unit 

pricing vs. percent-of-revenue pricing 

(with minima), the Services propose a 

rate structure for Subparts B and C that 

generally follows the structure set forth 

in the existing regulations adopted after 

the Judges approved the parties’ 2012 

settlement.250 The Services emphasize 

that they are not simply advocating that 

the basics of the 2012 rate structure 

should be preserved merely because 

there is a benefit in preserving the status 

quo. See 3/13/17 Tr. 564 (Katz) (relying 

on the 2012 structure as an excellent 

benchmark, ‘‘not because it’s the status 

quo.’’). 

Rather, the Services, through their 

economic experts, put forth the 2012 

rate structure (sans Mechanical Floor) 

as an appropriate benchmark—for the 

Judges to weigh, consider, adjust (if 

appropriate) and apply or reject—as 

they would with any proffered 

benchmark. See SJRPFF–CO at pp. 803– 

04 (and case law and record citations 

therein). The Services note that 

considering the current rate structure as 

a benchmark (rather than as a mere 

attempt to preserve aspects of the status 

quo) is instructive because it allows for 

an identification of market value by 

analogy—through the examination of a 

comparable circumstance, rather than 

requiring the experts and the Judges to 

build a theoretical model from the 

‘‘ground up’’ to represent the industry at 

issue, and without requiring the Judges 

to substitute their analysis and 

judgment as to why terms were 

included within the benchmarks. See 3/ 

13/17 Tr. 691–2 (Katz) (‘‘[My overall 

approach has been just ask the question 

[if] we take this as a benchmark . . . [i]s 

it reasonable to take the [2012] 

structure? . . . . [I]n trying to rely on 

the benchmark, I am trying to say, okay, 

well, the industry decided this, let me 

ask, is it working overall? . . . ’’ [T]hat’s 

what I would tend to do with any 

benchmark. I am using it as a 

benchmark to avoid having to model 

things and build it from the ground 

up.’’) (emphasis added). 

The Services’ experts opine that, for a 

number of reasons, the 2012 rate 

structure is not only a benchmark, but 

also that it is a highly appropriate 

benchmark. First, they note that the 

2012 rate structure embodies 

characteristics that the Judges have 

consistently identified as part and 

parcel of an appropriate benchmark. 

That is, the 2012 rate structure applies 

to: (a) the same rights; (b) the same uses; 

and (c) the same types of market 

participants. See 3/15/17 Tr. 1082–83 

(Leonard); 3/13/17 Tr. 551, 566–7 

(Katz). 

Additionally, because the 2012 rate 

structure was the product of a 

settlement between and among market 

participants, the Services maintain that 

it reflects market forces, including an 

implicit consensus as to the effects of 

the structure on piracy and potential 

substitution across platforms. See 3/13/ 

17 Tr. 580, 722 (Katz). More broadly, 

they argue that because the 2012 rate 

structure was agreed to by market 

participants who had assumedly 

weighed the costs and benefits of their 

agreement, it therefore demonstrates the 

‘‘revealed preferences’’ of these 

economic actors. See 3/15/17 Tr. 1095 

(Leonard); see also Leonard AWDT ¶ 74 

(direct license agreements that track the 

regulatory rate structure are further 

evidence of a ‘‘revealed preference’’ for 

that structure). 

Another Service expert notes that— 

because the Services have different tiers 

of listeners paying at different levels— 

their economic incentives are aligned 

with Copyright Owners—to avoid 

substitution of their higher priced 

services by their lower priced services 

(i.e., to avoid opportunity costs). Thus, 

the incentives that existed when the 

2012 rate structure was first 

implemented remain in effect. See 3/21/ 

17 Tr. 2192 (Hubbard) (testifying that 

there continues to be a ‘‘substantial 

heterogeneity on the consume side of 

the market.’’).251 Finally, the Services 

assert that the 2012 benchmark is 

relevant and helpful because, although 

it was entered into five years ago, it is 

nonetheless a relatively recent 

agreement, covering the current rate 

period and serving as a template for 

current agreements. See Katz WDT ¶¶ 6, 

71; 3/13/17 Tr. 608–09 (Katz); Leonard 

AWDT ¶ 47 et seq. (noting that ‘‘existing 

agreements’’ regularly track the section 

115 provisions); 3/15/17 Tr. 1082 

(Leonard). As noted by Amazon’s Head 

of Content Acquisition, Mr. 

Mirchandani, the 2012 rate structure has 

been demonstrated to be ‘‘workable,’’ 

even if ‘‘imperfect.’’ Mirchandani WDT 

¶ 7. 

The Services’ experts further 

emphasize that the structure of current 

rates satisfactorily reflects the economic 

market conditions in which the 

mechanical license for interactive 

streaming is used. See 4/13/17 Tr. 5943 

(Hubbard) (acknowledging a ‘‘love’’ of 

competitive markets, and recognizing 

that there are supply and demand 

considerations in this market that 

require the more flexible pricing 

structure generally provided in the 

current regulations). (I understand 

Professor Hubbard’s reference to the 

particularities of ‘‘this market’’ to relate 

to the quasi-public good nature of the 

copies of musical works/sound 

recordings, as discussed in this Dissent, 

supra.) 

The Services’ experts candidly 

acknowledge that the rate structure they 

advocate is not necessarily the ‘‘best’’ 

approach to pricing in this market. See 

4/7/17 Tr. 5574–6 (Marx); see also 

Mirchandani WDT, supra. Rather, the 

Services’ link the fact that the marginal 

physical cost of streaming is zero to the 

need for a flexible rate structure such as 

now exists. Professor Hubbard links the 

zero marginal physical cost 

characteristic to the setting of royalty 

rates by noting that, because ‘‘[t]he 

marginal production cost at issue here 

is—is zero. . . . it’s not clear why it’s 

not better to bring new customers into 

the market on which royalties would be 

paid and, of course, zero marginal cost 

incurred.’’ 4/13/17 Tr. 5917–18 

(Hubbard). See also Marx WDT ¶ 97 

(‘‘Setting the price of marginal 

downstream listening at its marginal 

cost of zero induces more music 

consumption and variety than per-song 

or per-album pricing.’’). I understand 

this testimony to be consistent with the 

economic point, discussed supra, that, 

in the ‘‘second-best world’’ created by 

the characteristics of this market, no one 

can claim that any given rate structure 

is the ‘‘best.’’ 

Professor Katz notes that the existing 

rate structure captures important 

specific aspects of the economics of the 

interactive streaming market, 

accounting for: (1) the variable WTP 

among listeners; and (2) the corollary 

1986 Federal Register / Vol. 84, No. 24 / Tuesday, February 5, 2019 / Rules and Regulations 

252A Copyright Owner economic expert, 

Professor Rysman, acknowledges that—under the 

current rate regime—revenues may be increasing 

because of movements ‘‘down the demand curve’’ 

(i.e., changes in quantity demanded in response to 

lower prices), rather than because of—or in addition 

to—an outward shift of the demand curve (i.e., an 

increase in demand at every price). 4/3/17 Tr. 

4373–74 (Rysman). 

253Professor Hubbard’s point that the variety of 

business models in the industry is a consequence 

of the various customer characteristics is 

noteworthy as a distinguishing counterpoint to the 

simple cliche ́ that the Judges should be ‘‘business 

model neutral.’’ 3/21/17 Tr. 2175–76 (Hubbard). 

254The Copyright Owners sought to rebut 

Professor Hubbard’s argument by confronting him 

with the offerings of Tidal, a streaming service that 

does not compete by offering a low-cost service. 

Eisenach WDT ¶¶ 49–50. However, Tidal’s offering 

of a higher priced subscription service that provides 

enhanced features such as hi-fidelity sound quality 

actually proves the point that Professor Hubbard 

and the other Service economists are making: There 

is a segmentation of demand across product 

characteristic and WTP that permits differential 

pricing in this industry. 

255All royalty sources include mechanical 

royalties from physical phonorecords, digital 

downloads and streaming; performance royalties 

from streaming and non-streaming; and 

synchronization. Zmijewski WRT ¶ 41. 

256By contrast, looking only at mechanical 

royalty revenue, for the sale of digital downloads 

and physical phonorecords mechanical royalty 

revenue [REDACTED] from $ [REDACTED] in 2014 

to $ [REDACTED] (as noted in (4) above, whereas 

mechanical royalty from streaming [REDACTED] 

from $ [REDACTED] in 2014 to $ [REDACTED] in 

2015. Thus, the $ [REDACTED] in mechanical 

royalty revenue from streaming [REDACTED] in 

mechanical royalty revenue from the sale of digital 

and physical phonorecords. This comparison is the 

metric from Professor Zmijewski’s analysis that 

Copyright Owners assert is most relevant. 

variable demand for streaming services. 

See 313/17 Tr. 586–87 (Katz); see also 

Marx WRT ¶ 239 et seq.; 4/7/17 Tr. 5568 

(Marx) (noting that the present structure 

serves differentiated products offered to 

customer segments with a variety of 

preferences and WTP). In more formal 

economic terms, Professor Katz notes 

that the present structure enhances 

variable pricing that allows streaming 

services ‘‘to work[][their]way down the 

demand curve,’’ i.e., to engage in price 

discrimination that expands the market, 

providing increased revenue to the 

Copyright Owners as well as the 

Services. 3/13/17 Tr. 701 (Katz).252 I 

understand this testimony to be 

consistent with the economic point, 

made supra, that a price discriminatory 

rate structure is appropriate in markets 

with zero marginal physical cost, 

varying WTP and the absence of 

arbitrage. 

Professor Hubbard attempts to capture 

the interrelationship between the 

economics of this market and the 

existing rate structure as follows: 

[F]rom an economic perspective, you can 

think of this market and this industry as 

being composed of different customer 

segments by tastes and preferences and 

willingness to pay. And so no rate structure 

can really work without understanding that, 

and no business model can really work 

without understanding that. 

[I]n terms of rate structures, the 

Phonorecords II framework from the previous 

proceeding does offer a benchmark to start 

because it provides for differences in distinct 

product categories in terms of music service 

offerings, pricing possibilities, and so on. 

And it has encouraged a very diverse digital 

music offering set from actual competitors. 

3/21/17 Tr. 2175–76 (Hubbard).253

Moreover, Professor Hubbard perceives 

a link between the existing rate 

structure and the ‘‘growth in the number 

of consumers, number of streams, entry, 

the number of companies providing the 

streaming services, and the identity of 

the companies providing those services 

. . . .’’ 4/13/17 Tr. 5978 (Hubbard); see 

also Hubbard WDT ¶ 4.7 

([REDACTED]).254 See also 3/15/17 Tr. 

1176 (Leonard) (noting that 

notwithstanding the changes and 

growth in the streaming marketplace 

over the current rate period, the 

underlying economic structure of the 

marketplace—that made a percent-ofrevenue based royalty appropriate—has 

not changed). 

The Services’ experts further assert 

that the multiple pricing structures 

necessary to satisfy the WTP and the 

differentiated quality preferences of 

downstream listeners relate directly to 

the upstream rate structure to be 

established in this proceeding. For 

example, Professor Marx opines that the 

appropriate upstream rate structure is 

derived from the characteristics of 

downstream demand. 3/20/17 Tr. 1967 

(Marx) (agreeing that the rate structure 

upstream should be derived from the 

need to exploit the willingness to pay of 

various users downstream via a 

percentage of revenue because 

downstream listeners have varying 

willingness to pay that should be 

exploited for the mutual benefit of 

copyright licensees and licensors). 

Professor Marx further acknowledged 

that this upstream:downstream 

consonance in rate structures represents 

an application of the concept of 

‘‘derived demand,’’ whereby the 

demand upstream for inputs is 

dependent upon the demand for the 

final product downstream. Id. Moreover, 

Dr. Leonard notes that ‘‘the downstream 

company is going to have a lot more 

information about . . . the business, 

about what makes sense,’’ 4/6/17 Tr. 

5238 (Leonard). 

The Services also note that the 

existing rate structure has produced 

generally positive practical 

consequences in the marketplace. Their 

joint accounting expert, Professor Mark 

Zmijewski, testified that the decrease in 

publishing royalties from the sale of 

product under Subpart A since 2014 has 

been offset by an increase in music 

publisher royalties (mechanical + 

performance royalties) over the same 

period. Expert Report of Mark E. 

Zmijewski February 15, 2017 ¶¶ 38, 40 

(Zmijewski WRT); 4/12/17 Tr. 5783 

(Zmijewski); see also 4/13/17 Tr. 5897 

(Hubbard) (‘‘the evidence that I 

reviewed suggests that the copyright 

holders have actually benefitted from 

this structure . . . .’’). 

More particularly, Professor 

Zmijewski testified that: 

1. Total revenues reported by the NMPA 

for NMPA members from all royalty 

sources 255 [REDACTED] from approximately 

$ [REDACTED] in 2014 to $ [REDACTED] in 

2015, a [REDACTED] in royalty revenue. Id. 

¶ 41. 

2. The [REDACTED] in (1) above includes 

an [REDACTED] in mechanical royalties from 

streaming from $ [REDACTED] in 2014 to $ 

[REDACTED] in 2015, a [REDACTED] in 

royalty revenue derived from the mechanical 

license. Id. 

3. The [REDACTED] in (1) above includes 

an [REDACTED] in performance royalties 

from streaming from 4 [REDACTED] in 2014 

to $ [REDACTED] in 2015, a [REDACTED]. 

Id. 

4. Mechanical royalty revenue for the sale 

of downloads and physical phonorecords 

[REDACTED] in 2014 to $ [REDACTED] in 

2015 (a [REDACTED] of $ [REDACTED]), 

while the combination of mechanical and 

performance royalty revenue royalty from 

streaming [REDACTED] from $ [REDACTED] 

in 2014 to $ [REDACTED] (an [REDACTED] 

of $ [REDACTED]). Thus, the [REDACTED] in 

royalty revenue from streaming outstripped 

the [REDACTED] from the sale of downloads 

and physical phonorecords by $ 

[REDACTED]. Id. ¶ 38.256

Moving to a comparison of revenue 

growth to streaming growth, Professor 

Hubbard dismisses as economically 

‘‘meaningless’’ the argument that 

Copyright Owners have suffered relative 

economic injury under the current rate 

structure simply because the increase in 

their revenues from interactive 

streaming has been proportionately less 

than the growth in the number of 

interactive streams—leading 

mathematically—to a lower implicit or 

effective per stream royalty rate. 4/13/17 

Tr. 5971–73 (Hubbard). That is, there is 

no evidence that, if the price of the 

services available to these low to zero 

WTP listeners had been increased, they 

would have paid the higher price, rather 

than declined to utilize a royaltybearing interactive streaming service. In 

fact, the only survey evidence in the 

record (the Klein Survey, discussed 

infra) suggests that listeners to 

Federal Register / Vol. 84, No. 24 / Tuesday, February 5, 2019 / Rules and Regulations 1987 

257This Dissent considers the specific deferral 

and displacement arguments in more detail infra. 

streaming services have a highly elastic 

demand, i.e., they are highly sensitive to 

price increases. I understand Professor 

Hubbard’s point to be highlighting the 

distinction, also discussed in the 

economics overview, supra, between an 

‘‘increase in demand’’ and an ‘‘increase 

in quantity demanded.’’ 

On the licensee (interactive streaming 

service) side of the ledger, Professor 

Katz identifies the entry of new 

interactive streaming services (including 

Pandora) and new investment in 

existing interactive streaming services 

during the present rate period as 

evidence that the present rate structure 

is ‘‘working.’’ 3/13/17 Tr. 667 (Katz). In 

fact, he notes the ubiquity of percentageof-revenue based royalty structures in 

the music industry, indicating (as a 

matter of revealed preference) the 

practicality of such a revenue-based 

royalty system. See 3/13/17 Tr. 766–67 

(Katz); see also 4/5/17 Tr. 5166–67 

(Leonard) (‘‘[I]n the area of intellectual 

property licensing . . . percentage-ofrevenue is not exactly surprising. In 

fact, I would say it is probably the most 

common approach that you see as a 

general matter. . . . [N]arrowing into 

the area we’re talking about here of 

interactive streaming, it is pretty 

common here, too. . . .’’). 

In sum, given ‘‘how the industry has 

performed’’ under the current rate 

structure, the Services conclude that it 

is therefore appropriate to continue that 

basic structure going forward. 3/13/17 

Tr. 565 (Katz). 

The Services’ economic experts do 

not ignore the fact that there may be 

revenue attribution problems when 

interactive streaming is combined with 

other products or services. They 

acknowledge that, even absent any 

wrongful intent with regard to the 

identification and measurement of 

revenue, attribution of revenue across 

product/service lines of various services 

can be difficult and imprecise. See, e.g., 

4/5/17 Tr. 5000 (Katz) (the problem of 

measuring revenue is ‘‘certainly a factor 

that goes into thinking about 

reasonableness.’’).257

However, Professor Katz testified that 

the existing rate structure agreed to by 

the parties accommodates these 

bundling, deferral and displacement 

issues via the use of a second rate prong 

that would be triggered if the royalty 

revenue resulting from the headline rate 

of 10.5% of streaming revenue fell 

below the royalty revenue generated by 

that second prong. Katz WDT ¶¶ 82–83; 

3/13/17 Tr. 670 (Katz). Moreover, 

Professor Katz concluded that, because 

the marketplace appears to be 

functioning (in the sense that publishers 

are earning profits and new and existing 

interactive streaming services continue 

to operate despite accounting losses), 

these revenue-measurement issues are 

being adequately handled by the 

alternative rate prong, even if an altered 

second prong might work better. Id. at 

738; 4/5/17 Tr. 5055–57 (Katz) (also 

noting that ‘‘ecosystem’’ entities in the 

mold of Amazon, Apple and Google, 

such as Yahoo, were in the marketplace 

when the existing rate structure was 

formulated). In similar fashion, Dr. 

Leonard opined that the 2012 rate 

structure created a number of ‘‘buckets’’ 

to deal with problems of this sort. 3/15/ 

17 Tr. 1227–28 (Leonard). 

More broadly, the Services’ position 

regarding the use of the two prongs and 

their alternate rates to ameliorate the 

revenue-measurement problems is 

summed up by Professor Katz as 

follows: 

[T]he primary reason [for the two rate 

prongs] . . . is because of the measurement 

issues that can come up when having 

royalties based on a . . . percentage of 

revenues because there can be issues about 

how to appropriately assign revenues to a 

service. And so I think the minim[a] can play 

an important role when those—you know, 

when those measurement problems are 

severe, you can turn to the minimum 

instead. . . . [W]hat I have in mind, right, is 

that what would happen if you could 

imagine an entrepreneur coming along and 

saying we want to have a service and have 

some incredibly low price and not a very 

good monetization model, where a copyright 

owner would say—in an effectively 

competitive market, would say, wait a 

minute, I don’t want to license to you on 

those terms. It’s—I just think the possibility 

of getting a return is so low, I’m not going 

to do it, even though you, as an entrepreneur, 

are willing to try this. I as the copyright 

owner want some sort of, you know, return 

on it. And that’s what the minimum also 

helps to do. 

3/13/17 Tr. 599 (Katz.); see also 3/20/17 

Tr. 1900–01 (Marx) (minima protect 

against revenue measurement 

problems); 4/7/17 Tr. 5584 (Marx) 

(noting that the statutory minima play 

‘‘two roles’’—protecting the Copyright 

Owners from ‘‘revenue 

mismeasurement’’ by creating the 

‘‘greater of’’ prong, ’’ but incorporating 

the per subscriber rate prong in the 

‘‘lesser of’’ component to protect the 

services from ‘‘manipulation of the 

sound recording royalties’’ on which the 

TCC prong is calculated). 

Another particular issue raised by the 

existing structure relates to the 

significant percentage of listeners to 

interactive streaming services that are 

‘‘free’’ to the user. For example, as of 

August 2016, Spotify had [REDACTED] 

million average monthly users on its adsupported service, compared with 

[REDACTED] million subscribers to its 

subscription service. Marx WDT ¶ 49 

n.62 & Fig. 7; Hubbard WDT ¶ 3.14 and 

Ex. 4 ([REDACTED]. Accordingly, the 

treatment of such services in the rate 

structure is of particular importance. 

The majority of the listeners to the adsupported format use Spotify’s adsupported service, although there are 

other such services available in the 

market, including SoundCloud and 

Deezer. See COPFF ¶ 341 (and record 

citations therein). (The arguments 

regarding the appropriate rate structure 

pertaining to ‘‘free to the user’’ services 

overlaps to an extent with the argument 

regarding ad-supported services, and I 

consider them jointly.) 

The Services assert that they offer adsupported or other free-to-the-user 

interactive streaming tiers to meet the 

demand of a large cohort of the listening 

population that does not have a positive 

WTP for streamed music. [REDACTED]. 

3/21/17 Tr. 2179–83 (Hubbard); see also 

Marx WDT ¶¶ 53–54; Katz WDT ¶ 86. 

[REDACTED]. 4/13/17 Tr. 5906 

(Hubbard) (‘‘[REDACTED]’’) see also 4/ 

5/17 Tr. 5231 (Leonard) (‘‘the funneling 

is itself a mechanism to separate out the 

people who really value music and want 

to just be able to listen to what they 

want to listen to, versus people who 

. . . are not willing to pay that amount 

of money . . . .’’). In this regard, 

Spotify most aggressively markets itself 

as an ‘‘up-seller’’—providing its adsupported service as a funnel to convert 

low WTP listeners into subscribers. 

Spotify’s strategy, as explained by its inhouse economist, is as follows: 

One of Spotify’s key beliefs in its 

commercial strategy is that moving someone 

from piracy to a legal music service needs to 

be frictionless—otherwise, they won’t come. 

Often a Spotify user’s journey begins in our 

free-to-users ad-supported tier, and upgrades 

to a paid (or premium) subscription as he or 

she becomes more familiar with the 

enhanced paid-only features through trial 

promotions and/or marketing efforts. . . . 

This presents a ‘‘you help me today and I’ll 

help you tomorrow’’ licensing proposition: as 

rightsholders allow Spotify to use their 

content, Spotify in turn helps rightsholders, 

by first taking users from free options that 

pay little to no royalties—such as piracy, or 

even AM/FM radio—to an ad-supported 

service that generates higher royalties, and 

then further taking these users to a paid 

service . . . . 

Written Direct Testimony of Will Page 

(On behalf of Spotify USA Inc.) (Page 

WDT) ¶¶ 13–14. 

Mr. Page notes the success of Spotify 

in growing the overall ‘‘royalty pie’’ in 

its home country of Sweden, where 

1988 Federal Register / Vol. 84, No. 24 / Tuesday, February 5, 2019 / Rules and Regulations 

258Professor Hubbard’s example parallels the 

insight of the 19th century French economist, Jules 

Dupuit, one of the first economists to explain the 

economics of price discrimination. Dupuit 

examined the pricing of several classes of seating 

on railway carriages. As he noted: ‘‘[A] good many 

. . . travelers in third class, travel[ ] without a roof 

over the carriage, on poorly upholstered seats . . . . 

It would cost very little . . . to put some meters of 

leather and kilos of horse-hair [on the seats], and 

it is beyond greed to withhold them. It is not 

because of the several thousand francs which they 

would have to spend to cover the third class 

wagons or to upholster the benches that a particular 

railway has uncovered carriages and wooden 

benches; it would happily sacrifice this for the sake 

of its popularity. Its goal is to stop the traveler who 

can pay for the second class trip from going third 

class. It hurts the poor not because it wants them 

to personally suffer, but to scare the rich. The 

comfort in third class is deliberately reduced to 

dissuade travelers who are ready to pay for higher 

levels of comfort from traveling at the cheaper 

fares.’’ Jules Dupuit, De l.infuence des pe ́ages sur 

l’utilite ́ des voies de communication, Annales des 

Ponts et Chausse ́es, 17, me ́moires et documents 207 

(1849), quoted in T. Randolph Beard & Robert B. 

Ekelund, Jr., Quality Choice and Price 

Discrimination: A Note on Dupuit’s Conjecture, 57 

So. Econ. J. 1155, 1156–57 (1991). 

259The interactive streaming of music is an 

‘‘experiential’’ good. See Byun, supra, at 23 (‘‘Music 

is a specific type of good, known as an experiential 

good, meaning that it must be experienced or 

sampled before the customer can assess . . . quality 

. . . and . . . utility.’’) Thus, the provision of a 

monetarily ‘‘free-to-the user’’ service is a reasonable 

marketing tool, and the Judges are loath to secondguess the business model incorporating that 

marketing approach, especially after it has proven 

successful while still providing royalties to rights 

owners. See Page WDT ¶ 27 (Spotify’s freemium 

model monetizes through subscriptions more 

successfully than the sale of downloads and CDs, 

as well as terrestrial radio and, of course, piracy). 

Also, the Judges do not find it relevant that many 

other interactive streaming services have not 

utilized an ad-supported service, absent record 

evidence as to why they have ceded that significant 

market (and marketing) niche principally to Spotify. 

‘‘[w]hat wasn’t understood [in 2009], 

but is appreciated now, is that the vast 

majority of the adult population in all 

key markets spends zero on music. 

Spotify’s core commercial proposition 

was to grow the business by growing the 

average revenue per person across the 

entire population, not by holding onto 

a shrinking minority of people buying 

albums or PDDs.’’ Id. ¶ 24. 

To avoid substitution (i.e., 

cannibalization) that would reduce 

revenues to the services and the 

rightsholders alike, the services 

differentiate such ‘‘funneling’’ products 

by intentionally structuring them as 

inferior in quality compared to 

subscription tiers, for example by 

interspersing songs with ads (as in the 

Spotify ‘‘free’’ tier) and by offering a 

more limited repertoire of songs (as with 

Amazon Prime Music). As Professor 

Hubbard explains, ‘‘free-to-the listener’’ 

tiers must be inferior in some manner of 

quality in order to sort out listeners who 

have a WTP sufficient to pay for the 

higher-priced (i.e., subscription) tier. He 

elucidates this point by analogizing to 

the discriminatory pricing of airline 

seating, whereby different classes of 

seating combine varying amenity 

packages with higher prices (i.e., first 

class, business class and coach). 

Hubbard WDT ¶ 3.15.258

The use of an ad-supported service as 

a ‘‘freemium’’ model thus serves a dual 

purpose: First, it is an efficient means of 

marketing—segregating listeners 

according to WTP—allowing them to 

‘‘experience’’ interactive streaming, 

while, second, still providing royalties to 

Copyright Owners. (If Spotify 

substituted self-advertising in other 

media as a marketing tool instead of 

offering an ad supported service, 

Copyright Owners would realize zero 

royalties until such self-advertising 

resulted in new subscribers.) 259

With regard to the tangible economic 

benefits of such downstream products to 

the upstream Copyright Owners, 

Professor Marx notes that an adsupported service is in the nature of a 

multi-party ‘‘platform,’’ creating an 

intersection among streaming services, 

listeners and advertisers. 3/21/17 Tr. 

2013 (Marx). This is why she 

emphasizes, as did Mr. Page, supra, that 

‘‘Spotify’s ad-supported service is 

monetizing . . . low-willingness-to-pay 

listeners better than [REDACTED], 

terrestrial radio, and, of course, piracy.’’ 

4/7/17 Tr. 5503 (Marx); see also Marx 

WRT at 14, Fig. 7 (comparing ‘‘musical 

works royalties per user-hour across 

these alternatives). 

Professor Marx also noted that it is 

inappropriate to consider the royalty 

rates paid by higher-priced interactive 

streaming services, such as Tidal, as 

evidence supporting a finding that adsupported or other ‘‘free to the listener’’ 

services pay too little in royalties. She 

notes that the ad-supported and other 

‘‘free to the listener’’ tiers represent the 

exploitation of the low WTP segment of 

the demand curve, whereas other 

services seek to exploit the higher end 

of the demand curve. For example, and 

as noted supra, Tidal offers a $20 per 

month subscription tier that can 

generate higher royalties, but does so by 

offering a differentiated product of 

higher quality via a premium highfidelity. 3/21/17 Tr. 5601–02 (Marx). 

4. Copyright Owners’ Argument against 

the 2012 Percent-of-Revenue Structure 

(with Minima) and Judicial Analysis of 

that Argument 

a. The Allegedly Limited Evidentiary 

Value of Settlement Rates 

Copyright Owners criticize the 

relevancy of the 2012 settlement-based 

rate structure. First, they note that, as 

terms in a settlement, the elements of 

the rate structure do not reflect the 

structure the market would set, but 

rather reflect only the parties’ own 

prediction of how the Judges would rule 

in the absence of a settlement. See 4/4/ 

17 Tr. 4591 (Eisenach). 

Second, Copyright Owners dismiss 

any relevancy in the fact that they 

agreed in the 2012 settlement to 

maintain virtually unchanged the 

Subpart B rate structure and rates set 

forth in the 2008 settlement. They claim 

that this essential status quo was 

maintained because there had been only 

a two-year window between the 

Phonorecords I settlement and the 

commencement of proceedings in 

Phonorecords II, and that no meaningful 

market changes occurred in that short 

time period. However, the Services 

dispute the substantive assertion that 

there was no significant market 

development by the time of 

Phonorecords II. Written Rebuttal 

Statement of Zahavah Levine (On behalf 

of Google, Inc.) ¶¶ 5–6 (Levine WRT); 3/ 

8/17 Tr. 171–172; 270–272 (Levine). 

Numerous services, including the more 

recent large new entrants, had already 

entered the market, with some realizing 

significant subscriber numbers. Id. at 

155–157 (Levine). Ms. Levine further 

testified that the Subpart B rates could 

not reasonably be construed as 

‘‘experimental’’ during the 

Phonorecords II negotiations, and by the 

time of the Phonorecords II settlement, 

other significant market changes had 

occurred in the music delivery market. 

Id. ¶ 5. For example, she notes that 

Rhapsody had already been in the 

market for approximately ten years and 

had approximately one million paying 

listeners. Id. ¶¶ 5–6. 

Third, Copyright Owners assert that 

[REDACTED]. Rebuttal Witness 

Statement of David M. Israelite ¶ 28 

(Israelite WRT); 3/29/17 Tr. 3649–3652 

(Israelite). However, the Services 

respond by noting that there is no 

evidence to support Mr. Israelite’s 

testimony regarding the [REDACTED]. 

And, notwithstanding his testimony 

regarding [REDACTED], the Services 

note that the NMPA incurred the 

expense of a year-long negotiation with 

the Services to seek higher rates, create 

new service categories in Subpart C, and 

changes to the TCC calculations. Id. at 

159, 161–164; 3/29/17 Tr. 3856 

(Israelite). 

Fourth, Copyright Owners assert, 

assuming arguendo that the current rate 

structure can be used for benchmarking 

purposes, that the Services have not 

presented competent evidence or 

testimony as to the intentions of the 

settling parties who had negotiated the 

Federal Register / Vol. 84, No. 24 / Tuesday, February 5, 2019 / Rules and Regulations 1989 

260 In an attempt to dig deeper into why 

Copyright Owners agreed to particulars in the 

settlements regarding the TCC prong, the Judges 

asked Dr. Eisenach if Copyright Owners had 

provided him with information regarding the 2012 

settlement. He responded by stating that ‘‘[w]hen 

I’ve asked the question, I’ve found people chuckle 

. . . when I ask the question, people say: ‘Nobody 

really knows.’ . . . . Someone may know, but that’s 

what I’ve been told.’’ 4/4/17 Tr. 4611 (Eisenach). I 

am perplexed by the response provided to Dr. 

Eisenach, because the history of the present rates 

would seem to be of great relevance, ascertainable 

and not subject to being laughed off when a party’s 

own expert seeks such information. 

261This strategy is referred to as ‘‘scaling,’’ and 

is discussed in more detail infra. 

2012 settlement, or, for that matter, the 

2008 settlement that preceded it. 

Specifically, Copyright Owners claim 

that the witnesses who were called by 

the Services to testify in this regard did 

not negotiate directly with the 

Copyright Owners in connection with 

these settlements. 3/29/17 Tr. 3621–22 

(Israelite). More particularly, the two 

Services’ witnesses who provided 

testimony in this regard, Adam Parness 

and Zahavah Levine, acknowledged 

they had no direct involvement in the 

Phonorecords I negotiations, and Ms. 

Levine did not engage in direct 

negotiations with regard to the 

Phonorecords II settlement either. 3/9/ 

17 Tr. 339–40 (Parness); 3/29/17 Tr. 

3885–86 (Israelite); see also Israelite 

WRT ¶ 14 (indicating that Ms. Levine 

had left Real Networks in 2006, before 

her former subordinate was negotiating 

the 2008 settlement). 

However, the evidence indicates that 

Ms. Levine and Mr. Parness were 

involved in the contemporaneous 

internal discussions of negotiation 

strategy on behalf of the Services, which 

makes their testimony relevant as to the 

intentions of the Services involved in 

those earlier negotiations. More 

particularly, Ms. Levine was employed 

by Google/You Tube when the 2012 

settlement was negotiated and finalized. 

At that time, Google was a member of 

DiMA, the trade association 

representing the interests of actual and 

potential interactive streaming services. 

See Phonorecords II, DiMA Petition to 

Participate. Thus, Ms. Levine was 

competent to give testimony as to the 

parties’ positions in the negotiations. 

Mr. Parness testified, at the time of 

the Phonorecords I settlement, he was 

Director of Musical Licensing for 

RealNetworks, Inc., an interactive 

streaming service and a member of 

DiMA, its bargaining representative. In 

that capacity, Mr. Parness was ‘‘actively 

involved’’ on behalf of Real Networks. 

Written Direct Testimony of Adam 

Parness (on behalf of Pandora Media, 

Inc.) ¶ 5 (Parness WDT). Mr. Parness 

understood that the important aspects of 

the Phonorecords I negotiations and 

settlement were: (1) an agreement that 

noninteractive services did not need a 

mechanical license; (2) the interactive 

mechanical license would be calculated 

on an ‘‘All-In’’ basis; (3) the rate would 

be structured as a percent-on-revenue 

with certain minima; and the headline 

rate would be 10.5%. Parness WDT ¶ 7. 

He noted that the rate minima were 

included at the behest of Copyright 

Owners, who were concerned that a 

purely revenue-based rate might result 

in too little revenue. Id. ¶ 8. Mr. Parness 

further testified, with regard to the 2012 

negotiations, that he directly negotiated 

with Mr. Israelite and the general 

counsel for the NMPA, negotiations that 

led to the parties’ agreement essentially 

to maintain the Subpart B structure and 

to create what became the new Subpart 

C rate structure. Id. at 11; see also 3/9/ 

17 Tr. 325–27 (Parness). 

Ms. Levine testified that in the 

Phonorecords II negotiations, Copyright 

Owners sought an increase in the 

Subpart B rates, the services refused, 

and Copyright Owners ultimately 

withdrew that demand. Levine WRT ¶ 2. 

The implication from this testimony is 

that the stability of the rate structure is 

not indicative of the absence of 

negotiations, but, at least according to 

Ms. Levine, that rate structure stability 

was a by-product of the negotiating 

process. 

b. The Settlement Rates are 

Anachronistic 

On behalf of Copyright Owners, Mr. 

Israelite described their willingness to 

continue the 2008 rate structure through 

2017 (ten years in total) as reflective of 

their understanding that the interactive 

streaming market was still not 

‘‘mature,’’ Israelite WDT ¶ 108; WRT 

¶ 26, and thus the ten year rate structure 

remained ‘‘experimental.’’ Israelite WDT 

¶ ¶ 81, 103; Israelite WRT ¶ ¶ 4, 19, 26, 

32. This issue is discussed in more 

detail infra.260

More particularly, Copyright Owners 

maintain that the current rate structure 

was ‘‘experimental’’ because there had 

been no data to evaluate the interactive 

streaming business, and Copyright 

Owners lacked knowledge as to the 

future development of the interactive 

market. Israelite WDT ¶¶ 33, 81, 95); 

Israelite WRT ¶¶ 4, 17, 18, 19, 29; 3/29/ 

17 Tr. 3631–32, 3754, 3764–65 

(Israelite); see also COPFF ¶ 421 (and 

record citations therein). 

Whether experimental or otherwise, 

[REDACTED]. Id. at 3636–38. 

In response, the Services assert that 

there is no record evidence, beyond Mr. 

Israelite’s testimony, that the existing 

rate structure was, or remains, 

experimental. They further note (as 

referenced supra) that by 2012, when 

this rate structure was renewed, 

consumer adoption of streaming was 

obvious, contrary to Copyright Owners’ 

allegations. Levine WRT ¶ 5. The 

Services also assert that numerous 

services, including those backed by 

large companies, such as Yahoo and 

Microsoft, had already entered the 

market, and some of those services had 

achieved significant subscriber 

numbers. 3/8/17 Tr. 155:14–157:12 

(Levine); see also Parness WDT ¶ 12. 

c. Alleged Displacement and Deferral of 

Revenue 

Copyright Owners criticize the 2012 

rate structure because its reliance on a 

revenue-based structure creates 

problems regarding the measurement of 

revenue. Specifically, Copyright Owners 

allege that services can displace revenue 

properly attributable to streaming and 

allocate it to other products within the 

owners’ broader economic ‘‘ecosystem.’’ 

Also, they allege that services can and 

do defer revenue from the present into 

the future, foregoing present profits in 

order to grow their customer base to 

achieve a market share that allows for 

long-term profits.261 See Rysman WDT 

¶ 13. 

The problems associated with revenue 

measurement and attribution arise in 

various contexts. First, the Services may 

focus on long-term profit or revenue 

maximization, thereby possibly 

deferring shorter-term profits through 

temporarily lower downstream pricing 

(i.e., revenue deferral) in a manner that 

suppresses revenue over that shorterterm. Second, the services may use 

music as a ‘‘loss leader,’’ displacing 

streaming revenue and encouraging 

consumers to enter into the so-called 

economic ‘‘ecosystem’’ of the streaming 

services, especially the multi-product/ 

service firms in this proceeding— 

Amazon, Apple and Google—within 

which consumers can be exposed to 

other goods and services available for 

purchase. Third, the interactive 

streaming services may obscure royaltybased streaming revenue by offering 

product bundles that include their 

music services with other goods and 

services, rendering it difficult to parse 

out the bundled revenue as between the 

royalty-bearing revenue (from the 

interactive service) and the revenue 

attributable to the other items in the 

bundle. 

i. Deferral 

With regard to revenue deferral, 

Copyright Owners argue that the 

services’ focus on future growth, not 

1990 Federal Register / Vol. 84, No. 24 / Tuesday, February 5, 2019 / Rules and Regulations 

262As I note in this Dissent, there is no sufficient 

evidence to allow the Judges to mold their unique 

rate structure, and the majority has erred in its 

attempt to do so. 

263Looked at from a different perspective, this 

issue pits the music publishing business model 

against the interactive streaming business model. 

Music publishers must maximize revenues (subject 

to any cost constraints) over some time horizon, and 

their argument in this proceeding indicates that 

they seek to maximize royalty revenue over the 

short-run, so that current songwriters receive 

royalties based on current revenue that is not 

deferred because of the interactive streaming 

services’ long-term business model. See Rysman 

WDT ¶ 50. The music publishers could instead pay 

royalties to songwriters based (at least in part) on 

an index of several years of revenue to be consistent 

with the long-term business models of the 

interactive streaming entities. See Leonard WRT 

¶ 60 (noting that advances from publishers to 

songwriters are examples of such a long-run 

‘‘smoothing’’ of royalty revenues). Or, as Copyright 

Owners urge, the Judges could require the 

interactive streaming services to abandon the 

revenue-based royalty structure (with protective 

alternate prongs and floors) and to accept inefficient 

per-unit rates, thereby compromising their 

downstream businesses. In keeping with the Judges’ 

long-standing position, I believe the Judges should 

remain business model neutral, and decline to favor 

one challenged business model over another. 

Instead, I would adopt the 2012 rate structure that 

embodies a negotiated compromise by the parties 

that has adequately addressed this revenue deferral 

issue. 

current revenues. See [REDACTED] 

([REDACTED]). By way of example, 

Copyright Owners highlight a particular 

aspect of [REDACTED] business model: 

[REDACTED]. Id. at 2168–69 

([REDACTED]). The economic upshot of 

such a focus on the long-run rather than 

on present revenues, according to 

Copyright Owners, has caused revenues 

to grow annually by only 31% from 

2013 to 2014, and by only 34% from 

2014 to 2015, even as the number of 

streams over these two periods has 

grown by 63% and 101% respectively. 

Ghose WDT ¶ 74. 

The Services respond by noting that 

Copyright Owners did not conduct an 

empirical analysis to confirm the extent 

to which to which interactive streaming 

services actually engage in revenue 

deferral, and that their expert was 

therefore compelled to qualify his 

conclusions by conceding only that 

such revenue deferral ‘‘may’’ occur. See 

4/3/17 Tr. 4344–43, 4347, 4349 

(Rysman). Additionally, the Services 

assert that the primary industry pricing 

model—$9.99 per month for unlimited 

access—has existed since the early 

2000’s, belying Copyright Owners’ 

assertion that there has been a change in 

pricing in the current rate period 

intended to build market share. See 

Levine WRT ¶ 6 (describing how 

Rhapsody ‘‘pioneered’’ the subscription 

on-demand model in the early 2000’s 

and how the $9.99 model was adopted 

by, e.g., MOG, Rdio and Rara). 

[REDACTED] 

The Services also argue that Copyright 

Owners misunderstand the services’ 

emphasis on [REDACTED]. However, as 

noted supra, the Services do 

acknowledge that they focus broadly on 

[REDACTED]. Id. at 2082, 2141 

([REDACTED]). 

The Services also disagree with 

Copyright Owners’ assertion that 

[REDACTED], 4/7/2017 Tr. 5498 (Marx); 

3/21/17 Tr. 2169 (McCarthy); and 

[REDACTED]. 4/6/2017 Tr. 5327 

(Vogel). Thus, the business model, they 

argue, is reflective of the fundamental 

structure of market demand, rather than 

evidence of revenue deferment. 

I find that the record indicates that 

the services do seek to engage to some 

extent in revenue deferral in order to 

promote their long-term growth strategy. 

A long-term strategy that emphasizes 

scale over current revenue can be 

rational, especially when a critical input 

is a quasi-public good—because growth 

in market share and revenues is not 

matched by a commensurate increase in 

the cost of such inputs, whose marginal 

cost of production (reproduction, 

actually, because they are copies of 

sound recordings/musical works) is 

zero. This is the success-throughscalability discussed infra. See generally 

Haskel & Westlake, supra, at 65–66 

(profitability through scaling is 

enhanced by the use of inputs with zero 

marginal costs). 

It appears that the nature of the 

downstream interactive streaming 

market, and its reliance on scaling for 

success, results necessarily in a 

competition for the market rather than 

simply competition in the market. This 

is the form of dynamic competition 

known as Schumpeterian competition 

(named after the economist Joseph 

Schumpeter). Such competition 

emphasizes the importance of the 

dynamic creation of new markets and 

‘‘new demand curves,’’ recognizing that 

short-term profit or revenue 

maximization may be inconsistent with 

rational competition for the market. 

That is, this form of competition 

recognizes that businesses and investors 

do not simply seek out commercial 

activities that will merely earn returns 

available elsewhere in the economy, but 

rather seek out longer-term supranormal 

profits, investing in businesses that 

appear able to satisfy consumer demand 

and capture large swaths of market 

share—a dynamic and enduring process 

that creates and ultimately destroys 

various business entities and markets in 

the process (which Schumpeter coined 

as ‘‘creative destruction.’’) See J. Sidak 

& D. Teese, Dynamic Competition in 

Antitrust Law, 5J. Comp. L. & Econ.5, 

581 (2009). Indeed, Amazon’s economic 

expert witness, Professor Hubbard, 

acknowledged that ‘‘[t]he music 

industry exemplifies this process’’ of 

Schumpeterian ‘‘creative destruction.’’ 

Hubbard WDT ¶ 2.1 & n. 1. 

Of course, when royalties are paid as 

a percent of current revenue, the input 

supplier, i.e., Copyright Owners in the 

present case, are likewise deferring 

some revenue to a later time period (and 

also assuming some risk as to the 

ultimate existence of that future 

revenue). One way the input supplier 

can avoid this impact is to refuse to 

accept a percent of revenue form of 

payment and move to a fixed per-unit 

input price. This is what Copyright 

Owners seek in this proceeding, subject 

to a bargaining room approach by which 

they could switch back to the old 

approach (or any other approach) 

through purely market-based 

negotiations, but free from the statutory 

standards of section 801(b)(1). However, 

another way in which the input supplier 

can mitigate the effect of such revenue 

deferrals is to establish a pricing 

structure that provides alternate rate 

prongs and floors, below which the 

royalty revenue cannot fall. This is 

precisely the bargain struck between 

Copyright Owners and services in 2008 

and 2012, and that has been ongoing 

through the present day. 

Are there even better ways to address 

this issue? Perhaps, but by the very 

nature of this adversarial proceeding, 

the Judges cannot identify the 

theoretically optimal manner by which 

the revenue deferral phenomenon 

should be addressed. Rather, the choices 

before the Judges are stark: the per-unit 

pricing proposals submitted by 

Copyright Owners and Apple, and the 

tiered rate structure now in existence 

and generally (but not uniformly) 

presented by the Services as the 

appropriate benchmark.262 As discussed 

infra, I have identified the 2012 rate 

structure as the best benchmark from 

among these proposals. The revenue 

deferral phenomenon indicates the need 

for Copyright Owners to protect 

themselves, but it does not indicate that, 

on balance, the issue is better resolved 

by the unacceptable per unit pricing 

proposals submitted in this proceeding. 

Accordingly, I do not find the revenue 

deferral issue to be a sufficient basis to 

reject the 2012 benchmark in favor of 

Copyright Owners’ or Apple’s per-unit 

rate proposals.263

ii. Displacement through Bundling 

Copyright Owners argue that services 

also displace revenue by engaging in 

‘‘cross-selling’’ by which they sell 

access to musical works/sound 

recordings through the bundling of that 

Federal Register / Vol. 84, No. 24 / Tuesday, February 5, 2019 / Rules and Regulations 1991 

264With regard to this topic, see the discussion 

of ‘‘cannibalization,’’ infra. 

access with other goods or services, 

allocating too much revenue to the nonmusic portion of the bundle, rather than 

attributing the correct amount to the 

music service and thus, to the revenue 

base. Written Rebuttal Testimony of 

Christopher C. Barry, CPA, CFF (on 

behalf of Copyright Owners) ¶ 7. 

Copyright Owners argue that the 

services manipulate revenue 

calculations in their favor, allegedly 

defining revenue in opportunistic ways. 

See Rysman WDT ¶ 44; Rysman WRT 

¶ 15; Ghose WDT ¶¶ 62–81. They 

maintain that they cannot discern such 

manipulation and opportunism as it 

occurs, because the booking of revenue 

among lines of business is ‘‘opaque to 

publishers’’—especially in comparison 

to the identification of the number of 

consumers or the number of streams. 

Rysman WDT ¶ 43; Rysman WRT ¶ 15; 

Ghose WDT ¶¶ 80–81. 

In response, the Services assert there 

is no evidentiary support for this overall 

and conclusory assertion. JSRPFF at p. 

308. In connection with the assertion of 

displacement-through-bundling, both 

parties examine—essentially as an 

emblematic case study—Amazon’s 

pricing of interactive music in a bundle 

with one of its products. That study is 

addressed below. 

Amazon Products and Pricing: A Case 

Study 

[REDACTED] 

Survey Results 

[REDACTED]. 264

Other Potential Displacements from 

Bundling 

With regard to other bundled offerings 

that Copyright Owners claim to 

improperly diminish revenue and hence 

the royalty base, the evidence is more 

descriptive than statistical. With regard 

to Google Play Music, Copyright Owners 

point to evidence suggesting that Google 

‘‘leverages its music business to drive 

revenue elsewhere within its 

enterprise.’’ COPFF ¶ 482A et seq. (and 

record citations therein). Google, in 

response, argues that this argument is 

preposterous because ‘‘Google’s other 

products already reach literally 

hundreds of millions of people in the 

U.S. [and] [t]he idea that Google is 

intentionally driving down the price of 

Google Play Music in order to ‘‘grow a 

base of customers’’ who will then be 

more likely to use Search or Gmail or 

Google Maps simply strains 

credulity. . . . . The value proposition 

flows in the opposite direction.’’ Levine 

WRT ¶¶ 8–9. 

With regard to Pandora, Copyright 

Owners note that it has expanded 

beyond its ‘‘pureplay’’ origins by 

acquiring Ticketfly, a fan-to-fan live 

concert ticket exchange business. 3/9/17 

Tr. 408–410 (Phillips). According to 

Copyright Owners, in the future, 

Pandora may generate revenue from this 

ancillary business—revenue that 

arguably should be included as ‘‘service 

revenue’’ in a revenue based rate 

structure. Rysman WRT ¶ 34. However, 

Pandora notes that Ticketfly is a small 

operation relative to Pandora’s overall 

business and, as Copyright Owners 

acknowledge, any use by Pandora of 

resources it obtained through streaming 

music to benefit Ticketfly would be 

realized in the future, making such a 

link speculative at this time. Moreover, 

Pandora argues that, if and when 

Pandora may drive incremental 

attendance at concerts and other live 

events through Ticketfly, music 

publishers and songwriters would 

benefit directly from such attendance. 

See Herring WRT ¶ 34. 

[REDACTED]. It has announced an 

offering of a subscription together with 

a subscription to The New York Times, 

i.e., a separate entity offering a separate 

product. According to Copyright 

Owners, Rysman WRT ¶ 36. However, 

[REDACTED]. SJRPFF at p. 868. 

Finally, with regard to Apple, 

Copyright Owners note that the various 

music and other services and products 

are available through Apple, including 

iTunes download purchases, Beats 

music service and, of course, Apple’s 

ubiquitous non-music products. See 

COPFF ¶¶ 523–527. Although Copyright 

Owners do not identify any specific 

bundling or product-to-product 

displacement, they note more broadly 

that ‘‘Apple’s interactive streaming 

service can operate as a gateway into the 

iTunes ecosystem, which Apple uses to 

sell iPhones, apps, and other products.’’ 

Kokakis WDT ¶ 60. 

Findings Regarding Displacement, 

Discounts and Bundling 

I find the parties’ back-and-forth on 

these bundling, discounting and 

displacement issues (absent a separate 

analysis of any given bundle/discount, 

such as presented by Amazon with 

regard to the bundled $7.99 price for 

Echo for Prime members) to be 

indeterminate—and for good reason. As 

the Judges have found previously, all 

such bundling, and associated 

discounts, constitute forms of price 

discrimination, whereby a seller can 

increase total revenues for the bundle 

and through a discount beyond the 

revenue realized if each item was sold 

at its separate or undiscounted price. 

See SDARS I Underpayment Ruling at 

18–19. The parties in the present 

proceeding do not so much dispute this 

point as they argue whether the bundles 

discounts and alleged displacements 

tend, on balance, to increase the 

revenue base (by adding new 

subscribers) or to decrease the revenue 

base (by reducing per subscriber 

revenue). I agree with Copyright Owners 

that the services may be using bundling 

and associated discounts in a manner 

that is inconsistent with short-run 

maximization of revenues, or even 

profits, but they may also be growing 

the revenue base. 

The import of this dispute in the 

present case is how the presence of 

bundling and discounting bears, 

initially, on the rate structure and, then, 

on the rates within that structure. With 

regard to the rate structure, the rate 

prongs in the 2012 benchmark that the 

Services are urging the Judges to adopt 

deal with these revenue measurement 

and attribution issues by the use of a 

greater-of rate structure, whereby—if the 

revenue-based royalty is lower than the 

other prong (typically a per-subscriber, 

a TCC prong or the Mechanical Floor)— 

then one of the latter prongs becomes 

applicable. By contrast, Copyright 

Owners’ proposal provides for a greaterof per unit/per-user royalty that does 

not contain any features pertaining to 

bundling. As between these two 

alternatives, I find that the 2012 rate 

structure is clearly more consonant with 

the marketplace reality of varying WTP, 

through the use of price discrimination 

through bundling and, indeed, has 

accommodated such bundling for a 

decade. 

I acknowledge Copyright Owners’ 

argument that the bundling they 

anticipated may well have been of a 

different nature (e.g., bundling 

interactive streaming with cell phone or 

internet service) when they agreed to 

the bundle provisions in the 2012 

settlement, and that they had not 

contemplated the myriad ways in which 

bundling would occur going forward, 

especially with the entry of large multiproduct ‘‘ecosystem’’ firms such as 

Amazon, Apple and Google. However, 

what that possible difference between 

anticipated and actual bundling 

indicates to me is that, hypothetically, 

perhaps a different bundling structure, 

or different rates within the structure, 

might be more appropriate than the 

2012 rate structure in this regard. But 

the Judges cannot deal in hypothetical 

rate structures and rates: Copyright 

Owners (and Apple) did not propose 

such an alternative structure; instead, so 

1992 Federal Register / Vol. 84, No. 24 / Tuesday, February 5, 2019 / Rules and Regulations 

265As noted supra, the Judges may also find that 

the existing rate structure and rates are appropriate, 

if the benchmarks proffered by all the parties are 

insufficient. See Music Choice, supra. Thus, the 

2012 rate structure would have been an appropriate 

structure for the forthcoming rate period even if it 

had not been affirmatively advocated as a 

benchmark by the Services. 

266 I note an important difference between the 

bundling issue in the SDARS context and that issue 

here. For the SDARS, the issue was how to measure 

revenue where only a pure revenue-based rate 

structure exists, and the Judges noted the difficulty 

in assigning value to different elements of the 

bundle. Here, the 2012 benchmark (the parties’ 

agreement) addresses this indeterminacy by 

adopting alternative royalty prongs, which, as noted 

in the text, supra, is one way to resolve the 

indeterminacy problem. 

to speak, they threw out the baby with 

the bath water, rejecting any price 

discriminatory rate structure (and 

bundling is a form of price 

discrimination)—proposing instead to 

replace such a structure with a nondiscriminatory rate that fails to address 

the varying WTP among listeners from 

which upstream demand by the 

interactive streaming services is 

derived. 

In these proceedings, the Judges are 

bound by the parties’ proposals, unless 

there are record facts that permit the 

Judges to mold a rate structure or rates 

that vary from the proposals.265 Here, 

with regard to the impact of bundling 

and other price discriminatory elements 

of the rate structure, the choices are 

stark. Only the 2012 benchmark 

proposed by the Services addresses 

these issues, and in a manner that has 

existed in the market for a decade.266

d. Cannibalization 

Copyright Owners assert that the 

Services’ benchmarking approach fails 

to account for the ‘‘cannibalization’’ of 

digital download and physical sales, 

through listeners’ substitution of 

interactive streaming for the purchase of 

digital downloads and physical 

products, mainly CDs. In support of this 

argument, Copyright Owners point to 

the contemporaneous increase in 

interactive streaming and the decrease 

in the sales of digital downloads and 

CDs. They note that the sale of digital 

albums and digital tracks decreased by 

9.4% and 12.5%, respectively from 2013 

to 2014, and by an additional 2.9% and 

12.5%, respectively, from 2014 to 2015. 

See Israelite WDT ¶ 70; Ex. 2773 (2014 

Nielsen Report), at 2; Ex. 2780 (2015 

Nielsen Report), at 7, 8. Thus, they 

argue that the royalty structure (and 

rates) must account for this substitution 

effect through an increase in the 

royalties on interactive streaming. See 

COPFF ¶¶ 575–586 (and record citations 

therein). 

The Services do not dispute these 

statistics. However, the Services argue 

that Copyright Owners have not 

presented any evidence that would 

support the claim that declining 

physical and download sales have been 

caused by increases in interactive 

streaming. Thus, in the absence of such 

evidence, the Services argue that 

Copyright Owners have merely assumed 

causation from correlation. See JSRPFF 

at p. 380 (and record citations therein). 

In fact, they point to the testimony of 

NMPA’s own witness, Bart Herbison, 

Executive Director of Copyright Owner 

participant NSAI. Mr. Herbison testified 

that he did not ‘‘blam[e] the loss of 

songwriters on streaming,’’ 

acknowledging that piracy and 

disaggregation of the album were major 

problems for songwriters prior to the 

popularity of streaming, and therefore, 

overall, he was ‘‘not ascribing any large 

percentage of [lower mechanical 

royalties] to streaming.’’ 3/23/17 Tr. 

2940–41, 2945, 2955–56 (Herbison). 

Moreover, not only do the Services 

note the absence of proof that these 

changes were caused by interactive 

streaming, they note that the changes 

can just as easily be attributed to 

changing ‘‘consumer preferences,’’ for 

which the interactive streaming services 

should not be penalized. See 3/21/17 Tr. 

2227–28 (Hubbard) (such changes do 

not reflect cannibalization, but rather 

how the industry has evolved to satisfy 

‘‘contemporary consumers’ preferences’’ 

and to ‘‘respond to consumer 

demand.’’). 

I find that there is no sufficient 

evidence to indicate that interactive 

streaming has caused the decline of the 

sale of physical and digital sound 

recordings. Moreover, even assuming 

arguendo any sales of digital downloads 

and physical product was caused by the 

listeners’ preference for interactive 

streaming, the effect of such a 

phenomenon on songwriter royalties is 

unclear. Record companies, as licensees, 

pay royalties to music publishers, under 

subpart A, for the musical works 

embodied by record companies in 

digital downloads and physical product. 

Assuming a portion of that royalty 

revenue is lost (‘‘cannibalized’’) by 

interactive streaming, the services that 

utilize the musical works in those 

streams pay both a mechanical royalty 

and a performance royalty in exchange 

for the licenses to use the musical 

works. There is insufficient evidence in 

the record to conclude that, on balance, 

there is a net substitution effect that 

results in lower royalties paid for 

musical works. 

Further, I agree with the Services that 

Copyright Owners’ attempt to compare 

sales of downloads and physical 

product (which generate mechanical 

royalties under subpart A) with 

revenues from interactive streaming 

(that generate mechanical royalties 

under subparts B and C, and 

performance royalties) is inconsistent 

with Copyright Owners’ (persuasive) 

argument, discussed infra, that there is 

no sufficient evidence to correlate 

listening across purchases and 

streaming services. The Services 

correctly note that the sale of a 

download or a CD (or a vinyl record) 

allows the purchaser to ‘‘access’’ that 

purchase an indefinite number of times, 

whereas access through a streaming 

service likewise allows for listening (to 

various songs) for an indeterminate 

number of times. In this regard, 

Copyright Owners’ proposed per-unit 

royalty rate for streaming is simply not 

consistent with pricing per unit sold 

under subpart B, because the items 

purchased are themselves inconsistent 

in nature—as Copyright Owners (again, 

persuasively) argue in opposition to the 

use of commercial and academic 

conversion ratios to correlate the 

number of times a consumer listens to 

a song in the purchased product and 

streaming spheres. 

e. The ‘‘Shadow’’ of the Statutory 

License 

Copyright Owners assert that any 

benchmark, including the Services’ 

proffered benchmarks, based on rates set 

for a compulsory license, are inherently 

suspect, because they are distorted by 

the so-called ‘‘shadow’’ of the statutory 

license. This is a recurring criticism. 

See, e.g., Web IV 81 FR at 26329–31. 

More particularly, Copyright Owners 

argue: ‘‘The royalty rate contained in 

virtually any agreement made by a 

music publisher or songwriter with a 

license for rights subject to the 

compulsory license will be depressed by 

the availability of the compulsory 

license.’’ COPFF ¶ 708 (and record 

citations therein). In summary, this 

alleged shadow purportedly diminishes 

the value of a rate that was formed by 

private actors who negotiated while 

understanding that either party could 

refuse to consummate a contract and 

instead participate in a proceeding 

before the Judges to establish a rate. 

Thus, neither side can utilize any 

bargaining power to threaten to actually 

‘‘walk away’’ from negotiations and 

refuse to enter into a license. In that 

sense, therefore, any bargain they struck 

would be subject to the so-called 

‘‘shadow’’ of the regulatory proceeding. 

The argument that the shadow taints 

the use of statutory rates, and direct 

agreements otherwise subject to the 

statutory license is undercut, however, 

by section 115 of the Copyright Act, 

Federal Register / Vol. 84, No. 24 / Tuesday, February 5, 2019 / Rules and Regulations 1993 

267The Judges note that one of the two 

benchmarking methods relied upon by Copyright 

Owners subtracts the statutory rate set in Web III 

for noninteractive streaming from a royalty rate 

derived from the unregulated market for sound 

recording licenses between labels and interactive 

streaming services. This would seem to violate the 

Copyright Owners’ own assertion that statutorily set 

rates are tainted by a regulatory shadow and thus 

cannot be used to establish reasonable rates. 

However, Copyright Owners’ expert testified that, 

in his opinion, the Judges in Web III accurately 

identified the market rate for noninteractive 

streaming, so that rate could be utilized as if it were 

set in the market. 4/4/17 Tr. 4643 (Eisenach). This 

assertion proves too much. If one expert on behalf 

of a party may equate a rate set by the Judges with 

the market rate, why cannot the Judges, or any other 

party’s expert, do the same with regard to a 

different statutory rate? The end result of such an 

approach takes us back to the point the Judges made 

at the outset in this section: any rate set by the 

Judges or influenced by the Judges’ rate-setting 

process must be considered on its own merits. 

268For example, the Judges regularly assume in 

a benchmarking approach that the contracting 

parties have ‘‘baked-in’’ the values of discrete items 

in their agreement. See, e.g., Web IV, supra, at 

26366. 

which provides that in addition to the 

objectives set forth in section 801(b)(1), 

in establishing such rates and terms, the 

Copyright Royalty Judges may consider 

rates and terms under voluntary license 

agreements described in subparagraphs 

(B) and (C). 17 U.S.C. 115(c)(3)(D). The 

two subparagraphs referenced therein, 

subparagraphs (B) and (C), respectively, 

refer to agreements on ‘‘the terms and 

rates of royalty payments under this 

section’’ by ‘‘persons entitled to obtain 

a compulsory license under [17 U.S.C. 

115](a)(1)]; and ‘‘licenses’’ covering 

‘‘digital phonorecord deliveries.’’ Id. 

Thus, it is beyond dispute that Congress 

has authorized the Judges, in their 

discretion, to consider such agreements 

as evidence, irrespective of—or perhaps 

because of—the shadow cast by the 

compulsory license. 

Additionally, as noted supra, the 

Judges may consider the existing 

statutory rates themselves as evidence of 

the appropriate rate for the forthcoming 

rate period, even when those rates were 

not the product of a settlement. Indeed, 

the Judges may consider existing rates 

as the starting point and the end point 

of their analysis. Music Choice, supra, 

774 F.3d at 1012 (the Judges may ‘‘use[ ] 

the prevailing rate as the starting point 

of their Section 801(b) analysis’’ and 

may ultimately find that ‘‘the prevailing 

rate was reasonable given the Section 

801(b) factors.’’). 

Of course, the fact that the Copyright 

Act and the D.C. Circuit grant the Judges 

statutory authority to consider and rely 

on statutory rates and related settlement 

agreements as evidence does not 

instruct the Judges as to how much 

weight to afford such agreements. The 

exercise of that judicial discretion 

remains with the Judges. 

But with regard to the particular issue 

of the so-called shadow of the statutory 

rate, there is no reason to find such 

benchmark agreements per se inferior to 

other marketplace benchmark 

agreements that may be unaffected by 

the shadow, because those other 

benchmarks may be subject to their own 

imperfections and incompatibilities 

with the target market. Thus, the Judges 

must not only consider (i) the 

importance, vel non, of any potential 

‘‘shadow-based’’ differences between 

the regulated benchmark market and an 

unregulated market that might impact 

the probative value of the former, but 

also (ii) how those differences (if any) 

compare to the differences (if any) 

between the unregulated market and the 

target market (e.g., differences based on 

complementary oligopoly power, 

bargaining constraints and product 

differentiation).267 In the present case, 

because Copyright Owners’ and Apple’s 

proposals are structured as per-unit 

rates, they suffer from deficiencies that 

dwarf any alleged problems associated 

by the alleged shadow of the 2012 

statutory benchmark; that is, assuming 

arguendo that the shadow on balance is 

problematic rather than beneficial. 

In the present proceeding, the parties 

weigh-in on the shadow issue with 

several, more particular, arguments. 

Copyright Owners emphasize that the 

purpose of their benchmarking 

approach is to avoid the distortions of 

the shadow, by utilizing the unregulated 

sound recording agreements between 

labels and interactive streaming services 

and then applying a ratio of sound 

recording: musical works royalties, (the 

latter also in unregulated contexts), to 

develop a benchmark wholly free of the 

shadow cast by the statute. 4/4/17 Tr. 

4191 (Eisenach) (‘‘[T]he underlying 

problem with looking at an agreement 

negotiated under the shadow of a 

license [is that][i]t shifts bargaining 

power from the compelled party to the 

uncompelled party by the very nature of 

the exercise.’’). 

The Services’ experts discount the 

foregoing shadow criticism. Indeed, 

what Copyright Owners considered 

vice, the Services laud as virtue. That is, 

the shift in bargaining power is 

precisely what makes any shadow effect 

of the statutory license tolerable. 

Professor Katz points out that rates set 

voluntarily by the parties in a settlement 

under the ‘‘shadow’’ provide two 

important benefits. 3/13/17 Tr. 661 

(Katz). First, with a statutory rate-setting 

proceeding as a backstop, large licensors 

cannot credibly threaten to ‘‘hold out’’ 

and ‘‘walk away’’ from the negotiations 

without an agreement, thereby negating 

their ability to use their ‘‘must have’’ 

status as a cudgel to obtain rates that 

can exceed even monopoly-level rates. 

Second, when such negotiations are 

conducted with all the parties at the 

figurative table (including perhaps trade 

associations), no single party, whether 

licensor or licensee, has 

disproportionate market power in the 

negotiations. 

I agree with Professor Katz that 

settlement agreements reached in the 

shadow are useful. Because the statutory 

proceeding is the backstop, the power of 

any entity simply to refuse to strike a 

deal except on its own unilateral terms 

is effectively negated. Thus, such 

settlement agreements tend to eliminate 

complementary oligopoly inefficiencies, 

and provide guidance as to an 

effectively competitive rate. Indeed, this 

argument is consistent with the Judges’ 

‘‘shadow’’ analysis in Web IV, supra, at 

26330–31 (noting the counterbalancing 

effect of the statutory license in 

establishing effectively competitive 

rates). Further, when such settlement 

agreements are industrywide, they tend 

to eliminate disproportionate market 

power, and the resulting rates thus may 

be evidence of a rate that is fair and thus 

consonant with Factor B of section 

801(b)(1). (This issue is discussed in 

further detail in connection with the 

Factors B and C analysis, infra.) 

Although Copyright Owners are 

theoretically correct in noting that some 

licenses might have otherwise been 

negotiated at rates higher than the 

settlement rate that was affected by the 

shadow, that is simply the tradeoff that 

the statutory scheme makes in its 

identification of settlement rates as 

evidentiary benchmarks. That is, such a 

theoretical problem needs to be weighed 

against the salutary aspects of 

settlement rate structures and rates, 

discussed supra. I find that the benefits 

of the settlement process, in this 

proceeding, easily outweigh the loss of 

any hypothetical deals that may have 

been reached above the settlement rates, 

especially because, in the absence of the 

shadow, rates higher than the settlement 

rate would be a function, in part, of the 

Copyright Owners’ complementary 

oligopoly and other market power, 

which compulsory statutory licensing 

has been designed to mitigate. 

Although I recognize the marketbased value of a benchmark agreement 

reached under the shadow of the 

statutory license, (indeed, economic 

actors’ settlement agreements are part 

and parcel of the market 268), I cannot 

1994 Federal Register / Vol. 84, No. 24 / Tuesday, February 5, 2019 / Rules and Regulations 

269Of course, the subpart A rates are implicitly 

‘‘All-In’’ because record companies do not pay 

performance royalties. I consider further, infra, the 

evidentiary value of the subpart A settlement and 

rates. 

defer to any implicit ‘‘mindreading’’ by 

contracting parties as to the Judges’ 

application of the all the non-market 

elements of section 801(b)(1). Rather, 

the Judges have a duty to independently 

apply the itemized factors listed in the 

statute. Accordingly, I reject the idea 

that rates and terms reached through a 

settlement must be understood to 

supersede—or can be assumed to 

embody—the Judges’ application of the 

statutory elements set forth in section 

801(b)(1). However, if on further 

analysis, the Judges find that provisions 

arising from an agreement in fact do 

reflect the statutory principles set forth 

in section 801(b)(1), then the Judges 

may adopt the provisions of that 

settlement in toto, again, if those 

provisions are superior to the evidence 

submitted in support of alternative rates 

and terms. 

5. The ‘‘All-In’’ Rate Structure and the 

‘‘Mechanical Floor’’ 

a. The ‘‘All-In’’ Rate Structure 

The current mechanical royalty rate is 

calculated as a so-called ‘‘All-In’’ rate. 

Simply put, the last step when 

calculating the mechanical rate is to 

subtract from the intermediate figure the 

rate paid by the interactive streaming 

services to performing rights 

organizations (PROs) for the ‘‘public 

performance’’ right. All five services 

(i.e., including Apple) urge the Judges to 

establish a statutory rate structure for 

the forthcoming rate period that 

contains this ‘‘All-In’’ feature, whereas 

Copyright Owners request that the rate 

for the forthcoming rate period be set 

without regard to the royalty rate paid 

by the services to the PROs for the 

performance rights. I examine the 

parties’ arguments seriatim below. 

i. The Services’ Position (including 

Apple’s Position) 

According to the services, a key 

aspect of the 2008 and 2012 settlements 

was that the rates paid by services for 

mechanical royalties would allow for a 

deduction of expenses for public 

performance royalties, i.e., the top-line 

rate paid under the Section 115 license 

would be ‘‘All-In’’ from the services’ 

point of view. Levine WDT ¶ 35; Parness 

WDT ¶ 7; 3/8/17 Tr. 298–99 (Parness). 

In this regard, a Google fact witness, 

Zahavah Levine, testified that as far 

back as 2001, the streaming services 

wanted to avoid what she described as 

a ‘‘double dip’’ problem, whereby a 

service might need to conduct separate 

negotiations with PROs and with music 

publishers in order to obtain usable 

musical works license rights. 3/8/17 Tr. 

147–148 (Levine). In fact, prior to 

settlement, some members of the 

streaming community expressed a view 

that the value of any mechanical right 

implicated by interactive streaming is 

essentially zero, because the Copyright 

Owners are already compensated 

through performance payments to the 

PROs. 3/29/17 Tr. 3645–47 (Israelite). 

According to Apple, the absence of any 

separate value in the mechanical rate 

(when separated from the performance 

rate) is underscored by the fact that 

interactive streaming is the only 

distribution channel that pays both a 

performance royalty and a mechanical 

royalty. Rebuttal Testimony of David 

Dorn ¶ 10 (Dorn WRT). 

Thus, according to the services, a 

determining factor in the 2008 

settlement was Copyright Owners’ 

agreement to a deduction of 

performance fees, via the acceptance of 

an ‘‘All-In’’ rate. 3/8/17 Tr. 298–301 

(Parness); Parness WDT ¶ 7; 3/8/17 Tr. 

170–71 (Levine) (explaining benefits of 

‘‘All-In’’ rate structure). In fact, for the 

services, according to one of its 

witnesses, the ‘‘All-In’’ nature of the rate 

was a determining factor in the parties 

reaching a settlement. 3/8/17 Tr. 300– 

301 (Parness). 

Accordingly, the services argue that 

this ‘‘All-In’’ rate structure is consistent 

with the parties’ expectations in settling 

Phonorecords I and II. See SJPFF ¶ 112. 

Additionally, the Services point out that 

many direct licenses between musical 

works copyright owners and streaming 

services incorporate the ‘‘All-In’’ feature 

of the existing section 115 license. See 

JSPFFCOL ¶¶ 143–145 (and record 

citations therein). The services also 

emphasize that the Copyright Owners’ 

recent settlement of the Subpart A 

rates—approved by the Judges—implies 

an ‘‘All-In’’ feature. Specifically, one of 

the services’ expert economic witnesses, 

Dr. Leonard, testified that, expressed as 

a percentage of payments to the record 

labels (not as a percentage of total 

streaming service revenue), the subpart 

A settlement reflects a payment of 

15.8% of ‘‘All-In’’ sound recording 

royalties in 2006, and of 14.2% of ‘‘AllIn’’ sound recording royalties, when 

compared to payments to record labels 

in 2015. Leonard AWDT ¶ 46 (noting 

that ‘‘these ratios are lower than the 

current ratios of musical works-to-sound 

recordings royalties contained in 

Section 385, Subparts B and C (e.g., 

musical works royalties are between 

17.36% and 21% of the service payment 

to record companies for sound 

recordings for Standalone Portable 

Subscription, Mixed Use services 

covered under Subpart B.’’)).269

Finally in this regard, the services 

assert that the Judges have made similar 

determinations for analogous sets of 

rights in other proceedings. For 

instance, they note that the Judges 

effectively set an ‘‘All-In’’ licensing rate 

for reproductions of sound recordings 

and performances of sound recordings 

under 17 U.S.C. 112 and 114. The 

services analogize the relationship of 

the performance right and the 

mechanical right, on the one hand, with 

the sound recording ephemeral right 

and the sound recording performance 

right on the other, characterizing both 

pairs of rights as ‘‘perfect 

complements.’’ See SJPFFCOL ¶ 114 

(citing Web IV, 81 FR at 26397–98 

(discussing bundling of Secs. 112 and 

114 rights and noting that licensees 

‘‘would be agnostic with respect to the 

allocation of those rates to the Section 

112 and 114 license holders.’’). 

Separately, as noted supra, Apple 

concurs with the adoption of an ‘‘AllIn’’ rate in the forthcoming rate period. 

According to Apple, the Judges should 

adopt an ‘‘All-In’’ rate for interactive 

streaming because (1) mechanical and 

performance royalties are 

complementary rights that must be 

considered together in order to prevent 

exorbitant costs; (2) the current statute 

uses an ‘‘All-In’’ rate; (3) ‘‘All-In’’ rates 

provide greater predictability for 

businesses; and (4) recent fragmentation 

and uncertainty with respect to 

performance licenses threaten to 

exacerbate the problems of high costs 

and uncertainty already present in the 

industry.’’ APFF ¶ 138 et seq. (and 

record citations therein). As a policy 

matter, Apple maintains that an ‘‘AllIn’’ rate helps maintain royalties at an 

economically efficient level because it 

sets a single value for all of the rights 

that interactive streaming services must 

obtain from publishers and songwriters. 

See 3/23/17 Tr. (Ramaprasad) 2667- 

2669, 2670 (a mechanical-only rate 

could cause ‘‘exorbitant’’ rates, but an 

‘‘All-In’’ rate would not); Expert 

Rebuttal Report of Professor Jui 

Ramaprasad February 15, 2017 ¶ 13 

(Ramaprasad WRT) (a mechanical-only 

royalty could lead to ‘‘unreasonably 

high combined royalties for publishers 

and songwriters’’); see also Leonard 

AWDT ¶ 58; Katz WDT ¶ 94; Herring 

WDT ¶ 59. Accordingly, Apple asserts 

that, by adoption of an ‘‘All-In’’ rate, the 

streaming services avoid two separate 

Federal Register / Vol. 84, No. 24 / Tuesday, February 5, 2019 / Rules and Regulations 1995 

270Pandora and Google separately make the same 

arguments as Apple in this regard. See Pandora 

PFFCOL ¶¶ 35–36 (and record citations therein); 

Google PFF ¶ 29 (and record citations therein). 

271 ‘‘Fragmentation’’ refers to the existence of 

more than one owner of copyrights to a musical 

work, requiring an interactive streaming service to 

engage in a costly and uncertain attempt to locate 

each owner and provide it with a separate Notice 

of Intent and to bear the risk of a potential 

infringement action if one or more copyright 

owners is not located. SJPFF ¶¶ 162–63 (and record 

citations therein). 

272Copyright Owners note that performance 

royalties are set directly in negotiations between 

licensors and licensees, but if the either of the two 

largest PROs (ASCAP and BMI) and licensees are 

unable to enter into consensual agreements, they 

rates are set in a federal court action in the 

Southern District of New York (before a designated 

‘‘rate court’’ judge), pursuant to existing Consent 

Decrees. See COPCOL ¶ 316; Register’s Report at 20, 

34, 37, 41. 

negotiations for the performance right 

and the mechanical right—ensuring that 

these two complementary rights are 

considered in tandem, with the cost of 

one impacting the cost of the other. See 

Dorn WRT ¶ 15; see also 3/13/17 Tr. 

587–588 (Katz); 3/15/17 Tr. 1191–1192 

(Leonard); Herring WDT ¶ 59. 

Further in this regard, Apple 

maintains, if a full mechanical-only rate 

were adopted in lieu of an ‘‘All-In’’ rate, 

interactive streaming services would 

need to pay for mechanical rights 

pursuant to the statute and then engage 

in an entirely separate negotiation for 

the performance right. Dorn WRT 

¶¶ 14–15; Ramaprasad WRT ¶ 13. This 

could lead to an undeserved windfall 

for publishers and songwriters as, after 

this negotiation, total royalty payments 

that interactive streaming services pay 

for musical works could be 

exponentially higher than whatever 

mechanical-only rate the Judges adopt. 

Dorn WRT ¶¶ 14–15; Ramaprasad WRT 

¶ 13. Apple avers that this would be 

unfair—because the royalty payments 

are all made to the same entities, i.e., the 

publishers and songwriters. Dorn WRT 

¶¶ 15–16; see also Herring WDT ¶ 59.270

As noted supra, Apple, consistent 

with the other Services, argues that the 

‘‘All-In’’ rate structure is particularly 

important because of relatively recent 

industry developments. Specifically, 

Apple takes note of the recent 

‘‘fragmentation’’ 271 and uncertainty in 

performance rights licensing that the 

services all claim to threaten an 

exacerbation of the existing uncertainty 

over royalty costs. See Dorn WRT 

¶¶ 17–18; Ramaprasad WRT ¶¶ 13, 63; 

Parness WDT ¶¶ 16–20; Katz WDT 

¶¶ 87–94; Tr. 3/13/17 Tr. 602–604 

(Katz). Apple notes that this problem 

may be exacerbated because of the 

emergence of a fourth PRO, Global 

Music Rights (GMR), in addition to 

ASCAP and BMI, as well as SESAC 

which (like GMR, and unlike ASCP and 

BMI) is not subject to a consent decree 

and rate court review (as discussed 

infra). Parness WDT ¶ 18; Katz WDT 

¶ 91. See 3/9/17 Tr. 382–83 (Parness); 3/ 

13/17 Tr. (Katz) 602–604. 

In addition to the problems created by 

potential fragmentation, the services 

also raise the specter of future 

‘‘withdrawals’’ by music publishers 

from one or more PROs. As Apple notes, 

in the past few years, publishers have 

taken steps to effectuate such 

withdrawals, especially from PROs that 

are governed by consent decrees. Dorn 

WRT ¶ 18; Ramaprasad WRT ¶¶ 13, 63; 

Parness WDT ¶ 17; Katz WDT ¶ 91. 

Apple points to the example of one large 

publisher, UMPG, which moved a 

portion of its catalog from ASCAP, a 

PRO governed by a consent decree, to 

SESAC, which is not. 3/27/17 Tr. 3207 

(Kokakis). Apple also notes that UMPG 

also fully withdrew from BMI for a brief 

period in June 2014. 3/27/17 Tr. 3204 

(Kokakis). Moreover, Apple maintains 

that, even when publishers have not 

actually withdrawn, ‘‘[s]everal 

publishers of significant commercial 

importance have threatened [to 

withdraw entirely from ASCAP and 

BMI].’’ 3/9/17 Tr. 376–81(Parness); see 

also Parness WDT ¶ 17; 3/27/17 Tr. 

3206 (Kokakis) (UMPG executive 

confirming that he and the services 

‘‘had discussed at times the possibility 

of Universal withdrawing’’ fully from a 

PRO); 3/28/17 Tr. 3310–3313 (Kokakis) 

([REDACTED]). Apple maintains that 

these events and threats of withdrawal 

create uncertainty in the performance 

rights marketplace and portend a 

potential increase in performance 

royalty costs for interactive streaming, 

which could not be ameliorated in the 

absence of an ‘‘All-In’’ rate. See 

Ramaprasad WRT ¶ 63 (the only certain 

result of publishers withdrawing is that 

performance royalties ‘‘will increase’’); 

3/8/17 Tr. 256–57, 262–63(Levine); 3/ 

13/17 Tr. 602–04 (Katz) (fragmentation 

leads to higher performance rights 

costs). 

ii. Copyright Owners’ Position 

Regarding an ‘‘All-In’’ Royalty Rate 

Copyright Owners initial argument is 

jurisdictional in nature; they emphasize 

that this is a proceeding to set rates and 

terms for the Section 115 compulsory 

mechanical license to make and 

distribute phonorecords, not to perform 

works. 17 U.S.C. 115, 801(b)(1). More 

particularly, they note that, whereas the 

Section 115 compulsory license 

explicitly applies solely to ‘‘the 

exclusive rights provided by clauses (1) 

and (3) of section 106, to make and to 

distribute phonorecords of [nondramatic 

musical] works,’’ it does apply to the 

exclusive right provided by clause (4) to 

perform the work publicly. 17 U.S.C. 

106, 115. Thus, Copyright Owners 

argue, the public performance right 

provided by 17 U.S.C. 106(4) is an 

entirely separate and divisible right 

from the mechanical right at issue in 

this proceeding and is not subject to the 

Section 115 license. See COPCOL ¶ 314 

(citing 17 U.S.C. 106, 115, 201(d); Ex. 

920 at 16; 2 Nimmer on Copyright Sec. 

8.04[B] (‘‘[T]he compulsory license does 

not convey the right to publicly perform 

the nondramatic musical work 

contained in the phonorecords made 

under that license. Similarly, a grant of 

performing rights does not, in itself, 

confer the right to make phonorecords 

of the work.’’)). 

Copyright Owners further note that 

performance royalties are set in 

negotiations between licensors and 

licensees, subject to challenge in a ‘‘rate 

court’’ proceeding, and conclude that 

the Judges cannot set an ‘‘All-In’’ rate 

because they have ‘‘not been vested 

with the authority to set rates for 

performance rights because they are not 

covered by Section 115.’’ COPCOL 

¶ 315.272

Copyright Owners also argue in this 

regard that the services have not 

provided evidence in this proceeding to 

justify and support an ‘‘All-In’’ rate, 

such as evidence showing the rates and 

terms in existing performance licenses; 

the duration of such licenses; 

benchmarks for performance rights 

licenses; and the impact of interactive 

streaming on other sources of 

performance income, including noninteractive streaming, terrestrial radio 

and satellite radio income. Further, 

Copyright Owners point out that the 

PROs and/or all music publishers are all 

necessary parties for any such 

determination, but they were not 

proffered by the services. See COPCOL 

¶ 319. 

For these reasons, Copyright Owners 

decry as mere ‘‘sophistry’’ the services’ 

argument that they are not asking the 

Judges to set performance rates, but 

rather only to ‘‘set’’ a ‘‘mechanical’’ rate 

that permits them to deduct what they 

pay as a performance royalty. More 

particularly, they argue that this 

approach, if adopted, would leave the 

mechanical rate indeterminate, subject 

to whatever is decided in negotiations 

or judicial action regarding the 

mechanical rate. See COPCOL ¶ 320. 

Indeed, Copyright Owners note, under 

the Services’ ‘‘All-In’’ proposal, the 

mechanical rate could be zero (if 

performance royalties are agreed to or 

set by the rate courts at a rate that is 

1996 Federal Register / Vol. 84, No. 24 / Tuesday, February 5, 2019 / Rules and Regulations 

273Copyright Owners take this argument one step 

further—maintaining that consequently the Services 

‘‘have presented no competent evidence that an 

‘‘All-In’’ rate structure ‘‘is consistent with the 

parties’ expectations in settling Phonorecords I and 

II.’’ CORSJPCL ¶ 112. It is difficult to conclude that 

this fundamental rate structure, agreed to in two 

separate settlements between the parties, was not 

consonant with their ‘‘expectations.’’ 

274Copyright Owners note that, in Phonorecords 

I, Judge Sledge voiced a similar sentiment from the 

bench, referring to consideration of the performance 

royalty as a ‘‘waste of time.’’ COPFF ¶ 597 (and 

record citations therein). The Judges are not bound 

by any prior statement by a Judge that is not a part 

of a prior determination. Moreover, the Judges note 

that they are not in this proceeding ‘‘setting’’ the 

performance royalty rate, but rather considering 

whether that royalty payment should be a 

deduction in the formula for calculating the 

mechanical license. 

275The Mechanical Floor refers to the step in the 

rate calculation after the ‘‘All-In’’ rate has been 

calculated. If that calculation would result in a 

dollar royalty payment below the stated Mechanical 

Floor rate, then the Mechanical Floor rate would 

bind. 

greater than or equal to the ‘‘All-In’’ rate 

proposed by the Services here)—and, 

they argue, ‘‘a mechanical royalty rate of 

zero ‘‘is anything but reasonable.’’ 

COPCOL ¶ 322. 

In an evidentiary attack, Copyright 

Owners demonstrate that the only 

percipient witness who engaged directly 

in the 2008 negotiations involving the 

‘‘All-In’’ rate (or any other matter) was 

the NMPA president, David Israelite, 

and that, by contrast, the services’ two 

witnesses, Mr. Parness and Ms. Levine, 

did not participate directly in those 

negotiations. See CORPFF–JS at 58. 

Thus, Copyright Owners assert that the 

services cannot credibly argue based on 

what the negotiating parties actually 

intended with regard to, inter alia, the 

‘‘All-In’’ rate.273

Copyright Owners also take aim at the 

services’ argument that it matters not 

whether they pay royalties designated as 

‘‘performance’’ or ‘‘mechanical,’’ 

because the same rights owners are also 

receiving performance royalties. 

According to Copyright Owners, this 

argument: (1) ignores the fact that the 

Copyright Act creates separate and 

distinct mechanical and performance 

rights, and made only the former subject 

to compulsory licensing under Section 

115; (2) ignores the fact that the rates for 

the use of those two rights, to the extent 

not agreed, are set in different 

jurisdictions; and (3) ignores the 

disruption that would be caused by 

eliminating mechanical royalties— 

disruptions arising from (a) the fact that 

mechanical royalties are the most 

significant source of recoupment of 

advances to songwriters; and (b) 

songwriters receive a greater share of 

mechanical royalties than they do of 

performance royalties (both because of 

the standard splits in songwriter 

agreements and the fact that 

performance income, unlike mechanical 

income, is diminished by PRO 

commissions). COPCOL ¶ 323; COPFF 

¶ 640.274 See also Witness Statement of 

Thomas Kelly ¶ 66; Witness Statement 

of Michael Sammis ¶ 27; Yocum WDT 

¶ 23; Israelite WDT ¶ 71 (all asserting 

that combining mechanical royalties 

and performance income in a single 

‘‘All-In’’ payment will diminish 

payments to songwriters, and will 

negatively impact the publishers’ ability 

to recoup advances, which will, in turn, 

negatively impact the size and number 

of future advances). 

Copyright Owners further assert that 

the Services’ claim that increasing 

‘‘fractionalization’’ of licenses justifies 

an ‘‘All-In’’ rate is a red herring. 

Specifically, they argue that there has 

always been fractional licensing of 

performance rights by the PROs, 

because there typically are multiple 

songwriters and publishers with 

ownership rights in a song and they may 

not all be affiliated with the same PRO, 

and there is no legal basis on which any 

one PRO has the right to license rights 

that it does not have. Israelite WRT 

¶¶ 65–66; 3/29/17 Tr. 3662–63 

(Israelite); HX–327; 3/9/17 Tr. 372–73 

(Parness). Moreover, they claim that, 

contrary to the Services’ assertions, the 

presence of GMR has not altered the 

extent of fragmentation in any manner, 

let alone increased the degree of 

fragmentation in the marketplace. In 

particular, Copyright Owners point out 

that the Services admitted that GMR 

represents fewer than 100 songwriters 

and has a meager market share of 

roughly 3 percent of the performance 

market. 3/9/17 Tr. 365–67 (Parness); see 

also Israelite WRT ¶ 59. Copyright 

Owners also note that the Services 

presented no evidence either that there 

has been an increase in performance 

rates in licenses issued by GMR, or, 

more generally, of any actual or 

potential impact of this alleged 

‘‘fragmentation’’ of the performance 

rights marketplace on their interactive 

streaming businesses. 3/9/17 Tr. 381 

(Parness). 

Next, Copyright Owners note that the 

issue of publisher withdrawals from 

PROs—if it ever was a justification for 

an ‘‘All-In’’ rate—has been overtaken by 

events. Specifically, they note that the 

ASCAP and BMI rate courts in the 

Southern District of New York, the 

Second Circuit and the Department of 

Justice have determined that partial 

withdrawals by publishers are not 

permitted. Ex. 876, at 4; Israelite WRT 

¶¶ 62–63, citing In re Pandora Media, 

Inc., supra, 1. 

b. The ‘‘Mechanical Floor’’ 

i. Copyright Owners’ Position 

Copyright Owners urge the Judges to 

retain the Mechanical Floor.275 They 

emphasize that the Mechanical Floor 

establishes a minimum value protecting 

the mechanical right, in that it cannot be 

reduced by subtracting the performance 

royalty as occurs under the ‘‘All-In’’ 

rate. See Israelite WRT ¶¶ 19–22, 29, 81; 

3/29/17 Tr. 3632, 3634–3636, 3638, 

3754, 3764–3765 (Israelite); 3/8/17 Tr. 

259 (Levine). 

They also note that the revenue 

displacement and deferral problems 

they allege to exist under a percentage 

of revenue ‘‘do not exist’’ with the 

Mechanical Floor because that rate is 

expressed on a per subscriber basis. 

COPFF ¶¶ 639–40. [REDACTED]. In this 

regard, Copyright Owners maintain that 

the Services’ desire to eliminate the 

Mechanical Floor is nothing other than 

a ‘‘thinly veiled effort to sharply reduce 

the already unfairly low mechanical 

royalties.’’ COPFF ¶ 644. The import of 

the Mechanical Floor is underscored by 

Dr. Eisenach who testifies that, in 2015, 

[REDACTED]. Written Rebuttal 

Testimony of Jeffrey A. Eisenach, Ph.D. 

¶ 115 (Eisenach WRT). 

Copyright Owners further argue that 

the Mechanical Floor is necessary to 

preserve a source of royalty revenue for 

the payment of advances to songwriters 

and the funding of recoupments of prior 

advances paid by publishers to 

songwriters. COPFF ¶ 640 (and record 

citations therein). They also point out 

that songwriters benefit more from 

publishing agreements than from 

agreements with PROs, because, under 

current publishing agreements, 

songwriters typically receive 75% or 

more of mechanical income whereas the 

PRO’s split performance income 50/50 

between publishers and songwriters. Id. 

Finally, Copyright Owners note that the 

PROs charge songwriters a fee, further 

reducing the value of the performance 

income relative to income. Id. 

ii. The Services’ and Apple’s 

Arguments for Eliminating the 

Mechanical Floor 

Despite their trumpeting of the 2012 

settlement as an appropriate benchmark, 

the Services (and Apple, which does not 

rely on the 2012 structure) propose the 

elimination from that benchmark of the 

Mechanical Floor in the forthcoming 

Federal Register / Vol. 84, No. 24 / Tuesday, February 5, 2019 / Rules and Regulations 1997 

276 I recognize that the reduction of the 

mechanical rate interim calculation by the amount 

of the performance rate in ‘‘Step 2’’ (see 

§ 385.12(b)(2)), acts as an exclusion from royalties 

rather than a deduction from revenue (by analogy, 

just as a tax credit is a subtraction from taxes, 

whereas a tax deduction is a subtraction from 

income). However, there is no statutory or 

regulatory impediment that prohibits this exclusion 

from royalties. Also, it is noteworthy that the costs 

that are excluded under current § 385.12(b)(2) are 

all costs over which the Judges have no authority. 

277The consensual nature of the handling of these 

perfect complements in Webcasting proceedings 

underscores the difference between the 

appropriateness of adopting an ‘‘All-In’’ rate that 

has been the subject of long-standing agreement in 

this proceeding (ten years) and the 

inappropriateness of the majority’s binding of the 

parties in this proceeding to the rates of another 

perfect complement, the sound recording rate. 

rate period. In support of this position, 

they make the following arguments: 

• When negotiating both the Phonorecords 

I and Phonorecords II settlements, the 

services acquiesced to the Copyright Owners’ 

insistence that this Mechanical Floor be 

included in the rate structure, because the 

services believed that the Mechanical Floor 

was ‘‘illusory,’’ i.e., that it was ‘‘highly 

unlikely to ever be triggered . . . .’’ SJPFF 

¶¶ 127, 160 (and record citations therein). 

See also Apple PFF ¶¶ 85, 165 (arguing that 

the Mechanical Floor in the current rate 

structure adds uncertainty and leads to 

services paying ‘‘windfall’’ royalties to the 

Copyright Owners well above the ‘‘All-In’’ 

amount); Google PCOL ¶ 22 (asserting that 

the triggering of the Mechanical Floor in 

some circumstances has been caused by 

Copyright Owners leveraging market power). 

In this regard, the Services assert that the 

parties who negotiated the Phonorecords 

settlements did not expect a Mechanical 

Floor to bind, due to longstanding, stable 

public performance rates. 3/8/17 Tr. 309 

(Parness); Parness WDT ¶¶ 9, 21; Levine 

WDT ¶ 35; 3/8/17 Tr. 254:24–256:8 (Levine). 

• Past and potential future fragmentation 

of the licensing of public performance rights, 

threatened withdrawals by music publishers 

from PROs and the advent of new PROs, all 

combine to increase the likelihood that the 

Mechanical Floor will be triggered. Katz 

WDT ¶¶ 87, 91. 

• Because mechanical rights and public 

performance rights are ‘‘perfect 

complements’’ from the perspective of an 

interactive streaming service, there is no 

economic rationale for setting the two rates 

separately from one another. Id. ¶ 88. See 

also Leonard AWDT ¶¶ 56, 82–83 (relying on 

the ‘‘perfect complements’’ argument to 

advocate for an elimination of the 

Mechanical Floor). Marx WDT ¶¶ 135, 165 

(‘‘Economic efficiency would be improved by 

removing the $0.50 per-subscriber fee floor 

from the paid subscriber mechanical royalty 

formula’’ and ‘‘[REDACTED]’’). 

• [REDACTED] Id. 

• Triggering of the Mechanical Floor 

would not reflect an increase in the value of 

performance rights or mechanical rights, but 

rather would reflect the ability of copyright 

holders to exert market power over 

interactive services in the form of supracompetitive performance rights license fees. 

Id. 94. 

• A Mechanical Floor defeats the benefits 

of an ‘‘All-In’’ rate. Apple PFF ¶¶ 164–167. 

(and record citations therein). 

• It is incorrect that Copyright Owners 

‘‘had no control over’’ public performance 

rates. The Services note that the same 

publishers that are members of the NMPA 

board, controlling its policy and strategy, are 

also member of the board of ASCAP, the 

largest PRO. SJRPFF–CO at p. 284 (citing In 

re Pandora Media, Inc., 6 F. Supp. 3d 317, 

341 (S.D.N.Y 2014) (describing how 

representatives of UMPG, Sony/ATV, and 

BMG all work with each other as ASCAP 

board members and work with David Israelite 

of the NMPA). 

[REDACTED] 

c. Findings Regarding the ‘‘All-In’’ Rate 

and the Mechanical Floor 

I find that the ‘‘All-In’’ rate is a 

necessary and proper element of the 

2012 benchmark, and must remain in 

the rate structure for the forthcoming 

rate period. As an initial matter, I reject 

Copyright Owners’ argument that the 

‘‘All-In’’ feature is unlawful because the 

Judges do not regulate performance 

rates. The ‘‘All-In’’ feature does not 

constitute a regulation of the 

performance rate, but rather represents 

a cost exclusion (or deduction) from the 

mechanical rate. I recognize, as do the 

parties, that the royalties otherwise due 

under a revenue-based format may 

exclude certain costs. See 73 CFR 

385.11(Definition of ‘‘Service Revenue,’’ 

paragraph (3) therein).276

The exclusion of performance 

royalties in the ‘‘All-In’’ calculation is 

also necessary, because—as all parties 

and economists agree—mechanical 

rights and performance rights are perfect 

complements. That is, each right is 

worthless without the other. See 

generally, Varian, supra, at 40 (‘‘Perfect 

complements are goods that are always 

consumed together in fixed proportions 

. . . A nice example is that of right and 

left shoes. . . . Having only one out of 

a pair of shoes doesn’t do the consumer 

a bit of good.’’). 

Accordingly, if the mechanical rate 

was set in this proceeding without a 

credit for the performance rate, the 

perfect complementarity of the two 

licenses would be ignored, and the 

interactive streaming services would 

pay two times for the same economic 

right—the right to stream the musical 

work embodied in the sound recording. 

Further, as the Services note, there is a 

substantial overlap not only in the 

songwriters who receive royalties from 

both licenses, but also in the entities 

that negotiate these rates on their behalf. 

Thus, it is appropriate to continue to 

recognize the economic and bargainingentity overlaps by continuing to exclude 

the performance rate through the ‘‘AllIn’’ rate structure. In this regard, I agree 

with the Services and Apple that the 

Judges’ treatment of the ephemeral 

license as embodied within the sound 

recording license in combined section 

112 and 114 proceedings is implicitly 

an acknowledgment that the royalties 

for licenses which are perfectly 

complementary can be calculated in a 

manner that reduces one royalty to 

reflect another royalty i.e., the sound 

recording license is reduced by the 

value of the ephemeral license. See Web 

IV, 81 FR, supra, at 26398 (‘‘The Judges 

. . . find that the minimum fee for the 

[s]ection 112 license should be 

subsumed under the minimum fee for 

the [s]ection 114 license, 5% of which 

shall be allocable to the [s]ection 112 

license holders, with the remaining 95% 

allocated to the [s]ection 114 license 

holders.’’). Of particular importance for 

this Dissent is the fact that the 

subsuming of the section 112 ephemeral 

license fee within the section 114 

license was done at the behest of the 

parties, and in fact dates back to the 

parties’ agreement as to that issue since 

Web I. See Web IV, supra, 81 FR at 

26396–97 (‘‘The current $500 minimum 

fee for commercial webcasters has been 

in force for more than a dozen years, 

and has been voluntarily re-adopted by 

licensors and licensees.’’).277

However, the performance license and 

the mechanical license, while 

overlapping in important respects, do 

not overlap in all respects. 

Consequently, I find that, for several 

reasons, the Mechanical Floor now in 

the regulations should also be included 

in the rate structure for the forthcoming 

rate period. 

First, the fact that the performance 

right and the mechanical right are 

necessary complements to the licensees 

does not end the inquiry. As Copyright 

Owners point out, the mechanical 

royalties are used by the publishers in 

part to fund advances to songwriters, 

and their subsequent recoupment, thus 

providing an important source of 

liquidity to songwriters, pending the 

later payment of royalties. If the ‘‘AllIn’’ rate substantially reduces or fully 

eliminates the mechanical portion of the 

calculation, the pool of funds available 

for advances and recoupments would be 

reduced. 

Thus, the Services’ argument that the 

mechanical right has no standalone 

value, while sufficient to support an 

‘‘All-In’’ rate, is incomplete and, to an 

extent, self-serving, with regard to the 

Mechanical Floor issue. To the music 

publishers and songwriters, the 

1998 Federal Register / Vol. 84, No. 24 / Tuesday, February 5, 2019 / Rules and Regulations 

278 I note that the majority maintains the 

Mechanical Floor. However, the Mechanical Floor 

was part of the trade-off of consideration within the 

2012 benchmark settlement. It is inconsistent for 

the majority to maintain this vestige of the 2012 

benchmark while rejecting its other aspects, in favor 

of the post-hearing rate structure they have created. 

This yet another example of how the majority’s rate 

structure—to borrow from Copyright Owners’ 

analogy—picks provisions from columns A, B . . . 

and now C, when inventing its post-hearing 

structure. 

279From a more technical economic perspective, 

all productive upstream inputs benefit downstream 

re-sellers. 

280This is the same principle that leaves me 

reluctant to rely on speculation inherent in the 

Majority Opinion and in Copyright Owners’ ‘‘seesaw’’ assertion regarding an assumed willingness by 

record companies to agree to a decrease in sound 

recording royalties in response to an increase in 

mechanical royalties, as discussed infra. Also, the 

point in the accompanying text should be 

contrasted with the basis for adoption of an ‘‘AllIn’’ rate: The industry over which the Judges have 

jurisdiction in this proceeding for ten years has 

operated under a rate structure (which I find to be 

a useful benchmark), that incorporates the ‘‘All-In’’ 

adjustment to account for the performance royalties. 

Thus, the Mechanical Floor and the ‘‘All-In’’ 

structure are both parts of the 2012 benchmark, 

revealing the parties’ longstanding willingness and 

ability to operate under an overall structure in 

which performance royalties are subject only to a 

limited deduction in the calculation of the 

mechanical royalty. 

281 I note once again that, separate and apart from 

its usefulness as a benchmark in this proceeding, 

the existing rate structure can also constitute a 

reasonable rate that the Judges may adopt, 

particularly in the absence of any contrary 

probative record evidence. See Music Choice, supra, 

774 F.3d at 1010. 

mechanical right does have a separate 

value, in the funding of songwriters, a 

value not provided by the performance 

royalty. It is essentially a source of 

royalty revenue that has been 

designated and created through an arm’s 

length negotiation, by which songwriter 

advances and recoupments can be 

funded. The fact that this pool or source 

of revenue arises from the payment by 

services for the mechanical right that is 

a perfect complement (from their 

perspective) to the performance right is 

not the point; Copyright Owners have a 

right to the benefit of the 2012 

bargain 278 that identified a floor below 

which their source of advances/ 

recoupment funds would not fall. By 

analogy, the cost of any publisher input, 

not just the cost of providing liquidity 

to songwriters, such as, for example, the 

cost of heating the buildings in which 

songwriters toil, has no direct, 

standalone value to the services, yet no 

one would assert that the licensors are 

not entitled to a pool of royalty revenue 

sufficient to recover their heating costs. 

Liquidity funding for songwriters is a 

necessity, just as heat is a necessity— 

and the complementary nature of the 

rights to the Services is of no relevance 

in that regard. (In fact, providing 

financial liquidity to songwriters, like 

providing them with a heated building, 

of course indirectly does benefit the 

services, because songwriters who are 

financially illiquid or physically frozen 

from lack of heat, are equally unable to 

write the musical works that the 

services must play.) 279

In recognition of the importance of 

advances to songwriters, Professor Katz 

speculates that the problem of 

recouping advances could be solved by 

transferring some of the advancements 

from the music publishers to the PROs. 

3/13/17 Tr. 607 (Katz). However, I am 

loath to join in speculation that parties 

over whom the Judges have no 

jurisdiction will voluntarily change the 

conduct of their businesses, and then 

bootstrap those speculative predictions 

to support their rulings.280

Second, although the services assert 

that they had dismissed the triggering of 

the Mechanical Floor as ‘‘illusory,’’ that 

dismissal was demonstrably incorrect, 

as evidenced by the large number and 

percent of service-months in which the 

Mechanical Floor has been triggered. 

Moreover, [REDACTED]. Marx WDT 

¶ 76. More generally, the Mechanical 

Floor provides a form of insurance to 

Copyright Owners that the mechanical 

royalty will not be reduced or 

eliminated if services trigger that rate 

alternative because of relatively high 

performance rates. 

Third, I am unpersuaded by the 

Services’ argument that the sole reason 

the Mechanical Floor has been triggered 

is because the performance royalty rate 

has increased significantly ‘‘to levels not 

foreseen when the Mechanical Floor 

was negotiated.’’ SJRPFF–CO at pp. 

411–12. I find that criticism puzzling; 

the purpose of the Mechanical Floor is 

to limit the extent to which the 

performance royalty rate would 

diminish the mechanical rate through 

the ‘‘All-In’’ approach. Thus, the 

services are asserting that the essential 

nature of the Mechanical Floor is a bug, 

when in fact it is a defining feature— 

again, a form of rate insurance for which 

the music publishers/songwriters 

bargained, and to which the services 

acquiesced, when agreeing to the 2008 

and 2012 settlements. 

Fourth, I do not find that the potential 

for further fragmentation of musical 

works licenses and publisher 

withdrawals is a sufficient reason to 

consider eliminating the Mechanical 

Floor. Copyright Owners have 

convincingly argued that: (1) Services 

have offered no evidence that the 

introduction of the new PRO, GMR, will 

have any impact on the performance 

royalty rate; (2) partial withdrawals are 

not permitted by the rate court, the 

Second Circuit or the Department of 

Justice; (3) there is no evidence of 

increasing performance rates (and the 

rate courts can ensure ‘‘reasonable’’ 

rates charged by the two largest PROs, 

ASCAP and BMI); and (4) some 

fractional (a/k/a fragmented) licensing 

has always been present in the market. 

See CORPFF–JS at pp. 87–90 (and 

record citations therein). 

Fifth, I reject a further complaint, 

[REDACTED], that the Mechanical Floor 

is perverse, because lower retail pricing 

that diminishes revenues will increase 

the likelihood that the Mechanical Floor 

will bite. I see this too as a feature of 

this floor—not a bug. As Pandora’s 

witness, Mr. Parness, explained (see 3/ 

9/17 Tr. 354 (Parness)), the Mechanical 

Floor was made part of the ongoing 

settlement terms expressly because 

Copyright Owners were fearful that 

retail pricing would be too low and 

generate decreased royalties under other 

prongs. 

Finally, I do not agree with the 

assertion that the presence of the 

Mechanical Floor rate ‘‘defeats the 

benefits’’ of an ‘‘All-In’’ rate. To be sure, 

the Mechanical Floor limits the value of 

the effective cost reduction embodied in 

the ‘‘All-In’’ rate, but that limitation 

does not defeat the ‘‘All-In’’ rate. This 

critique actually underscores a broader 

infirmity in the services’ arguments in 

opposition to a continuation of the 

Mechanical Floor. They maintain that 

the 2012 settlement, carrying forward 

essentially the structure of the 2008 

settlement, has worked satisfactorily for 

licensors and licensees alike. I agree, 

finding that the present rate structure 

should be continued. However, the 

Services, contrary to their basic 

argument, seek to disrupt the status quo 

that they otherwise recommend, in 

order to obtain a better bargain than 

contained in that benchmark. To put the 

point colloquially, the Services cannot 

have their cake and eat it too. 

6. Findings Regarding the Rate 

Structure 

Based on the foregoing, and as 

detailed further below, I conclude that 

the 2012 rate structure constitutes a 

usable objective benchmark in this 

proceeding.281 Based on the foregoing, I 

reject the per-unit rate structure 

advocated by Copyright Owners. I also 

reject the services’ proposal to eliminate 

the Mechanical Floor. 

Federal Register / Vol. 84, No. 24 / Tuesday, February 5, 2019 / Rules and Regulations 1999 

282Copyright Owners assert that the different 

identities of the licensees, particularly the market 

entry of Amazon, Apple and Google, and their 

bundling and discounting of interactive streaming, 

diminish the comparability of the 2012 benchmark. 

The Services note that even prior to the entry of 

these three entities, similar multiproduct firms were 

licensees—including Yahoo and Microsoft. I 

discuss the bundling and discounting issues 

elsewhere in this Dissent. 

283The provenance of the story in which the 

quoted phrase is the punch line is uncertain, and 

has been variously attributed to, inter alios, George 

Bernard Shaw, Winston Churchill, Groucho Marx, 

Mark Twain, W.C. Fields, and Bertrand Russell. 

284This point underscores a defect in the Majority 

Opinion. Under its provisions, participants in a 

neighboring market, the record companies in the 

sound recording market, who license their own 

perfect complement, will have economic control 

over the mechanical royalty rate, via the TCC prong. 

7. The 2012 Benchmark, in its Entirety, 

is a More Useful Benchmark than a PerUnit Rate Structure or the Services’ 

Modified Version of the 2012 

Benchmark 

I further find that the discriminatory 

rate structure in the 2012 benchmark 

renders it a more useful benchmark than 

the per-unit proposals set forth by 

Copyright Owners and Apple. Although 

the 2012 rate structure is not necessarily 

the best structure that could have been 

designed, it possesses the characteristics 

of a useful and beneficial benchmark. In 

that regard, I take note of the four classic 

characteristics of an appropriate 

benchmark, as identified by the federal 

rate court: 

In choosing a benchmark and determining 

how it should be adjusted, a rate court must 

determine [1] the degree of comparability of 

the negotiating parties to the parties 

contending in the rate proceeding, [2] the 

comparability of the rights in question, and 

[3] the similarity of the economic 

circumstances affecting the earlier 

negotiators and the current litigants, as well 

as [4] the degree to which the assertedly 

analogous market under examination reflects 

an adequate degree of competition to justify 

reliance on agreements that it has spawned. 

In re Pandora Media, supra, at 354. 

The 2012 benchmark meets these 

criteria. First, it pertains to the same 

rights at issue in this proceeding. 

Second, the licensors (music publishers) 

and licensees (interactive streaming 

services) categories are comparable (if 

not identical).282 Third, the economic 

circumstances are sufficiently similar 

and the same in crucial respects, i.e., the 

ongoing differentiated nature of this 

marketplace and the zero marginal 

physical cost of the licensed copies, (as 

discussed supra). Fourth, the 2012 

benchmark it reflects a rate structure 

with an adequate degree of competition 

because, as explained in connection 

with the discussion of the shadow 

effects, it is a rate free of complementary 

oligopoly effects and of an imbalance in 

market power. Further with regard to 

this fourth point, the parties have been 

operating over the past ten years under 

this basic rate structure, with profits 

accruing to the licensors and admittedly 

tolerable losses for the licensees. 

More particularly, I re-emphasize that, 

as a matter of law, section 115 

specifically provides that settlements 

shall constitute evidence of market 

rates. Therefore, I cannot simply 

disregard the settlement rates as 

immaterial evidence. See 17 U.S.C. 

115(c)(3)(D). Of course (as noted supra), 

the Judges may give whatever weight 

they think is proper to such evidence, 

without running afoul of any statutory 

duty. As explained in further detail 

below, for a number of reasons, I not 

only find this benchmark useful, I also 

accord substantial weight to this 

benchmark. 

First, the record indicates that 

Copyright Owners have demonstrated 

(albeit tacitly) their understanding that, 

if the Judges did not set a price 

discriminatory rate structure to reflect 

the varying WTP, Copyright Owners 

would have to invent it. This finding is 

apparent from a careful reading of their 

advocacy for the adoption of a 

bargaining room approach to ratesetting. That approach is explicitly 

premised on the idea that Copyright 

Owners would offer to enter into 

multiple and different price 

discriminatory agreements with various 

services, if the high statutory rate set 

under the bargaining room theory is too 

high for some services to operate. This 

point is made clear by the testimony of 

Professor Rysman and Dr. Eisenach. See, 

e.g. 4/3/17 Tr. 4390, 4431 (Rysman) 

(lauding the bargaining room approach 

as reflecting the ‘‘economical element of 

price discrimination . . . the [licensor] 

is picking its prices carefully.’’) 

(emphasis added). 

The following colloquy between the Judges 

and Dr. Eisenach is also instructive: 

[THE JUDGES] 

Are you familiar with the concept of the 

bargaining theory of rate setting . . . [t]he 

idea that rate setters, such as this Board, 

should set rates that are higher than the 

market rate for certain users because they can 

then, as you are testifying to now, can 

bargain with the licensors for lower rates to 

use a bargaining concept in the setting of 

rates? 

[DR. EISENACH] 

So as you have just stated it, I think that 

is consistent with my testimony in this 

matter, which is that the compulsory license 

serves as a back-stop. It is a guaranteed cap 

on what anyone would have to pay. The 

ability to negotiate mutually beneficial 

bargains below that cap is there for all of the 

parties. And the incentives to do so are there 

as well. 

4/4/17 Tr. 4845 (Eisenach) (emphasis 

and underscore added); see also id. at 

4843–44 (‘‘one thing that I took into 

account in considering . . . higher 

mechanical rates . . . is the ability of 

streaming services to negotiate direct 

deals with the publishers. . . . We’re 

looking here at an upper and not a lower 

end. . . . [I]f the Copyright Owners’ 

proposal were adopted, [the services] 

would have the ability to negotiate 

direct agreements with publishers.’’) 

(emphasis and underscore added). 

Professor Rysman, echoed Dr. 

Eisenach in this regard, when 

discussing the potential impact on 

Spotify of Copyright Owners’ proposed 

substantial rate increase: 

[REDACTED] 

4/3/17 Tr. 4390, 4431 (Rysman) 

(emphasis added). 

Thus, I find there to be no real dispute 

as to the need for an upstream 

discriminatory rate structure. To borrow 

from a classic story, I perceive that the 

parties are not in disagreement as to 

what kind of rate structure is needed in 

the market, but are rather ‘‘haggling over 

the price.’’ 283 Perhaps more 

importantly, the parties appear to be in 

disagreement as to who and what shall 

be in control of the setting of rates, the 

Judges and the statute on the one hand, 

or Copyright Owners and the 

unregulated market on the other. The 

answer is—as it must be according to 

statute—that it is the Judges who set the 

rates. They are instructed by statute and 

guided by precedent to set a reasonable 

rate and to consider several itemized 

factors, not to cede that authority to any 

market participant.284 Further, as 

Professor Katz testified, the statutory 

license, and negotiations undertaken 

under the so-called shadow of that 

license, incorporate a countervailing 

power that allows the streaming services 

a more equal bargaining position. 

3/13/17 Tr. 577 (Katz). Under the 

bargaining room approach, that salutary 

aspect of the statutory scheme would be 

eliminated. 

Second, and related to the prior point, 

I find the 2012 rate structure to be a very 

useful benchmark because it embodies a 

price discriminatory rate structure that 

reflects the downstream market’s 

segmentation by WTP. Although 

Copyright Owners correctly argue that 

discriminatory upstream rates are not 

required in order to accommodate 

downstream price discrimination, they 

do not provide a sufficient counterargument to the Services’ point that the 

upstream rate should also be price 

discriminatory in order to incentivize, 

2000 Federal Register / Vol. 84, No. 24 / Tuesday, February 5, 2019 / Rules and Regulations 

285 In this regard, it is noteworthy that another of 

Copyright Owners’ expert economic witnesses— 

expressly echoing a prior licensor expert in 

Phonorecords I—opines that the present interactive 

streaming market is ‘‘unlike a mature business.’’ See 

Watt WRT ¶ 40 (‘‘Interactive streaming of music is 

a relatively new enterprise, made of some relatively 

new companies and companies new to the space.’’). 

Although Professor Watt was making this point for 

the purpose of explaining how to identify revenues 

and costs for inclusion in a Shapley value analysis 

(discussed infra), unlike ‘‘Schrodinger’s Cat,’’ the 

interactive streaming market cannot be two 

contradictory things at once, simultaneously 

‘‘mature’’ for the purpose of avoiding a 

discriminatory rate structure and ‘‘not mature’’ for 

Shapley purposes. 

286Of course, as explained supra, all second-best 

markets are inefficient in the static sense. Thus, 

under the bargaining room approach that Copyright 

Owners endorse, they would exchange one 

‘‘inefficiency’’ (percent of revenue pricing) with 

another (unit pricing above marginal cost) and then 

seek to negotiate away the latter inefficiency, 

outside the ‘‘reasonable rate’’ requirement and 

without regard to itemized statutory factors in 

section 801(b)(1). 

287Again, it bears emphasis that the 2012 

benchmark provides Copyright Owners with an 

access (option) value prong, in the form of a persubscriber rate. 

rather than jeopardize, the downstream 

licensees’ satisfaction of the varying 

WTP among listeners. Absent such a 

structure, the services are more likely to 

face the vexing problem of essentially 

fixed revenues and variable costs, under 

the ‘‘all-you-can-eat’’ model demanded 

by listeners. Although Copyright 

Owners may well be correct in their 

argument that an upstream 

discriminatory rate structure can be 

accomplished without resort to a 

revenue-based rate structure (that is, for 

example, via different per-play rates), 

neither Copyright Owners nor Apple 

proposed such an alternative 

discriminatory rate or provided 

evidence by which the Judges could 

mold such rates (as they did in Web IV). 

Third, I find insufficient evidence to 

support Copyright Owners’ assertion 

that the market in 2012 was not yet 

‘‘mature’’—compared with the market at 

present—and that the 2012 rate 

structure was thus ‘‘experimental.’’ At a 

high level, all markets are not ‘‘mature,’’ 

in the sense that they are dynamic and 

thus subject to change, making all rate 

structures ‘‘temporary,’’ if not 

‘‘experimental.’’ Moreover, the ongoing 

creative destruction in the streaming 

industry has only reinforced the fact 

that, even since 2012, the interactive 

streaming services market is still not yet 

‘‘mature.’’ See. e.g., Written Direct 

Testimony of Paul Joyce (on behalf of 

Google Inc.) ¶ 17 (Joyce WDT) 

(describing Google Play Music as 

‘‘nascent compared to other participants 

in the streaming music market.’’) 285

However, even if Copyright Owners’ 

maturity/experimental argument had 

merit, it does not supersede the 

convincing economic logic that a price 

discriminatory rate structure remains 

appropriate, because the economic 

fundamentals endure. The cost of 

producing an additional copy of a 

musical work remains zero. A market 

segmented by WTP is efficiently served 

through price discrimination. Upstream 

demand for licenses is a derived 

demand, see 3/20/17 Tr. 1967–68 

(Marx), and thus a function of the 

segmented downstream demand, 

making an upstream discriminatory rate 

structure more efficient, even if not 

necessary. I find that, in a second-best 

world such as the interactive streaming 

industry, a consonance between 

upstream and downstream pricing 

structures enhances efficiency.286

Fourth, Copyright Owners argument 

that the 2012 benchmark, with its 

attendant multi-pronged rate structure, 

is inconsistent with the idea that a 

musical work has (or should have) a 

single ‘‘inherent’’ value, see, e.g., 

Israelite WDT at 10; ¶ ¶ 29(B), 30, 31(C); 

Brodsky WDT ¶ 68, is actually 

inconsistent with Copyright Owners’ 

own proposed rate structure. That is, 

Copyright Owners’ proposal, that the 

statutory rate automatically should shift 

from a per-play rate to a per-user rate if 

the latter leads to greater royalties, 

belies their fealty to the ‘‘inherent 

value’’ argument. Rather, their greater-of 

approach demonstrates their eagerness 

to jettison this concept if another 

measurement tool (the per user rate) 

could result in greater revenue. That is, 

Copyright Owners’ proposal seeks to 

accommodate two separate values 

(value-in-use and access (option) value, 

while denying that other marketplace 

values can exist, even if they reflect 

varying WTP and varying ability-topay). 

I recognize that the 2012 benchmark 

is also a greater-of approach, but it 

blends into that approach a ‘‘lesser of’’ 

approach (per subscriber or TCC) within 

one of the ‘‘greater of’’ prongs. Thus, 

there is no real fundamental dispute 

between Copyright Owners and the 

Services as to whether rates may be 

disconnected from unit pricing. Rather, 

the question is whether the disconnect 

will be made to benefit only Copyright 

Owners (in a manner that would cause 

substantial negative impact to Services, 

(as detailed in Professor Ghose’s rebuttal 

testimony, discussed supra), or will be 

structured to reflect the parties’ 

historical and ongoing bargain that 

softens and balances the impact of a 

greater-of structure. See 4/7/17 Tr. 5584 

(Marx) (noting that Copyright Owners’ 

‘‘greater-of’’ proposal lacks the balance 

in the 2012 structure that combines a 

‘‘greater of’’ structure’’ with a ‘‘lesser of’’ 

prong). 287

Fifth, I rely on the 2012 rate structure 

as an objective benchmark. Thus, the 

absence of more direct testimony 

regarding what went through the minds 

of the negotiators of the 2008 and the 

2012 settlement does not diminish the 

objective value of this benchmark. I do 

not place dispositive weight on the 

subjective reasons why the parties may 

have entered into the prior settlements. 

I view the terms of the 2012 settlement 

as potential objective benchmark 

information. See, e.g., 3/13/17 Tr. 550– 

51, 566 (Katz) (acknowledging his lack 

of knowledge as to why the parties 

negotiated specific provisions of the 

2012 settlement, but noting that 

objectively the results of the settlement 

demonstrate the satisfactory 

performances of the market). Further, 

both Professor Katz and another 

Services’ expert, Professor Hubbard, 

noted that the current rate structure 

remains valuable, not based on their 

consideration of the parties’ subjective 

understandings at the time of 

settlement, but rather because the 

market has not since changed in a 

manner that would create a basis to 

depart from a multiple-rate upstream 

rate structure. Katz WDT ¶ 80 (‘‘My 

analysis has identified no changes in 

industry conditions since then [2012] 

that would require changing the 

fundamental structure of the percentageof-revenue prong.’’); 4/13/17 Tr. 5977– 

78 (Hubbard) (changes in the market are 

‘‘not uncorrelated with the structure 

that was in place’’ in 2012). In this 

regard, it bears emphasis that Dr. 

Eisenach, quite properly, relied on 

several potential benchmarks for his rate 

analysis, without attempting to examine 

the parties who negotiated those 

benchmark agreements. He too was 

treating potential benchmarks in an 

objective manner, consistent with my 

understanding of the long-standing 

method of using benchmarks for the 

setting of rates. 

Sixth, I do not credit the arguments by 

Copyright Owners and Apple (and by 

the majority) that the present rate 

structure is complex. If some 

songwriters find their royalty statements 

confusing, that is a real concern that 

should be resolved. However, one of the 

benefits of a collective, be it the 

publishers themselves, or, the NMPA, 

the NSAI or a PRO, is that these 

collectives have the expertise and 

resources to identify and explain how 

Federal Register / Vol. 84, No. 24 / Tuesday, February 5, 2019 / Rules and Regulations 2001 

288 I note that Copyright Owners not only 

voluntarily agreed to this multi-tiered rate structure 

in 2008, they were the parties who had proposed 

this structure, and they then ratified its usefulness 

by adopting it anew in the 2012 settlement. 

Moreover, Copyright Owners agreed to a similar 

tiered structure for the new subpart C rates in that 

2012 settlement. These facts belie the assertion that 

Copyright Owners found this rate structure to be too 

confusing. 

royalties are computed and distributed. 

There is no good reason why the rate 

structure that is consonant with the 

parties’ ten year history and with the 

relevant economic model should be 

sacrificed on the slender argument that 

‘‘simpler is better than complicated.’’ I 

agree that, ceteris paribus, the rate 

structure should be simple but, as 

Albert Einstein is credited with saying: 

‘‘Everything should be made as simple 

as possible, but no simpler.’’ The 2012 

rate structure meets this criterion.288

Accordingly, for the reasons set forth 

in this Section III of the Dissent, I find 

the 2012 rate structure, in its entirety, to 

be the appropriate benchmark for the 

rate structure in the forthcoming period. 

I. THE PARTIES’ PROPOSED RATES 

Establishing a rate structure resolves 

only one aspect of the overall rate 

determination. The next issue to decide 

is whether the rates within the 2012 

benchmark are appropriate, whether 

they need to be changed and, if so, 

whether the record provides a basis for 

identifying different rates. Unlike the 

majority, I hew to the record, and do not 

attempt to divine from the record brand 

new post-hearing rates (or rate 

structures) that were never presented by 

the parties, and thus never subjected to 

examination by the parties’ counsel and 

economists. 

Copyright Owners have identified per 

play and per user rates in their rate 

proposal. Although I have rejected that 

rate structure, I review Copyright 

Owners’ evidence regarding the setting 

of such rates. If that evidence is 

informative, and if the record permits, I 

would attempt to convert Copyright 

Owners’ per-unit rate proposal into a 

percent of revenue rate with appropriate 

minima, consistent with the 2012 

benchmark rate structure. 

On the other side of the ledger, 

several of the Services’ expert 

economists have asserted that, although 

the 2012 benchmark sets forth a 

generally appropriate rate structure, and 

that the rates have been acceptable to 

the Services, the rates within that 

structure are in fact too high and should 

be reduced for the forthcoming rate 

period. Accordingly, I also examine 

those lower rates to determine if they 

should be incorporated into the 20212 

benchmark for the forthcoming rate 

period. 

1. The Copyright Owners’ Benchmark 

Rates 

a. Overview of Approach 

Copyright Owners identified potential 

rates through an analysis undertaken by 

one of their economic experts, Dr. 

Eisenach, of several benchmarks, and of 

relationships between musical works 

and sound recording royalties that he 

identified in various markets. He began 

by noting that ‘‘an economically valid 

approach for assessing the value of 

intellectual property rights which are 

subject to compulsory licenses is to 

examine market-based valuations of 

reasonably comparable benchmark 

rights—that is, fair market valuations 

determined by voluntary negotiations.’’ 

Eisenach WDT ¶ 8 (emphasis added). In 

selecting potential benchmarks, Dr. 

Eisenach identified what he understood 

to be key characteristics that would 

make a benchmark useful: 

‘‘[U]nderlying market factors . . . ; the 

term or time period covered by the 

agreements; factors affecting the relative 

bargaining power of the parties; and 

differences in the services being 

offered.’’ Id. ¶ 80. 

Dr. Eisenach found useful the license 

terms for the sound recording rights 

utilized by interactive streaming 

services, because they are negotiated 

freely between record companies and 

the interactive streaming services. Id. 

These rates made attractive inputs for 

his analysis because they: (1) relate to 

the same composite good—the sound 

recording that also embodied the 

musical work; and (2) the interactive 

streaming service licensees were the 

same licensees as in this proceeding. 

Thus, to an important degree, Dr. 

Eisenach found these agreements to 

possess characteristics similar to those 

in the mechanical license market at 

issue in this proceeding. Moreover, Dr. 

Eisenach found that ‘‘[d]ata on the 

royalties paid under these licenses are 

available and allow . . . estimat[ion of] 

the rates actually paid by the 

[interactive] streaming services to the 

labels for sound recordings on both a 

per-play and a per-user basis.’’ Id. 

However, as Dr. Eisenach noted, these 

benchmark agreements related to a 

different right—the right to a license of 

sound recordings—not the right to 

license musical works broadly, or to the 

mechanical license more specifically. 

Thus, as with any benchmark that does 

not match-up with the target market in 

all respects, Dr. Eisenach examined how 

the rates set forth in the sound 

recording: interactive streaming 

benchmark agreements could be 

utilized. Id. More particularly, Dr. 

Eisenach posited that there may be a 

relationship—a ratio—between the 

sound recording royalty rate and the 

musical works royalty rate. To that end, 

he ‘‘examine[d] a variety of markets in 

which sound recording and musical 

works rights are both required in order 

to ascertain the relative value of the two 

rights as actually reflected in the 

marketplace.’’ Id. (emphasis added). 

Through this examination, Dr. 

Eisenach concluded that these proposed 

benchmarks ‘‘establish upper and lower 

bounds for the relative value of sound 

recording and musical works rights . . . 

estimate[d] to be between 1:1 and 

4.76:1.’’ Id. To make these ratios more 

instructive, I note that the inverse of 

these ratios (e.g., 1:4.76 instead of 

4.76:1) can be expressed as a percentage. 

Thus, the ratio of 1:4.76 is equivalent to 

a statement that musical works royalties 

equal 21% of sound recording royalties 

in agreements struck in the purported 

benchmark market. More obviously, the 

1:1 ratio means that, in agreements 

within that purported benchmark 

market, musical works royalties equal 

100% of sound recording rates. By 

converting the ratios into percentages, it 

becomes apparent that the high end of 

Dr. Eisenach’s benchmark range is 

almost five times as large as the low end 

of the range. 

b. Economic Relationship between 

Sound Recording and Musical Works 

Rights 

Dr. Eisenach testified that ‘‘[f]or music 

users that require both sound recording 

rights and musical works rights, the two 

sets of rights can be thought of in 

economic terms, as perfect complements 

in production: Without both inputs, 

output is zero.’’ Id. ¶ 76 (emphasis 

added). Dr. Eisenach also notes that, 

‘‘for interactive streaming services, the 

two categories of rights [sound 

recordings and musical works] are 

further divided into a reproduction 

license [i.e., the mechanical license] and 

a performance license. . . .’’ Id. (Thus, 

the mechanical license and the 

performance license likewise are perfect 

complements with each other and with 

the sound recording license.) 

Dr. Eisenach acknowledges that ‘‘[t]he 

relative value of sound recording [to] 

musical works licenses may depend on 

a variety of factors, and traditionally the 

relationship has differed across different 

types of services and situations.’’ Id. 

¶ 78. Dr. Eisenach eschewed 

unnecessary ‘‘assumptions, 

complexities and uncertainties 

associated with theoretical debates’’ as 

to why the particular existing market 

2002 Federal Register / Vol. 84, No. 24 / Tuesday, February 5, 2019 / Rules and Regulations 

289Lower percentages apply if the record 

companies’ revenue includes revenue to be ‘‘passed 

through’’ by them to pay mechanical license 

royalties. However, according to Dr. Eisenach, such 

‘‘pass throughs’’ are not typical. Id. ¶ 82 n.67. 

290Spotify was launched in the United States in 

the summer of 2011. 3/20/17 Tr.1778 (Page). 

291 I discuss the ‘‘shadow’’ argument supra. 

292 [REDACTED]; 4/7/2017 Tr. 5509 (Marx) 

(indicating most recent sound recording royalty 

payments equaled [REDACTED] % of revenue); 

Marx WDT ¶ 62 (‘‘In 2015, Spotify paid 

[REDACTED] % of its US gross revenue for sound 

recording royalties based on its negotiated rates 

with record labels summarizing Spotify’s rates 

under various agreements); see generally SJPFF ¶ 87 

([REDACTED]). 

293Again, I discussed the issue of the ‘‘shadow’’ 

of the statutory license supra. Suffice it to note here 

that the ‘‘shadow’’ of the statutory license does not 

‘‘shift’’ bargaining power so much as it eliminates 

unequal bargaining power. Although the interactive 

services have the legal right to refuse to license at 

rates set by the Judges (the legal compulsion 

operates only on the licensors), such refusal of the 

services to obtain licenses would shut them out of 

the interactive streaming market in which they have 

made substantial investments (unless they 

attempted to engage in piracy which certainly 

would be quickly shut down). So, it would be 

absurd for the services not to license at rates set in 

a section 115 proceeding. And, if they did so refuse, 

Copyright Owners could then attempt to move the 

listeners of the erstwhile interactive streaming 

service to other distribution channels such as 

purchased downloads and physical products, 

which they claim are sufficiently profitable for 

them and, they claim, have been cannibalized by 

interactive streaming. Or, as Copyright Owners 

indicate (as discussed supra), under the bargaining 

room approach, if the statutory rate was set too high 

for some services, Copyright Owners could 

negotiate lower rates, free of the statutory 

‘‘reasonableness’’ requirement, without regard to 

the four itemized objective in section 801(b)(1), and 

with the complementary oligopoly power to ‘‘hold 

out’’ and ‘‘walk away, or to threaten to do so, to 

obtain a higher rate than would be set under the 

statute. 

ratios existed. Id. ¶ 79. Rather, instead of 

‘‘put[ting] forward a general theory of 

relative valuation,’’ he found it 

‘‘sufficient . . . to assume that the 

relative values of the two rights should 

be stable across similar or identical 

market contexts.’’ Id. 

c. Dr. Eisenach’s Potential Benchmarks 

Dr. Eisenach considered a variety of 

benchmark categories in which the 

licensee was obligated to acquire 

licenses for musical works and licenses 

for sound recordings. His selection and 

consideration of each category of 

benchmark markets are itemized below. 

i. The Current Section 115 Statutory 

Rates 

The current statutory rate structure 

contains several alternate rates 

explicitly calculated as a percentage of 

payments made by interactive streaming 

services to the record companies for 

sound recording rights. As noted supra, 

such rates are identified in the industry 

as the ‘‘TCC’’ rates, the acronym for 

‘‘Total Content Cost.’’ Id. ¶ 82. In the 

Subpart B category, the TCC is 22% for 

ad-supported services and 21% for 

portable subscriptions. Id.; see also 37 

CFR 385.13(b)(2) and (c)(2).289 These 

percentage figures correspond to sound 

recording: musical works royalty ratios 

of 4.55:1 and 4.76:1, respectively. 

Dr. Eisenach notes that these statutory 

rates were not set by the Judges 

pursuant to a contested hearing, but 

rather (as noted supra) reflect two 

consecutive settlements (spanning 

approximately a decade), first in 2008 

and again in 2012. Id. ¶ 83. Dr. Eisenach 

discounts the value of these settlement 

rates for three reasons. First, he notes 

that they were established prior to the 

‘‘marketplace success’’ of Spotify in the 

interactive streaming industry.290

Second, he notes that the settlements, 

although voluntary, ‘‘were negotiated 

under the full shadow of the 

compulsory license.’’ 291 Third, he finds 

that, although the settlement 

incorporates rate prongs based on a 

percent of sound recording rates (the 

TCC prongs), those provisions are part 

of a ‘‘lesser of’’ segment of the rate 

structure, and thus capped by 

alternative per subscriber rates. Id. & 

n.70. Thus, Dr. Eisenach concludes: ‘‘In 

my opinion, the evidence . . . indicates 

that the relative valuation ratios implied 

by the current Section 115 compulsory 

license . . . represent an upper bound 

on the relative market valuations of the 

sound recording and musical works 

rights.’’ Id. ¶ 92 (emphasis added). (As 

an ‘‘upper bound,’’ these ratios would 

represent the lower bound of the 

reciprocal percentage of the value 

musical works rights relative to sound 

recording rights, again, 21% and 22%.) 

The 21% and 22% TCC rates within 

section 115 identified by Dr. Eisenach 

imply certain approximate percent-ofrevenue rates, i.e., percent of total 

service revenue (not percent of sound 

recording revenue). For example, if the 

sound recording royalty rate for 

interactive streaming is [REDACTED] 

%,292 then, using these section 115 TCC 

figures, the implied musical work 

royalty rate would be calculated as 

[REDACTED][ %, or [REDACTED] %. To 

take the low end of the range, if the 

sound recording royalty rate is 

[REDACTED] % then, applying these 

TCC figures, the implied musical work 

royalty rate would be calculated as 

[REDACTED] %, or [REDACTED] %. 

Again, because Dr. Eisenach opines that 

these are upper bounds on the relative 

market valuations,’’ that is the 

equivalent of opining that they 

represent the lower bound of a 

percentage-based royalty calculated via 

this ratio approach. 

ii. Direct Licenses between Parties 

Potentially Subject to a Section 115 

Compulsory License 

Dr. Eisenach also examined direct 

agreements between record companies 

and interactive streaming services that 

contain rates for sound recordings and 

mechanical royalties, respectively. See, 

e.g., id. ¶ ¶ at 84–91. In such cases, the 

ratio of sound recording:musical works 

royalties ranged tightly between 4.2:1 to 

4.76:1, closely tracking the regulatory 

ratios implicit in the section 115 TCC. 

Id. ¶ 92. (The 4.2:1 ratio equates to a 

TCC rate of 23.8%, and the 4.76:1 ratio 

equates to a mechanical rate of 21%.) 

According to Dr. Eisenach, the 

similarity of these direct contract rate 

ratios to the statutory ratios reflects the 

‘‘shadow of the statutory license,’’ by 

which direct negotiations between 

parties regarding rights that are subject 

to a statutory license are influenced by 

the presence of statutory compulsory 

rates and/or the prospect of a future rate 

proceeding. 4/4/17 Tr. 4591 (Eisenach) 

(‘‘The underlying problem with looking 

at an agreement negotiated under the 

shadow of a license’’ is that [i]t shifts 

bargaining power from the compelled 

party to the uncompelled party by the 

very nature of the exercise.’’).293

Given these limitations, Dr. Eisenach 

concluded, as he did with regard to the 

actual section 115 rates licenses, that 

‘‘[i]n my opinion, the evidence 

presented . . . indicates that the relative 

valuation ratios implied by the . . . 

negotiations under [the statutory] 

shadow—ranging from 4.2:1 [23.8%%] 

to 4.76:1[21%]—represent an upper 

bound on the relative market valuations 

of the sound recording and musical 

works rights.’’ Eisenach WDT ¶ 92 

(emphasis added). 

iii. Synchronization Agreements 

Synchronization (Synch) Agreements 

are license contracts between audiovideo producers, such as movie and 

television producers, with, respectively, 

music publishers and record companies, 

allowing for the use, respectively, of the 

musical works and the sound recordings 

in ‘‘timed synchronization’’ with the 

movie or television episode. See 

generally D. Passman, All you Need to 

Know about the Music Business 265 (9th 

ed. 2015). Dr. Eisenach found these 

Synch Agreements to be a mixed bag in 

terms of their value as a benchmark. On 

the one hand, he recognized that the 

licenses they conveyed ‘‘do not apply to 

music streaming services as such’’ but, 

on the other hand, they ‘‘are negotiated 

completely outside the shadow of the 

Federal Register / Vol. 84, No. 24 / Tuesday, February 5, 2019 / Rules and Regulations 2003 

294 Dr. Eisenach finds this 1:1 ratio to be present 

in the two types of Synch Agreements he identified. 

One version represents an agreement relating to a 

specific musical work and sound recording 

combination. The other version, a ‘‘Micro-Synch’’ 

Agreement, which he describes as ‘‘essentially 

‘blanket’ synch licenses, in that the license grants 

the right to synchronize not just one particular song 

. . . but any song in the publisher’s catalog (or a 

significant portion thereof). . . .’’ Eisenach WDT 

¶ 96. 

295Although Dr. Eisenach does not emphasize the 

following point, the actual percentages of revenue 

reflect that musical works royalties constitute only 

[REDACTED]% of total revenues in these YouTube 

agreements, [REDACTED]. Also, these data indicate 

that YouTube, as licensee, retains [REDACTED]% to 

[REDACTED]% of the total revenue attributable to 

these benchmark agreements, [REDACTED]. 

296Pandora was only a noninteractive service at 

that time, and only paid the performance right 

royalty, not the mechanical right royalty, for the 

right to use musical works. Because the parties 

agree that the performance right and the mechanical 

right are perfect complements, Pandora’s payments 

for the performance right are relevant and 

probative. 

compulsory license. . . . ’’ Id. ¶ 93. Dr. 

Eisenach notes, from his review of other 

testimony and an industry treatise, that 

these freely negotiated market 

agreements grant the musical 

composition royalty payments equal to 

the corresponding royalty paid for the 

sound recording,’’ id. ¶ ¶ 94–95 & nn.87, 

88, which is the equivalent of a 1:1 

sound recording:musical works ratio.294

Dr. Eisenach finds this 1:1 

relationship to be important benchmark 

evidence, concluding as follows: 

The synch and micro-sync examples confirm 

that in circumstances in which licensees 

require both sound recording and musical 

composition copyrights in order to offer their 

service, and where that service is not entitled 

to a compulsory license for either right, the 

sound recording rights and the musical 

composition rights are in many cases equally 

valued, that is, the ratio of the two values is 

1:1. 

Id. ¶ 98. 

iv. YouTube Agreements 

Dr. Eisenach also examined licenses 

between: (1) YouTube (owned by 

Google) and record companies; and (2) 

YouTube and music publishers, to 

determine their potential usefulness as 

benchmarks. [REDACTED]. For these 

reasons, Dr. Eisenach concluded that for 

purposes of assessing the relative value 

of the sound recording and musical 

works rights, the YouTube agreements 

represent reasonably comparable 

benchmarks. Id. 

In his original Written Direct 

Testimony, Dr. Eisenach relied upon 

seven agreements between YouTube and 

several music publishers pertaining to 

[REDACTED]. Id. ¶ 101 n.93. 

[REDACTED]. However, with regard to 

the revenue received by the record 

companies, Dr. Eisenach could only 

speculate based on public reports as to 

the percent of revenue received by the 

record companies for the sound 

recordings embedded in the posted 

YouTube videos. Id. ¶ 102. Thus, he was 

unable to make an informed argument 

in his original written testimony 

regarding the ratio of sound recording 

royalties:music publisher royalties in 

his YouTube [REDACTED]. 

However, after the Judges compelled 

Google to produce in discovery copies 

of the YouTube agreements with the 

record companies, Dr. Eisenach filed 

(with the Judges’ approval) 

Supplemental Written Rebuttal 

Testimony (SWRT) addressing these 

agreements. In that testimony, Dr. 

Eisenach examined [REDACTED]. 

Eisenach SWRT ¶ 6, and n. 5. Dr. 

Eisenach identified nine of these 

licenses specifically in his SWRT, and 

noted that YouTube paid to 

[REDACTED]—which Dr. Eisenach 

found to be the comparable YouTube 

category—whereas [REDACTED]. Id. 

and Table 1 therein. 

As Dr. Eisenach accurately calculated, 

the [REDACTED] revenue split reflects a 

ratio of [REDACTED], (a musical works 

rate equal to [REDACTED] % of the 

sound recording rate), whereas the 

[REDACTED] revenue split reflects a 

ratio of [REDACTED] (a musical works 

rate equal to [REDACTED] % of the 

sound recording rate).295

v. The Pandora ‘‘Opt-Out’’ Deals 

Dr. Eisenach also examined certain 

direct licensing agreements entered into 

between Pandora and major music 

publishers covering the period from 

2012 through 2018, to determine 

whether they constituted useful 

benchmarks in this proceeding. Id. 

¶ 103. Pandora had negotiated these 

direct agreements with major publishers 

for musical works rights after certain 

publishers had decided to ‘‘opt-out,’’ 

i.e., to withdraw their digital music 

performance rights from PROs, and 

asserted the right to negotiate directly 

with a digital streaming service. As Dr. 

Eisenach acknowledges, the music 

publishers’ legal right to withdraw these 

rights remained uncertain during an 

extended period. Pandora thus 

negotiated several such ‘‘Opt-Out’’ 

Agreements with an understanding that 

the rates contained in those direct 

agreements might not be subject to rate 

court review. 

Given this unique circumstance, and 

given that the markets and parties 

involved in the Pandora Opt-Out 

agreements are somewhat comparable to 

the markets and parties at issue in this 

proceeding,296 Dr. Eisenach concluded 

that these agreements provided 

‘‘significant insight into the relative 

value of the sound recording and 

musical works rights in this 

proceeding.’’ Id. (emphasis added). 

Dr. Eisenach compared the musical 

works rates in these ‘‘Opt-Out’’ 

agreements with the sound recording 

royalty rates paid by Pandora, which he 

obtained from the revenue disclosures 

in Pandora’s Form 10K filed with the 

SEC that provided royalties (‘‘Content 

Costs’’) as a percent of revenue, and he 

also relied on data contained in prior 

rate court decisions. Eisenach WDT 

¶ 125 & Table 6. With this data, he 

calculated that the ratio of sound 

recording: musical works royalties in 

existing agreements was [REDACTED] 

for 2018, i.e., the musical works rate 

equaled [REDACTED]% of sound 

recording royalties. This [REDACTED]% 

ratio would correspond to a mechanical 

rate of [REDACTED]%, assuming, 

arguendo, the sound recording rate is 

[REDACTED]%, or [REDACTED]% if the 

sound recording rate is [REDACTED]%. 

Dr. Eisenach also made a forecast, by 

which he linked the passage of time to 

an assumption that, after the rate court 

proceedings concluded, the parties, 

without any further legal uncertainty, 

would permanently be ‘‘permitted to 

negotiate freely outside of the control of 

the rate courts.’’ He made this 

estimation and forecast through a 

temporal linear regression, extrapolating 

from the prior [REDACTED] in these 

Pandora ‘‘opt out’’ musical works rates. 

See Eisenach WDT ¶ 129. Dr. Eisenach’s 

linear regression further [REDACTED] 

the ratio to [REDACTED], which would 

be equivalent to [REDACTED] the 

musical works rate, as a percentage of 

sound recording royalties, from the 

[REDACTED]% noted above for actual 

agreements in force in 2018 to 

[REDACTED]%. almost a [REDACTED] 

based on the extrapolation alone. Id. 

¶ ¶ 104; 128 & Table 8, Fig. 13. (This 

[REDACTED]% ratio would correspond 

to a musical works rate of 

[REDACTED]%. assuming the sound 

recording rate is [REDACTED]% and 

[REDACTED]% if the sound recording 

rate was [REDACTED]%.) 

d. Dr. Eisenach’s Two Methods for 

Estimating the Mechanical Rate 

Having calculated these five 

benchmarks, Dr. Eisenach applied them 

in two separate methods to estimate the 

mechanical rate to be adopted in this 

proceeding. 

i. Method #1 

Dr. Eisenach’s Method #1 for 

estimating the mechanical rate is based 

on the following premises: 

2004 Federal Register / Vol. 84, No. 24 / Tuesday, February 5, 2019 / Rules and Regulations 

297 Dr. Eisenach testified that [REDACTED]. 

1.The sound recording royalty paid by 

interactive streaming services is 

unregulated and thus negotiated in the 

marketplace. Eisenach WDT ¶ 16. 

2.The sound recording royalty paid by 

noninteractive services is regulated, but 

Dr, Eisenach find the royalties set by the 

Judges in Web III to reflect a market rate. 

4/4/17 Tr. 4643 (Eisenach); see also 

Eisenach WDT ¶ 136 and n.123. 

3. The interactive streaming services 

require a mechanical license (the license 

at issue in this proceeding), whereas the 

noninteractive services are not required 

to obtain a mechanical licenses. 

4. According to Dr. Eisenach, the 

difference between the rates paid by 

interactive services and noninteractive 

services for their respective sound 

recording licenses equals the value of 

the remaining license, i.e., the 

mechanical license. Id. ¶ 137 (‘‘[T]he 

difference between these two rights is 

akin to a ‘mechanical’ right for sound 

recordings, directly paralleling the 

mechanical right for musical works in 

this proceeding.’’). 

5.The mechanical rate implied by this 

difference in sound recording rates must 

be ‘‘adjust[ed] for the relative value of 

sound recordings [to] musical works’’ 

(as discussed supra). Id. ¶ 140. 

Dr. Eisenach combines these steps 

and expresses his Method #1 in the form 

of the following algebraic equation: 

MRMW = (SRIS¥SRNIS)/RVSR/MW, 

where 

MRMW = Mechanical Rate for Musical Works 

SRIS = Sound Recording Rate for Interactive 

Streaming (All In) 

SRNIS = Sound Recording Rate for NonInteractive Streaming (Performance 

Only) 

RVSR/MW = Relative Value of Sound 

Recording to Musical Works Rights. 

Eisenach WDT ¶ 140. 

Dr. Eisenach determined the per play 

rate paid by interactive services by 

identifying certain services, but 

[REDACTED], and ‘‘tally[ing] the total 

payments . . . and divid[ing] by the 

total number of interactive streams the 

service reports.’’ Id. ¶ 148. The average 

sound recording per play royalty 

calculated by Dr. Eisenach was 

$[REDACTED] ([REDACTED]). Id. Table 

11. 

Dr. Eisenach estimated the rate paid 

by noninteractive services for sound 

recordings at $0.0020 per play, or $0.20 

per 100 plays. He made this estimate by 

taking note of the various rates paid in 

2015 pursuant to the Judges’ Web III 

Determination and pursuant to the 

pureplay rates paid under an earlier 

settlement. Id. ¶ 136 & n.123. However, 

he candidly acknowledged that he 

found it ‘‘not possible to know the 

average amount paid by non-interactive 

webcasters,’’ and he acknowledged that 

the subsequent Web IV Determination 

had superseded those noninteractive 

sound recording rates. Id. at n. 123. 

His final inputs, discussed supra, are 

the several benchmark ratios of sound 

recording: musical works royalties in 

the markets that he had selected. 

After Dr. Eisenach inserted the 

foregoing data into the algebraic 

expression set forth above, he presented 

his data in the following tabular form: 

MUSICAL WORKS MECHANICAL PER 100 PLAYS RATE CALCULATION

[Method 1] 

(1) (2) (3) (4) (5) 

SRIS per 100 SRNIS per 100 Difference RVSR/MW MRMW per 100 

[REDACTED] .......................... $0.20 [REDACTED] ......................... 1:1 .......................................... [REDACTED] 

[REDACTED] .......................... 0.20 [REDACTED] ......................... [REDACTED] ......................... [REDACTED] 

[REDACTED] .......................... 0.20 [REDACTED] ......................... [REDACTED] ......................... [REDACTED] 

[REDACTED] .......................... 0.20 [REDACTED] ......................... [REDACTED] ......................... [REDACTED] 

[REDACTED] .......................... 0.20 [REDACTED] ......................... 4.76:1 ..................................... [REDACTED] 

See id. Table 12.297 Thus, applying 

his five potential benchmark ratios, Dr. 

Eisenach determined that the 

mechanical works royalty rate to be set 

in this proceeding ranged from 

$[REDACTED] per play to 

$[REDACTED] per play (dividing the 

figure in column (5) by 100 to reduce 

the rate from ‘‘per 100’’ to ‘‘per play’’). 

ii. Method #2 

Dr. Eisenach describes his Method #2 

as an alternative method of deriving a 

market-derived mechanical royalty. His 

Method #2 ‘‘derive[s] an all-in musical 

works value based on the relative value 

of sound recordings to musical works 

and then remove[s] the amount of 

public performance rights paid for 

musical works, leaving just the 

mechanical-only rate.’’ Id. ¶ 142. The 

algebraic expression for Method #2 is as 

follows: 

MRMW = (SRIS/RVSR/MW)¥PRMW, 

where PRMW is the public performance 

royalty rate for musical works, and the 

other variables are as defined and 

described in Method #1. 

Id. 

Dr. Eisenach calculates PRMW, as an 

average of $[REDACTED] per 100 plays 

for the licensees that he included in his 

data analysis. Id. ¶ 156, Table 13. 

Applying all the inputs across the 

various benchmark ratios, the results 

from Dr. Eisenach’s Method #2 can also 

be depicted in tabular form, as set forth 

below: 

MUSICAL WORKS MECHANICAL PER 100 PLAYS RATE CALCULATION

[Method 2] 

(1) (2) (3) = (2) 298

× (1) (4) (5) 

SRIS RVSR/MW Ratio Adj. (Avg.) PRMW MRMW

[REDACTED] ..................... 1:1 ..................................... [REDACTED] .................... [REDACTED] .................... [REDACTED] 

[REDACTED] ..................... [REDACTED] .................... [REDACTED] .................... [REDACTED] .................... [REDACTED] 

[REDACTED] ..................... [REDACTED] .................... [REDACTED] .................... [REDACTED] .................... [REDACTED] 

[REDACTED] ..................... [REDACTED] .................... [REDACTED] .................... [REDACTED] .................... [REDACTED] 

Federal Register / Vol. 84, No. 24 / Tuesday, February 5, 2019 / Rules and Regulations 2005 

298The ratio in column (2) is converted into its 

reciprocal percentage and the percentage is 

multiplied by the corresponding figure in column 

(1). For example, in the third row, the [REDACTED] 

ratio equals [REDACTED]%. When $[REDACTED] is 

multiplied by [REDACTED], the product is 

$[REDACTED] (rounded). 

299 Dr. Eisenach found these results to confirm the 

reasonableness of Copyright Owners’ per play rate 

proposal. However, because I reject a per-play rate 

structure, that point is not relevant to my Dissent. 

I further note that Dr. Eisenach also calculates a per 

user rate, using his Method #2. As he explains, 

‘‘this is accomplished by calculating all-in 

publisher royalties on a per user basis and 

subtracting the average effective per-user 

performance royalties to publishers, leaving an 

appropriate rate for mechanical royalties.’’ Id. ¶ 159. 

He finds that the sound recording rate per user is 

$[REDACTED] (the per user analog to [REDACTED] 

per 100 plays in his per play analysis). Applying 

the same ratios and utilizing similar market data as 

in his per play approach, Dr. Eisenach concludes 

that a ‘‘mechanical rate of between $[REDACTED] 

and $[REDACTED] per user reflects the range of 

relative values for sound recordings and musical 

works . . . .’’ Id. ¶ 165. Finally, he notes that, at 

the [REDACTED] ratio (his mid-point of the 

YouTube and Pandora benchmarks), the 

‘‘mechanical only’’ rate would be $[REDACTED] per 

user (even greater than the $1.06 per user rate 

proposed by Copyright Owners.) Id. Because I do 

not agree that Copyright Owners’ per-user proposal 

is appropriate (for the reasons discussed supra), this 

asserted confirmation of the reasonableness of 

Copyright Owners’ per-user proposal is unhelpful 

in the context of this Dissent. 

300 In Web IV, the Judges noted that, even in the 

willing buyer/willing seller context of 17 U.S.C. 

114(f)(2(B), all relevant authority required that 

those rates be reasonable, that is, they must reflect 

a market that is ‘‘effectively competitive’’ (i.e., 

‘‘workably’’ competitive, the economic analog to 

‘‘effectively’’ competitive.). See Web IV, supra, at 

26331–34 (noting the legal bases for an equivalence 

between effectively competitive and reasonable 

rates). (However, the rates in this proceeding are 

further subject to potential adjustment by 

application of the four itemized factors in section 

801(b)(1).). As the Judges noted in Web IV, ‘‘[a]n 

effectively competitive market is one in which 

supercompetitive prices or below-market prices 

cannot be extracted by sellers or buyers . . . .’’ Id. 

at 26331 (citation omitted). Because Dr. Eisenach’s 

approach intentionally incorporates sound 

recording market-based royalty rates into his ratios, 

those rates and the ratios in which they are inputs 

must be reduced to eliminate the supercompetitive 

effect of complementary oligopoly that is 

inconsistent with effective competition. 

301 Dr. Eisenach suggests that the entry of large 

‘‘ecosystem’’ firms, Amazon, Apple and Google into 

the interactive streaming market has tended to add 

‘‘bargaining power’’ to the licensee side of the 

Continued 

MUSICAL WORKS MECHANICAL PER 100 PLAYS RATE CALCULATION—Continued 

[Method 2] 

(1) (2) (3) = (2) 298

× (1) (4) (5) 

SRIS RVSR/MW Ratio Adj. (Avg.) PRMW MRMW

[REDACTED] ..................... 4.76:1 ................................ [REDACTED] .................... [REDACTED] .................... [REDACTED] 

See id., Table 14. 

In sum, after applying all of his 

potential benchmarks in both of his 

methods, Dr. Eisenach opined that ‘‘the 

YouTube and Pandora [Opt Out] 

agreements represent the most 

comparable and reliable benchmarks, 

implying ratios of [REDACTED] and 

[REDACTED], respectively, with a midpoint of [REDACTED].’’ Id. ¶ 130 (I note 

that converting these end-points and 

mid-point of his range to TCC 

percentages results in a range from 

[REDACTED]% to [REDACTED]% and a 

mid-point of [REDACTED]%.) 299

e. Criticisms and Analysis of Dr. 

Eisenach’s Benchmark Methods 

i. Dr. Eisenach’s Ratio of Sound 

Recordings: Musical Works 

Dr. Eisenach’s attempt to identify 

comparable benchmarks and 

corresponding ratios of sound recording 

rates to musical works rates appears to 

me to be a reasonable first step in 

seeking to identify usable benchmarks. 

That is, I find his basic conceptual 

approach—relying on empirics over 

abstract theory, viz., assuming that a 

tightly clustered set of ratios across 

several markets and discerning a central 

tendency from among them—could aid 

in the identification of the statutory 

rates. (As noted supra, Dr. Eisenach 

eschewed unnecessary ‘‘assumptions, 

complexities and uncertainties 

associated with theoretical debates’’ as 

to why the particular existing market 

ratios existed. Id. ¶ 79.) In this regard, I 

understand that Dr. Eisenach was 

following a well-acknowledged 

principle of economic analysis, 

articulated by the Nobel laureate 

economist Milton Friedman, who 

famously eschewed excessive theorizing 

that failed to match the predictive 

power of empirical analysis. See M. 

Friedman, The Methodology of Positive 

Economics, reprinted in D. Hausman, 

The Philosophy of Economics at 145, 

148–149 (3d ed. 2008). 

However, the data available to Dr. 

Eisenach did not demonstrate a 

sufficient cluster of similar ratios to 

establish a predictive ratio across the 

data set. That is, the problem does not 

lie in the analysis, but rather in the 

implications from the data regarding 

ratios of sound recording royalties to 

musical works royalties. The Services 

make this very criticism, noting the 

instability of the ratio across the several 

markets in which Dr. Eisenach 

identified potential benchmarks. See 

SJRPFF–CO at 182 (and record citations 

therein). Apple finds that the wide 

range of ratios is unsurprising, because 

Dr. Eisenach’s benchmarks do not relate 

to the same products and same uses of 

the two rights. Indeed, Apple’s 

[REDACTED], confirming, according to 

Apple, that there is no fundamental 

market ratio that can be applied in this 

proceeding. Dorn WRT ¶ ¶ 6, 24, 28–29. 

To be sure, this point does not go 

unnoticed by Dr. Eisenach, who focuses 

more on the royalty ratios arising from 

two potential benchmarks in the middle 

of his range—the Pandora ‘‘Opt-Out’’ 

agreements and the YouTube 

Agreements, discussed infra. 

The Services assert an additional and 

fundamental criticism of Dr. Eisenach’s 

approach. They note that his use of 

sound recording royalties paid by 

interactive services embeds within his 

analysis the inefficiently high rates that 

arise in that unregulated market through 

the complementary oligopoly structure 

of the sound recording industry and the 

Cournot Complements inefficiencies 

that arise in such a market. See Katz 

CWRT ¶ 56; Marx WRT ¶ ¶ 137–141. I 

agree with this criticism. Indeed, the 

Judges explained at length in Web IV 

how the complementary oligopoly 

nature of the sound recording market 

compromises the value of rates set 

therein as useful benchmarks for a 

market that is ‘‘effectively 

competitive.’’ 300 In Web IV, the Judges 

were provided with evidence of the 

ability of noninteractive services to steer 

some performances toward recordings 

licensed by record companies that 

agreed to lower rates in exchange for 

increased plays. Here, the Judges were 

not presented with such evidence, likely 

because an interactive streaming service 

needs to play any particular song 

whenever the listener seeks to access 

that song (that is the essence of an 

interactive service compared with a 

noninteractive service). Thus, the Judges 

have no direct evidence sufficient to 

apply a discount on the interactive 

sound recording rate to adjust that 

potential benchmark in order to fashion 

an effectively competitive rate.301

2006 Federal Register / Vol. 84, No. 24 / Tuesday, February 5, 2019 / Rules and Regulations 

market, obviating any concern over undue licensor 

power. Eisenach WRT ¶ 77. However, as indicated 

by the Shapley value analyses of Copyright Owners’ 

other economic expert witnesses, Professors Gans 

and Watt, bargaining power is a function of how 

many participants exist on one side of the market 

versus the other. See Gans WRT ¶ 55 (noting, 

without making any exception for these large 

entities, that ‘‘[s]ervices are substitutes for one 

another, providing rightsholders with a wide array 

of choices in their licensing decisions [and] this 

competition reduces individual services’ bargaining 

power.’’); Watt WRT ¶ 25 (‘‘[T]he different 

interactive streaming companies—Spotify, Apple 

Music, Rhapsody/Napster, Google Play Music, 

Amazon, etc.—do all compete (and rather fiercely) 

among themselves, offering very (perhaps perfectly) 

substitutable services.’’). That is, despite the overall 

size of Apple, Amazon and Google, in a market 

transaction, all licensors providing complementary 

‘‘must have’’ inputs will have a bargaining 

advantage, and they can refuse to license even to 

these large entities if the latter insist on too low a 

royalty, licensing instead to other interactive 

streaming services who can satisfy downstream 

market demand. In this regard, there is no evidence 

that [REDACTED]. 

302See the discussion infra regarding the 

importance of this qualifier in connection with 

Pandora’s Direct Licenses. 

303The Copyright Owners also rely on blanket 

(‘‘microsynch’’) licenses by which publishers grant 

their entire catalogs for use in synchronized audiovideo productions, and they also rely on synch 

licenses for mobile and video game applications. 

The Judges’ critique of synch licenses as 

benchmarks is equally applicable to these licenses. 

Thus, the sound recording royalties 

relied upon by Dr. Eisenach likely are 

too high and would need to be adjusted 

to reflect reasonable rates derived from 

a market that is effectively competitive. 

However, because there is no record 

evidence in this proceeding allowing for 

an estimate of the adjustment, I can find 

only that Dr. Eisenach’s ratios are too 

high to the extent they incorporate the 

royalty rates derived from the sound 

recording market. 

ii. Dr. Eisenach’s Specific Benchmarks 

Section 115 Benchmark 

The Services assert that Dr. Eisenach’s 

calculation of a section 115 ‘‘valuation 

ratio’’ of 4.76:1 is incomplete, because 

he limited this statutory ratio to the 

21% and 22% TCC prongs. They note 

that under the percentage-of-revenue 

prong of section 115 (10.5%), this 

statutorily-derived ratio would have 

ranged between 5:1 and 6:1, see 4/5/17 

Tr. 5152 (Leonard), implying a musical 

works rate equal to only 16.67% to 20% 

of sound recording royalty rates. I agree 

that Dr. Eisenach’s statutory 

benchmarks would have been more 

comprehensive if he had included the 

‘‘valuation ratios’’ derived from this 

headline prong of the present royalty 

rate structure. However, the Services’ 

focus on that lower implied TCC fails to 

recognize the greater-of rate structure 

(with a lesser-of second prong) to which 

the parties agree. The purpose of the 

explicit TCC levels was that they could 

trigger if greater than the 10.5% rate and 

the implicit TCC that could be derived 

from that rate. Accordingly, I find that 

the fact that the existing rate structure, 

on which the Services rely in this 

proceeding, includes the potential use 

of the 21% and 22% prongs, 

demonstrates the usefulness of this 

benchmark as a representation of a rate 

that the licensors have agreed to accept, 

given the provisions of section 115. 

Direct Licenses 

The Services disagree with Dr. 

Eisenach’s minimization of the 

relevance of this benchmark category. 

They argue that the direct licenses 

between interactive services and music 

publishers ‘‘are by far the most directly 

apposite benchmarks used in Dr. 

Eisenach’s analysis,’’ because they, like 

the section 115 rates and terms 

themselves, possess the characteristics 

of a useful benchmark in that they are: 

(1) voluntary; (2) concern the same 

licensors/publisher; (3) negotiated in the 

same market; and (4) pertain to the same 

rights. See Katz WDT ¶ ¶ 97–113; 

Leonard AWDT ¶ ¶ 51–76. 

I find that direct licenses that meet 

the foregoing criteria are at as least as 

useful as the section 115 benchmark 

itself, provided those licenses do not 

include additional rights whose values 

have not been adequately isolated from 

the particular mechanical license at 

issue in this proceeding.302 The socalled ‘‘shadow’’ of section 115 provides 

a default rate for the licensing parties, 

so direct licenses that deviate in some 

manner from the rates in the statutory 

license reveal a preference for other 

rates and terms that, at least marginally, 

are below the statutory rate. (If in the 

direct negotiations the licensors insisted 

on rates above the statutory rates, a 

licensee would simply reject the 

demand and default to the statutory 

rate.) Thus, as the services note, these 

benchmarks are useful, because ‘‘these 

agreements . . . were voluntarily 

entered both in 2008 and 2012, by the 

very same publishers in the same 

markets and for the same rights . . . .’’ 

SJPFF ¶ 261 (and record citations 

therein). More generally, as described 

supra, I find that the so-called 

‘‘shadow’’ of the statutory license on a 

benchmark not only does not disqualify 

that benchmark as useful evidence, but 

rather serves to eliminate licensor ‘‘hold 

out’’ power, making the resulting rate 

more reasonable and more reflective of 

an effectively competitive rate 

Synchronization Licenses 

The Services also take issue with Dr. 

Eisenach’s inclusion of synchronization 

licenses in his collection of benchmarks. 

See, e.g., Leonard WRT ¶ ¶ 37–40 

(testifying that synchronization licenses 

are not comparable for interactive 

streaming licenses because 

synchronization differs in important 

economic respects from streaming); 

Hubbard WRT ¶ ¶ 6.31–6.32 (testifying 

on various ‘‘economic characteristics of 

synch licenses, that render the ratio 

between sound recording royalties and 

musical works royalties different 

between synch and interactive 

streaming services’’); Marx WRT 

¶ ¶ 148–151 (‘‘Synch royalty rates are a 

poor benchmark for streaming royalty 

rates’’). Indeed, even Dr. Eisenach 

acknowledged that, at best, the low ratio 

in the synch licenses indicates an 

unusually high musical works royalty 

rate among his collection of 

benchmarks. 4/4/17 Tr. 4671, 4799 

(Eisenach); Eisenach WDT App. A–9. 

In a prior proceeding, the Judges 

rejected the synch license benchmark as 

useful ‘‘[b]ecause of the large degree of 

its incomparability.’’ See Phonorecords 

I, 74 FR at 4519. I find that nothing in 

the present record supports a departure 

from that prior finding. The lack of 

comparability remains present because 

the synchronization market differs in 

important economic respects from the 

streaming market. See Leonard WRT 

¶ 39. Because synch rights pertain to 

media such as music used in films or in 

television episodes,303 the historically 

equal valuation of publishing rights and 

sound recording rights arises from the 

particular conditions faced in those 

industries. Id. Movie and television 

producers may have a certain musical 

work in mind as a good fit for a 

particular scene in the film. Id. 

However, these producers have the 

option of making their own sound 

recording of that musical work, and for 

this reason, ‘‘cover’’ songs are quite 

common in films. Id.; see also Marx 

WRT ¶ 149 (‘‘Both film and television 

production companies have the option 

of recording their own versions of songs, 

rather than paying royalties to use a prerecorded song. . . . . This option gives 

the users of synch rights, such as movie 

producers, more bargaining power 

relative to the labels than would be the 

case with streaming services.’’). Thus, 

the contribution to value of the sound 

recording is less vis-a`-vis the musical 

work in the synch market. Leonard WRT 

¶ 39. 

Additionally, in the case of 

synchronization rights, the marketplace 

for sound recording rights is more 

competitive than other music licensing 

contexts because individual sound 

Federal Register / Vol. 84, No. 24 / Tuesday, February 5, 2019 / Rules and Regulations 2007 

304 I take note of Dr. Eisenach’s criticism of the 

[REDACTED] publishing rates as constrained by the 

‘‘shadow’’ of the section 115 license. However, as 

explained elsewhere in this Dissent, I find the 

‘‘shadow’’ of the section 115 statutory license to be 

beneficial in establishing rates that reflect the 

workings of an effectively competitive market. 

305Pandora’s status as a purely noninteractive 

service prior to 2018 does not impact the relevancy 

of this benchmark, because: (1) noninteractive and 

interactive services both pay performance royalties; 

(2) noninteractive services do not pay mechanical 

royalties; and (3) the performance license and the 

mechanical license are perfect complements. 

recordings (and thus the musical works 

within them) compete against one 

another for inclusion in the final 

product (e.g., a movie or television 

episode). By contrast, in the interactive 

streaming market, services must build a 

catalog of sound recordings and their 

included musical works, so that many 

works can be streamed to listeners. Id. 

That is, in the interactive streaming 

market, the sound recordings (and their 

embodied musical works) are ‘‘must 

have’’ complements, not in competition 

with each other. However, in the synch 

market the potential sound recordings of 

any given musical work identified by 

the movie or television producer is a 

substitute good, in competition with any 

other existing or future cover sound 

recording of the same musical work for 

inclusion in the movie or television 

show. 

YouTube Agreements 

I agree with Copyright Owners that 

YouTube is a competitor vis-a-vis the 

interactive streaming services. Indeed, 

the Services acknowledge this point. 

[REDACTED]. Page WDT ¶ ¶ 47, 53, 55; 

see also (Eisenach) WRT ¶ 59. In like 

fashion, Professor Marx testified that 

[REDACTED]. Marx WDT ¶ 44 n.54. 

Accordingly, at least one form of 

YouTube Agreement would likely be 

somewhat comparable to the interactive 

streaming market. 

As noted supra, Dr. Eisenach selected 

for input into his ratio the YouTube 

agreements and rates pertaining to 

[REDACTED]. See SJRPFF–CO at 187– 

89 (and record citations therein). 

I agree that the inclusion of a video 

component in the YouTube product 

renders less useful as a benchmark the 

agreements relating to ‘‘User Videos 

with Commercial Sound Recordings.’’ 

Further, as Dr. Eisenach acknowledges, 

these YouTube audio/video 

combinations also provide for 

synchronization rights, see Eisenach 

WDT ¶ 100, and this addition of yet 

another right in the licenses further 

muddies the comparability of a 

YouTube benchmark. 

The Services further maintain that— 

assuming arguendo any YouTube 

licenses are appropriate benchmarks— 

Dr. Eisenach should have relied on a 

different category of YouTube licenses 

for his benchmark analysis. Specifically, 

they maintain that the more appropriate 

YouTube benchmark ratio would 

compare the contractual provisions 

between YouTube and publishers, and 

YouTube and record companies, for 

[REDACTED]. 

I agree with the Services in this 

regard. [REDACTED].304

Under the [REDACTED] contract 

provisions (i.e., the [REDACTED] 

provisions) governing YouTube’s 

agreements with [REDACTED]. See 

Professor Katz’s Supplemental Written 

Rebuttal (Katz SWRT) ¶ ¶ 13(b) n.26 and 

13(e) n. 29 (and contracts referenced 

therein). [REDACTED], the sound 

recording copyright owner receives a 

royalty of [REDACTED]% of revenue, 

compared with the [REDACTED] 

received by music publishers. Id. 

¶ ¶ 13(h) n. 32 and (k) n.35 (and 

contracts referenced therein). 

Thus, under the [REDACTED] deals, 

the royalty ratio is [REDACTED], which 

equals 4.76:1. In turn, that ratio implies 

a TCC musical works rate of 

[REDACTED]%. Under the [REDACTED] 

deals, the royalty ratio is [REDACTED], 

which equals [REDACTED], which 

implies a TCC musical works rate of 

[REDACTED]%. I find that these ratios 

and implied percentages derived from 

YouTube’s [REDACTED] royalty rates to 

be usable benchmarks in this 

proceeding. 

Pandora ‘‘Opt-Out’’ Agreements 

Together with his YouTube 

benchmark, Dr. Eisenach finds the 

Pandora ‘‘Opt-Out’’ agreements to be the 

most useful among the several potential 

benchmarks he examined. I agree with 

Dr. Eisenach that the Pandora ‘‘OptOut’’ agreements have a degree of 

comparability sufficient to render them 

usable as benchmarks. 

However, I do not agree with Dr. 

Eisenach’s attempt to extrapolate into 

the future from the actual rates in those 

Opt-Out Agreements. Rather, I find that 

the [REDACTED] ratio that Dr. Eisenach 

identified for the year 2018 derived 

from existing agreements is the most 

useful benchmark derived from the 

‘‘Opt-Out’’ data. See Eisenach WDT 

¶ 104. The Services concur with Dr. 

Eisenach with regard to the existence of 

this [REDACTED] ratio, and they further 

note that Pandora’s most recent direct 

license agreements during the ‘‘OptOut’’ period with the publishers (who 

control many of the works underlying 

sound recordings performed by 

Pandora) provide that publisher 

royalties will be determined as 

[REDACTED].305 Specifically, these 

agreements resulted in a shift of the 

sound recording: musical works ratio to 

[REDACTED], implying a musical works 

TCC percentage of [REDACTED]%. See 

Katz CWRT ¶ ¶ 101–104; Herring WRT 

¶ ¶ 28–29. 

I reject Dr. Eisenach’s identification of 

a trend in the [REDACTED]. His change 

in the ratio to [REDACTED] was driven 

by expectations regarding the likelihood 

of an uncertain change in the legal 

landscape regarding publisher 

withdrawals from performing rights 

organizations. However, changes in 

such uncertainties are not well-captured 

by mapping them over a time horizon. 

Moreover, as the Services note, and as 

Dr. Eisenach concurs, even assuming 

arguendo such a change in relative 

uncertainty could be captured in a 

regression, other regression forms, such 

as a quadratic form, could have been 

used to demonstrate not a [REDACTED], 

but rather a return of the ratio to its 

prior level (an equally plausible future 

event). See 4/5/17 Tr. 495963 (Katz); 

Katz CWRT ¶ ¶ 104–107, Table 1,F; 

4/4/17 Tr. 4807–08 (Eisenach) (noting 

his linear form of regression was not 

‘‘material’’). 

Moreover, the assumption behind Dr. 

Eisenach’s regression was not borne out. 

In 2015, the Second Circuit Court of 

Appeals affirmed a 2014 decision by the 

Southern District of New York, 

prohibiting such partial withdrawals. In 

re Pandora Media, Inc. v. ASCAP, 785 

F.3d 73, 77–78 (2d Cir. 2015), aff’g In re 

Pandora Media, 6 F. Supp. 3d 317, 322 

(S.D.N.Y. 2014). Subsequently, in 

August, 2016, the Department of Justice 

issued a statement announcing that, 

consistent with these judicial decisions, 

it would not permit such partial 

withdrawals under the existing consent 

decrees. See Eisenach WDT ¶ 114 & n. 

109 therein. In fact, as indicated supra, 

there were actual Pandora ‘‘Opt-Out’’ 

agreements that set rates through 2018 

that established a sound 

recording:musical works ratio of 

[REDACTED], that Dr. Eisenach chose to 

disregard in favor of his extrapolated 

lower ratio. See Katz CWRT ¶ 103; 

Herring WRT ¶ 28. 

iii. Dr. Eisenach’s Per Play Sound 

Recording Rate 

I also have difficulty relying on the 

data set which Dr. Eisenach developed 

for his estimation of a $[REDACTED] 

per play sound recording royalty rate, to 

which he applied the several benchmark 

ratios. The principal problems with this 

2008 Federal Register / Vol. 84, No. 24 / Tuesday, February 5, 2019 / Rules and Regulations 

306 In the parlance of platform economics, and as 

noted supra, Spotify’s ad-supported service 

provides a multi-platform approach, in which 

listeners, advertisers, sound recording rights 

holders and musical works holders all combine to 

obtain revenue based on the mutual values each 

brings to that platform. See 3/21/17 Tr. 2013 (Marx). 

307Copyright Owners belatedly propose that—if 

the Judges intend to include the Spotify adsupported service in the rate structure and rate 

calculations—that they establish (1) separate rates 

for ad-supported services that are not incorporated 

into the calculation of rates set for other services; 

and (2) separate terms for an ad-supported service 

that limit the functionality of such a service to 

avoid potential cannibalization of services paying 

higher royalties. COPCOL ¶ 228 & n.34. This 

argument is a tacit acknowledgement by Copyright 

Owners that a segmented market may require a 

differentiated rate structure (even as they 

strenuously dispute the appropriateness of such a 

structure). Such a post-hearing argument is ‘‘too 

little, too late.’’ If Copyright Owners wanted to 

argue in the alternative in this manner, they needed 

to do so during the hearing, and support their 

arguments for limited ad-supported functionality 

and segmented rates with testimony and evidence. 

As I noted supra, the Judges ‘choices were limited 

to the rate structures proffered by the parties, or 

reasonably suggested by the evidence; a different 

structure, if proffered or suggested by the evidence, 

might have been preferable, but it had to be 

supported by record evidence. In any event, the rate 

structure I adopt in this Dissent does not simply 

average Spotify’s lower effective per-unit rate into 

an overall rate, because the I am adopting a 

differentiated rate structure that continues to treat 

the ad-supported market segment separately, 

reflecting the presence of a market segment with a 

lower WTP. Startlingly, the majority adopts this 

reasoning wholesale in the Majority Opinion, 

foreclosing Copyright Owners’ argument. So, 

although the majority agrees that Copyright Owners 

could not propose a new rate structure post-hearing, 

the majority gives itself a free pass to do the same, 

even though the harm to the parties is identical in 

either case—they are deprived of the opportunity to 

challenge the post-hearing creation. 

308Another alternative marketing approach 

would be the offering of free trial subscriptions. 

However, there was no testimony as to whether free 

trials would better monetize listening than the 

freemium model used by Spotify. In fact, Spotify’s 

CFO, Mr. McCarthy testified that, [REDACTED]. 

3/21/17 Tr. 2113–2115 (McCarthy). See also COPFF 

¶ 369. 

data is that it covered a non-random 

sample of only approximately 15% of 

all interactive plays, excluding in 

particular plays on [REDACTED] adsupported services and Apple’s 

interactive streaming service. Inclusion 

of [REDACTED] would have 

[REDACTED] his per play rate from 

$[REDACTED] to $[REDACTED] 

(Inclusion of [REDACTED] would have 

[REDACTED] the $[REDACTED] 

estimate to $[REDACTED].) SJRPFF–CO 

at 158–59 (and record citations therein). 

Dr. Eisenach explained that he 

restricted his data sample purposefully. 

He decided to omit several sound 

recording labels because they 

[REDACTED], which he asserted 

[REDACTED]. Eisenach WDT ¶ 150. I 

acknowledge Dr. Eisenach’s assertion 

that this fact could have an impact, on 

the margin, of driving [REDACTED] the 

royalties paid by [REDACTED] to those 

labels. However, the evidence does not 

bear that out, because [REDACTED]. 

More particularly, the [REDACTED] 

contract with record labels that Dr. 

Eisenach reviewed show [REDACTED]. 

4/4/17 Tr. 4739–53 (Eisenach); see also, 

e.g. Trial Ex. 2760 ([REDACTED]); Trial 

Ex. 2765 ([REDACTED]). [REDACTED]. 

With regard to Dr. Eisenach’s specific 

omission of data from Spotify’s adsupported service, Copyright Owners 

make additional arguments. They claim 

that the ad-supported service does not 

reflect the actual value of the sound 

recordings, because that tier acts as a 

funnel to draw listeners to the 

subscription service. Therefore, 

Copyright Owners maintain, the adsupported service is essentially a lossleader, with the difference between the 

higher effective per play rates for 

subscription services and the lower 

effective per play rates for the adsupported services more in the nature of 

a marketing expense that should not be 

deducted from Dr. Eisenach’s royalty 

calculations. See Eisenach WDT ¶ 148 

n.127. 

However, that analysis omits several 

important facts. First, as Mr. McCarthy, 

Spotify’s CFO testified, [REDACTED]. 

3/21/17 Tr. 2058–59 (McCarthy) 

([REDACTED]). Second, he notes that 

[REDACTED]% of Spotify’s paid 

subscribers in the United States were 

previously such engaged users of the adsupported service. McCarthy WRT ¶ 22; 

see also 3/21/17 Tr. 2059 (McCarthy). 

Third, Mr. McCarthy testified that the 

ad-supported tier [REDACTED]. See 

3/21/17 Tr. 2059 (McCarthy) 

([REDACTED]). 

Notwithstanding the marketing value 

of the freemium model, it must be 

remembered that [REDACTED]. These 

listeners, and the advertising revenue 

they generate, are real and reflect the 

WTP of a large swath of interactive 

listeners.306 See Marx WRT ¶ 115–16 & 

Fig. 9 (‘‘While I agree that one aspect of 

the ad-supported service is to provide 

an on-ramp to paid services, it also has 

another important aspect, namely to 

serve low WTP customers . . . . 

Copyright Owners’ economists err in not 

calculating the impact of the Copyright 

Owners’ proposal on ad-supported 

services. Ad-supported services 

currently make up [REDACTED] in the 

industry.’’) I agree with this point, and 

I therefore agree with the Services that 

Copyright Owners erred in their 

decision to exclude Spotify data from 

their analyses.307

I also disagree with Copyright 

Owners’ suggestion that the adsupported service deprives them of 

higher royalties from subscribers. 

Although ad-supported services identify 

future subscribers, until those 

subscribers are identified, they are not 

subscribers. In that sense, ad-supported 

services indeed are marketing tools, but 

they do not reduce present royalties 

because the future subscribers have not 

yet been identified. By using adsupported services, Spotify certainly 

does avoid hard marketing costs that 

would be incurred through, for example, 

paid advertising to convince nonsubscribers to subscribe. However, there 

is no record evidence that this hard cost 

saving translates directly into lost 

royalty revenue to Copyright Owners. 

Apparently, Copyright Owners argue 

that their loss is in the form of an 

opportunity cost, losing the opportunity 

to obtain subscription-level royalties 

from the ad-supported listeners. But if 

Spotify paid subscription-level royalties 

for all ad-supported listeners, it would 

be paying an implicit marketing cost 

that inefficiently was wasted on the 

[REDACTED].308

In this regard, it is important to 

remember that, as discussed supra, 

music is an ‘‘experiential’’ good. See 

Byun, supra, at 23. Thus, provision of a 

monetarily ‘‘free-to-the user’’ service is 

a reasonable marketing tool, and the 

Judges are loath to second-guess the 

business model incorporating that 

marketing approach, especially after it 

has proven successful while still 

providing royalties to rights owners. See 

Page WDT ¶ 27 (Spotify’s freemium 

model monetizes through subscriptions 

more successfully than the sale of 

downloads and CDs, as well as 

terrestrial radio and, of course, piracy). 

d. Service’s Criticisms and Judicial 

Analysis of Dr. Eisenach’s Method #1 

The Services criticize Dr. Eisenach’s 

Method #1 calculation as being based 

upon the incorrect assumption that the 

entire difference between interactive 

and noninteractive rates must be 

attributed to the mechanical license 

right. As the Services properly note, 

there are several reasons, all unrelated 

to the mechanical right and license, why 

interactive rates are higher than 

noninteractive rates for musical works 

performance rights. Leonard WRT ¶ 55; 

Katz CWRT ¶ ¶ 117–118; Hubbard WRT 

¶ 6.4; 4/5/17 Tr. 4972–74 (Katz). First, 

Dr. Eisenach’s Method #1 did not 

account for the presence of the 

ephemeral right in licensing 

noninteractive streaming (discussed 

supra), which accounts for 5% of the 

noninteractive rate. 4/4/17 Tr. 4851–52 

(Eisenach); see also 4/5/17 Tr. 5159– 

5161 (Leonard) (discussing how Dr. 

Eisenach’s analysis does not consider 

Federal Register / Vol. 84, No. 24 / Tuesday, February 5, 2019 / Rules and Regulations 2009 

the ephemeral right); Leonard WRT 

¶ ¶ 55–56. Second, there is a difference 

in the performance rights royalty rates 

charged by PROs to interactive and 

noninteractive services that is not 

captured by Method #1. See, e.g., In re 

Petition of Pandora Media, Inc., 6 F. 

Supp. 3d at 330 (ASCAP charges 

different royalty rates for performance 

rights depending on whether the service 

is non-interactive or interactive). Had 

Dr. Eisenach considered these factors, 

he might well have estimated a 

mechanical rate significantly less than 

the rates he derived, even using his 

‘‘valuation ratios.’’ See Katz CWRT 

¶ 122. 

The Services also note the impact in 

Method #1 of Dr. Eisenach’s decision to 

[REDACTED] from his modeling. As the 

Services note, adding [REDACTED] to 

Dr. Eisenach’s effective per play rate for 

sound recording results in a per rate of 

$[REDACTED]. See 4/4/17 Tr. 4771–74 

(Eisenach). Further, the Services note 

that, by introducing the unregulated 

sound recording rates in his ratio, Dr. 

Eisenach has imported the 

complementary oligopoly (Cournot 

Complements) power associated with 

those rates, as noted in Web IV. See Katz 

CWRT ¶ 56; Marx WRT ¶ ¶ 137, 141. 

Combining all of the foregoing 

criticisms, the Services conclude as 

follows: 

If one were to use $[REDACTED] per 

hundred plays for the sound recording rate 

([REDACTED]) (id. at 4771:10–4774:5), 

reduce that by 12% as the Board did in Web 

IV for complementary oligopoly power, 

increase the $0.20 per hundred plays Dr. 

Eisenach uses for musical works performance 

rights by 60% to account for the difference 

in ASCAP rates identified by Judge Cote [in 

the rate court], and then apply Dr. Eisenach’s 

invalid ‘‘valuation ratio’’ of [REDACTED], the 

result would be $[REDACTED] per hundred 

plays [$[REDACTED] per play], way below 

the $0.15 per hundred plays rate [$0.0015 per 

play] that Dr. Eisenach attempts to validate. 

SJPFF ¶ 279 (and record citations 

therein). Thus, the foregoing criticisms 

would reduce Copyright Owners’ 

benchmark by 80%. 

I agree with the Services that Method 

#1 does not provide a useful benchmark 

in this proceeding. As noted supra, and 

most importantly, the absence of 

interactive streaming data from Spotify 

is a critical omission. The fact that 

much of that data relates to adsupported services with a limited 

functionality does not justify removing 

that data from a market analysis, 

because that service is a part of the 

market. In fact, Copyright Owners 

argument proves too much. That is, 

their willingness to distinguish and 

isolate the Spotify ad-supported service 

and related data in this manner only 

underscores the need for a 

differentiated/price discriminatory rate 

structure, such as proposed by this 

Dissent. 

Also, I agree that Dr. Eisenach’s 

analysis imports the complementary 

oligopoly power of the sound recording 

companies. Although (as also noted 

supra) I do not think that the Judges 

could simply import the 12% steering 

adjustment from Web IV to calculate 

this effect (because the 12% was a 

function of evidence specific to that 

proceeding), it is clear that any 

benchmark approach should adjust 

downward a rate inflated by the 

presence of complementary oligopoly in 

the benchmark market. 

And to reiterate, although the Services 

utilize Dr. Eisenach’s [REDACTED] ratio 

(implying a TCC of [REDACTED]%) to 

illustrate the impact of their other 

criticisms, I find that ratio to be much 

lower than what can reasonably be 

gleaned from Dr. Eisenach’s 

benchmarks. As indicate supra, the 

most usable benchmark information 

from Dr. Eisenach’s approach are the 

YouTube [REDACTED] ratio, and the 

Pandora ‘‘Opt-Out’’ ratio from actual 

agreements, which imply a TCC 

between [REDACTED]% and 

[REDACTED]%. 

e. Services’ Criticisms and Judicial 

Analysis of Dr. Eisenach’s Method #2 

The Services criticize Dr. Eisenach’s 

Method #2 principally for the same 

reason they criticize his Method #1, viz., 

his use of a ratio that embodies 

inapposite sound recording data. They 

also emphasize the import of his 

decision to omit Spotify’s sound 

recording data from his Method #2 

calculations. At the hearing, Dr. 

Eisenach acknowledged the significance 

impact of this omission, but he 

defended the omission as virtue rather 

than vice, because of the starkly 

different manner in which Spotify 

monetizes its ad-supported service. He 

testified that, had he incorporated all of 

Spotify’s sound recording data in 

estimating a current industrywide 

monthly per user charge, he would have 

calculated a monthly per user sound 

recording rate of $[REDACTED] per 

month, rather than the $[REDACTED] 

rate he determined when excluding 

[REDACTED] data. 4/4/17 Tr. 4825–28 

(Eisenach). 

In addition, the Services assert that 

Method #2 is faulty because of Dr. 

Eisenach’s use of the rate court 

performance royalty rates that he 

subtracts from his ratio-derived musical 

works rate to identify an implied 

mechanical works rate. More 

specifically, the Services assert that Dr. 

Eisenach’s willingness to use the rate 

courts’ performance rates is inconsistent 

with his broader claim that musical 

works rates have been artificially 

reduced below market rates. For 

example, when identifying benchmarks, 

Dr. Eisenach relies on the non-rate court 

performance rights paid by Pandora in 

the Opt-Out agreements precisely 

because they represent, in his opinion, 

market-based rates untainted by the 

depressing effects of the rate court. See 

Eisenach WDT ¶ ¶ 106–110, 4/4/17 Tr. 

4805, 4821–23. (Eisenach). According to 

the Services, to be consistent, Dr. 

Eisenach should have increased the rate 

court levels to reflect what he 

understood to be market rates. Such 

consistency, they assert, would make 

the subtracted rate in the Method #2 

formula larger, and the difference— 

which is Dr. Eisenach’s mechanical 

rate—smaller. 

Finally, the Services criticize Dr. 

Eisenach’s Method #2 calculations 

because they exclude not only 

significant sound recording data, but 

also the performance royalty data for 

Amazon, Apple, Google, and Spotify. 

Accordingly, Method #2 accounts for 

only 13 percent of total interactive 

service revenues in 2015. See Katz 

CWRT ¶ 124. 

I agree with the Services that Method 

#2 does not contain sufficient 

industrywide performance royalty and 

sound recording data to provide a 

meaningful analysis for determining a 

per-user monthly mechanical works 

royalty. I am also troubled by the 

apparent inconsistent use of rate court 

established rates in Method #2, when 

Dr. Eisenach had indicated in other 

contexts that rates unshackled from rate 

court decisions provide a truer 

indication of market rates. 

More broadly, I understand that Dr. 

Eisenach omitted [REDACTED] because 

of [REDACTED], which is [REDACTED]. 

I recognize that combining [REDACTED] 

user data with other interactive 

streaming services’ data [REDACTED]. 

See CORPFF–JS at pp. 183–184 (noting 

what Copyright owners describe as 

‘‘[t]he profound impropriety of 

[REDACTED] into Copyright Owners’ 

benchmarking and calculations.) 

Once again, though, that seeming 

anomaly actually underscores why I 

find the differentiated rate structure in 

the 2012 benchmark to be appropriate. 

The royalty rates paid by all services 

should be reflective of the differentiated 

WTP of their listeners (for the reasons 

discussed supra). That is, the same 

reason why Dr. Eisenach elected not to 

lump Spotify with other services in his 

calculations incorporated into Copyright 

2010 Federal Register / Vol. 84, No. 24 / Tuesday, February 5, 2019 / Rules and Regulations 

309The following analysis does not address the 

direct deals entered into by Pandora, cited by 

Professor Katz in his testimony. He candidly 

acknowledged that the probative value of these 

agreements was weakened by the fact that they 

included rates for other tiers of service, including 

noninteractive service, and he had not given 

consideration to how the bargaining and setting of 

each rate in each tier might be interrelated. See Katz 

WDT ¶ 105 (‘‘The simultaneous agreement with 

respect to multiple services can cloud the 

interpretation of any given number in a contract 

because the rates are negotiated as a package.’’). I 

agree with Professor Katz and, for this reason, I 

place no weight on those direct Pandora 

agreements. 

310This point is not made to be critical of Dr. 

Eisenach’s approach, but rather to show that the 

Services’ reliance on the 2012 settlement as a 

benchmark shares this similar analytical 

characteristic, typical and appropriate for the 

benchmarking method in general. 

Owners’ ‘‘one size fits all’’ rate 

structure. Indeed, the anomalous nature 

of Spotify’s monetization of the 

downstream market underscores why 

‘‘one size does not fit all,’’ and why the 

2012 rate structure therefore is 

preferable (and why Copyright Owners 

made the post-hearing argument for a 

separate rate structure, with separate 

terms, for ad-supported services, as 

discussed supra). 

f. Conclusion 

For the reasons set forth above, I 

would not adopt Dr. Eisenach’s 

proposed benchmark rates as the 

mechanical rates for the upcoming rate 

period. However, as explained supra, I 

find that the actual Pandora Opt-Out 

Agreements, the [REDACTED] YouTube 

Agreements [REDACTED] rates provide 

useful benchmark information (albeit 

not the same information that Dr. 

Eisenach identifies as useful from those 

agreements). Thus, usable ratios from 

Dr. Eisenach’s analysis consist of the 

[REDACTED] and [REDACTED] ratios 

derived from the YouTube [REDACTED] 

agreements and the [REDACTED] ratio 

derived from the Pandora Opt-Out 

Agreements. These ratios, respectively 

convert to percentages (i.e., a TCC 

percentages) of [REDACTED]%, 

[REDACTED]%, and {REDACTED]%. 

Also useful are the 21%-22% TCC 

values in the existing rate structure, 

which, as Dr. Eisenach indicated, 

[REDACTED]. See Eisenach WDT 

¶ ¶ 84–92. 

2. The Services’ Benchmark Rates 309

a. The Present Section 115 Rates 

The Services do not examine in detail 

the particular rates within the existing 

rate structure. Rather, they treat the 

rates within that structure as 

benchmarks are generally treated— 

considerations in arriving at an 

agreement. Thus, just as Dr. Eisenach 

did not analyze why the rates and ratios 

on which he relied as benchmarks were 

set at the levels he identified, or 

consider the subjective understandings 

of the parties who negotiated his 

benchmarks, the Services’ economists 

elect to rely on the 2012 rates as 

objectively useful evidence of the 

parties’ revealed preferences.310

Copyright Owners disagree with this 

use of the 2012 rate structure. As with 

regard to the structure of the rates, they 

take the Services to task for failing to 

present evidence of the negotiations that 

led to the prior settlements, including 

the present 2012 benchmark. They argue 

that, without such supporting evidence 

or testimony, the Services cannot 

provide support for their proposed rates. 

See CORPFF–JS at p. 61 (noting the lack 

of evidence for the ‘‘computations for 

different types of potential services’’ in 

the 20212 benchmark). 

The Services take a broad approach in 

their attempt to support the usefulness 

of the rate levels within the 2012 

benchmark. They note that music 

publishers have consistently realized 

profits under these rates, including 

profits from musical works royalties. 

However, Copyright Owners note that 

mechanical royalties have not created a 

profit for Copyright Owners, and the 

Services’ assertion of overall publisher 

profitability is based on their lumping of 

performance royalties together with 

performance royalties. As I have noted 

supra, in considering Professor 

Zmijewski’s analysis, the combination 

of mechanical and performance 

royalties earned by the music publishers 

is the more important metric, because: 

(1) performance and mechanical 

royalties are perfect complements; and 

(2) the mechanical royalty has been 

calculated in an ‘‘All-In’’ fashion, 

subtracting the performance royalty 

from the mechanical royalty, which of 

course has the effect of inflating the 

performance royalty portion relative to 

the mechanical royalty portion. 

The Services also maintain that they 

relied on the continuation of the rates 

that now exist to develop their business 

models. For example, Pandora, the latest 

entrant into the interactive streaming 

market, asserts that its decision to enter 

this market was based on its assumption 

that there would be no increase in the 

mechanical royalty rates. Herring WRT 

¶ 3. I categorically reject this argument. 

The applicable regulations provide that 

‘‘[i]n any future proceedings the royalty 

rates payable for a compulsory license 

shall be established de novo.’’ 37 CFR 

385.17; see also 37 CFR 385.26 (same). 

A party may feel confident that past is 

prologue and the parties will agree to 

roll over the extant rates for another 

period; a party could be sanguine as to 

its ability to make persuasive arguments 

as to why the rates should remain 

unchanged; a party might even conclude 

that the mechanical rate is such a small 

proportion of the total royalty obligation 

that its increase would be unlikely to 

alter long-term business plans. But for 

sophisticated commercial entities to 

claim that they simply assumed the 

rates would roll over without the 

possibility of adjustment strikes me as 

so absurd and reckless as to raise 

serious doubts about the credibility of 

that position. 

At least one of the Services, Spotify, 

further suggests that the present rates 

should not be increased because an 

increase in the rates might affect 

different interactive streaming services 

in different ways. In particular, there 

might be a dichotomous effect as 

between essentially pure play streaming 

services (such as Spotify and Pandora) 

and the larger new entrants with a wider 

commercial ‘‘ecosystem’’ (such as 

Amazon, Apple and Google). As 

Spotify’s CFO testified: 

The Copyright Owners argue that ‘‘a 

change in market-wide royalty rates such as 

this would affect all participants in a similar 

way,’’ suggesting that the industry as a whole 

could increase prices without affecting their 

relative price points. Rysman WDT ¶ 94. 

[REDACTED]. See, e.g., Rysman WDT ¶ 29 

. . . . [REDACTED]. 

McCarthy WRT ¶ 38 (emphasis 

added); see also McCarthy WDT ¶ ¶ 50– 

51 ([REDACTED]); McCarthy WRT ¶ 36 

([REDACTED]). 

I construe this argument as an 

iteration of the ‘‘business model’’ 

argument that the Judges have 

consistently rejected, viz., that the 

Judges will not set rates in order to 

protect any particular streaming service 

business model. Final Rule and Order, 

Digital Performance Right in Sound 

Recordings and Ephemeral Recordings, 

72 FR 24084, 24088 n.8 (May 1, 2007) 

(Web II). That is, I distinguish between: 

(1) business models that are necessary 

reflections of the fundamental nature of 

market demand, particularly, the varied 

WTP among listeners; and (2) business 

models that may simply be unable to 

meet dynamic competition within the 

market or a given market segment. If 

pure play interactive streaming services 

are unable to match the pricing power 

of businesses imbued with the selffinancing power of a large commercial 

ecosystem, nothing in section 801(b)(1) 

permits—let alone requires—that the 

Judges protect those pure play 

Federal Register / Vol. 84, No. 24 / Tuesday, February 5, 2019 / Rules and Regulations 2011 

311Moreover, any disruption arising from the 

disparate impact of a rate increase among 

interactive streaming services would not constitute 

‘‘disruption’’ under Factor D of section 801(b)(1), 

because such disruption would not impact the 

structure of the industry or generally prevailing 

industry practices, but rather would impact 

particular business models. The irrelevancy, for 

disruption purposes, of a rate increase under the 

existing structure must be distinguished from a rate 

increase caused, as in the Majority Opinion, by a 

radical change in the rate structure that cedes 

control of rates to private third-parties, i.e., the 

record companies, who have economic interests 

adverse to both the services and Copyright Owners, 

as discussed supra. 

312However, the licensees in the benchmark 

market are not the same. Moreover, as Copyright 

Owners note, there is an important economic 

difference in the identities of the licensees. In 

subpart A, the licensees are record companies, who 

use the licensed musical works as inputs to create 

a new product, the sound recording. In subpart B, 

the interactive streaming services use the musical 

work through their use of the finished product (the 

sound recording). This basic difference suggests 

that the different values are a consequence of a 

difference in kind. 

interactive streaming services from the 

forces of horizontal competition.311

On balance, I do not find that the 

Services’ status quo and business model 

arguments for maintaining the section 

115 rates are themselves persuasive 

reasons to maintain those rates. If those 

rates should be maintained, support for 

such a result would need to be found 

elsewhere in the record. 

b. The Services’ Subpart A Benchmark 

The Services propose the rate set forth 

in Subpart A as a benchmark for the 

Subpart B rates to be determined in this 

proceeding. As noted supra, Subpart A 

reflects the rates paid by record 

companies, as licensees, to Copyright 

Owners for the mechanical license, i.e., 

the right to reproduce musical works in 

digital or physical formats. The 

particular Subpart A benchmark rate on 

which the Services’ rely is the existing 

rate, which the Subpart A participants 

have also agreed to continue through the 

forthcoming rate period through the 

settlement noted supra. 

In support of this benchmark, the 

Services emphasize that the total 

revenue created by the sale of digital 

phonorecord downloads and CDs is 

essentially commensurate with the 

revenues created through interactive 

streaming, indicative of an equivalent 

financial importance to publishers when 

negotiating rates when negotiating rates 

with licensees in Subparts A and B 

respectively. See 3/20/17 Tr. 1845 

(Marx) (‘‘downloads, in particular, are 

comparable to interactive streaming.’’). 

Also, although the Subpart A rate is the 

product of a settlement, the Services 

argue that the rate is a useful benchmark 

because it reflects both the industry’s 

sense of the market rate and the 

industry’s sense of the how the Judges 

would apply the section 801(b)(1) 

considerations to those market rates. 

3/15/17 Tr. 1184, 1186 (Leonard); 

3/20/17 Tr. 1842–43 (Marx). 

In opposition, Copyright Owners 

argue, for several reasons, that the 

Subpart A rates are not proper 

benchmarks. First, they emphasize that 

revenue from the sale of DPRs and CDs 

has been declining over the past several 

years. See COPFF ¶ ¶ 196, 583, 611, 736 

(and record citations therein). Second, 

they note that, as the Services 

acknowledge, the parties are not 

identical; specifically, the licensees in 

Subpart A are the record companies 

whereas in Subpart B the licensees are 

the interactive streaming services. See, 

e.g., 3/15/17 Tr. 1193 (Leonard). Third, 

they emphasize that the existing Subpart 

A rate is itself the product of a 

settlement, rather than a market rate. 

More importantly, Copyright Owners 

also note that the subpart A settlement 

establishes a per-unit royalty rate of 

$.091 per physical or digital download 

delivery (with higher per-unit rates for 

longer songs), rendering that rate 

inapposite as a benchmark for the 

Services’ present subpart B proposal. In 

support of the conclusion that this 

makes for an inapposite comparison, 

Copyright Owners argue that because 

the subpart A rate is expressed as a 

monetary unit price, the Copyright 

Owners have eliminated the risk that 

the retailers’ downstream pricing 

decisions will impact Copyright 

Owners. More specifically, they note 

that, ‘‘[u]nder the Subpart A rate 

structure, the label (as licensee) pays the 

same [penny rate] amount in 

mechanical royalties regardless of the 

price at which the sound recording is 

ultimately sold [within the] range of 

price points for individual tracks in the 

market ranging from $0.49 to $1.29 and 

the mechanical penny rate binds 

regardless of the price of the track. 

COPFF ¶ 727 (citing Ramaprasad WDT 

¶ 28 & Table 1). 

Of equal importance, Copyright 

Owners distinguish Subpart A from 

Subpart B based on the fact that 

downstream listeners to DPDs and CDs 

(and any other physical embodiment of 

a sound recording) become owners of 

the sound recording and the musical 

work embodied within it, whereas 

under Subpart B the listeners only 

obtain access to these songs and musical 

works for as long as they remain 

subscribers or registered listeners (to a 

non-subscription service). 

In reply to this argument, Dr. Leonard, 

asserted that the legal ‘‘ownership vs. 

access’’ distinction does not reflect as 

fundamental an economic difference as 

might appear on the surface. Leonard 

WRT ¶ 27 (‘‘[T]here are certain 

conceptual similarities between 

streaming and a download.’’). Having 

paid for a track download, a user can 

listen to it as often as desired without 

further charge. Similarly, having paid 

the subscription fee, a streaming user 

can listen to a track as often as desired 

without further charge’’); 3/15/17 Tr. 

1098, 1113 (Leonard) (‘‘in the case of a 

PDD, and streaming, in both cases 

you’re getting—it’s really about ondemand listening . . . . I think it’s . . . 

a very, very useful benchmark.’’). 

I disagree with Dr. Leonard, and agree 

with Copyright Owners that the 

‘‘ownership vs. access’’ dichotomy 

diminished the usefulness of the 

subpart A rate as a benchmark. 

Although Dr. Leonard is correct in 

noting that ownership is in essence a 

more comprehensive and unconditional 

form of access, a downstream purchaser 

acquires ownership of only the digital or 

physical embodiment of a sound 

recording (and the embodied musical 

work) in exchange for an up-front 

charge (the purchase price), and then 

has unlimited free access to that single 

sound recording/musical work going 

forward. By contrast, a subscriber to an 

interactive streaming service pays an 

up-front charge (usually monthly), and 

then likewise has unlimited access to 

the entire catalog of sound recordings 

(and the embodied musical works) for 

each such period. 

Thus, the dissimilarities between the 

products regulated in subpart A and 

subpart B outweigh their similarities. 

An interactive streaming service 

provides an access (option) value to 

entire repertoires of music. A purchased 

download or CD provides unlimited 

access for only a single sound 

recording/musical work. 

In other respects, though, I recognize 

that the subpart A market and 

settlement are somewhat comparable to 

the subpart B market. The licensed right 

in question is identical—the right to 

license copies of musical works for 

listening in a downstream market. 

Further, the licensors—i.e., the music 

publishers and songwriters—are 

identical.312 Finally, the time period is 

reasonably recent, and the Copyright 

Owners have not explained whether or 

how the particular market forces in the 

Subpart A market sectors have changed 

since 2012 to make the rate obsolete. 

Notwithstanding these similarities 

though, I find that the facially different 

access value in subpart A constitutes a 

fatal flaw in its usefulness as a 

benchmark in this proceeding. However, 

the Services, and Apple, have presented 

2012 Federal Register / Vol. 84, No. 24 / Tuesday, February 5, 2019 / Rules and Regulations 

313Professor Ramaprasad also relied on two other 

equivalency ratios, the first from Billboard 

magazine, and the second from another entity, UK 

Charts Company (UK Charts). However, she 

acknowledges that the Billboard ratio combines 

video streaming royalty data with audio streaming 

royalty data, which results in an overestimation of 

the ratio of streams to track sales relative to an 

audio-stream-only analysis. 3/23/17 Tr. 2760–61 

(Ramaprasad). She also acknowledges that UK 

Charts changed its ratio from 1:100 to 1:150 without 

explanation, rendering uncertain that purported 

industry standard. See COPFF ¶ 683 (and record 

citations therein). Also, there was no evidence 

indicating that streaming and download activity in 

the United Kingdom would be comparable to U.S. 

activity. 

evidence which they assert provides 

two different ways of rendering subpart 

A rates compatible. Accordingly, I 

consider those approaches below. 

c. The Services’ and Apple’s Subpart A 

Benchmarking Approaches 

To convert the per-unit rate in subpart 

A into a subpart B percent-of-revenue 

rate, the Services and Apple identify 

several alleged third-party conversion 

ratios between a given number of 

interactive streams and a single play of 

a purchased DPD that they allege are 

applicable in this proceeding. 

Professor Marx first applies a 

conversion ratio of PDDs to streams of 

1:150, which she noted had been 

established by the RIAA. Second, she 

(as well as Professor Katz) takes note of 

an academic study which estimated 

that, in the marketplace, 137 interactive 

streams was equivalent to the sale of 

one DPD. Marx WDT ¶ 108 & n.21 

(citing L. Aguiar and J. Waldfogel, 

Streaming Reaches Flood Stage: Does 

Spotify Stimulate or Depress Music 

Sales? (working paper, National Bureau 

of Economic Research, 2015)); Katz 

WDT ¶ 110 (same). Apple’s economic 

expert, Professor Ramaprasad, also 

relied on the Aguiar/Waldfogel article to 

support Apple’s benchmark per play 

proposal. Ramaprasad WDT ¶ 56, 

n.102.313

To apply the 1:150 conversion ratio, 

Professor Marx first calculated the 

subpart A mechanical license fee as the 

weighted average of the PDD/CD 

mechanical license fee for songs five 

minutes or less and songs greater than 

five minutes: $[REDACTED] per copy 

for the former and $[REDACTED] per 

minute or a fraction thereof 

(conservatively assuming that songs 

longer than five minutes have an 

average length of eight minutes). Based 

on this assumption, she estimated a 

PDD/CD mechanical license fee of 

$[REDACTED] per song. Marx WDT 

¶ 108. Next, Professor Marx obtained a 

per-play streaming royalty equivalent by 

dividing the $[REDACTED] per song 

amount (derived supra) by the number 

of streams, 150, yielding a value for the 

per-play total streaming royalty of 

$[REDACTED]. Id. ¶ ¶ 109–110. The 

resulting per-play royalty rate for the 

sum of mechanical and performance 

royalty translates to [REDACTED]% of 

Spotify’s revenue. Id. ¶ 111. Subtracting 

out the performance royalty of 

[REDACTED]% as in an ‘‘All-In’’ 

calculation, she derived a mechanical 

royalty rate equivalent from Subpart A 

of approximately [REDACTED]% to 

[REDACTED]% of revenue. Id. ¶ 112, 

Fig. 22. 

Professor Marx engaged in the same 

calculation methodology when applying 

the 1:137 conversion ratio from the 

Aguiar/Waldfogel article, and she 

determined a percent-of-revenue royalty 

for Spotify of [REDACTED]% (‘‘All-In’’), 

higher than the [REDACTED]% when 

applying the 1:150 conversion ratio. Id. 

¶ 111 n.123. 

On behalf of Pandora, Professor Katz 

used the same 1:150 conversion ratio as 

Professor Marx. He calculated a 

mechanical rate implied by the subpart 

A rate of 4.25%, higher than Professor 

Marx’s implied rate, but still lower than 

the existing headline rate of 10.5% in 

subpart B. Katz WDT ¶ 111. On behalf 

of Apple, Professor Ramaprasad utilizes 

the 1:150 ratio, which she adopted from 

Billboard magazine’s ‘‘Stream 

Equivalent Albums’’ approach. 

Ramaprasad WDT ¶ 84. Because Apple 

has advocated for a per stream rate, her 

conversion was expressed on a per 

stream basis, at $0.00061 per stream. 

Professor Ramaprasad noted that this 

rate was not only lower than the 

$0.0015 per stream rate proposed by 

Copyright Owners, but also significantly 

lower than Apple’s own proposed perstream rate of $0.00091. Ramaprasad 

WDT ¶ 86. When Professor Ramaprasad 

applied the Waldfogel/Aguiar 1:137 

ratio, expressed on a per-play basis, she 

calculated a rate of $0.00066 per-stream 

for interactive streaming, which she 

noted also was even lower than the perstream rate of $0.00091 Apple had 

proposed. 

I do not place any weight on this 

‘‘conversion’’ approach. Copyright 

Owners levy numerous criticisms of the 

ratio approach, and those criticisms, 

each on its own merit, serve to discredit 

the ratio approach. First, the Services 

and Apple simply adopted the 

equivalence ratios without defining 

what ‘‘equivalence’’ means. For 

example, the RIAA used the concept to 

identify albums that were sufficiently 

popular to garner ‘‘gold’’ or ‘‘platinum’’ 

awards. That use, absent other evidence, 

does not indicate that the conversion 

ratio is appropriate for rate-setting 

purposes. See generally Rysman WRT 

¶ 96. Second, and relatedly, the experts 

who relied on the Aguiar/Waldfogel 

article did not verify that the input data 

used by the authors was appropriate for 

the purposes for which it has been 

relied upon in this proceeding. See 

3/20/17 Tr. 1945–46 (Marx); 3/23/17 Tr. 

2789–90 (Ramaprasad). Third, the 

Aguiar/Waldfogel article appears not to 

specifically address two issues that 

would make an equivalency ratio 

meaningful: (a) what happens to the 

download behavior of an individual 

who adopts streaming; and (b) how the 

availability of streaming alters the 

consumption of a particular song. See 

Rysman WRT ¶ 97. Fourth, the experts 

for the Services and Apple ignore that 

Aguiar and Waldfogel conducted an 

additional analysis described in the 

same article on which they rely. In that 

second analysis, the authors compared 

the weekly data from Spotify for the 

period April to December 2013 with 

weekly data from Nielson on digital 

download sales for the same exact songs 

during the same overlapping time 

period. That approach, which Aguiar 

and Waldfogel called their ‘‘matched 

aggregate sales’’ analysis, yielded a ratio 

of 1:43, implying a much higher 

mechanical rate for streaming. See 

COPFF ¶ ¶ 663–64 (and record citations 

therein). 

The Services and Apple offer no 

sufficient evidence to overcome these 

criticisms of their ‘‘equivalence’’ 

approach for applying the Subpart A 

rates in this proceeding. Accordingly, I 

do not rely on such ‘‘equivalence’ 

approaches in this determination. 

By contrast, the Services’ second 

Subpart A benchmarking approach, 

utilized by both Professor Marx and Dr. 

Leonard, is more straightforward, and 

does not require a conversion of 

downloads into stream-equivalents. 

Rather, under this approach, Professor 

Marx simply divides the effective perunit download royalty of $[REDACTED] 

by the average retail price of a 

download, $1.10, to calculate an ‘‘AllIn’’ musical works royalty percent of 

[REDACTED]%. Subtracting Spotify’s 

[REDACTED]% performance rate nets a 

mechanical works rate of 

[REDACTED]%. In similar fashion, 

given an average CD price of $1.24 per 

song, she finds that the ‘‘All-In’’ musical 

works rate equals [REDACTED]%. 

Subtracting Spotify’s [REDACTED]% 

performance rate nets an ‘‘effective’’ 

mechanical royalty rate of 

[REDACTED]% under this approach. 

Thus, she concludes that the Services’ 

proposal in general, and Spotify’s 

proposal in particular, are conservative 

and reasonable, because those proposals 

provide for substantially higher royalty 

Federal Register / Vol. 84, No. 24 / Tuesday, February 5, 2019 / Rules and Regulations 2013 

314 In the context of this section, ‘‘total’’ revenue 

is intended to distinguish from the percent of 

royalties paid by interactive streaming services to 

record companies as sound recording royalties (i.e., 

TCC). 

315To repeat for the sake of clarity, Dr. Eisenach 

does not rely on the ‘‘static image’’ agreements for 

his ultimate opinion. But the text accompanying 

this footnote expresses how the ‘‘static image’’ rate 

is being applied based on Dr. Eisenach’s ratio 

approach. 

316The record in some places records this figure 

as [REDACTED]% and [REDACTED]%. I 

understand these differences reflect rounding of 

figures and some discrepancy as to the time period 

covered. In any event, these differences do not 

impact my findings. 

rates than suggested by this subpart A 

benchmark analysis. Marx WDT 

¶ ¶ 113–114 & Fig. 23. 

Dr. Leonard did a similar calculation. 

He found that, applying the subpart A 

rates, expressed as a percentage of 

revenue, interactive streaming services 

would pay an ‘‘All-In’’ rate to Copyright 

Owners of 8.7% of revenue, based on 

the average retail price of digital 

downloads in 2015. Leonard AWDT 

¶ 42. Dr. Leonard further calculated that, 

expressed as a percentage of payments 

to the record labels (rather than total 

downstream revenues) the subpart A 

settlement reflects a payment of 14.2% 

of ‘‘All-In’’ sound recording royalties, 

when compared to payments to record 

labels in 2015. Leonard AWDT ¶ 46. 

Using updated 2016 data, which 

lowered the DPD retail price to $.99, Dr. 

Leonard calculates an ‘‘effective’’ 

percentage royalty rate of 9.6%. 3/15/17 

Tr. 1108–09 (Leonard). Dr. Leonard then 

adjusts this result to make it comparable 

to Google’s proposal, which seeks a 15% 

reduction of up to 15% in certain costs 

incurred to acquire revenues. Adjusting 

for this cost reduction, Dr. Leonard 

concludes that the equivalent percent of 

revenue (after deducting similar costs) 

in Subpart A is 10.2% in 2015 and 

11.3% in 2016. Id. at 1109. 

Copyright Owners do not dispute the 

calculations made by Professor Marx 

and Dr. Leonard in these regards. 

However, they emphasize that this 

approach nonetheless is not useful 

because it fails to fails even to attempt 

to explain the significant differences in 

access value between the purchase of a 

download or CD, on the one hand, and 

a subscription to (or free use of) an 

interactive streaming service, on the 

other. That is, whereas the Services and 

Apples’ first approach is deficient 

because its conversion ratios are not 

applicable, Services’ second approach 

fails because it simply bypasses 

altogether the problem of access value 

differences. 

Finally, I take note of a point made by 

Professor Marx, that Copyright Owners, 

like any seller/licensor, would 

rationally seek to equalize the rate of 

return from each distribution channel 

i.e., from licensing rights to sell DPDs/ 

CDs under subpart A and from licensing 

to interactive streaming services under 

subpart B. As she explains: 

This principle of equalizing rates of return 

across different platforms has some 

similarities with that underlying the 

approach of W. Baumol and G. Sidak, ‘‘The 

Pricing of Inputs Sold to Competitors,’’ . . . . 

They propose an efficient component pricing 

rule whose purpose is to ensure that the 

bottleneck owner (in our case, the copyright 

holder) should get compensation for access 

from all downstream market participants, 

whether existing or new entrants, that leaves 

him as well off as he would have been absent 

entry. 

Marx WDT ¶ 104, n.118. The Judges 

first identified this principle in Web IV, 

through a colloquy with an economic 

witness. See Web IV, 81 FR at 26344 

(SoundExchange’s economic expert, 

Professor Daniel Rubinfeld, 

acknowledging that, generally, 

licensors, as ‘‘a fundamental economic 

process of profit maximization . . . 

would want to make sure that the 

marginal return that they could get in 

each sector would be equal, because if 

the marginal return was greater in the 

interactive space than the 

noninteractive . . . you would want to 

continue to pour resources, recordings 

in this case, into the [interactive] space 

until that marginal return was 

equivalent to the return in the 

noninteractive space.’’). 

However, that argument is dependent 

upon a usable conversion ratio to 

equalize access value per unit. Professor 

Marx does not explain how, absent such 

conversions, it would be possible to 

equalize rates of return across platforms. 

Accordingly, I find that the principle of 

‘‘equalized returns’’ relied upon by 

Professor Marx cannot be applied. 

3. Apple’s Proposed Rate 

Apple proposes a per-play rate of 

$0.00091 per unit. However, that rate is 

premised on two analytical factors that 

I have rejected, as discussed supra. 

First, as a single, per-play rate, it fails 

to reflect the variable WTP in the 

market, rendering it a less efficient 

upstream royalty rate. Second, Apple’s 

proposed $0.00091 rate is derived from 

the subpart A conversion ratio approach 

that I have rejected, for the reasons 

discussed supra. I incorporate herein 

my analysis rejecting a per-unit 

approach, and my analysis rejecting the 

subpart A conversion ratio approach. 

4. Findings Regarding the Reasonable 

Rate (before consideration of the four 

itemized factors) 

There are several rates, as discussed 

supra, that I find to be supported by 

sufficient evidence to be relevant to the 

setting of rates in the present 

proceeding. 

First, Dr. Eisenach’s Pandora Opt-Out 

Agreement benchmarks, as contained in 

those agreements (i.e., without 

extrapolation), reflect a ratio of 

[REDACTED] of sound 

recordings:musical works in a 

comparable benchmark setting. This 

ratio, as noted supra, translates to a TCC 

percent of [REDACTED]%. With sound 

recording royalty rates of approximately 

[REDACTED]% to [REDACTED]%, this 

TCC reflects a royalty equal to an 

effective percent of total 314 revenue 

equal to [REDACTED]% to 

[REDACTED]%. 

Second, the YouTube agreements 

with music publishers identified by Dr. 

Eisenach—that relate to [REDACTED]. 

That [REDACTED]% royalty is a 

denominator in the ratio concept 

utilized by Dr. Eisenach,315 and the 

numerator is the [REDACTED] sound 

recording royalty paid to the record 

companies. As explained supra, 

YouTube has agreed to pay 

[REDACTED], and has agreed to pay 

[REDACTED]. The [REDACTED] ratio 

reduces to [REDACTED], implying a 

TCC ([REDACTED]) of [REDACTED]%. 

The [REDACTED] ratio reduces to 

[REDACTED], implying a TCC 

([REDACTED]) of [REDACTED]%. 

Third, I look at the effective rates paid 

by Spotify, the largest interactive 

streaming service in terms of in terms of 

the number of subscriber-months and 

the number of plays. See Marx WRT 

¶ ¶ 37–38 & Figs. 8 & 9. Under the 

current rate structure, as noted supra, 

[REDACTED] 316 [REDACTED]. 

Continuing with a consideration of 

Spotify’s rates paid under the existing 

rate structure, [REDACTED]. 

[REDACTED]. The average rate is 

relevant in this proceeding because, as 

discussed supra, Spotify’s two tiers are 

interrelated, in that the ‘‘freemium’’ 

model construes ad-supported listeners 

as a pool of potential converts to the 

subscription tier, even as they generate 

(indirectly) advertising revenue that 

converts to royalties for the Copyright 

Owners under the TCC prong. 

Fourth, leaving the Spotify rates, I 

note that direct deals identified in the 

record reflect rates in the present 

regulations (as Dr. Eisenach noted, 

albeit he minimized the importance of 

those direct agreements). Also, the 

direct agreements contain additional 

terms that make them relatively 

uncertain benchmarks. For example, 

although Google’s direct deals include 

rates that reflect the statutory rate— 

2014 Federal Register / Vol. 84, No. 24 / Tuesday, February 5, 2019 / Rules and Regulations 

317 [REDACTED]. 

[REDACTED]. Leonard AWDT ¶ ¶ 53– 

54.317 Also, its direct deals omit the 

Mechanical Floor, id., which, as noted 

supra, [REDACTED]. 

[REDACTED] pays [REDACTED] 

royalties equal to [REDACTED] for its 

bundled subscription services which, 

after subtracting an [REDACTED]% 

performance royalty, equals a 

mechanical royalty of [REDACTED] % 

of [REDACTED]. Leonard AWDT ¶ 64. 

[REDACTED]. 

Apple pays [REDACTED]. Wheeler 

WDT ¶ 10. [REDACTED]. See Eisenach 

WDT ¶ 10 (‘‘[A]s a matter of economics 

the Section 115 license operates as a 

ceiling but not a floor on Section 115 

royalties.’’). 

Based on the foregoing evidence 

regarding rates, I find that the existing 

rate structure is generating effective 

percent-of-revenue rates in the manner 

in which it was intended. The 10.5% 

headline rate is exceeded by the rates 

paid by [REDACTED], even as the 

effective per play rates that generate 

those percentages are lower. The rates 

actually paid and the rates under the 

2012 benchmark are also consistent 

with the benchmark rates arising from 

the benchmark analyses undertaken by 

Dr. Eisenach that I find to be sufficiently 

comparable, particularly with regard to 

the TCC prong. The clustering of the 

effective percent of revenue rates in this 

regard indicates that the price 

discriminatory aspects of the existing 

structure allow for the growth of 

revenue, as the interactive streaming 

services ‘‘exploit the demand curve’’ by 

offering tiers of service that appeal to 

the budget constraints and the 

preferences of the segmented 

marketplace. The fact that a wide array 

of products with different 

characteristics at different price points 

has monetized usage, such that some 

effective actual rates exceed the 10.5% 

‘‘headline’’ rate, is testament to the 

mutual benefits of the existing rates. 

As noted supra, this finding does not 

mean that there might not be better 

ways to monetize demand, and I do not 

suggest that the record permits me (or 

the majority) to identify appropriate 

rates with mathematical precision. 

However, as the D.C. Circuit has held, 

and as noted supra, our rate-setting is an 

intensely practical affair, and 

mathematical precision is not possible. 

Nat’l Cable Television Ass’n, 724 F.2d at 

182. Moreover, the Judges are 

constrained: We must choose among the 

rates and structures proposed by the 

parties, or reasonably ascertainable from 

the evidence, through an evidentiary 

process that the parties were permitted 

to consider, challenge and rebut at the 

hearing. What the Judges cannot do is 

attempt to cobble together elements of 

different proposals (the majority’s 

‘‘Frankenstein’s Monster’’ approach, as 

characterized by Copyright Owners) 

without evidence as to how those 

combined elements would impact the 

industry and its participants. 

VI. SUBPART C: APPLYING THE 2012 

BENCHMARK 

The parties’ negotiations in 

Phonorecords II that culminated in the 

2012 settlement focused more intensely 

on the rates that would apply to new 

service types, including cloud locker 

services, that would ultimately be 

embodied in subpart C of 37 CFR part 

385. Parness WDT ¶ 13; Levine WDT 

¶ ¶ 38–39; Israelite WDT ¶ ¶ 28–30. In 

fact, the subpart C negotiations that 

created five new service categories were 

quite protracted, the subject of a 

negotiation over more than one year. 

3/29/17 Tr. 3652–55 (Israelite). 

Moreover, in this protracted give-andtake, the NMPA rejected some categories 

proposed by the services, while others 

were accepted and became part of 

subpart C. Id. at 3654- 56. 

In setting these rates—rather than 

developing a new royalty structure for 

these service types—the parties 

ultimately agreed on a structure for 

subpart C that resembled the subpart B 

structure, adopting a headline 

percentage of revenue royalty rate and 

per-subscriber and TCC minima. 

Parness WDT ¶ 14; see also 37 CFR 

385.22. As with the bundling 

negotiations relating to subpart B, the 

parties negotiated and created a bundled 

service category under subpart C (with 

certain adjustments to the definition of 

‘‘revenue.’’) 3/8/17 Tr. 161–64 (Levine); 

37 CFR 385.21. Not only are these 

provisions the default statutory terms, 

but publishers and service also 

incorporate these rates and terms in 

their direct licenses. See Leonard 

AWDT ¶ ¶ 54, 58, 67, 69. 

Copyright Owners now urge the 

elimination of these subpart C 

provisions. They note that, although the 

Services had been very interested in 

locker services (a large focus of subpart 

C) during the 2012 negotiations, locker 

services have decreased in popularity 

and significance, and have largely 

disappeared. They explain this 

phenomenon as linked to the transition 

by listeners from ownership to access 

models, rendering functionally 

unimportant a listener’s access to his or 

her own libraries as stored in a cloud 

locker. In fact, Copyright Owners point 

out that the Services’ own witnesses 

have acknowledged this decrease in the 

popularity of lockers. 3/8/17 Tr. 159– 

160 (Levine); 3/16/17 Tr. 1458–1461 

(Mirchandani) ([REDACTED]); 

Mirchandani WDT ¶ 33 ([REDACTED]), 

Copyright Owners further note that this 

fall in popularity is reflected in the fact 

that neither Spotify nor Pandora offers 

either a purchased content or a paid 

locker service. They note that Apple, 

which at one time offered a paid locker 

service, has abandoned that product, but 

still offers a purchased content locker 

service (perhaps a function of its market 

share of previous listener purchases of 

digital downloads from its iTunes 

Store). 3/22/17 Tr. 2523 (Dorn). 

Copyright Owners also note that the 

Services’ subpart C arguments suffer 

from the same defect as their subpart B 

arguments: they have not provided any 

evidence explaining the basis for any of 

the rates or terms contained in . . . 

subpart C . . . . of the statute. 

CORPFF–JS at p.2. 

In opposition, the Services argue that 

Copyright Owners do not point to any 

evidence to show that locker services 

have completely ‘‘disappeared.’’ Rather, 

they note that Apple and Amazon 

continue to offer locker services. Joyce 

WDT ¶ 5; Mirchandani WDT ¶ ¶ 16–17. 

In this regard, Apple notes that each 

service in this proceeding that sells 

downloads also offers locker services. 

See 3/22/17 Tr. 2523–25 (Dorn); 

Ramaprasad WDT, Table 3. The Services 

also note that Copyright Owners are 

seeking rates for subpart C products that 

are substantially higher than present 

rates. See Joyce WDT ¶ 19. 

More generally, the Services urge the 

Judges to use the subpart C rate 

structure as the benchmark for rates in 

the forthcoming period for the same 

reasons as they urge the use of the 

subpart B benchmarks a an appropriate 

benchmark. That is, the 2012 subpart C 

benchmarks were negotiated by the 

same parties, covering the same rights 

over a relatively contemporaneous 

period, and the economic circumstances 

are sufficiently similar. Amazon 

characterizes the ‘‘[t]he existing . . . 

Subpart C service categories and rate 

structures [as] represent[ing] the 

collective efforts of industry 

participants . . ., including [a] 

proceeding[] before the [Judges] which 

were resolved by a negotiated settlement 

agreement among the participants many 

of whom are also participants in this 

proceeding.’’ Mirchandani WDT ¶ ¶ 58– 

62. Moreover, several of the listed 

services already provided (or had plans 

to provide) subpart C services in 2012, 

underscoring the relevance of the 

negotiated settlement. See 3/18/17 Tr. 

157–158 (Levine) (discussing Google’s 

plans to launch a . . . locker service in 

Federal Register / Vol. 84, No. 24 / Tuesday, February 5, 2019 / Rules and Regulations 2015 

318Once again, separate and apart from the 

usefulness of the 2012 benchmark structure and 

rates as benchmark evidence, the existing rate 

structure and rates, which embody the 2012 

settlement, serve as a default rate structure and set 

of rates, because the other evidence in the record 

does not support an alternative approach. See Music 

Choice, supra. 

319Thus, the Judges reject Copyright Owners’ 

argument that the first three itemized section 

801(b)(1) factors per se reflect the same forces that 

shape the rate set in the marketplace. See 4/4/17 Tr. 

4589, 4666 (Eisenach). The Services also challenge 

Dr. Eisenach’s assertion that he believes that the 

first three itemized factors reflect market forces, 

based on his prior writings and testimony, a charge 

that he persuasively denies. Compare SJRCOPFF at 

p.5 with 4/4/17 Tr. 4676–79 (Eisenach). I find this 

dustup to be irrelevant to their objective analysis of 

the itemized 801(b)(1) factors. 

the period of Phonorecords II 

negotiations); Mirchandani WDT ¶ 16 

(discussing launch of Amazon locker 

service in mid-2012). 

The Services also criticize the 

application of Copyright Owners’ 

greater-of approach in the subpart C 

context as absurd. They claim that 

under Copyright Owners’ proposal, 

licensors would receive $0.091 for each 

download of a copy from a purchased 

content locker, and at least $1.06 permonth for each month that a listener 

facilitates a copy in order to accesses the 

track via that locker, because. This 

would be absurd, according to the 

Services, because the separate copy is 

the basis for the royalty payments that 

Copyright Owners had already received 

when the listener originally purchased 

the product. Mirchandani WRT ¶ 47. 

Adding to this criticism, Apple 

emphasizes that Copyright Owners fail 

to mention that: (1) all purchased 

content locker services are free by 

definition, pursuant 37 CFR 385.21; and 

(2) some locker service streams originate 

from private copies of songs that are not 

streamed content from a central service 

(see 3/13/17 Tr. 829–830 (Joyce). 

On balance, I find that the subpart C 

rate structure has the same attributes of 

a useful benchmark as does the subpart 

B rate structure. The categories of 

parties were the same, the rights are the 

same and the agreement is relatively 

contemporaneous. I do not find that the 

lack of popularity of the subpart C 

configurations cuts against the use of 

the 2012 rate structure as a benchmark. 

If the subpart C categories wither in the 

marketplace, the impact of this rate 

structure will be of little importance. 

But if these lockers, bundles and other 

offerings grow in popularity, the relative 

strength of this benchmark will be 

preferable to the ‘‘greater of’’ 

formulation proposed by Copyright 

Owners. 

In that regard, Copyright Owners’ rate 

structure proposal for subpart C 

(identical to its proposal for subpart B) 

is rejected for the same reasons as it was 

rejected for subpart B, and those 

criticisms are incorporated into this 

section. Further, locker services are 

distinguishable from other products. 

Musical works embodied in the sound 

recordings that have already been 

purchased have a value that is reflected 

in the sale through another distribution 

channel. It would be anomalous to 

apply the same rate structure to the right 

of a service to obtain a copy so that the 

downstream customer could store or 

access that which he or she already 

owns. I find that the parties’ prior arm’s 

length negotiations of the subpart C 

structure better reflects their 

understanding of the different use 

values implicated by subpart B and the 

locker services identified in subpart 

C.318

VII. THE FOUR ITEMIZED FACTORS 

IN SECTION 801(b) 

The four itemized factors set forth in 

section 801(b)(1) require the Judges to 

exercise ‘‘legislative discretion’’ in 

making independent policy 

determinations that balance the interests 

of copyright owners and users.’’ 

SoundExchange, Inc. v. Librarian of 

Cong., 571 F.3d 1220, 1224 (DC Cir. 

2009); see also RIAA v. CRT, 662 F.2d 

1, 8–9 (D.C. Cir. 1981) (analyzing 

identical factors applied by predecessor 

rate-setting body and holding that the 

statutory policy objectives of 801(b)(1) 

‘‘invite the [Board] to exercise a 

legislative discretion in determining 

copyright policy in order to achieve an 

equitable division of music industry 

profits between the copyright owners 

and users’’). 

The four factors ‘‘pull in opposing 

directions,’’ leading to a ‘‘range of 

reasonable royalty rates that would 

serve all these objectives adequately but 

to differing degrees.’’ Recording Indus. 

Ass’n of Am. v. Copyright Royalty 

Tribunal, 662 F.2d 1, 9 (D.C. Cir. 1981) 

(‘‘Phonorecords 1981 Appeal’’) 

(citations omitted). Certain factors 

require determinations ‘‘of a judgmental 

or predictive nature,’’ while others call 

for a broad fairness inquiry. Id. at 8 

(citations & quotations omitted). 

Accordingly, the Judges are ‘‘free to 

choose’’ within the range of reasonable 

rates . . . within a ‘zone of 

reasonableness.’ ’’ Id. at 9 (citations 

omitted). 

Further, as explained at note 205 (and 

the accompanying text) supra, the 

‘‘reasonableness’’ analysis can be 

undertaken as an initial step, followed 

by consideration of the four itemized 

factors, or the four-factor analysis can be 

undertaken as part of the 

‘‘reasonableness’’ analysis. I have 

followed what I understand to be the 

more conventional approach in 

proceedings applying the section 

801(b)(1) standards by essentially 

undertaking the former approach. 

However, my following consideration of 

the four itemized section 801(b)(1) 

factors also provides further support for 

the findings identifying the reasonable 

rate structure and rates. 

A. The Relationship of the Four 

Itemized Factors to the Market Rate 

The D.C. Circuit recently reiterated 

the relationship between the 801(b) 

standard and market-based rates by 

contrasting that standard with the 

willing buyer/willing-seller standard set 

forth in 17 U.S.C. 114(f)(2)(B). The court 

noted that the two standards are 

distinguishable by the fact that, unlike 

section 114(f)(2)(B), section 801(b)(1) 

does not focus in the same manner as 

rates that would be set in a marketplace. 

SoundExchange, Inc. v. Muzak LLC, 854 

F.3d 713, 715 (D.C. Cir. 2017). 

However, to the extent that market 

factors may implicitly address any (or 

all) of the four itemized factors, the 

reasonable, market-based rates may 

remain unadjusted, And, if the evidence 

suggest that the market-based rates fail 

to account for any (or all) of these four 

itemized factors, the Judges will adjust 

the reasonable, market-based rate 

appropriately. See SDARS I, supra at 

4094 (applying the same itemized 

factors and holding that ‘‘[t]he ultimate 

question is whether it is necessary to 

adjust the result indicated by 

marketplace evidence in order to 

achieve th[e] policy objective.’’).319

B. Factor A: Maximizing the 

Availability of Creative Works to the 

Public 

1. Introduction 

Factor A provides that rates and terms 

should be determined to ‘‘maximize the 

availability of creative works to the 

public.’’ 17 U.S.C. 801(b)(1)(A). Of 

particular importance, this provision 

unambiguously links the upstream rates 

and terms that the Judges are setting 

with the downstream market, in which 

‘‘the public’’ is listening to sound 

recordings that embody musical works. 

In a prior Determination, the Judges 

made a general statement, attributed to 

an expert economic witness, Dr. Janusz 

Ordover, in SDARS I, that ‘‘[w]e agree 

with Dr. Ordover that ‘voluntary 

transactions between buyers and sellers 

as mediated by the market are the most 

effective way to implement efficient 

allocations of societal resources.’ 

2016 Federal Register / Vol. 84, No. 24 / Tuesday, February 5, 2019 / Rules and Regulations 

320 I recount Professor Ordover’s testimony to 

provide the context for the snapshot of his 

testimony excerpted and relied on in SDARS I. I do 

not rely on Professor Ordover’s testimony in 

deciding any factual issues in this proceeding. 321To estimate the different values (elasticities) 

within a distribution channel, Professor Ordover 

found ‘‘highly informative’’ the ‘‘survey data and 

results’’ obtained by a testifying survey expert, id. 

at 23—just as I find informative the results of the 

Klein Survey. 

322To be clear, this static ‘‘harm’’ is hardly 

conclusive evidence that such market power is 

actually harmful, or even inefficient, on balance, in 

a dynamic sense. A monopoly may be more 

efficient in reducing unit costs because of, inter 

alia, necessary scale (such as a natural monopoly) 

or because of superior production techniques. 

Ordover WDT at 11.’’ SDARS I, 73 FR 

at 4094. However, as the discussion of 

the economics of this market, supra, 

should make plain, I do not agree that 

such a broad statement captures all the 

economic realities of the market. In fact, 

Professor Ordover’s full testimony in 

SDARS I clearly demonstrates that he 

fully appreciates the particular aspects 

of the economics of the markets at issue, 

including the aspects relevant to Factor 

A. More fully, Professor Ordover 

testified as follows in SDARS I: 320

Unimpeded market transactions promote 

economic efficiency and lead to supply and 

demand decisions that maximize society’s 

economic welfare. [I]n the special case of 

markets for sound recordings and other 

intellectual property . . . the incremental 

cost of serving any single user is very low 

relative to the initial cost of creation, and use 

by any single user does not diminish the 

availability of the content to others. . . . [T]o 

account for these differences, pricing in these 

markets should be based on the underlying 

value of the product to the buyer. 

. . . 

The solutions to this policy problem focus 

on an oft-noted tension in the pricing of 

intellectual property between static and 

dynamic efficiency. . . . [E]conomists have 

. . . a clear answer . . . provided by so 

called second-best . . . pricing.’’ . . . The 

rule is that those customers—be they final 

users or intermediate customers (such as the 

SDARS, for example)—whose demand for the 

product (content) is inelastic should pay a 

higher markup above the marginal cost of 

serving them, and those whose demands are 

elastic should pay a lower markup. . . . 

Since elasticity of demand is related to 

‘‘willingness to pay’’ [WTP] [so] users or 

usages with a high [WTP] . . . should be 

required to contribute the most (per unit of 

usage). . . . [T]his principle assures that the 

greatest number of consumers will be able to 

benefit from use of a product . . . . [‘‘V]aluebased pricing’’ . . . provides the correct 

incentives for producers of content insofar as 

it ensures that overall revenues from all 

sources recoup the costs of creating the 

content in the first place. 

Ordover WDT at 4, 16–18 (emphasis 

added). Professor Ordover then noted 

the same upstream/downstream link 

that I have identified in this proceeding: 

[I]t is important to note that demand for 

music content by the SDARS [or any 

distribution channel] is a ‘‘derived demand’’ 

in the sense that it flows from consumers’ 

demand for the service as a distribution 

channel for music. . . . [T]he SDARS’ [or any 

distribution channel’s] [WTP] content owner 

is inextricably linked to consumers’ [WTP] 

for the . . . service . . . . 

Id. at 18–19 (emphasis added).321

2. The Services’ Position 

On behalf of the Services, Professor 

Marx approaches Factor A in a manner 

that is at once novel (for these 

proceedings) yet consistent with 

fundamental and relevant economic 

principles. Specifically, she asserts that 

maximization of the availability of 

musical works (embodied in sound 

recordings) to the public, through 

interactive streaming, requires that the 

combined ‘‘producer surplus’’ and 

‘‘consumer surplus’’ be maximized, 

because that leads to listening by all 

segments of the public regardless of 

their WTP. To understand Professor 

Marx’s analysis, the economic 

terminology on which she relies needs 

a brief explanation. 

The ‘‘producer surplus’’ is ‘‘the 

amount by which the total revenue 

received by a firm for units of its 

product exceeds the total marginal cost. 

. . .’’ A Schotter, Microeconomics: A 

Modern Approach at 389 (2009). The 

‘‘consumer’ surplus’’ is ‘‘[t]he difference 

between what the consumer would be 

willing [and able] to pay and what the 

consumer actually has to pay.’’ 

Mansfield & Yohe, supra, at 93. When 

a perfectly competitive market is in 

equilibrium (or tending that way) ‘‘the 

sum of consumer surplus . . . and 

producer surplus . . . is maximized.’’ 

Schotter, supra, at 420. By contrast, if a 

market is not perfectly competitive 

because the sellers have some degree of 

market power, and the level of output is 

somewhat restricted, producer surplus 

increases relative to consumer surplus— 

with a portion of the overall surplus 

redistributed to producers/sellers. 

Another portion is lost as ‘‘a pure 

‘deadweight’ loss . . . the principal 

measure of the allocation of harm’’ 

arising from the exercise of market 

power. Mansfield & Yohe, supra, at 499. 

See also Schotter, supra, at 398 (setting 

forth the accepted definition of 

‘‘deadweight loss’’ as ‘‘[t]he dollar 

measure of the loss that society suffers 

when units of a good whose marginal 

social benefits exceed the marginal 

social cost of providing them are not 

produced because of the profitmaximizing motives of the firm 

involved.’’).322

As the foregoing definitions imply, 

the two surpluses may be measured by 

reference to a single equilibrium price. 

However, when sellers are able to price 

discriminate, they enlarge the total 

value of the combined surpluses, 

diminish the ‘‘deadweight loss’’ and 

appropriate for themselves the larger, 

combined surplus. See Varian, supra at 

465 (With price discrimination, ‘‘[j]ust 

as in the case of a competitive market, 

the sum of producer’s and consumer’s 

surplus is maximized [but with] the 

producer . . . getting the entire surplus 

generated in the market. . . .’’). In fact, 

price discrimination is ubiquitous in the 

marketplace. See Baumol, Regulation 

Misread by Misread Theory, supra. 

Professor Marx marshals these 

microeconomic principles, Marx WDT 

¶ ¶ 119–122, to explain why the 2012 

rate structure tends to incentivize and 

support the maximization of musical 

works available to the public under 

Factor A. Id. ¶ ¶ 123–133. As she 

testified: 

[H]aving different means of price 

discrimination is going to allow greater 

efficiency to be achieved [i]f we have a way 

for low willingness to pay consumers to 

access music, for example, student discounts, 

family discounts or ad-supported streaming, 

where low-willingness-to-pay consumers can 

still access music in a way that still allows 

some monetization of that provision of that 

service. 

3/20/17 Tr. 1894–95 (Marx) (emphasis 

added). See also Marx WDT ¶ 12 (‘‘An 

economic interpretation of [F]actor A is 

that the royalty structure should 

‘‘maximize the pie’’ of total producer 

and consumer surplus. . . .’’). 

More granularly, Professor Marx 

explained why the price discriminatory 

rate structure is superior to a per play 

model in maximizing the availability of 

musical works to the public: 

The subscription model provides an 

efficiency benefit because the price of a play 

is equal to the marginal cost of roughly 

zero—a subscriber faces the true marginal 

cost of playing a song over the internet and 

thus consumes music at the efficient level. 

When subscribers face a per-play royalty cost 

of zero, interactive streaming services have 

the appropriate incentive to encourage music 

listening at the margin. 

In contrast, if interactive streaming services 

faced a positive per-play royalty cost, they 

would have a diminished incentive to attract 

and retain high-use consumers, the very type 

of consumers who create the most social 

surplus through their listening. They would 

also have an incentive to discourage music 

listening among the high-use consumers they 

retain. The higher the level of per-play 

royalties is, the more this incentive might 

affect the behavior of interactive streaming 

services. 

Federal Register / Vol. 84, No. 24 / Tuesday, February 5, 2019 / Rules and Regulations 2017 

323With regard to Factor A as it relates to 

Copyright Owners’ proposal, Professor Hubbard 

also notes the supply-side ‘‘Cournot Complements’’ 

problem created by Copyright Owners’ reliance on 

the unregulated sound recording market. This is a 

problem because rates in such a ‘‘must have’’ 

unregulated market can be even higher than 

monopoly rates, thereby depressing the quantity 

supplied—contrary to a goal of maximizing the 

availability of musical works. See 4/7/17 Tr. 5532 

(Hubbard). 

Id. ¶ ¶ 130–131 and n.135 (emphasis 

added) 323

Although Professor Marx’s analysis is 

based on an understanding that 

maximizing the availability of musical 

works is a function of incentives to 

distributors and a function of 

downstream demand characteristics, she 

notes that the variable, percent-of-rate 

based rate structure is consistent with 

agreements in the unregulated upstream 

market, where record companies license 

sound recordings to these same 

interactive streaming services. In that 

regard, she notes: 

Ironically, given the preference of . . . 

Copyright Owners’ economists for market 

outcomes in this context, they support a 

proposal that would tend to [REDACTED], 

which the unregulated sound recording side 

of the market has facilitated. Their proposal 

would also completely do away with 

percentage-of-revenue rates that form a key 

part of unregulated rates negotiated between 

music labels and interactive streaming 

services. 

Marx WRT ¶ 84 (emphasis added). 

Beyond these theoretical arguments, 

Dr. Leonard notes that this is the basic 

rate structure that has existed for two 

rate periods, and there is no evidence 

that the songwriters as a group have 

diminished their supply of musical 

works to the public. In fact, he notes 

that the music publishing sector has 

been profitable throughout the present 

rate period. 3/15/17 Tr. 1120 (Leonard). 

I understand this point—particularly in 

the context of Factor A—to indicate that 

there has been and will continue to be 

a growing supply of musical works 

available to the public, because 

profitability is a market signal for the 

entry of new resources and supply. See 

generally Varian, supra at 416 (‘‘[I]f a 

firm is making profits we would expect 

entry to occur.’’). 

3. Copyright Owners’ Position 

Copyright Owners, principally 

through the rebuttal testimony of 

Professor Watt, argue that Professor 

Marx has made a fundamental error in 

equating the maximizing of availability 

of musical works with a maximization 

of the sum of the producer and 

consumer surplus. Watt WRT ¶ 10. 

According to Professor Watt: ‘‘A better 

understanding of criterion A is that the 

royalty payments should ensure that a 

plentiful supply of works is forthcoming 

into the future. . . .’’ Id. To accomplish 

that end, Professor Watt argues the rates 

should be set so as to ensure that 

‘‘creators are given the correct 

incentives to continue to create and 

make available valuable works.’’ Id. 

Further, Professor Watt argues that 

even if the rates and rate structure are 

designed to maximize the consumer and 

producer surplus, such maximization 

would not inform the Judges as to 

whether that result satisfies Factor A. 

Rather, according to Professor Watt: 

In effect, a royalty structure is simply a 

way in which producer surplus, once 

created, is shared between the interactive 

streaming firms and the copyright holders, 

but in and of itself, the structure does not 

determine the size of either producer or 

consumer surplus. Consumer surplus and 

producer surplus are both entirely 

determined by the interplay of the demand 

curve for the product in question (here, 

interactive music streaming) and the way the 

product is priced by the interactive streaming 

industry to its consumers. That is, regardless 

of the structure of the royalty payments, the 

‘‘size of the pie’’ is determined by the 

unilateral decisions made by interactive 

streaming firms about their pricing to 

consumers. 

Watt WRT ¶ 11. 

Professor Watt also attempts to decouple the upstream and downstream 

rate structures by analogizing interactive 

streaming to a retail restaurant offering 

of an ‘‘all you can eat buffet.’’ There, 

restaurants pay a positive per unit price 

for inputs of food offered at the buffet, 

yet still—according to Professor Watt— 

charge a single price for unlimited 

access to the buffet. (Professor Watt does 

not provide any evidence of how buffet 

restaurants in fact make pricing 

decisions.) Thus, he concludes that a 

retailer, such as an interactive streaming 

service or a buffet restaurant, can pay 

for inputs (musical works or food) perunit while still charging an up-front 

access fee ($9.99 per monthly 

subscription or $9.99 for a buffet meal). 

By this analogy, Professor Watt purports 

to demonstrate that interactive 

streaming services do not require nonunit royalty rates to serve their 

downstream listeners. Id. ¶ 12. 

Professor Watt further notes that 

Spotify is not accurate when it claims 

that listeners to its ad-supported service 

do not pay a marginal positive price. He 

notes that listening to advertising that 

interrupts the music imposes a timerelated/annoyance cost that the listeners 

must accept. This suggests to Professor 

Watt that per-unit pricing (at least in a 

non-monetary manner) indeed is 

possible downstream. Id. ¶ 13. 

(However, to the extent the advertising 

is informative, especially when it is 

targeted to specific listeners, it is not 

clear from the record that such 

‘‘interruptions’’ would constitute a pure 

cost. See Phillips WDT ¶ 33 (noting the 

ability of streaming services to ‘‘deliver 

extremely targeted advertising to 

particular audiences.’’)). 

Further, Professor Watt opines that 

any positive marginal cost pricing of 

songs by interactive streaming services 

on subscription plans necessarily would 

be offset by a reduction in the up-front 

subscription price. He further suggests 

that this consequence would not 

necessarily be deleterious for the 

streaming service because ‘‘[w]ith the 

reduction in the fixed fee (along with 

the positive per-unit price), it becomes 

entirely possible that consumers who 

were not initially in the market now 

find it to be in their interests to join the 

market, consuming positive amounts of 

streamed music where previously they 

consumed none.’’ Id. ¶ 15. 

In their affirmative case regarding 

Factor A, Copyright Owners argue that 

‘‘availability maximization’’ should be 

considered through the lens of the 

creators, who seek high rates as a signal 

to spur creation, and would see low 

rates as a disincentive. In particular, 

another of Copyright Owners’ expert 

economic witnesses, Professor Rysman, 

testified, in colloquy with the Judges, 

that the importance of price-signaling 

was so paramount that even a 

hypothetical outlandish royalty would 

induce creators to maximize 

availability: 

THE JUDGES: So if all the available music 

was available on streaming services and the 

subscription price was $10,000 a month, that 

would be equally available as it would on an 

ad-supported service? 

PROFESSOR RYSMAN: That’s how I read 

availability. . . . I think that would raise 

questions in the other factors, but as I read 

availability, that would still satisfy 

availability. 

4/3/17 Tr. 4397 (Rysman). 

4. Analysis and Findings 

For several reasons, I find that 

Professor Marx’s analysis of how a price 

discriminatory model maximizes 

availability is correct. 

First, the rationale for price 

discrimination is two-fold; not only 

does it serve low WTP listeners, but it 

also serves copyright owners, by 

incentivizing interactive streaming 

services to increase the total revenue 

that the price discriminating licensor 

can obtain. Any seller or licensor would 

prefer to maximize its revenue, and a 

rate structure that will effect such 

maximization thus would be the best 

structural inducement. Moreover, for 

2018 Federal Register / Vol. 84, No. 24 / Tuesday, February 5, 2019 / Rules and Regulations 

324This point appears to raise a question: How 

could Copyright Owners and their economic 

experts argue against a rate structure that inures to 

their benefit as well? The answer is: They do not. 

As stated supra, they advocate for a rate set under 

the bargaining room theory, through which 

mutually beneficial rate structures can still be 

negotiated, but not subject to the ‘‘reasonable rate’’ 

and itemized factor analysis required by law. In 

those negotiations, as Dr. Eisenach candidly 

acknowledged, Copyright Owners would have a 

different threat point to use in order to obtain better 

rates and terms. 4/4/17 Tr.4845–46 (Eisenach). 

325This point is reminiscent of an old joke from 

the era of the Great Depression. A poor boy is 

selling Apples on the street corner for a price of $1 

million per apple. A man approaches and asks the 

boy: ‘‘How many apples do you expect to sell at that 

price?’’ To which the boy responds: ‘‘Well, I only 

have to sell one!’’ 

326On a technical economic level, perhaps 

beyond the material in a prototypical ‘‘Economics 

101’’ course, a party with market power, whether 

a monopolist or otherwise, is not subject to a supply 

curve, because a supply curve depicts how much 

supply would be forthcoming at given prices, 

whereas a firm with any pricing power can 

influence both price and quantity. See Krugman & 

Wells, supra, at 368 (‘‘[M]onopolists don’t have 

supply curves . . . [A] monopolist . . . does not 

take the price as a given; it chooses a profit 

maximizing quantity, taking into account its own 

ability to influence the price.’’). Oligopolists act 

similarly, but their influence on price is 

complicated by their predictions of, and reactions 

to, the pricing and production decisions of their 

oligopolistic competitors. See Nicholson & Snyder, 

supra, at 521 (‘‘[I]n an oligopoly . . . prices depend 

on how aggressively firms compete, which in turn 

depends on which strategic variables firms choose, 

how much information firms have about rivals, and 

how often firms interact with each other in the 

market.’’) In similar fashion, Professor Watt 

acknowledged the presence of a supply curve in 

competitive markets but declined to conclude that 

one exists in the markets at issue here. 3/27/17 Tr. 

3035–36 ([JUDGES]: ‘‘Is there a supply curve in the 

market?’’ [PROFESSOR WATT]: ‘‘[T]hat’s a hard 

question to answer. . . . [C]learly . . . economic 

theory points to certain markets where there is no 

supply curve, per se, and other markets in which 

there would be. Like a perfectly competitive market, 

it’s acceptable that there’s a supply curve. . . . 

[O]once you get into non-perfectly competitive 

output markets . . . it becomes really debatable.’’). 

327And, again, Copyright Owners are not 

economic naifs. Once more, the bargaining room 

approach is relevant, in connection with the 

foregoing price discrimination analysis. A licensor 

who could segment the market via WTP could 

exploit the demand curve and increase revenues 

above the revenues available in a single-price 

market. Copyright Owners appear to understand 

this point—acknowledging they would bargain 

with licensees if the single-price rate set by the 

Judges was too high. 

328More particularly, in Web IV, the Judges set 

multiple per-stream noninteractive royalty rates on 

a per-play basis, differentiating among subscription 

services, ad-supported services and educational 

webcasters. These decisions were based on the 

Judges’ understanding of the evidence at the 

hearing. If the parties had presented the Judges with 

evidence in this proceeding that would have 

permitted them to fashion price-discriminatory perplay or per user rates, those would have been an 

options for consideration. However, there was 

insufficient evidence to permit me to depart from 

the parties’ proposals in that regard. 

purposes of applying Factor A, a rate 

structure that better increases revenues, 

ceteris paribus, would induce more 

production of musical works, a result 

that Copyright Owners should desire.324

Second, and by contrast, it would be 

less profitable simply to equate 

‘‘availability’’ with a higher rate. As 

noted supra, any product that is priced 

beyond the WTP of a significant portion 

of the public is unavailable to that 

segment. In this regard, Copyright 

Owners have taken a cramped and 

unrealistic view of such incentives. In 

particular, I disagree with Professor 

Rysman’s assertion that even a $10,000 

per month subscription price would 

increase ‘‘availability.’’ I find that he 

misapprehends the nature of a price 

signal. If the price is so high as to 

eliminate or reduce total revenue to 

creators, in no way will higher rates 

simply induce the supply of creative 

works over time.325 Indeed, even 

monopolists do not seek the highest 

price possible, but rather seek to 

maximize profits. See Mansfield & 

Yohe, supra, at 362–63 (‘‘Monopolies 

maximize profits by producing where 

marginal cost equals marginal 

revenue.’’). Thus, even monopolists— 

who have the most market power—are 

constrained in their pricing by the 

demand curve and the marginal revenue 

it creates.326 Although a higher royalty 

rate might have an immediate 

superficial appeal, if the consequence 

will be lower revenues, the high perplay rate would reveal itself as a form 

of fool’s gold.327

Third, I find that the objective of 

maximizing the availability of musical 

works downstream to the public is 

furthered by an upstream rate structure 

that contains price discriminatory 

characteristics that enhance the ability 

of the interactive streaming services to 

engage in downstream price 

discrimination (‘‘down the demand 

curve,’’ increasing revenue for both 

Copyright Owners and the interactive 

streaming services). That is, as 

recognized by both Professor Marx in 

this proceeding—and Professor Ordover 

in SDARS I—upstream pricing is a 

function of derived demand, and should 

be ‘‘value-based,’’ i.e., discriminating 

among the different values placed on 

streamed music by different segments of 

listeners. 

Fourth, I find that Professors Watt and 

Marx are talking past each other 

regarding price discrimination. 

Professor Watt argues that a percent-ofrevenue based upstream royalty 

structure is not necessary in order for 

the streaming services to price 

discriminate downstream. However, I 

understand Professor Marx to be 

asserting not that a percent-of-revenue 

royalty structure is a necessary 

condition for downstream price 

discrimination, but rather that some 

form of price discrimination is 

appropriate, and that a discriminatory 

percent-of-revenue royalty structure will 

better align the upstream and 

downstream incentives, thus 

maximizing the availability of musical 

works downstream. A single upstream 

price for musical works would tend to 

make price discrimination downstream 

more difficult, because (as noted by 

Professor Marx and Professor Ordover in 

SDARS I) upstream demand is derived 

from downstream demand. 

To be clear, I do agree with Professor 

Watt that percent-of-revenue pricing is 

not necessary to facilitate price 

discrimination downstream. Indeed, in 

Web IV, the Judges adopted multi-tier 

upstream per-play pricing, not percentof-revenue pricing, to reflect variable 

WTP downstream. But here, Copyright 

Owners have not proposed multiple-tier 

per unit pricing, and nothing in the 

record indicates how the Judges could 

mold Copyright Owners’ per- play rate 

into multiple, discriminatory rates. The 

only rate structure proposed in this 

proceeding that promotes such 

efficiencies is the existing rate structure. 

Because the Judges remain subject to 

(and bounded by) the evidence adduced 

at the hearing, they have before them 

only one rate structure that promotes 

and reflects the downstream market’s 

need for price discrimination to 

promote the availability of musical 

works to the public.328

In this regard, Pandora notes the 

challenges of operating a business that 

has fixed revenues per customer but 

variable cost. Herring WRT ¶ 17. 

Copyright Owners did not provide 

sufficient evidence that their proposed 

per unit royalty rate would better 

accommodate such risks. Instead, as 

noted supra, Copyright Owners rely on 

an analogy; Professor Watt’s comparison 

of the streaming industry to the buffet 

restaurant industry, in which he 

assumed input suppliers did not charge 

based on a percent of revenue. However, 

Professor Watt admitted that his 

testimony in this regard was ‘‘pure 

observation,’’ and that he has never 

consulted for a buffet restaurant and has 

never performed any economic analysis 

of the business strategies of buffet 

restaurants. 3/27/17 Tr. 3173–74 (Watt). 

I note one particular difference between 

a foodstuff input to a buffet restaurant 

and a musical stream input to an 

interactive service: the foodstuff is a 

private good, rivalrous in consumption, 

i.e., with a positive marginal cost, 

whereas the copy of the musical work 

is non-rivalrous, i.e., with a zero 

Federal Register / Vol. 84, No. 24 / Tuesday, February 5, 2019 / Rules and Regulations 2019 

329And shift some consumer surplus to the 

producers, which is the point of price 

discrimination from the perspective of the seller. 

330 Indeed, the enhancement of efficiency and the 

increase in profits (with the attendant signal to 

producers) is at the essence of price discrimination. 

See Nicholson & Snyder, supra, at 507 (when 

sellers’ price discrimination leads to an increase in 

total output it is ‘‘allocatively superior’’). 

331Professor Watt notes that Spotify has engaged 

in a non-monetary version of this strategy, offering 

an ad-supported service with no up-front 

subscription price but a non-monetary ‘‘fee’’ in the 

form of burdensome advertising. Watt WRT ¶ 15. 

However, as noted supra, it is not necessarily 

correct to equate listening to advertising with a 

monetary cost, because some advertising is 

valuable, especially more targeted advertising (why 

else would advertisers pay to advertise?) and nonmonetary costs may be quite de minimis for an 

appreciable segment of the public. In any event, the 

business of identifying consumer preferences in 

order to establish the appropriate mix of up-front 

fees and per-play ‘‘costs’’ is the specialized business 

activity of the interactive streaming services, so any 

change in rate structure that is premised on an 

assumption that market demand and the 

availability of musical works can be equally or 

better served via a different rate structure needs to 

be supported by additional record evidence. 

332The Majority Opinion finds that its significant 

increase in rates is necessary to provide sufficient 

income to songwriters and, thereby incentivize 

songwriting which will make more musical works 

‘‘available’’ to the public. In this regard, the 

majority has made the same mistake as Professor 

Rysman, confusing higher prices with increased 

revenues. The majority has collapsed the existing 

price discriminatory rate structure into a single 

greater-of structure, based on two revenue prongs. 

(which I acknowledge to be a ‘‘blunt’’ price 

discriminatory tool, compared with the richer price 

discrimination in the 2012 rate structure that has 

worked successfully).The majority’s approach fails 

to address two problems: (1) what is the evidence 

as to the elasticity of demand that makes them 

confidence that their 44% increase in rates will 

bring forth additional revenue to songwriters? (That 

is, what would be the corresponding decrease in 

quantity demanded?); and (2) with the TCC rate 

uncapped, how can the majority conclude that 

sound recording companies will not seek to 

preserve their share of royalties even as mechanical 

royalties rise under the majority’s approach, leading 

to a spiraling of royalties and a reduction of overall 

quantity demanded that offsets the rate increases? 

(This second problem is a reprise of my broader 

criticism of the majority’s assumption that the 

sound recording companies will docilely accept a 

‘‘Shapley Surrender’’ (to coin a phrase) and accept 

the transfer of tens of millions of dollars of royalties 

from them to music publishers/songwriters, rather 

than attempt to preserve their revenues and take 

that preservation out of the hides of the services, 

Copyright Owners, or both. 

marginal production cost. Because this 

difference is a critical aspect of the 

economics of intellectual property, 

Copyright Owners’ failure to explore 

this distinction precludes judicial 

reliance on their proffered analogy. 

Fifth, I find that Professors Watt and 

Marx are also talking past each other 

with regard to the usefulness of the 

consumer surplus/producer surplus 

approach. Professor Watt claims that the 

development of the surplus is relevant 

only to determine how the surplus will 

be split, as noted supra. See Watt WRT 

¶ 11. Professor Marx takes issue with the 

assertion that the rate structure does not 

determine the size of either producer or 

consumer surplus. I understand 

Professor Marx’s point to be that a 

royalty structure that efficiently 

incentivizes price discrimination will 

enlarge the producer surplus by 

appropriating consumer surplus and 

eliminating deadweight loss,329

resulting in more surplus that can then 

be allocated between the licensors and 

licensees. Indeed, a close reading of 

Professor Watt’s testimony is not 

inconsistent with this understanding. 

He testified that the rate structure ‘‘in 

and of itself’’ does not determine the 

size of the producer surplus. Rather, he 

testified that producer (and consumer) 

surplus are ‘‘entirely determined by the 

interplay of the [downstream] demand 

curve and the way the product is priced 

[downstream].’’ Id. But Professor Marx’s 

point is that (1) upstream price 

discrimination makes downstream price 

discrimination more efficient; and (2) 

downstream price discrimination (a) 

increases the producer surplus (by 

appropriating consumer surplus and 

eliminating the ‘‘deadweight loss); and 

(b) increases the quantity of musical 

works listened to downstream, i.e., that 

are available to the public at prices 

approximating their WTP. She does not 

state that the rate structure ‘‘in and of 

itself’’ will impact the consumer 

surplus; in fact, her point is that the rate 

structure interacts with the demand 

curve, via price discrimination, to affect 

the size of the producer surplus.330

Sixth, I am unpersuaded by Professor 

Watt’s argument that a positive per-play 

charge levied downstream would likely 

necessitate a lower subscription price 

that would maximize availability of 

music to the public. Although the point 

is economically logical, the services are 

the market actors who interact with 

listeners and are in the better position 

to gauge consumer demand. It would be 

inappropriate to rely on the opinion of 

Copyright Owners’ expert as to what is 

theoretically possible if the business 

model was changed, or the impact of 

that change on the availability of 

musical works. Indeed, Professor Watt 

could testify only that if the interactive 

streaming services attempted to pass 

through to listeners a per-unit royalty 

via a per-unit downstream charge, it 

would become ‘‘possible’’ that 

consumers who were not initially in the 

market would be induced by the lower 

subscription price to join the market, 

preferring the combination of the lower 

subscription price and the positive per 

play rate to a higher subscription price 

and a lower per play rate. Watt WRT 

¶ 15. However, the net effect of such a 

change is simply speculative. What can 

be said with some assurance is that such 

a change would impose a positive 

marginal cost on the listener for a 

product (the copy of streamed music) 

that has a zero production cost, which 

is inconsistent with static allocative 

efficiency. Also, if the services could 

obtain more revenue by lowering the 

subscription price and charging a perplay rate, there is nothing in the record 

to explain why they have not engaged 

in such a strategy on a widespread 

basis.331

Seventh, although I acknowledge that, 

in response to per-play pricing, the 

services could implement downstream 

usage restrictions, such as listening 

caps, usage-based tiers and overage 

charges (see Rysman WRT 75) such 

steps would not align with the price 

discriminatory model that would best 

serve a listening market with a variable 

WTP. Again, a price discriminatory 

upstream rate structure is appropriate 

not because it is either necessary or the 

only way in which this market can be 

structured, but rather because the record 

indicates it is a rate structure (among all 

the ‘‘second best’’ economic options) 

that has aligned well the characteristics 

of both the upstream and downstream 

markets in a manner that increases the 

availability of musical works ‘‘down the 

demand curve.’’ And once again, I note 

that Copyright Owners and their experts 

are not in the business of attempting to 

market interactive streaming services in 

the downstream market, so their 

‘‘advice’’ as to the beneficial use of 

listening caps, overages and tiered 

subscriptions is simply speculative. See 

[REDACTED]. 

In sum, I am persuaded that Professor 

Marx’s analysis of Factor A is consistent 

with the purpose of that statutory 

objective and sound economic theory. 

An upstream rate structure that contains 

multiple royalties reflective of and 

derived by downstream variable WTP 

will facilitate beneficial price 

discrimination. In turn, such price 

discrimination allows for access to be 

afforded ‘‘down the demand curve,’’ 

making musical works available to more 

members of the public. Accordingly, I 

would not make any adjustment 

pursuant to Factor A.332

C. Factors B and C: Fair Income and 

Returns and Consideration of the 

Parties’ Relative Roles 

Factor B directs the Judges to set rates 

that ‘‘afford the copyright owner a fair 

return for his or her creative work and 

the copyright user a fair income under 

existing economic conditions.’’ Factor C 

instructs the Judges to weigh ‘‘the 

2020 Federal Register / Vol. 84, No. 24 / Tuesday, February 5, 2019 / Rules and Regulations 

333These dimensions are: ‘‘creative contribution, 

technological contribution, capital investment, cost, 

risk, and contribution to the opening of new 

markets for creative expression and media for their 

communication.’’ Id. 

334Public utility-style regulation—especially in 

1967 when Mr. Nathan was testifying—was classic 

‘‘rate-of-return’’ regulation. Essentially, the 

regulator would identify the utility’s costs, 

determine the value of invested capital, ascertain an 

appropriate rate of return on such capital, and, 

then, establish the rate (or rates) charged to 

customers (or to different customers), in order to 

provide the utility with revenue that covers its costs 

and provides a ‘‘reasonable rate of return.’’ See 

generally C. Decker, Modern Economic Regulation 

at 104 (2014). 

335The economic experts for Copyright Owners 

and the Services acknowledge that microeconomic 

principles (pre-Shapley values) do not provide 

insights as to what constitutes ‘‘fairness.’’ See, e.g., 

3/30/17 Tr. 3991 (Gans) (‘‘fairness . . . is not a 

topic that is sitting in an economics textbook 

somewhere.’’); 3/20/17 Tr. 1830 (Marx) (‘‘Fairness 

is not a notion that has a unique definition within 

economics.’’); 1128–29 (Leonard) (‘‘economists . . . 

typically don’t do ‘fair’ ’’); 4/13/17 Tr. 5919 

(Hubbard) (Economists aren’t philosophers. I can’t 

go to the biggest picture meaning of ‘‘fair’’. . . .). 

Rather, economists attempt to identify ex ante 

‘‘fairness’’ by identifying fair processes in the 

workings of and structure of markets and 

bargaining, and in the efficiency of outcomes 

generated by these processes, although their 

understanding of what constitutes a fair ‘‘process’’ 

varies. See, e.g. 3/13/17 Tr. 555 (Katz) (‘‘[T]he most 

useful or practical way of thinking about it here was 

really to focus on whether the process is fair’’ . . . 

[and] a conception that’s often used in economics 

is that a process is fair if it’s . . . competitive or 

the outcome of a competitive market. A competitive 

bargaining process is fair. And so that’s the—the 

central notion of fairness that I used here.’’); 3/15/ 

17 Tr. 1129 (Leonard) (‘‘My concept of fair . . . and 

what I think a lot of economists would say is that 

if you have . . . a negotiation between two parties 

and there are no . . . constraints such as holdup 

. . . and there’s no market power . . . again I 

hesitate to use the word, so maybe I’ll put it in 

quotes, would be [‘]fair[’].’’); Eisenach WDT ¶ 24 (‘‘a 

rate set at the fair market value by definition 

provides fair returns and incomes to both the 

licensee and licensor.’’) 

336 Dr. Lloyd Shapley won a Nobel Memorial 

Prize in economics for this work. The Shapley 

approach represents a method for identifying fair 

outcomes, previously unaddressed in 

microeconomics. Mr. Nathan did not reference the 

potential use of the Shapley value approach in his 

1967 testimony, perhaps because this methodology, 

although developed by Lloyd Shapley in 1953, was 

not yet widespread in the economic literature. 

337The parties’ economic expert witnesses find 

that these Factors B and C are properly considered 

jointly in the present proceeding, and I agree. See 

Marx WDT ¶ ¶ 11–2 (the Shapley value . . . 

operationalizes the concept of fair return based on 

relative contributions.’’); Watt WRT ¶ 22 (‘‘the 

Shapley model is a very appropriate methodology 

for finding a rate that satisfies factors B and C of 

801(b)’’); see also Gans WDT ¶ ¶ 65 n. 35, 67 (noting 

the Shapley approach provides for a ‘‘fair 

allocation’’ as among input suppliers to reflect ‘‘the 

contributions made by each party.’’) 

338Unlike in public utility regulation, the 

Shapley value method considers the costs of all 

input providers whose returns will be determined. 

In traditional public utility rate regulation, the 

utility is a monopoly and thus the only provider of 

a regulated service. 

relative roles of the copyright owner and 

copyright user in the product made 

available to the public,’’ across several 

dimensions.333

As explained supra, Factor B, and, 

implicitly, Factor C, were included in 

section 801(b)(1) to establish a legal 

standard that would pass constitutional 

muster, yet the statutory language 

paralleled public utility-style regulatory 

principles.334 According to Mr. Nathan 

in his 1967 congressional testimony, 

these principles were ill-suited for 

setting rates that ‘‘equitably divided 

compensation for the ‘‘relative roles’’ of 

licensors and licensees in order to 

provide a ‘‘fair’’ outcome.335 However, 

as the parties’ economic experts make 

clear in their approaches to Factors B 

and C, economics has evolved since Mr. 

Nathan’s 1967 testimony in which he 

criticized as economically impossible 

any regulatory attempt to equitably 

divide creative contributions. 

The parties’ economic experts have 

addressed the Factor B and C issues 

through either a Shapley value analysis 

or an analysis ‘‘inspired’’ by the Shapley 

valuation approach.336 The Judges 

defined and described the Shapley 

value in a prior distribution proceeding: 

‘‘[T]the Shapley value gives each player 

his ‘average marginal contribution to the 

players that precede him,’ where 

averages are taken with respect to all 

potential orders of the players.’’ 

Distribution of 1998 and 1999 Cable 

Royalty Funds, 80 FR 13423, 13429 

(Docket No. 2008–1) (March 13, 2015) 

(citing U. Rothblum, Combinatorial 

Representations of the Shapley Value 

Based on Average Relative Payoffs, in 

The Shapley Value: Essays in Honor of 

Lloyd S. Shapley 121 (A. Roth ed. 

1988)).337 See also Gans WDT ¶ 64 (‘‘The 

Shapley value approach . . . models 

bargaining processes in a free market by 

considering all the ways each party to 

a bargain would add value by agreeing 

to the bargain and then assigns to each 

party their average contribution to the 

cooperative bargain.’’); Marx WDT ¶ 144 

(‘‘The idea of the Shapley value is that 

each party should pay according to its 

average contribution to cost or be paid 

according to its average contribution to 

value. It embodies a notion of 

fairness.’’); Watt WRT ¶ 23 (‘‘The 

Shapley model is a game theory model 

that is ultimately designed to model the 

outcome in a hypothetical ‘‘fair’’ market 

environment. It is closely aligned to 

bargaining models, when all bargainers 

are on an equal footing in the process.’’). 

In the parties’ direct cases, on behalf 

of the Services, Professor Marx 

constructed a Shapley model. On behalf 

of Copyright Owners, Professor Gans 

developed what he described as a 

‘‘Shapley-inspired’’ approach. In 

rebuttal to Professor Marx’s Shapley 

value model, Copyright Owners, 

through the testimony of Professor Watt, 

criticized Professor Marx’s analysis, and 

made adjustments to her model. 

1. The Parties’ Shapley Value Evidence 

and Testimony 

a. Shapley Values 

A Shapley value approach requires 

the economic modeler to identify 

downstream revenues available for 

division among the parties. The 

economic modeler must also input each 

provider’s costs, which each must 

recover out of downstream revenues, in 

order to identify the residue, i.e., the 

Shapley ‘‘surplus,’’ available for 

division among the parties. As such, the 

Shapley approach is cost-based, in the 

same general manner as a public utilitystyle rate-setting process identifies a 

utility’s costs that must be recovered 

before an appropriate rate of return can 

be set.338 In the present case, Copyright 

Owners and the Services have applied 

this general approach in different ways, 

and each challenges the appropriateness 

of the other’s model. 

To summarize the differences in their 

approaches, Professor Marx utilizes a 

Shapley value approach that purposely 

alters the actual market structure in 

order to obtain results that intentionally 

deviate from the market-based 

distribution of profits—in order to 

determine rates she identifies as 

reflecting a ‘‘fair’’ division of the 

surplus (Factor B) and recompense for 

the parties’ relative roles (Factor C). 

By contrast, Professor Watt’s 

‘‘correction’’ of Professor Marx’s model 

rejects her alteration of the market 

structure to achieve such a result. 

Rather, he maintains that the 

incorporation of ‘‘all potential orders of 

the players’’ in her model—as in all 

Shapley models—already adjusts for the 

hold-out power of any input provider 

who might threaten to walk away from 

a transaction. 

Professor Gans, like Professor Watt, 

does not attempt to alter the market 

structure. However, Professor Gans also 

does not attempt to construct Shapley 

values from the ground up. Rather, he 

takes as a given Dr. Eisenach’s 

estimation that record companies 

receive a royalty of $[REDACTED] per 

play from interactive streaming services. 

Because Professor Gans identifies 

musical works and sound recordings as 

perfect complements, he assumes that 

the musical works licensors would 

receive the same profit as the record 

companies (but not the same royalty 

rate, given their different costs). Because 

this is not a Shapley value ground-up 

Federal Register / Vol. 84, No. 24 / Tuesday, February 5, 2019 / Rules and Regulations 2021 

339Content costs, as opposed to non-content 

costs, are not deducted because the content costs 

comprise the surplus to be allocated in terms of 

royalties paid and residual (if any) that remains 

with the interactive streaming (and substitute) 

services. The non-content costs, as discussed infra, 

must be recovered by each input provider as part 

of its Shapley value, because entities must recover 

costs. 

approach (which would entail 

estimating the input costs of all three 

input providers—the record companies, 

the music publishers and the interactive 

streaming services—Professor Gans 

candidly acknowledged on crossexamination that he did not perform a 

full-fledged Shapley value analysis; 

hence he describes his methodology as 

a ‘‘Shapley-inspired’’ approach. 3/30/17 

Tr. 4109 (Gans) ([Q]: ‘‘[Y]ou do, is it fair 

to say, a Shapley-inspired analysis, if it 

wasn’t a Shapley model?’’ [PROFESSOR 

GANS]: ‘‘That’s fair enough.’’). 

b. Professor Marx’s Shapley Value 

Approach 

Professor Marx testified that, as an 

initial matter ‘‘[t]he Shapley value 

depends upon how [the modeler] 

delineate[s] the entities contributing to 

a particular outcome.’’ Marx WDT ¶ 145. 

More particularly, Professor Marx 

delineated the entities in a manner that 

was ‘‘not putting in market power into 

the model.’’ 3/20/17 Tr. 1862–63 (Marx). 

That is, she modeled the downstream 

interactive streaming services as a 

combined single service (and she added 

to her model ‘‘other distribution types 

as another form of downstream 

distribution to account for the potential 

opportunity cost (‘‘cannibalization’’) of 

interactive streaming). By modeling the 

downstream market in this manner, 

Professor Marx artificially—but 

intentionally—treated the multiple 

interactive streaming services as a single 

service, a treatment used as a device (or 

artifact) to countervail the allegedly real 

market power of the collectives (the 

music publishers and the record 

companies respectively) that owned the 

other inputs—a market power that 

Professor Marx concluded must be 

removed (i.e., offset) to establish a fair 

division of the surplus and a fair rate. 

See 3/20/17 Tr. 1865, 1907 (Marx) 

(‘‘[M]y goal is to model a fair market, 

where there [are] no obvious 

asymmetries in market power upstream 

versus down. So I viewed it as 

appropriate to view interactive 

streaming as one player.’’). 

With regard to the upstream market of 

copyright holders, Professor Marx 

utilized two separate approaches. In her 

self-described ‘‘baseline’’ approach, she 

‘‘treat[ed] rights holders as one 

upstream entity, reflecting the broad 

overlap in ownership between 

publishers and record labels.’’ Marx 

WDT ¶ ¶ 146, 162. In her ‘‘alternative’’ 

approach, she ungrouped the two 

collectivized copyright holders—the 

songwriters/publishers, on the one 

hand, and the recording artists/record 

companies, on the other. Id. The two 

purposes of her alternative approach 

were: (1) to separately allocate surplus 

and indicate rates for musical works 

(the subject of this proceeding); and (2) 

to illuminate the additional ‘‘bargaining 

power’’ of each category of copyright 

holder when these two categories of 

necessary complements arrive 

separately in the input market under the 

Shapley methodology. 3/20/17 Tr. 

1883–84 (Marx). Each of Professor 

Marx’s Shapley value approached is 

considered in more detail infra. 

i. Professor Marx’s Baseline Approach 

Professor Marx noted the undisputed 

principle that ‘‘[t]he calculation of the 

Shapley value depends on the total 

value created by all the entities together 

and the values created by each possible 

subset of entities.’’ Marx WDT ¶ 147. 

Equally undisputed is the 

understanding that ‘‘[t]hese values are 

functions of the associated revenue and 

costs.’’ Id. 

The surplus to be divided (from 

which rates can be derived) is realized 

at the downstream end of the 

distribution chain when revenues are 

received from retail consumers. That 

surplus can be measured as the profits 

of the downstream streaming services 

(and the alternative services in her 

model), i.e., their ‘‘revenue minus . . . 

non-content costs.’’ 339 The total 

combined value created by the delivery 

of the sound recordings through the 

interactive (and substitutional) 

streaming services consists of: (1) the 

aforementioned profits downstream 

(i.e., service revenue ¥ non-content 

cost) minus (2) ‘‘the copyright owners’ 

non-content costs. Simply put, 

‘‘surplus’’ reflects the amount of retail 

revenue that the input providers can 

split among themselves after their noncontent costs (i.e., the costs they do not 

simply pay to each other) have been 

recovered. 

Thus, any Shapley value calculation 

requires data to estimate costs and 

revenues. In her Shapley analysis, 

Professor Marx relied on 2015 data from 

Warner/Chappell for her music 

publisher non-content cost data and its 

ownership-affiliated record company, 

Warner Music Group, for record 

company non-content costs. She was 

limited to this data set for non-content 

costs because among all major holders 

of musical works and sound recording 

copyrights ‘‘only Warner . . . breaks 

down its cost by geographic region and 

by source in enough detail to estimate 

the amounts needed.’’ Marx WDT 

¶ ¶ 149–50. Utilizing this Warner cost 

data and extrapolating to the entire 

industry, Professor Marx estimated that 

‘‘Musical Work Copyright Holders’ Total 

Non-Content Costs’’ equaled $424 

million; and ‘‘Sound Recording 

Copyright Holders’ Total non-content 

costs equaled $2.605 billion (more than 

six times copyright Holders’ noncontent costs), summing to total 

upstream non-content costs of $3.028 

billion. Id. ¶ 150, Fig. 26. 

Turning to the downstream 

distribution outlets, Professor Marx 

identified and relied on Spotify’s 2015 

revenue and cost data from for 

interactive streaming services, and for 

the alternative distribution modes, she 

relied on Pandora’s and Sirius XM’s 

revenue and cost data. Id. ¶ 152 and 

nn.149–152. Using that data, Professor 

Marx estimated interactive streaming 

revenue of $[REDACTED]; and (2) 

interactive streaming profit of 

$[REDACTED]. For the alternative 

distributors (Pandora and Sirius XM), 

she estimated (1) revenues of $8.514 

billion; and (2) profits of $3.576 billion. 

The total downstream revenue, 

according to Professor Marx, equaled an 

estimated $10.118 billion. Id. ¶ 153 & 

Fig. 27. 

Professor Marx noted that there would 

be some degree of substitution between 

interactive streaming services and 

alternative distribution channels (e.g., 

non-interactive internet radio and 

satellite radio). Id. ¶ 154. She opined 

that ‘‘it is difficult to determine the 

exact value of this substitution effect,’’ 

so she reported a range of Shapley value 

calculations that corresponded to ‘‘a 

range of possible substitution effects.’’ 

Id. 

These data were all inputs into the 

Shapley algorithm, i.e., assigning value 

to each input provider for each potential 

order of arrival among these categories 

of providers to the market. The multiple 

values were summed and averaged as 

required by the Shapley methodology to 

arrive at the ‘‘Shapley value,’’ which as 

explained supra, accounts for each 

entity’s revenues and (non-content) 

costs under each possible ordering of 

market-arrivals. 

Based on the foregoing, Professor 

Marx estimated that the total royalty 

payment due from the interactive 

streaming services to the Copyright 

Owners would range from 

$[REDACTED] to $[REDACTED], based 

on varying assumptions as to the 

substitution between interactive 

services and substitute delivery 

2022 Federal Register / Vol. 84, No. 24 / Tuesday, February 5, 2019 / Rules and Regulations 

340Because her baseline approach combines 

sound recording and musical works licensors into 

a single entity, Professor Marx does not break out 

separate royalties for musical works or mechanical 

licenses. However, she recommends that the 

mechanical rate should be lowered based on this 

finding. Professor Marx does specifically estimate 

the musical works rate under her Alternative 

approach, as discussed infra. 

channels. This range of dollar-based 

revenues reflected a ‘‘percentage of 

revenue’’ paid by interactive streaming 

services to all copyright holders 

(musical works and sound recordings) 

ranging from [REDACTED]% to 

[REDACTED]%. Id. ¶ ¶ 159–160. 

Professor Marx then noted that this is 

well below the combined royalty rate of 

[REDACTED]% paid by Spotify for 

musical works and sound recording 

rights, indicating that the actual 

combined royalty payments are clearly 

too high. Id. ¶ 161.340

ii. Professor Marx’s Alternative 

Approach 

As noted supra, Professor Marx also 

performed an ‘‘alternative’’ Shapley 

value in which (as opposed to her 

baseline approach) she modeled the 

upstream market as two entities: ‘‘a 

representative copyright holder for 

musical works and a representative 

copyright holder for sound recordings.’’ 

Id. ¶ 163. (That change enlarged the 

number of ‘‘arrival’’ orderings to 24 

(four factorial) but, in all other respects, 

Professor Marx’s methodology was the 

same as her methodology in her initial 

approach. See id. ¶ 199, App. B). 

Under this alternative approach with 

two owners of collective copyrights 

upstream (musical works owners and 

sound recording owners), interactive 

streaming’s total royalty payments range 

from [REDACTED]% to [REDACTED]% 

of streaming revenue. Id. (Sound 

recording copyright holders’ total 

royalty income under this alternative 

approach ranged from [REDACTED]% to 

[REDACTED]% of revenue. Id. Professor 

Marx explained that this higher range of 

combined royalties (as a percentage) in 

her alternative approach arose from the 

fact that splitting the copyright holders 

into two creates two ‘‘must-haves’’ 

providing each upstream entity with 

more ‘‘market power and consequently 

higher payoffs than the baseline 

calculation.’’ Id. ¶ 164, n.153. By 

splitting the upstream licensors into two 

categories (record companies and 

musical works licensors), Professor 

Marx calculated that ‘‘musical work 

copyright holders’ total royalty income 

as a percentage of revenue ranges from 

[REDACTED]% to [REDACTED]%.’’ Id. 

¶ 163. By way of comparison, Spotify 

actually pays [REDACTED]% of its 

revenue for musical works royalties (i.e., 

‘‘All-In’’ royalties). Accordingly, 

Professor Marx concludes that 

‘‘[b]ecause this proceeding is about 

mechanical rates, the fairness 

component of 801(b) factors suggests 

that interactive streaming’s mechanical 

rates should be reduced from their 

current level.’’ Id. ¶ 161. 

iii. Discussion of Professor Marx’s 

Shapley Value Approach and the 

Criticisms of the Copyright Owners’ 

Witnesses 

Copyright Owners criticize Professor 

Marx’s model for ‘‘failing to accurately 

reflect realities of the market, where 

current observed market rates for sound 

recording royalties alone are 

approximately [REDACTED]% of 

service revenue. See Watt WRT ¶ 23; 

Written Rebuttal Testimony of Joshua 

Gans on Behalf of Copyright Owners 

¶ ¶ 19, 28 (Gans WRT); see also COPFF 

¶ 741. More technically, Copyright 

Owners object to Professor Marx’s 

joinder of the sound recording and 

musical works rightsholders as a single 

upstream entity in her ‘‘baseline’’ 

model, which had the undisputed effect 

of lowering Shapley values, and hence 

royalties, available to be divided 

between the two categories of 

rightsholders. Gans WRT ¶ 21; Watt 

WRT App. 3 at 2) (noting that in the real 

world, as opposed to the stylized 

Shapley-world, the institutional 

structure is such that the two would not 

jointly negotiate with licensees); see also 

COPFF ¶ 742. Even more particularly, 

Professor Gans questions Professor 

Marx’s rationale for her joint negotiation 

assumption, viz., the’ overlapping 

ownership interests of record companies 

and music publishers. Gans WRT ¶ 21. 

I find this criticism of Professor 

Marx’s baseline approach to be 

appropriate, in that it was not necessary 

to combine the two rightsholders in a 

Shapley analysis. As Professor Watt 

explained in his separate criticism, 

there is no need to collapse the 

rightsholders into a single bargaining 

entity to eliminate holdout power by the 

respective rightsholders, because the 

‘‘heart and soul’’ of the Shapley value 

excludes the holdout value that any 

input supplier could exploit in an actual 

bargain. 3/27/17 Tr. 3073 (Watt). More 

particularly, Professor Watt explains: 

The model . . . allows us to capture a 

player’s necessity [and] bargaining power, 

including vetoes, holdouts, everything . . . 

that’s actually in the market. It allows us to 

import all of that into a model that generates 

a fair reflection upon each player of what 

they actually do without any abuse of . . . 

any power that they may have. 

Id. at 3058–59. He emphasizes that, 

because the Shapley approach 

incorporates all possible ‘‘arrivals’’ of 

input suppliers, it eliminates from the 

valuation and allocation exercise the 

effect of an essential input supplier 

holding out every time or arriving 

simultaneously with another input 

supplier (or apparently creating Cournot 

Complement inefficiencies). Id. at 3069– 

70. 

However, the foregoing criticism does 

not pertain to Professor Marx’s second 

Shapley value model—her 

‘‘Alternative’’ model—in which she 

maintains the two separate rightsholders 

for musical works and sound 

recordings. Marx WDT ¶ 146, n.153; 3/ 

20/17 Tr. 1871–72 (Marx). With regard 

to this Alternative model, Copyright 

Owners level a more general criticism of 

Professor Marx’s approach that does 

pertain to this model (as well as her 

Baseline model). They assert, through 

both Professors Gans and Watt, that 

Professor Marx wrongly distorted the 

actual market in yet another manner— 

by assuming the existence of only one 

interactive streaming service—rather 

than the presence of competing 

interactive streaming services. Watt 

WRT ¶ ¶ 25, 32 n.19, 17; Gans WRT 

¶ ¶ 55–56; see also COPFF ¶ 755. By this 

change, they argue, Professor Marx 

inflated the Shapley surplus attributable 

to the interactive streaming services 

compared to the actual proportion they 

would receive in the market. 

According to Professor Gans, this 

simplified assumption belies the fact 

that the market is replete with many 

substitutable interactive streaming 

services, whose competition inter se 

reduces each service’s bargaining 

power. The problem, he opines, is that 

to the extent the entities being 

combined are substitutes for one 

another—such as alternative music 

services—then combining them ignores 

the effects of competition between them, 

thereby inflating their combined share 

of surplus from the joint enterprise (i.e. 

their Shapley value). Gans WRT ¶ 21. 

Professor Marx does not deny that she 

intentionally elevated the market power 

of the services by combining them in the 

model as a single represent agent. 

However, as noted supra, she explained 

that she made this adjustment to offset 

the concentrated market power that the 

rightsholders possess—separate and 

apart from any holdout power they 

might have (which, as noted by 

Professor Watt, is addressed by the 

Shapley ordering algorithm). Thus, her 

alteration of market power apparently 

was designed to address an issue— 

market power—that the Shapley value 

approach does not address. 3/20/17 Tr. 

Federal Register / Vol. 84, No. 24 / Tuesday, February 5, 2019 / Rules and Regulations 2023 

341For example, in Professor Marx’s ‘‘alternative’’ 

Shapley model, she models four entities, two 

upstream (musical works holders and sound 

recording holders), and two downstream (the 

representative single streaming service and a single 

alternate distribution outlet). With these four 

entities, the number of different arrival orders is 4!, 

or 24. If Professor Marx instead had broken the 

musical works copyright holders and the sound 

recording copyright holders respectively into two 

entities, the number of total entities would have 

increased from 4 to 6. The number of arrival orders 

would then have increased from 24 to 720. 

342At the hearing, Professor Watt was confronted 

on cross-examination with his published article 

stating that the Shapley value eliminates ‘‘market 

power.’’ As the foregoing analysis indicates, though, 

the Shapley value incorporates whatever market 

power exists (unless otherwise adjusted). Professor 

Watt testified that his language in this regard was 

‘‘poorly worded’’ and that he intended to state that 

the Shapley value eliminates the ‘‘abuse of market 

power,’’ by which he meant the ability of ‘‘must 

have’’ suppliers to ‘‘hold out’’ and refuse (or 

threaten to refuse) to negotiate. 3/27/17 Tr. 3131– 

33, 3148 (Watt). The Judges find, considering the 

totality of Professor Watt’s testimony and writings, 

that he indeed intended to refer to ‘‘abuse of market 

power’’ in his prior writing. This seems clear 

because he has consistently expressed the opinion 

that the Shapley value does prevent the exploitation 

of complementary oligopoly (must have/hold out) 

power, through its inclusion of all ‘‘arrival 

orderings’’ in its algorithm. However, his writings 

(like Professor Gans’s prior work with which he was 

confronted on cross-examination) demonstrate that 

the Shapley value approach may be applied by 

adjusting the number of licensors or licensees to 

change any existing market power disparities. This 

is fully consistent with Professor Marx’s testimony 

that the extent of market power remains a choice 

for the Shapley modeler, and Professor Katz’s 

testimony that a Shapley value that makes no such 

adjustment simply takes as given any disparity in 

market power that actually exists. 

1863 (Marx) (‘‘I want a model that 

represents a fair outcome in the absence 

of market power, so I am going to have 

to be careful about how I construct the 

model that I am not putting in market 

power into the model.’’). 

Although at first blush it would seem 

more appropriate for Professor Marx to 

have directly adjusted the copyright 

holders’ market power by breaking them 

up into several entities each with less 

bargaining power, such an approach 

would have made Shapley modeling 

less tractable (by increasing the number 

of arrival alternatives in the algorithm), 

compared with the practicality of 

equalizing market power by inflating the 

power of the streaming services (by 

reducing them to a single representative 

agent).341

Professor Gans testified that 

(regardless of how Professor Marx 

sought to equalize market power) her 

approach was erroneous because 

Shapley values are meant to incorporate 

market power asymmetries, not to 

eliminate them. Gans WRT ¶ 31 (noting 

Shapley values incorporate market 

power asymmetries). However, I note 

that Professor Gans acknowledged that 

in an Australian legal proceeding, he too 

combined multiple downstream entities 

into a single entity in his Shapley value 

approach in ‘‘comparison’’ to two 

upstream rightsholders. 3/30/17 Tr. 

4179 (Gans). Additionally, Professor 

Watt has authored and published an 

article (cited at Gans WDT ¶ 65, n.36) in 

which he too ‘‘artificially’’ equalized 

market power between rightsholders 

and licenses (radio stations) in the same 

manner. See R. Watt, Fair Copyright 

Remuneration: The Case of Music 

Radio, 7, 25, 35 (2010) 7 Rev. of Econ. 

Res. on Copyright Issues 21, 25, 35 

(2010) (‘‘artificially’’ modeling the 

‘‘demand side of the market as a single 

unit, rather than individual radio 

stations . . . thereby . . . add[ing] 

(notionally) monopsony power to the 

demand side’’ to offset the monopoly 

power of the input supplier). 

In essence, the import of this criticism 

is actually not about the faithfulness of 

Professor Marx’s approach to the 

Shapley Value model. Rather, the 

salience of this critique pertains to her 

decision to include within her ‘‘fair 

income/return’’ and ‘‘relative 

contribution’’ analysis of Factors B and 

C an adjustment for market power 

asymmetry that seeks to equalize market 

power as between Copyright Owners 

and the streaming services. In this 

regard, her adjustment is consistent 

with testimony by Professor Katz, who 

cautioned that the Shapley value 

approach takes the parties’ market 

power as a given, locking-in whatever 

disparities exist. 4/15/15 Tr. 4992–93 

(Katz). 

I agree with Professor Watt and find 

that the Shapley value approach 

inherently eliminates the ‘‘hold-out’’ 

problem that would otherwise cause a 

rate to be unreasonable, in that it would 

fail to reflect effective (or workable) 

competition. However, Professor Marx’s 

Shapley value approach attempts to 

eliminate a separate factor—market 

power—that she asserts renders a 

market-based Shapley approach 

incompatible with the objectives of 

Factors Band C of section 801(b)(1). 

Strictly speaking, this issue does not 

raise the question of which approach is 

more consistent with the traditional 

Shapley value approach, but rather, as 

Professor Marx noted, whether the 

modeler should equalize market power 

in this particular context in order to 

satisfy these two statutory objectives. 

See also 3/27/17 Tr. 3126–27 (Watt) 

(indicating that a market rate ‘‘might 

reflect’’ both existing market power and 

‘‘abuse of monopoly power,’’ the latter 

in the form of ‘‘hold-out’’ behavior, but 

the Shapley Value approach will 

eliminate the ‘‘abuse of monopoly 

power.’’).342

In the present case, the issue of 

market power, as it relates to the 

fairness of the rates and their reflection 

of the parties’ relative roles and 

contributions, pertains in large measure 

to the power of the rightsholders 

derived from their status as collectives. 

As noted supra, music publishing is 

highly concentrated among a few large 

publishers. (As also noted supra, the 

major record companies likewise 

control significant percentages of the 

market.) These large entities provide the 

efficiencies of a collective, performing 

the salutary service of minimizing 

licensing transaction costs. However, a 

by-product of collectives is the 

concentration of pricing power. This is 

why, for example, the performing rights 

societies, ASCAP and BMI, operate 

under consent decrees that limit their 

receipt of royalty rates reflective of their 

market power. See R. Epstein, Antitrust 

Consent Decrees at 31(2007) (noting that 

a collective representing numerous 

musical works can be understood as ‘‘all 

potential competitors in the market 

banded together . . . who will sell their 

goods—at above-competitive prices.’’). 

Professor Marx’s adjustment for 

market power, like Professor Watt’s 

adjustment as noted in his article (and 

like Professor Gans’s adjustment in his 

Shapley approach in the 

aforementioned Australian proceeding), 

ameliorates this collective pricing 

power. In that sense, the adjustment 

renders the Shapley value more 

representative of ‘‘fairness’’ and 

‘‘relative contributions.’’ In the process, 

the baby is not thrown out with the 

bathwater, so to speak, because the 

lower transaction costs achieved by the 

collectives are inputs in the Shapley 

model, thereby enlarging the surplus 

available for sharing among all input 

suppliers. (That is, if the songwriters 

were disaggregated (‘‘uncollectivized’’) 

and required to bargain separately with 

each interactive streaming service, 

transaction costs would be higher, if not 

disabling.) 

Professor Marx’s adjustment thus 

mitigates the collective market power of 

music publishers, yet retains the lower 

transaction costs incurred by 

rightsholders. In this approach, I detect 

a clear and modern echo of the ‘‘public 

utility’’ rate regulation history that was 

the foundation for Factors B and C of 

section 801(b)(1). The goal of such rate 

regulation has been to maintain the 

efficient cost structure of the utility (i.e., 

its low average costs), while 

ameliorating the ability of sellers to use 

their concentrated market power to earn 

2024 Federal Register / Vol. 84, No. 24 / Tuesday, February 5, 2019 / Rules and Regulations 

343To be clear, although I find such a market 

power adjustment a relevant consideration in a 

section 801(b)(1) Factor B and C analysis, it is not 

a consideration when determining only a rate that 

reflects ‘‘effective competition.’’ An effectively 

competitive rate need not adjust for such market 

power, because such a rate (as also set under the 

willing buyer/willing seller standard of 17 U.S.C. 

14(f)(2)(B)) does not include consideration of these 

two factors or their public utility style legislative 

history antecedents. Alternately stated, the Shapley 

value approach, without any adjustments for market 

power, eliminates only the complementary 

oligopoly (‘‘must have’’) effect, through its use of all 

‘‘arrival orderings,’’ indicating the outcome of an 

effectively competitive market, but does not 

necessarily address the Factor B and C objectives. 

344Professor Marx estimated a Shapley-derived 

rate of [REDACTED]% to [REDACTED]%. Marx 

WDT ¶ 163 & App. B. This rate range brackets the 

‘‘headline’’ 10.5% rate in the 2012 benchmark but 

is [REDACTED] pursuant to the 2012 benchmark 

structure. However, I note that Professor Marx 

testified that the mechanical rate she derived in her 

Alternate Shapley approach was not intended to be 

precise, but rather indicative of a range and 

direction for the Judges to consider. 4/7/17 Tr. 5576 

(Marx) (the Factor B and C Shapley Value analysis 

points in the ‘‘direction’’ of rates ‘‘moving slightly 

lower’’ within the existing rate structure). 

345Of course, the parties in the present 

proceeding could not know in advance that the 

Judges would determine a rate structure 

incorporating these principles, and their Shapley 

analyses thus were proffered given that uncertainty. 

346Professors Watt and Gans also criticize 

Professor Marx’s selection of data as inputs in her 

Shapley model. In fact, Professor Gans testified that 

his re-working of Professor Marx’s model through 

the use of different data alone accounted for the 

bulk of his increase (‘‘the lion’s share’’) of the 

surplus attributable to rights holders. However, in 

his written testimony, he did not separately 

quantify the impact of Professor Marx’s attempts to 

equalize market power by reducing the number of 

streaming services. 3/30/17 Tr. 4057, 4119 (Gans). 

Because I find that Professor Marx’s Shapley value 

model would be redundant given the rate structure 

analysis undertaken, for the reasons stated in the 

text, supra, these data input disputes are moot. Of 

course, if one were to apply the Shapley values in 

this proceeding (as the majority does), each party’s 

criticisms of the sufficiency of the other’s data sets 

would need to be carefully scrutinized. 

supranormal profits. See Decker, supra, 

(public utility rate of return regulation 

is intended to allow the regulated entity 

to recover its costs and a ‘‘fair rate of 

return’’). Professor Marx’s market power 

adjustment provides a form of market 

power mitigation, while still 

incorporating the higher surplus 

emanating from the more efficient cost 

structure of collectivized licenses.343

iv. Application of Professor Marx’s 

Shapley Value Analysis in this 

Proceeding 

Consideration of whether to apply 

Professor Marx’s Shapley value model 

requires the placement of her modeling 

in the proper context of other evidence 

in this proceeding. More particularly, 

her Shapley value methodology must be 

compared with the process that led to 

the creation of the 2012 rate structure. 

This comparison demonstrates that the 

Judges should not make any adjustment 

to the reasonable rates they have 

determined in this proceeding through 

an application of the Shapley value 

analyses.344

The 2012 rate structure (for subparts 

B and C) was the product of an 

industrywide negotiation, with the 

music publishers represented by the 

NMPA and the interactive streaming 

services represented by DiMA, their 

respective trade associations, continuing 

the 2008 industrywide settlement rate 

structure for subpart B. (Although 

individual entities also participated, the 

settlement was industrywide.) When 

such a settlement occurs, it contains the 

same benefits with regard to the 

avoidance of the ‘‘hold-out’’ effect and 

the equalizing of bargaining power as 

produced by Professor Marx’s Shapley 

value modeling. See 3/13/17 Tr. 577 

(Katz) (‘‘I think of the shadow as 

balancing the bargaining power between 

the two parties.’’); Katz CWRT 136, 

n.236 (‘‘there are market forces that 

promote the achievement of the 

statutory objectives in private 

agreements, such as the 2012 

Settlement, when the parties are equally 

matched (it was an industry-wide 

negotiation) and the negotiations are 

conducted in the shadow of a pending 

rate-setting proceeding that can be 

expected to set reasonable rates in the 

event that the private parties do not 

reach agreement.’’). Accordingly, any 

attempt by me to use Professor Marx’s 

Shapley modeling approach, after I have 

accepted the appropriateness of the 

present rate structure and rates as 

benchmarks, would constitute an 

inappropriate form of double-counting. 

The Judges came to a similar 

analytical conclusion with regard to 

analogous private agreements in Web III 

(on remand), where they adopted as 

benchmarks two settlements between 

SoundExchange (as the negotiating and 

settling agent for the record company 

licensors), and respectively, the 

National Association of Broadcasters 

(NAB) and Sirius XM. Determination of 

Royalty Rates for Digital Performance 

Right in Sound Recordings and 

Ephemeral Recordings, 79 FR 23102 

(Apr. 25, 2014). There (although 

Shapley values were not in evidence), 

the Judges found that 

SoundExchange, as a collective, would 

internalize the impact of the complementary 

nature of the repertoires on industry revenue 

and thus seek to maximize that overall 

revenue. This would result in lower overall 

rates compared to the situation in which the 

individual record companies negotiated 

separately. . . . 

The . . . power of SoundExchange was 

compromised by the fact that the NAB . . . 

could have chosen instead to be subject to 

the rates to be set by the Judges . . . which 

would be free of any potential cartel effects— 

rather than voluntarily agree to pay abovemarket rates. 

Id. at 23114 (emphasis added). In those 

settlements, the licensees likely were 

represented by, respectively, a trade 

association (NAB), and the entire 

licensee-side of the relevant market 

(Sirius XM). Thus, the Judges have 

previously acknowledged a similar 

removal of the ‘‘abuse of market power’’ 

(arising from complementarity) as in a 

Shapley value analysis, when the 

licensors are jointly represented in 

negotiations by a common agent. 

Further, because the 2012 settlement 

was industrywide, with both sides 

represented by (inter alia) their 

respective trade associations; there was 

no apparent imbalance of market power 

in the negotiating process (such as the 

imbalance that Professor Marx 

attempted to eliminate by equalizing the 

number of Shapley-participants on each 

side of the bargain). In this regard, in 

Web III (on remand), the Judges also 

found that these settlement 

agreements—with the ‘‘shadow’’ of a 

statutory license looming over the 

negotiations—avoided the same market 

power imbalance that Professor Marx 

seeks to eliminate in her Shapley 

modeling equalizing the number of 

licensors and interactive streaming 

services. Specifically, in Web III (on 

remand), the Judges held: 

[T]he NAB, which negotiated on behalf of 

a group of broadcasters, enjoyed a degree of 

bargaining power on the buyers’ side during 

its negotiations with SoundExchange. . . . . 

[S]uch added market power on the buyer side 

tends to mitigate, if not fully offset, 

additional leverage that SoundExchange 

might bring to the negotiations. . . . The 

question of competition is not confined to an 

examination of the seller’s side of the market 

alone. Rather, it is concerned with whether 

market prices can be unduly influenced by 

sellers’ power or buyers’ power in the 

market. 

Id. Thus, the Judges have previously 

recognized that a negotiated agreement 

between industrywide representatives— 

when a failure to agree will trigger a 

statutory rate proceeding—will: (1) 

ameliorate the complementary 

oligopolists’ ‘‘abuse of power’’ arising 

from the threat to withhold a ‘‘must 

have’’ license; and (2) reflect 

countervailing licensee power that 

neutralizes the monopoly power of a 

licensor-collective. 

Web III, as a prior determination by 

this body, thus underscores the 

redundancy of a Shapley value 

adjustment in such a context.345 346

Further, absent any valid reason to the 

contrary, the Judges have a statutory 

Federal Register / Vol. 84, No. 24 / Tuesday, February 5, 2019 / Rules and Regulations 2025 

347 If the Judges had considered the impact of the 

Shapley value analyses in the context of setting a 

reasonable rate—rather than as a separate 

consideration under Factors B and C—they would 

have reached the same result, given the 

countervailing power that exists between the 

settling parties. 

348Professor Gans multiplies the per play rate by 

81% but the per user rate by 80%. Compare Gans 

WDT ¶ 78 with Gans WDT ¶ 85. The rate derived 

by Professor Gans was the 80% figure. Gans WDT 

¶ 77, Table 3, line 17. This discrepancy does not 

impact the relevance of his analysis or my findings. 

duty to act in accordance with their 

prior determinations. 17 U.S.C. 

803(a)(1).347

c. Professor Gans’s ‘‘Shapley-Inspired 

Approach’’ 

On behalf of Copyright Owners, 

Professor Gans presented a model that 

he described as ‘‘inspired’’ by the 

Shapley value approach, and thus not 

per se a Shapley value approach. 3/30/ 

17 Tr. 4109 (Gans). At a high level, his 

Shapley-inspired approach attempted to 

determine the ratio of sound recording 

royalties to musical works royalties that 

would prevail in an unconstrained 

market. After calculating that ratio, he 

estimated what publisher mechanical 

royalty rates would be in a market 

without compulsory licensing by 

multiplying the benchmark sound 

recording rates by this ratio. Gans WDT 

¶ 63. 

Professor Gans begins his analysis by 

making two critical assumptions: (1) 

publishers and record companies must 

have equal Shapley values (i.e., they 

must each recover from total surplus 

equal profits), because musical 

compositions and sound recording 

performances are perfect complements 

and essential components of the 

streamed performance; and (2) the label 

profits from interactive streaming 

services are used as benchmark Shapley 

values. Gans WDT ¶ 77. The royalties 

that result will differ, given the different 

level of costs incurred by music 

publishers and record companies 

respectively. Gans WDT ¶ ¶ 23, 71, 74, 

76; Gans WRT ¶ ¶ 15–17; see also 3/30/ 

17 Tr. 3989 (Gans). 

Echoing Dr. Eisenach, Professor Gans 

found these assumptions critical 

because agreements between record 

companies and interactive streaming 

services are freely negotiated, i.e., they 

are not set by any regulatory body or 

formally subject to an ongoing judicial 

consent decree and, accordingly, are 

also not subject to any regulatory or 

judicial ‘‘shadow’’ that arguably might 

be cast from such governmental 

regulation in the market. Professor Gans 

therefore uses the profits arising from 

these unregulated market transactions to 

estimate what the mechanical rate for 

publishers would be if they too were 

also able to freely negotiate the rates for 

the licensing of their works. Gans WDT 

¶ 75. 

In light of his decision to assume this 

equality in upstream Shapley values, 

Professor Gans also coined the phrase 

‘‘top-down’’ approach to describe his 

approach, as distinguished from 

Professor Marx’s approach which— 

again coining a phrase—he labeled a 

’‘‘bottom-up’’ approach. Gans WDT ¶ 77. 

Moreover, as Professor Gans noted, an 

important distinction between the two 

approaches is that the bottom-up 

approach was ‘‘really an exercise . . . in 

modeling the royalty rate as the result 

of a hypothetical bargain [whereas] [t]he 

top-down approach was to actually 

calculate this [b]enchmark I was 

worried about. Is this price [i.e., the 

Copyright Owner’s proposed rate] too 

high or not?’’ 3/30/17 Tr. 4013–14 

(Gans). 

Professor Gans utilized data from 

projections in a Goldman Sachs analysis 

to identify the aggregate profits of the 

record companies and the music 

publishers, respectively. 3/30/17 Tr. 

4017 (Gans). Given his assumption that 

sound recordings and musical works 

were both ‘‘essential’’ inputs and thus 

able to claim an equal share of the 

profits, Professor Gans posed the 

question: ‘‘[H]ow much revenue do we 

need to hand to the publishers so that 

they end up earning the same profits as 

the labels?’’ Id. at 4018. 

He found that, for the music 

publishers to recover their costs and 

achieve profits commensurate with 

those of the record companies under his 

‘‘top down’’ approach, the ratio of 

sound recording royalties to musical 

works royalties derived from his 

Shapley-inspired analysis was 2.5:1. 

(which attributes equal profits to both 

classes of rights holders and 

acknowledges the higher costs incurred 

by record companies compared to music 

publishers). Gans WDT ¶ 77, Table 3. 

As noted, Professor Gans made a key 

assumption, treating as accurate Dr. 

Eisenach’s calculation of an effective 

per play rate for sound recordings of 

$[REDACTED]. Given those two inputs 

(the 2.5:1 ratio and the $[REDACTED] 

per play rate), Professor Gans’s 

approach indicated a market-derived 

musical works royalty rate of 

$[REDACTED] (rounded). Id. ¶ 78, Table 

3. However, because the musical works 

royalty is comprised of the mechanical 

rate and the performance rate paid to 

PROs (not to publishers), this 

$[REDACTED] rate needed to be 

adjusted down. Accordingly, he 

subtracted the performance rate and 

determined that the percent of revenues 

attributable to mechanical royalties was 

81% of the total musical works 

royalties, under his Shapley-inspired 

approach. Thus, he estimated a 

mechanical royalty rate of 

$[REDACTED] (rounded) (i.e., 

[REDACTED] × [REDACTED]), Gans 

WDT ¶ 78, confirming, in his opinion, 

the reasonableness of Copyright 

Owners’ proposed $0.0015 statutory per 

play rate. 

On this basis, Professor Gans also 

concluded that his Shapley-inspired 

approach supports the Copyright 

Owners’ per-user rate proposal. 

Applying the Shapley value based ratio 

of 2.5 to 1 to the benchmark per-user 

rate negotiated by the labels of 

%[REDACTED] per user per month, and 

after subtracting the value of the 

performance rights royalty, Professor 

Gans obtained an equivalent publisher 

mechanical rate of $[REDACTED] 

(rounded) per user per month. (i.e., 

([REDACTED]/2.5) × 80%).348 Gans 

WDT ¶ 85. 

i. Services’ Criticisms and Dissent’s 

Analysis of Professor Gans’s Approach 

I do not credit Professor Gans’s 

Shapley-inspired model, because of its 

assumption and use of the 

$[REDACTED] per play sound recording 

interactive rate. As found supra, Dr. 

Eisenach’s $[REDACTED] per play 

sound recording rate is not supported by 

the weight of the evidence. Therefore, 

Professor Gans’s Shapley-inspired 

analysis is unpersuasive for that reason 

alone. More particularly, the record 

company profits are inflated by the 

inefficient rates created through the 

Cournot Complements ‘‘hold out’’ 

problem that impacts the agreements 

between record companies and 

streaming services, as noted by the 

Services’ experts in this proceeding, and 

as the Judges noted in Web IV. 

Professor Gans’s model is also 

troubling because it begs two broad 

questions: (1) whether the model 

produces a ‘‘reasonable’’ rate as required 

by Sec. 801(b)(1); and (2) whether the 

model produces a rate that also 

adequately satisfies Factors B and C of 

section 801(b)(1). He testified as follows 

as to why he understands a Shapleybased methodology generally will 

provide an economic approach that 

satisfies the objectives of section 

801(b)(1): 

[O]ne of the reasons why the Shapley 

analysis is useful is because these regulations 

have a fairness objective. I wasn’t the only 

one—every economist I think you’ve asked 

about what they meant by fairness. It’s—it’s 

not a topic that is sitting in an economic 

2026 Federal Register / Vol. 84, No. 24 / Tuesday, February 5, 2019 / Rules and Regulations 

349Because I do not apply the Shapley 

approaches to adjust the rates or to determine 

reasonableness, the parties’ attacks on the 

usefulness of the other’s data sets are moot. 

However, as noted supra, to the extent the Majority 

Opinion applies any of the Shapley approaches, it 

needed to address and resolve the issues of data 

reliability. 

textbook somewhere. But the way in which, 

you know, I viewed it turned out to be 

similar to others in that it means that if you 

contribute something of economic value that 

is very similar to what somebody else does 

in terms of economic value, you should be 

expecting them to get the same out of it in 

terms of what they get to take home. 

Tr. 3/30/17 3991 (Gans). Thus, if (as Dr. 

Eisenach opines), there is an identity 

between a market rate and a reasonable 

(effectively competitive) rate that takes 

into account Factors B and C of section 

801(b)(1), then Professor Gans’s 

Shapley-inspired analysis would be 

useful (absent any other defects). 

Conversely, if there is no identity 

between a purely market-based rate and 

a reasonable (effectively competitive) 

rate that explicitly takes into account 

Factors B and C, then Professor Gans’s 

model is not helpful in applying those 

statutory factors. 

I find that Professor Gans’s model 

fails to incorporate sufficiently the 

reasonableness requirements and the 

‘‘fairness’’ and ‘‘relative roles’’ elements 

of section 801(b)(1). As explained supra, 

the concept of a ‘‘reasonable’’ rate 

reflects a market rate that is not 

distorted by a lack of effective 

competition. Here again, a key 

assumption made by Professor Gans, by 

his own admission, is that the 

$[REDACTED] per play rate estimated 

by Dr. Eisenach satisfies the statutory 

requirement of reasonableness. But, as 

discussed supra, Dr. Eisenach’s 

calculation of the $[REDACTED] per 

play rate sound recording rate reflects 

the unregulated ‘‘must have’’ hold out 

power of the record companies. Thus, 

Professor Gans’s Shapley-inspired 

approach has imported the record 

companies’ ‘‘must have’’ hold out 

power, and therefore inserted the 

‘‘abuse of power’’ that Professor Watt 

rightly identified as necessarily 

excluded from a full-fledged Shapley 

value approach. Although Professor 

Gans chose to describe his approach by 

coining the phrases ‘‘Shapley-inspired’’ 

and a ‘‘‘top-down’ Shapley,’’ I find his 

borrowing of the Shapley moniker in 

this context to be somewhat Orwellian, 

and find his approach to be too 

dissimilar from a full-fledged Shapley 

approach to be of assistance in 

establishing a reasonable (effectively 

competitive) rate. See 3/30/17 Tr. 4107– 

09 (Gans) (acknowledging that the top 

down/bottom up dichotomy is of his 

own making and that the original work 

by Dr. Shapley ‘‘is closer to a bottomup approach’’). 

Professor Gans’s Shapley-inspired 

approach also does not attempt to 

eliminate any other market power that 

may be possessed by the music 

publishers. As explained supra with 

regard to Professor Marx’s model and 

the critiques thereto, a model that does 

not address the market power 

asymmetries of the parties (as Professor 

Gans expressly acknowledges his model 

does not) thus fails to address the 

concepts of fairness and relative roles/ 

contributions required by Factors B and 

C. Thus, while Professor Marx’s analysis 

is redundant of the market power 

adjustments reflected in the 2012 

settlement, Professor Gans’s Shapleyinspired approach omits such 

adjustments. 

I also agree with Professor Marx’s 

further criticism that Professor Gans’s 

Shapley-inspired model is lacking in 

certain other important respects. 

Perhaps most importantly, he 

intentionally omits the streaming 

services from his model, because he is 

interested only in equating Copyright 

Owners’ profits with those of the record 

companies. Professor Gans did not 

provide any convincing evidence to 

explain why the Judges should rely on 

a model that omits from consideration 

the very licensees who would be paying 

the royalties pursuant to a rate the 

model is intended to confirm. (I 

understand this omission by Professor 

Gans to be one reason why he described 

his model a ‘‘top-down,’’ Shapley 

‘‘inspired’’ approach, as opposed to a 

full-fledged Shapley value model.). 

Consequently, Professor Gans’s results 

provide for the streaming services to pay 

total royalties (sound recording and 

musical works) greater than their total 

revenue, leading to losses despite their 

undisputed contribution to the total 

surplus available for distribution. Marx 

WRT ¶ 184 (Professor Gans’s Shapleyinspired calculation of a per-play 

musical works royalty rate of $0.0031, 

combined with the existing sound 

recording royalty rate, would cause 

Spotify to pay [REDACTED]% of its 

revenue in royalties). 

Professor Gans apparently explains 

away these losses by the fact that the 

Services have been engaging in below 

market pricing to increase market share 

and such pricing shows up in their 

lower revenues. I address that issue 

elsewhere in this Determination. 

However, to the extent Professor Gans is 

correct in this regard, it shows the limits 

of a Shapley-inspired approach that, by 

definition, treats accounting costs and 

revenue inputs as relevant parameters. 

Further in that regard, it is important to 

note ‘‘[t]hat the main problem with the 

Shapley approach . . . a particularly 

pressing problem [is] that of data 

availability.’’ R. Watt, Fair Copyright 

Remuneration: The Case of Music 

Radio, 7 Rev. Econ. Rsch Copyright. 

Issues at 21, 27 (2010).349

Finally, one of the assumptions 

behind Professor Gans’s approach is that 

musical works are as indispensable as 

sound recordings for purposes of a 

Shapley value approach. However, that 

assumption is subject to challenge. More 

particularly, I find merit in a further 

critique made by Dr. Leonard. He 

questioned the underlying assumption 

that musical works are ‘‘essential 

inputs,’’ or ‘‘must haves,’’ in the same 

way in which sound recordings are 

essential inputs/’’must haves.’’ 

As he explained, at the time a 

recording artist and a record company 

decide upon which song to record, they 

have numerous songs from which to 

choose. No one song therefore is 

essential at the time in which the 

recording artist and the record company 

must select the song. (The essentiality of 

the song may exist, as Copyright Owners 

note, in those instances when the 

songwriter himself or herself is of 

sufficient acclaim and notoriety.). It is 

only after a song has been incorporated 

into a recording that it has become 

essential. As Dr. Leonard notes, this 

point is analogous to the problem of 

‘‘hold up’’ in the setting of royalties for 

patented inputs within a larger complex 

device. At an early stage of production, 

the device manufacturer has the 

opportunity to select among several 

competing patented inputs, but once 

one of them is selected, its uniqueness 

allows the owner of the input to 

demand a disproportionate share of the 

revenue in royalties, because, ex post 

selection, it has become ‘‘essential.’’ 

However, ex ante selection, it was not 

‘‘essential.’’ Thus, the existing spread 

between musical works royalties and 

sound recording royalties, according to 

Dr. Leonard, may reflect this 

phenomenon, rather than simply an 

artificial regulatory diminution in the 

mechanical royalty rate. 4/5/17 Tr. 

5185–87 (Leonard). 

d. Professor Watt’s Shapley Approach 

and the ‘‘See-Saw’’ Effect 

As noted supra, Professor Watt 

appeared solely as a rebuttal witness. In 

that capacity, he testified as to 

purported defects in Professor Marx’s 

Shapley modeling. In addition, he 

presented alternative modeling intended 

Federal Register / Vol. 84, No. 24 / Tuesday, February 5, 2019 / Rules and Regulations 2027 

350Under her baseline Shapley value model, 

Professor Marx estimated combined royalty 

payments equaling [REDACTED]% to 

[REDACTED]% of total Spotify revenue. Id. at 1888. 

She could not break that range down into musical 

works and sound recording royalties because her 

baseline model treated both types of royalties as if 

they were paid to a single rightsholder. 

351At present, record companies receive 

approximately 55% to 60% of total interactive 

streaming revenue, substantially higher than the 

37.9% calculated by Professor Watt. 

352More specifically, Professor Watt calculates 

that, for each dollar that the statutory rate holds 

down fair market musical works royalties, 95 cents 

is captured by the record companies (and 5 cents 

is captured by the streaming services). Watt WRT 

¶ 23, n.13 & App. 3. 

353Although it is noteworthy that Professor Gans 

does not anticipate such an effect, and instead 

speculates that the Services might simply pay the 

same sound recording royalty rate and the higher 

mechanical rate out of existing profits or through 

an increase in downstream prices. Gans WRT ¶ 32. 

The Judges find no evidence to support the 

speculation that the Services could engage in such 

substantial adjustments in the market. 

354According to the RIAA, interactive streaming 

revenues for 2015 totaled $1.604 billion. See Marx 

WDT ¶ 153 & App. B.1.b (citing RIAA figures). The 

assumption that the see-saw effect would induce 

record companies to surrender a significant amount 

of this revenue (which has been growing year-overyear as streaming becomes more popular), absent 

any evidence, makes the assumption of the see-saw 

effect speculative and unreasonable. 

355Copyright Owners argue that Professor Watt 

(as a non-lawyer) did not appreciate that contracts 

between record companies and interactive 

streaming services could be renegotiated at any time 

upon mutual agreement of those parties. See 

CORPFF–JS at 221–22 (and citations therein). While 

this legal point of course is correct, it does not 

address the economic uncertainty as to whether the 

record companies would be willing to renegotiate 

rates in a manner by which they concede a loss of 

royalty revenue as indicated by Professor Watt’s 

anticipated see-saw effect. 

to apply an adjusted version of Professor 

Marx’s Shapley value model. 

Professor Watt agreed that the 

Shapley model is extremely well-suited 

to address Factors B and C within 

section 801(b)(1). 3/27/17 Tr. 3057 

(Watt). He characterizes the Shapley 

model as an approach ‘‘for analyzing 

complex strategic behavior in a very 

simple way.’’ Id. at 3058. However, he 

found that Professor Marx’s approaches 

contained several flaws and 

methodological issues. Id. at 3057. 

Accordingly, he, like Professor Gans, 

attempted to adjust her modeling in a 

manner that, in his opinion, generated 

‘‘decent, believable results.’’ Id. at 3058. 

Professor Watt criticized Professor 

Marx’s alternative Shapley model, in 

which she treated sound recording and 

musical works as being owned by two 

distinct entities. 3/20/17 Tr. 1885 

(Marx). In that alternative model, 

Professor Marx found that Spotify’s total 

royalties for musical works and sound 

recordings combined would range from 

{REDACTED]% to [REDACTED]% of 

total royalties. Id.350 That total indicated 

a payment of approximately 

[REDACTED]% to [REDACTED]% of 

total revenue for sound recording 

royalties. Although she understood that 

Spotify actually pays [REDACTED]% of 

its revenue in total for these royalties 

(see id. at 1860–61), she was not 

concerned by the difference, or by the 

reduction of royalties paid to record 

companies under her alternative 

Shapley model, because she ‘‘wasn’t 

trying to construct a model of the 

market as it is,’’ but rather . . . a model 

that represents the allocation of surplus 

in a way that is fair and respects the 

relative contributions of the parties’’. Id. 

at 188. 

In his Shapley modeling adjusting 

Professor Marx’s analysis, Professor 

Watt reached conclusions that were 

broadly consistent with her finding that 

the ratio of sound recording:musical 

works royalty rates should decline. 

Specifically, Professor Watt found that 

at least [REDACTED]% of interactive 

streaming revenue should be allocated 

to the rightsholders, and, of this 

[REDACTED] should be retained by the 

Musical Works copyright holders, which 

equals [REDACTED]% (i.e., 

[REDACTED]) of total interactive 

streaming revenue. As these 

calculations imply, the record 

companies would receive 

[REDACTED]% ([REDACTED]) of the 

[REDACTED]% of interactive streaming 

revenues allocated to the rightsholders. 

Thus, the record companies would 

receive [REDACTED]% of total 

interactive streaming revenues 

([REDACTED]). Watt WRT ¶ 35; 3/27/17 

Tr. 3083, 3115–16 (Watt).351

Professor Watt’s ratio of 37.9%:29.1% 

equals 1.3:1, whereas Professor Marx’s 

ratio (given the range she estimated) is 

[REDACTED], a ratio of [REDACTED]. 

Moreover, both of their ratios are well 

below the current ratio of approximately 

[REDACTED] for Spotify, and 

approximately [REDACTED] comparing 

the 10.5% headline rate to an average 

sound recording rate of approximately 

[REDACTED]% of revenue. 

Accordingly, under their Shapley value 

models, Professors Watt and Marx 

appear to be in general agreement that 

the ratio of sound recording:musical 

works royalties should decline. 

However, Professor Watt’s model 

indicates that this ratio reduction 

should occur via a significant increase 

in musical works royalties and an even 

greater precipitous decline in the sound 

recording royalties set in an unregulated 

market. On the other hand, Professor 

Marx’s model indicates that the ratio 

should narrow essentially through a 

dramatic reduction in sound recording 

royalties and an essentially stable 

musical works rate. 

Professor Watt explains that the cause 

of the dramatically lower sound 

recording rates in his Shapley model is 

the existing regulation of musical works 

rates. Specifically, he opines: 

[The reason] my predicted fraction of 

revenues for sound recording royalties is 

significantly less than what is observed in the 

market [is] simple. The statutory rate for 

mechanical royalties in the United States is 

significantly below the predicted fair rate, 

and the statutory rate effectively removes the 

musical works rightsholders from the 

bargaining table with the services. Since this 

leaves the sound recording rightsholders as 

the only remaining essential input, 

bargaining theory tells us that they will 

successfully obtain most of the available 

surplus. 

Watt WRT ¶ 36.352 Professor Watt 

opines that, because the mechanical rate 

should rise, the sound recording rate 

therefore should fall—a phenomenon 

the parties have summarized as a ‘‘seesaw’’ effect. See, e.g., 4/5//17 Tr. 5079– 

80:10 (Katz).353

However, no witness explained how 

this seesaw effect would occur, and 

there were no witnesses from the record 

companies who testified that the record 

companies would impotently acquiesce 

to a significant loss in royalties to 

accommodate the diversion of a huge 

economic surplus away from them and 

to the Copyright Owners.354 Indeed, 

when the Judges inquired of Professor 

Watt how such an adjustment might 

occur, given existing contractual rates 

between the Services and record 

companies, he acknowledged that he 

had not thought of that problem until he 

was questioned by the Judges at the 

hearing, and he acknowledged that the 

timing of any adjustment might be 

disruptive. 3/27/17 Tr. 3091–92 

(Watt).355

2028 Federal Register / Vol. 84, No. 24 / Tuesday, February 5, 2019 / Rules and Regulations 

356As a matter of economic theory, given the 

present interactive streaming market structure, the 

record companies already have the economic power 

to put streaming services out of business, because 

the market in which record companies and 

interactive streaming services negotiate is 

unregulated. So, I recognize that—given the present 

interactive streaming market structure—the record 

companies apparently find it in their self-interest to 

maintain the presence of interactive licensees. 

Indeed, the evidence in Web IV revealed that the 

record companies’ strategy has been to 

‘‘[REDACTED].’’ Web IV, supra, at 63 (restricted 

version). However, if mechanical royalty rates were 

to increase to a level that significantly reduced the 

profits of the record companies from streaming, 

there is no evidence in the record in this proceeding 

that indicates whether the record companies would 

decide to maintain the current vertical structure of 

the market and docilely accept such a revenue loss. 

For example, they could create their own streaming 

services (perhaps learning the lessons from the 

failed Pressplay and MusicNet attempts of the past). 

Or, they could maintain the sound recording royalty 

rates, thereby hastening a more immediate exit of 

streaming services from the market. Although such 

an acceleration of exit might be the consequence in 

an unregulated market (fostering Schumpeterian 

competition for the holy grail of market scale), such 

a change would not only be inconsistent with 

affording the services a fair income, but also would 

clearly be disruptive pursuant to Factor D of section 

801(b)(1). 

I am loath to adopt the hypothetically 

plausible idea of a ‘‘see-saw’’ effect 

impacting the division of this surplus, 

when there is simply no evidence that 

such an adjustment would occur.356

Given at least $[REDACTED] in 

interactive streaming revenue, if the 

record companies were to passively 

accept a reduction of royalties from 

approximately [REDACTED]% of that 

revenue, $[REDACTED], to Professor 

Watt’s proposed 37.9%, i.e., to 

$[REDACTED], they would lose 

(assuming no further growth in 

streaming) approximately 

$[REDACTED] annually, or 

$[REDACTED] over five years. The 

Judges cannot merely assume that the 

record companies would ‘‘go quietly 

into that good night,’’ rather than seek 

some other market structure in which to 

protect this revenue, such as, for 

example, resurrecting the idea of 

establishing or otherwise integrating 

their own streaming services. The 

Services’ experts, and Apple’s expert, 

testified that any purported see-saw 

effect was indeterminate with regard to 

its impact on the interactive streaming 

services. See 4/5/17 Tr. 4944–45 (Katz) 

(acknowledging the possibility that a 

mechanical royalty rate increase would 

affect sound recording royalties in the 

future but not immediately, and that 

there is no reliable estimate of the size 

of any such adjustment); 4/7/17 Tr. 

5515–5516(Marx) ([REDACTED]); 4/5/17 

Tr. 5704–05 (Ghose) (‘‘[I]t’s quite likely 

that the streaming service will want to 

maintain their royalties and their 

revenues at the current levels. And so, 

you know, to me it seems like an 

extreme statement that the entire 

increase in publisher profits will come 

at the expense of the streaming 

services.’’). 

In any event, from an evidentiary 

perspective, there is no need to indulge 

in such speculation. There is absolutely 

no evidence that such a significant shift 

in royalty distribution would occur, nor 

is there sufficient evidence as to the 

potential consequences of such a 

draconian reallocation of revenue. 

In sum, my analysis of the Shapley 

approaches with regard to the elements 

of Factors B and C demonstrates 

(whether that analysis was undertaken 

as part of the ‘‘reasonable rate’’ analysis 

or as a separate ‘‘factor’’ analysis) that 

there is no basis to apply those elements 

to adjust the reasonable rates as set forth 

in the 2012 benchmark. 

D. Factor D 

The last itemized factor of section 

801(b)(1), Factor D, directs the Judges 

‘‘to minimize any disruptive impact on 

the structure of the industries involved 

and on generally prevailing industry 

practices.’’ 17 U.S.C. 801(b)(1)(D). In 

Phonorecords I, 74 FR at 4525, the 

Judges reiterated their understanding of 

Factor D, concluding that a rate would 

need adjustment under Factor D if that 

rate 

directly produces an adverse impact that is 

substantial, immediate and irreversible in the 

short-run because there is insufficient time 

for either [party] to adequately adapt to the 

changed circumstance produced by the rate 

change and, as a consequence, such adverse 

impacts threaten the viability of the music 

delivery service currently offered to 

consumers under this license. 

Id. I adopt and apply in this 

Determination the same Factor D test as 

set forth above. 

The Services are advocating broadly 

for essentially the same rate structure 

that now exists, except for the 

elimination of the Mechanical Floor. 

See SJPFF at 1. My proposed rate 

structure is consistent with that 

position, except that I would maintain 

the Mechanical Floor. I would also 

maintain the existing rates. Because this 

result would continue the existing 

structure and rates, neither the services 

nor Copyright Owners can reasonably 

complain of disruption under the 

standard quoted above. Indeed, a 

continuation of the present rate 

structure and rates reflects constancy 

rather than disruption. 

More particularly, the fact that 

interactive streaming services are failing 

to realize an accounting profit under 

this structure does not demonstrate that 

the rate structure proposed would 

threaten their viability. As noted supra, 

such year-over-year accounting losses 

are consistent with a long-run 

competition for the market, during 

which losses can be endured as a cost 

of doing business. Indeed, the services 

remain in business despite the existence 

of chronic losses. In that regard, a 

financial expert engaged jointly by the 

Services testified that he was ‘‘not aware 

of a single standalone digital music 

service that has sustained profitability 

to date,’’ Testimony of David B. Pakman 

¶ 23 (Pakman WDT), yet that lack of 

sustained profitability has not 

materially diminished the ranks of 

interactive streaming services nor 

dampened competition from new 

entrants into the market. 

Moreover, the record indicates that 

the services are not as concerned with 

short-term rates as they are with longterm market share, or what the services 

call ‘‘scaling,’’ in their Schumpeterian 

competition for the market. This point 

was made clearly by [REDACTED] 

(emphasis added). Of course, 

[REDACTED]. Katz CWRT ¶ 204. 

The point is well-recognized by 

Google as well. See Joyce WDT ¶ 20 

([REDACTED]) (emphasis added). This 

acknowledgement was echoed by one of 

Copyright Owners’ economic expert 

witnesses, who explained that the 

services’ competitive posture was 

typical of internet-based entities that 

accept short-term losses to build 

economies of scale through, for 

example, investing in customer loyalty. 

Rysman WDT ¶ 32. 

Moreover, another expert economic 

witness for the Services, Dr. Leonard, 

candidly acknowledged that ‘‘[a]n 

argument may be made that the services 

expect to be profitable eventually, 

otherwise they would go out of business 

and Spotify, for example, would not 

have positive market value.’’ Leonard 

AWDT 101, n.153. Likewise, Pandora 

notes that it can ‘‘achieve the growth it 

projects . . . under a continuation of 

existing rates and terms . . . .’’ 

Pandora’s Introductory Rebuttal 

Memorandum at 3 (emphasis added). 

This inability of the services to 

become profitable will persist based on 

the record, under existing competitive 

conditions. As Mr. Pakman testified: 

[N]o current music subscription 

service—including marquee brands like 

Pandora, Spotify and Rhapsody—can 

ever be profitable, even if they execute 

perfectly . . . .’’ Pakman WDT 23 n.5 

(citation omitted). Although Mr. 

Pakman blames the lack of profitability 

(in part) on the level of mechanical 

royalties, id., I find, based on the 

Services’ own acknowledgement, that 

the lack of profitability is a function of 

Federal Register / Vol. 84, No. 24 / Tuesday, February 5, 2019 / Rules and Regulations 2029 

357 In this regard, Copyright Owners argue that 

the services could attempt to cut their non-content 

costs in order to remain sustainable. They suggest 

that the services emulate Sirius XM, which 

successfully reduced its non-content costs as a 

percent of revenue. See Rysman WDT ¶ ¶ 98–100. 

However, as Spotify’s CFO, Mr. McCarthy notes, 

Sirius and XM (the pre-merger predecessors to 

Sirius XM) ‘‘nearly bankrupted themselves and 

merged in order to survive.’’ McCarthy WRT ¶ 42. 

Moreover, not only were Sirius XM’s content costs 

lower as a percent of revenue, but also its ‘‘costs 

declined as a percentage of revenue as they grew 

their subscriber base. . . . . Their costs declined as 

they achieved scale.’’ Id. Once again, the necessity 

of scale remains paramount. 

358That is, the potentially profitable long-run cost 

curve, from scaling, may never be attainable if the 

interactive streaming services remain on perpetual 

loss-inducing short-run cost curves. 

359Of course, it is possible that the majority may 

be correct that rolling out this rate increase over five 

years will ameliorate its disruptive impact. But it 

is equally possible that the rate and structure 

remain disruptive even when introduced in this 

extended manner. The salient point, again, is that 

the fact this rate structure and these rates were 

adopted post-hearing with the absence of a record 

to support them makes the analysis too speculative. 

The parties deserve an opportunity, and are entitled 

to one under the statute, to challenge the rates and 

rate structure, whether as inconsistent with Factor 

D or as inconsistent with any other requisite set 

forth in section 801(b)(1). 

a lack of scale (which is another way of 

indicating that market share is divided 

among too many competing interactive 

streaming services). In fact, Mr. Pakman 

himself recognizes the importance of 

scale to long-run profitability. Pakman 

WDT ¶ 26 n.11 (‘‘Scale is a magic word 

for so many cloud-based companies and 

services. . . . It may be that Spotify will 

gain some power over the royalties it 

pays once it has a critical mass of 

customers . . . .’’). Pakman WDT ¶ 26 

n.11 (emphasis added). 

Given the paramount importance of 

scaling to the long-term success of 

interactive streaming, lowering 

mechanical royalties in this 

proceeding—simply to mitigate or 

prevent shorter-term losses by 

interactive streaming services—would 

constitute an unwarranted subsidy to 

these services at the expense of 

Copyright Owners.357

Also, although the services have 

indicated their ability to withstand 

short-term losses as they compete for 

scale/market share, the record also 

indicates that there is a limit to such 

losses—however imprecise and 

unknown—beyond which services will 

be unable to attract capital and survive 

until the long run market de ́nouement. 

In this regard, Mr. Joyce noted that, 

[REDACTED], at some point 

[REDACTED]. Joyce WDT ¶ 18. As Dr. 

Leonard testified, ‘‘[REDACTED].’’ 

Leonard AWDT ¶ 101 n.151. This 

testimony reflects the well-understood 

principle that ‘‘[t]here is no specific 

time period . . . that separates the short 

run from the long run.’’ R. Pindyck & D. 

Rubinfeld, Microeconomics at 190 (6th 

ed. 2005). Thus, although the services 

appear able to withstand current rates, 

a rate increase of the magnitude sought 

by Copyright Owners would run the 

very real risk of preventing the services 

from surviving the ‘‘short-run,’’ 

threatening the type of disruption Factor 

D is intended to prevent.358

Moreover, the 44% rate increase 

adopted by the majority likewise places 

the services in quite unchartered waters 

regarding the disruptive impact of that 

increase. The majority actually 

recognizes that the increase is so 

draconian that it cannot be 

implemented immediately. See Majority 

Opinion, supra. Instead, the majority 

leaches the increase into the rates yearby-year, as if one can simply assume 

that the disruptive impact of such a rate 

increase is ameliorated in this manner. 

Without a record to consider the impact 

of that rate increase, the majority may 

simply be substituting a slow bleed for 

a fatal blow.359

With regard to the Mechanical Floor, 

I do not find that the continuation of 

this element of the existing rate 

structure would be disruptive under the 

applicable standard. As discussed 

supra, the risks of fractionalized 

licenses and publisher withdrawals 

have receded, belying any reasonable 

assertion that such events are on the 

‘‘immediate’’ horizon. Further, given 

that musical works royalties are a 

fraction of the total royalties paid by 

interactive streaming services, the 

triggering of the Mechanical Floor 

would be unlikely to ‘‘threaten the 

viability’’ of the interactive market.’’ 

Further, because the Mechanical Floor 

was a bargained-for feature of the 

benchmark structure on which the 

Services rely, and because that 

provision protects the funds available to 

provide liquidity to songwriters in the 

form of advances, removal of the 

Mechanical Floor would more likely 

disrupt ‘‘prevailing industry practices.’’ 

The continuation of the Mechanical 

Floor avoids that disruption. 

With regard to the impact on 

Copyright Owners, I find that the 

adoption of a rate structure based on the 

2012 benchmark would not be 

disruptive under the standard quoted 

above. The record indicates that music 

publishers have been profitable while 

this standard has been in effect, and that 

interactive streaming has contributed to 

that profitability. Although that 

profitability is generated by a 

combination of mechanical and 

performance royalties paid by 

interactive streaming services, the fact 

that those two rights are—without 

dispute—perfect complements, means 

that the profitability of Copyright 

Owners must be viewed economically 

in the context of royalties realized from 

both rights (especially given the ‘‘AllIn’’ aspect of the mechanical royalty). 

Indeed, Copyright Owners’ principal 

complaint is that, although their 

mechanical royalty revenue has 

increased, it has not increased as fast as 

the increase in the number of musical 

works streamed via sound recordings 

performed on interactive services. 

However, as noted, supra, the record 

reflects that the increase in streams is 

itself a function of the price 

discriminatory rate structure that 

incentivizes downstream services that 

can move ‘‘down the demand curve’’ 

and offer streaming services to listeners 

with a low WTP. 3/13/17 Tr. 701 (Katz). 

Such a structure will produce an 

increase in royalties, even as it may 

produce a lower effective royalty per 

stream but, as Professor Hubbard 

explained, that comparison misses the 

salient economic point. 4/13/17 Tr. 

5971–73 (Hubbard). 

Further, the current rate structure has 

allowed for rates to exceed the 10.5% 

headline rate. For example, 

[REDACTED]. Accord, 3/29/17 Tr. 3637 

(Israelite (‘‘I don’t even think we 

thought of them as minima. We thought 

of them as alternate rates. And we 

would get the greatest of three different 

rates.’’). In this regard, the existing 

‘‘greater of’’ structure incorporates the 

benefits that the Copyright Board of 

Canada identified (as discussed supra) 

as tilted in favor of rights holders, 

although the existing structure, 

established via settlement, ameliorates 

that impact by providing a ‘‘lesser-of’’ 

approach in the second rate prong.) 

In sum, I find no evidentiary basis to 

support a Factor D adjustment to the 

rates I have otherwise proposed in this 

Dissent. 

Because I have rejected Copyright 

Owners’ rate proposal, the potential 

disruptive impact of their proposal is 

moot, given my decision to consider the 

‘‘reasonable’’ rate structure and rate 

issues before considering the four 

itemized factor of section 801(b)(1). 

However, if I had incorporated this 

disruption consideration within the 

‘‘reasonable rate’’ analysis, my finding 

would be the same, i.e., that Copyright 

Owners’ rate proposal would be 

unreasonable because it would be 

disruptive under the Factor D standards. 

That disruptive effect is captured by 

the following summary of the rate 

changes for the several services if 

Copyright Owners’ proposal were to be 

implemented: 

2030 Federal Register / Vol. 84, No. 24 / Tuesday, February 5, 2019 / Rules and Regulations 

FIGURE 3—IMPACT OF COPYRIGHT OWNERS’ PROPOSAL ON SPOTIFY’S ROYALTIES

[In thousands except percentages, 2H2015–1H2016] 

[REDACTED] 

FIGURE 4—ESTIMATED IMPACT OF THE COPYRIGHT OWNERS’ PROPOSAL ON OTHER STREAMING SERVICES, 2015 

Service name 

Current Copyright Owner’s proposal Impact of Copyright Owners’ 

proposal 

Mechanical 

royalties 

Musical works 

royalties 

Mechanical 

royalties 

Musical works 

royalties 

% increase in 

mechanical 

royalties 

% increase in 

musical works 

royalties 

Google .................................... [REDACTED] .... [REDACTED] .... [REDACTED] .... [REDACTED] .... [REDACTED] .... [REDACTED] 

Amazon Prime ....................... [REDACTED] .... [REDACTED] .... [REDACTED] .... [REDACTED] .... [REDACTED] .... [REDACTED] 

Rhapsody ............................... $7,323,476 ....... $10,253,216 ..... $11,230,793 ..... $14,160,533 ..... 53% .................. 38% 

Apple Music ........................... [REDACTED] .... [REDACTED] .... [REDACTED] .... [REDACTED] .... [REDACTED] .... [REDACTED] 

TIDAL ..................................... $755,522 .......... $1,754,546 ....... $1,600,723 ....... $2,599,747 ....... 112% ................ 48% 

Deezer .................................... $438,412 .......... $563,412 .......... $822,541 .......... $947,540 .......... 88% .................. 68% 

Other ...................................... $4,478,824 ....... $11,255,046 ..... $16,709,012 ..... $23,485,234 ..... 273% ................ 109% 

Average .................................. $5,277,869 ....... $8,311,074 ....... $16,098,189 ..... $19,131,394 ..... 194% ................ 109% 

Marx WRT at 8–9. 

These increases are on an order of 

magnitude that indicates to me that 

such increase would clearly implicate 

the applicable disruption standard. 

The knock-on effects of this proposal 

would be disruptive under the 

applicable standard. Pandora indicates 

it would have little choice but to 

eliminate its limited offering Pandora 

Plus product. See Herring WRT ¶ 10. 

Under Copyright Owners’ proposed per 

user rate, it would pay [REDACTED] the 

amount it now pays for both mechanical 

and performance royalties, and royalties 

would be even higher on the other 

prong—based on the number of songs 

played, Herring WRT ¶ 7, even though 

the overwhelming majority of streams 

on Pandora Plus are noninteractive and 

do not implicate the mechanical right. 

See Herring WRT ¶ 16. Mr. Herring 

further testified that, under Copyright 

Owners’ proposal, [REDACTED]. 

Consequently, he notes that Pandora 

would lack any resources to invest in its 

burgeoning interactive streaming service 

offerings. Herring WDT ¶ 58. 

[REDACTED]. Marx WRT ¶ 16 & Fig. 

1. 

In similar fashion, Google claims that 

Copyright Owners’ rate proposal would 

[REDACTED] rates it pays for interactive 

streaming on its Google Play Music 

service. More particularly, if Google had 

paid Copyright Owners’ proposed rates 

from June 2013 to June 2016, 

[REDACTED], Leonard WRT ¶ 9. On 

dollar terms, Google estimates that it 

would have paid $[REDACTED] for 

musical works rights under Copyright 

Owners’ proposal, compared with 

[REDACTED] it paid during that period 

under existing rates. Id. ¶ ¶ 8, 9. 

Apple also claims that Copyright 

Owners’ proposal would lead to a 

shutdown of one of its services. 

Specifically, Apple asserts that it would 

not continue to offer its purchased 

content locker service if it were subject 

to Copyright Owners’ per-user proposal 

and that Apple would never offer a paid 

content locker again if the Copyright 

Owners’ rates were in place. 3/22/17 Tr. 

2526 (Dorn). 

Copyright Owners argue that the 

services could ameliorate any disruptive 

impact from these rates by estimating 

the number of plays per user, raising 

rates and/or limiting functionality (e.g., 

by capping listening). See Rysman WRT 

¶ 75. However, there is no sufficient 

evidence in the record that the services 

could engage in such modifications and 

estimations in order to offset the 

draconian rate increases that would 

result from Copyright Owners’ proposal. 

Copyright Owners argue that the 

current status of the interactive 

streaming market indicates that neither 

their proposed rate structure nor their 

proposed higher rates would be 

disruptive pursuant to Factor D or the 

Judges’ application of that factor. In that 

regard, Copyright Owners make three 

points with regard to ongoing market 

developments: 

1. Ongoing entry of new interactive 

streaming services indicates that the market 

is healthy and expanding; 

2. The entry in particular of large entities 

with comprehensive product ‘‘ecosysems’’ 

(i.e., Amazon, Apple and Google) specifically 

demonstrates the opportunity for profitable 

interactive streaming; and 

3. [REDACTED]. 

4/4/17 Tr. 4647–49 (Eisenach). 

I find these three points inapposite 

with regard to the issue of whether 

Copyright Owners’ proposed rate 

structure and rate increase would 

minimize disruption. Simply put, 

Copyright Owners’ proposed changes 

are not yet in existence, so any evidence 

of changes that have occurred 

previously cannot reflect the potential 

impact of Copyright Owners’ proposals. 

Of particular note, Copyright Owners’ 

proposal would eliminate the ‘‘All-In’’ 

feature of the mechanical rate, resulting 

in the disruption from ‘‘doublecounting’’ the value of perfect 

complements that the ‘‘All-In’’ feature is 

designed to avoid. 

And again, I return to Copyright 

Owners’ endorsement of the bargaining 

room theory and their concomitant 

acknowledgement that they might well 

engage in bargaining, by which they 

would agree to lower rates to 

accommodate different services catering 

to differing listener segments. That 

argument at least implicitly 

acknowledges that Copyright Owners’ 

‘‘one-size-fits-all’’ rate is a misnomer, 

and that their proposal is designed to 

handle potential disruptive impacts 

through negotiation that were not 

subject to an application of any of the 

section 801(b)(1) factors. 

In sum, even if I had integrated my 

disruption analysis into my reasonable 

rate analysis (as opposed to treating it 

separately), I would have rejected 

Copyright Owners’ rate structure and 

rate proposal as inconsistent with Factor 

D. 

I also find that Apple’s per play rate 

structure would be disruptive, 

Federal Register / Vol. 84, No. 24 / Tuesday, February 5, 2019 / Rules and Regulations 2031 

essentially for the same reason that 

Copyright Owners’ proposed structure 

would be disruptive. For example, 

Apple’s proposed per-play rate would 

increase Spotify’s royalty payments on 

its ad-supported service to 

[REDACTED]% of revenue, threatening 

the continuation of that service—the 

only one to provide a monetarily free 

service. See Written Rebuttal Testimony 

of Paul Vogel (on behalf of Spotify USA 

Inc.) ¶ 48. In this regard, the senior 

director of Apple Music, David Dorn, 

indicated in colloquy with the Judges, 

that [REDACTED]. See 3/22/17 Tr. 2538 

(Dorn) ([REDACTED]). Of course, the adsupported Spotify service, and the 

[REDACTED], for example, are designed 

to [REDACTED], so Apple’s proposed 

rate structure and rates would 

disincentivize such distribution 

channels, impeding the ‘‘future’’ listener 

conversion Mr. Dorn anticipates. 

Moreover, such low WTP listeners on an 

ad-supported or other free-to-thelistener service generate royalties that 

would otherwise not be paid. See 

Written Rebuttal Testimony of Will Page 

(On behalf of Spotify USA Inc.) ¶ 48 

([REDACTED]); see also 4/7/17 Tr. 5503 

(Marx) ([REDACTED]). 

4. Conclusion 

For the foregoing reasons, I 

respectfully dissent. 

Issue Date: November 5, 2018. 

David R. Strickler, 

Copyright Royalty Judge. 

List of Subjects in 37 CFR Part 385 

Copyright, Phonorecords, Recordings. 

Final Regulations 

■ For the reasons set forth in the 

preamble, the Copyright Royalty Judges 

revise 37 CFR part 385 to read as 

follows. 

PART 385—RATES AND TERMS FOR 

USE OF NONDRAMATIC MUSICAL 

WORKS IN THE MAKING AND 

DISTRIBUTING OF PHYSICAL AND 

DIGITAL PHONORECORDS 

Subpart A—Regulations of General 

Application 

Sec. 

385.1 General. 

385.2 Definitions. 

385.3 Late payments. 

385.4 Recordkeeping for promotional or 

free trial non-royalty-bearing uses. 

Subpart B—Physical Phonorecord 

Deliveries, Permanent Digital Downloads, 

Ringtones, and Music Bundles 

385.10 Scope. 

385.11 Royalty rates. 

Subpart C—Interactive Streaming, Limited 

Downloads, Limited Offerings, Mixed 

Service Bundles, Bundled Subscription 

Offerings, Locker Services, and Other 

Delivery Configurations 

385.20 Scope. 

385.21 Royalty rates and calculations. 

385.22 Royalty floors for specific types of 

offerings. 

Subpart D—Promotional and Free-to-theUser Offerings 

385.30 Scope. 

385.31 Royalty rates. 

Authority: 17 U.S.C. 115, 801(b)(1), 

804(b)(4). 

PART 385—RATES AND TERMS FOR 

USE OF NONDRAMATIC MUSICAL 

WORKS IN THE MAKING AND 

DISTRIBUTING OF PHYSICAL AND 

DIGITAL PHONORECORDS 

Subpart A—Regulations of General 

Application 

§ 385.1 General. 

(a) Scope. This part establishes rates 

and terms of royalty payments for the 

use of nondramatic musical works in 

making and distributing of physical and 

digital phonorecords in accordance with 

the provisions of 17 U.S.C. 115. This 

subpart contains regulations of general 

application to the making and 

distributing of phonorecords subject to 

the section 115 license. 

(b) Legal compliance. Licensees 

relying on the compulsory license 

detailed in 17 U.S.C. 115 shall comply 

with the requirements of that section, 

the rates and terms of this part, and any 

other applicable regulations. This part 

describes rates and terms for the 

compulsory license only. 

(c) Interpretation. This part is 

intended only to set rates and terms for 

situations in which the exclusive rights 

of a Copyright Owner are implicated 

and a compulsory license pursuant to 17 

U.S.C. 115 is obtained. Neither the part 

nor the act of obtaining a license under 

17 U.S.C. 115 is intended to express or 

imply any conclusion as to the 

circumstances in which a user must 

obtain a compulsory license pursuant to 

17 U.S.C. 115. 

(d) Relationship to voluntary 

agreements. The rates and terms of any 

license agreements entered into by 

Copyright Owners and Licensees 

relating to use of musical works within 

the scope of those license agreements 

shall apply in lieu of the rates and terms 

of this part. 

§ 385.2 Definitions. 

Accounting Period means the monthly 

period specified in 17 U.S.C. 115(c)(5) 

and any related regulations. 

Affiliate means an entity controlling, 

controlled by, or under common control 

with another entity, except that an 

affiliate of a record company shall not 

include a Copyright Owner to the extent 

it is engaging in business as to musical 

works. 

Bundled Subscription Offering means 

a Subscription Offering providing 

Licensed Activity consisting of Streams 

or Limited Downloads that is made 

available to End Users with one or more 

other products or services (including 

products or services subject to other 

subparts) as part of a single transaction 

without pricing for the subscription 

service providing Licensed Activity 

separate from the product(s) or 

service(s) with which it is made 

available (e.g., a case in which a user 

can buy a portable device and one-year 

access to a subscription service 

providing Licensed Activity for a single 

price), 

Copyright Owner(s) are nondramatic 

musical works copyright owners who 

are entitled to royalty payments made 

under this part pursuant to the 

compulsory license under 17 U.S.C. 

115. 

Digital Phonorecord Delivery or DPD 

has the same meaning as in 17 U.S.C. 

115(d). 

End User means each unique person 

that: 

(1) Pays a subscription fee for an 

Offering during the relevant Accounting 

Period; or 

(2) Makes at least one Play during the 

relevant Accounting Period. 

Family Plan means a discounted 

subscription to be shared by two or 

more family members for a single 

subscription price. 

Free Trial Offering means a 

subscription to a Service’s transmissions 

of sound recordings embodying musical 

works when: 

(1) Neither the Service, the Record 

Company, the Copyright Owner, nor any 

person or entity acting on behalf of or 

in lieu of any of them receives any 

monetary consideration for the Offering; 

(2) The free usage does not exceed 30 

consecutive days per subscriber per 

two-year period; 

(3) In connection with the Offering, 

the Service is operating with 

appropriate musical license authority 

and complies with the recordkeeping 

requirements in § 385.4; 

(4) Upon receipt by the Service of 

written notice from the Copyright 

Owner or its agent stating in good faith 

that the Service is in a material manner 

operating without appropriate license 

authority from the Copyright Owner 

under 17 U.S.C. 115, the Service shall 

within 5 business days cease 

2032 Federal Register / Vol. 84, No. 24 / Tuesday, February 5, 2019 / Rules and Regulations 

transmission of the sound recording 

embodying that musical work and 

withdraw it from the repertoire 

available as part of a Free Trial Offering; 

(5) The Free Trial Offering is made 

available to the End User free of any 

charge; and 

(6) The Service offers the End User 

periodically during the free usage an 

opportunity to subscribe to a non-free 

Offering of the Service. 

GAAP means U.S. Generally Accepted 

Accounting Principles in effect at the 

relevant time, except that if the U.S. 

Securities and Exchange Commission 

permits or requires entities with 

securities that are publicly traded in the 

U.S. to employ International Financial 

Reporting Standards in lieu of Generally 

Accepted Accounting Principles, then 

that entity may employ International 

Financial Reporting Standards as 

‘‘GAAP’’ for purposes of this subpart. 

Interactive Stream means a Stream, 

where the performance of the sound 

recording by means of the Stream is not 

exempt from the sound recording 

performance royalty under 17 U.S.C. 

114(d)(1) and does not in itself, or as a 

result of a program in which it is 

included, qualify for statutory licensing 

under 17 U.S.C. 114(d)(2). 

Licensee means any entity availing 

itself of the compulsory license under 

17 U.S.C. 115 to use copyrighted 

musical works in the making or 

distributing of physical or digital 

phonorecords. 

Licensed Activity, as the term is used 

in subpart B of this part, means delivery 

of musical works, under voluntary or 

statutory license, via physical 

phonorecords and Digital Phonorecord 

Deliveries in connection with 

Permanent Digital Downloads, 

Ringtones, and Music Bundles; and, as 

the term is used in subparts C and D of 

this part, means delivery of musical 

works, under voluntary or statutory 

license, via Digital Phonorecord 

Deliveries in connection with 

Interactive Streams, Limited 

Downloads, Limited Offerings, mixed 

Bundles, and Locker Services. 

Limited Download means a 

transmission of a sound recording 

embodying a musical work to an End 

User of a digital phonorecord under 17 

U.S.C. 115(c)(3)(C) and (D) that results 

in a Digital Phonorecord Delivery of that 

sound recording that is only accessible 

for listening for— 

(1) An amount of time not to exceed 

one month from the time of the 

transmission (unless the Licensee, in 

lieu of retransmitting the same sound 

recording as another limited download, 

separately and upon specific request of 

the End User made through a live 

network connection, reauthorizes use 

for another time period not to exceed 

one month), or in the case of a 

subscription plan, a period of time 

following the end of the applicable 

subscription no longer than a 

subscription renewal period or three 

months, whichever is shorter; or 

(2) A number of times not to exceed 

12 (unless the Licensee, in lieu of 

retransmitting the same sound recording 

as another Limited Download, 

separately and upon specific request of 

the End User made through a live 

network connection, reauthorizes use of 

another series of 12 or fewer plays), or 

in the case of a subscription 

transmission, 12 times after the end of 

the applicable subscription. 

Limited Offering means a subscription 

plan providing Interactive Streams or 

Limited Downloads for which— 

(1) An End User cannot choose to 

listen to a particular sound recording 

(i.e., the Service does not provide 

Interactive Streams of individual 

recordings that are on-demand, and 

Limited Downloads are rendered only as 

part of programs rather than as 

individual recordings that are ondemand); or 

(2) The particular sound recordings 

available to the End User over a period 

of time are substantially limited relative 

to Services in the marketplace providing 

access to a comprehensive catalog of 

recordings (e.g., a product limited to a 

particular genre or permitting 

Interactive Streaming only from a 

monthly playlist consisting of a limited 

set of recordings). 

Locker Service means an Offering 

providing digital access to sound 

recordings of musical works in the form 

of Interactive Streams, Permanent 

Digital Downloads, Restricted 

Downloads or Ringtones where the 

Service has reasonably determined that 

the End User has purchased or is 

otherwise in possession of the subject 

phonorecords of the applicable sound 

recording prior to the End User’s first 

request to use the sound recording via 

the Locker Service. The term Locker 

Service does not mean any part of a 

Service’s products otherwise meeting 

this definition, but as to which the 

Service has not obtained a section 115 

license. 

Mixed Service Bundle means one or 

more of Permanent Digital Downloads, 

Ringtones, Locker Services, or Limited 

Offerings a Service delivers to End 

Users together with one or more nonmusic services (e.g., internet access 

service, mobile phone service) or nonmusic products (e.g., a telephone 

device) of more than token value and 

provided to users as part of one 

transaction without pricing for the 

music services or music products 

separate from the whole Offering. 

Music Bundle means two or more of 

physical phonorecords, Permanent 

Digital Downloads or Ringtones 

delivered as part of one transaction (e.g., 

download plus ringtone, CD plus 

downloads). In the case of Music 

Bundles containing one or more 

physical phonorecords, the Service 

must sell the physical phonorecord 

component of the Music Bundle under 

a single catalog number, and the 

musical works embodied in the Digital 

Phonorecord Delivery configurations in 

the Music Bundle must be the same as, 

or a subset of, the musical works 

embodied in the physical phonorecords; 

provided that when the Music Bundle 

contains a set of Digital Phonorecord 

Deliveries sold by the same Record 

Company under substantially the same 

title as the physical phonorecord (e.g., a 

corresponding digital album), the 

Service may include in the same bundle 

up to 5 sound recordings of musical 

works that are included in the standalone version of the set of digital 

phonorecord deliveries but not included 

on the physical phonorecord. In 

addition, the Service must permanently 

part with possession of the physical 

phonorecord or phonorecords it sells as 

part of the Music Bundle. In the case of 

Music Bundles composed solely of 

digital phonorecord deliveries, the 

number of digital phonorecord 

deliveries in either configuration cannot 

exceed 20, and the musical works 

embodied in each configuration in the 

Music Bundle must be the same as, or 

a subset of, the musical works embodied 

in the configuration containing the most 

musical works. 

Offering means a Service’s 

engagement in Licensed Activity 

covered by subparts C and D of this part. 

Paid Locker Service means a Locker 

Service for which the End User pays a 

fee to the Service. 

Performance Royalty means the 

license fee payable for the right to 

perform publicly musical works in any 

of the forms covered by subparts C and 

D this part. 

Permanent Digital Download or PDD 

means a Digital Phonorecord Delivery in 

a form that the End User may retain on 

a permanent basis and replay at any 

time. 

Play means an Interactive Stream, or 

play of a Limited Download, lasting 30 

seconds or more and, if a track lasts in 

its entirety under 30 seconds, an 

Interactive Stream or play of a Limited 

Download of the entire duration of the 

track. A Play excludes an Interactive 

Stream or play of a Limited Download 

Federal Register / Vol. 84, No. 24 / Tuesday, February 5, 2019 / Rules and Regulations 2033 

that has not been initiated or requested 

by a human user. If a single End User 

plays the same track more than 50 

straight times, all plays after play 50 

shall be deemed not to have been 

initiated or requested by a human user. 

Promotional Offering means a digital 

transmission of a sound recording, in 

the form of an Interactive Stream or 

Limited Download, embodying a 

musical work, the primary purpose of 

which is to promote the sale or other 

paid use of that sound recording or to 

promote the artist performing on that 

sound recording and not to promote or 

suggest promotion or endorsement of 

any other good or service and: 

(1) A Record Company is lawfully 

distributing the sound recording 

through established retail channels or, if 

the sound recording is not yet released, 

the Record Company has a good faith 

intention to lawfully distribute the 

sound recording or a different version of 

the sound recording embodying the 

same musical work; 

(2) For Interactive Streaming or 

Limited Downloads, the Record 

Company requires a writing signed by 

an authorized representative of the 

Service representing that the Service is 

operating with appropriate musical 

works license authority and that the 

Service is in compliance with the 

recordkeeping requirements of § 385.4; 

(3) For Interactive Streaming of 

segments of sound recordings not 

exceeding 90 seconds, the Record 

Company delivers or authorizes delivery 

of the segments for promotional 

purposes and neither the Service nor the 

Record Company creates or uses a 

segment of a sound recording in 

violation of 17 U.S.C. 106(2) or 

115(a)(2); 

(4) The Promotional Offering is made 

available to an End User free of any 

charge; and 

(5) The Service provides to the End 

User at the same time as the 

Promotional Offering stream an 

opportunity to purchase the sound 

recording or the Service periodically 

offers End Users the opportunity to 

subscribe to a paid Offering of the 

Service. 

Purchased Content Locker Service 

means a Locker Service made available 

to End User purchasers of Permanent 

Digital Downloads, Ringtones, or 

physical phonorecords at no 

incremental charge above the otherwise 

applicable purchase price of the PDDs, 

Ringtones, or physical phonorecords 

acquired from a qualifying seller. With 

a Purchased Content Locker Service, an 

End User may receive one or more 

additional phonorecords of the 

purchased sound recordings of musical 

works in the form of Permanent Digital 

Downloads or Ringtones at the time of 

purchase, or subsequently have digital 

access to the purchased sound 

recordings of musical works in the form 

of Interactive Streams, additional 

Permanent Digital Downloads, 

Restricted Downloads, or Ringtones. 

(1) A qualifying seller for purposes of 

this definition is the entity operating the 

Service, including affiliates, 

predecessors, or successors in interest, 

or— 

(i) In the case of Permanent Digital 

Downloads or Ringtones, a seller having 

a legitimate connection to the locker 

service provider pursuant to one or 

more written agreements (including that 

the Purchased Content Locker Service 

and Permanent Digital Downloads or 

Ringtones are offered through the same 

third party); or 

(ii) In the case of physical 

phonorecords: 

(A) The seller of the physical 

phonorecord has an agreement with the 

Purchased Content Locker Service 

provider establishing an integrated offer 

that creates a consumer experience 

commensurate with having the same 

Service both sell the physical 

phonorecord and offer the integrated 

locker service; or 

(B) The Service has an agreement with 

the entity offering the Purchased 

Content Locker Service establishing an 

integrated offer that creates a consumer 

experience commensurate with having 

the same Service both sell the physical 

phonorecord and offer the integrated 

locker service. 

(2) [Reserved] 

Record Company means a person or 

entity that: 

(1) Is a copyright owner of a sound 

recording embodying a musical work; 

(2) In the case of a sound recording of 

a musical work fixed before February 

15, 1972, has rights to the sound 

recording, under the common law or 

statutes of any State, that are equivalent 

to the rights of a copyright owner of a 

sound recording of a musical work 

under title 17, United States Code; 

(3) Is an exclusive Licensee of the 

rights to reproduce and distribute a 

sound recording of a musical work; or 

(4) Performs the functions of 

marketing and authorizing the 

distribution of a sound recording of a 

musical work under its own label, under 

the authority of the Copyright Owner of 

the sound recording. 

Relevant Page means an electronic 

display (for example, a web page or 

screen) from which a Service’s Offering 

consisting of Streams or Limited 

Downloads is directly available to End 

Users, but only when the Offering and 

content directly relating to the Offering 

(e.g., an image of the artist, information 

about the artist or album, reviews, 

credits, and music player controls) 

comprises 75% or more of the space on 

that display, excluding any space 

occupied by advertising. An Offering is 

directly available to End Users from a 

page if End Users can receive sound 

recordings of musical works (in most 

cases this will be the page on which the 

Limited Download or Interactive Stream 

takes place). 

Restricted Download means a Digital 

Phonorecord Delivery in a form that 

cannot be retained and replayed on a 

permanent basis. The term Restricted 

Download includes a Limited 

Download. 

Ringtone means a phonorecord of a 

part of a musical work distributed as a 

Digital Phonorecord Delivery in a format 

to be made resident on a 

telecommunications device for use to 

announce the reception of an incoming 

telephone call or other communication 

or message or to alert the receiver to the 

fact that there is a communication or 

message. 

Service means that entity governed by 

subparts C and D of this part, which 

might or might not be the Licensee, that 

with respect to the section 115 license: 

(1) Contracts with or has a direct 

relationship with End Users or 

otherwise controls the content made 

available to End Users; 

(2) Is able to report fully on Service 

Revenue from the provision of musical 

works embodied in phonorecords to the 

public, and to the extent applicable, 

verify Service Revenue through an 

audit; and 

(3) Is able to report fully on its usage 

of musical works, or procure such 

reporting and, to the extent applicable, 

verify usage through an audit. 

Service Revenue. (1) Subject to 

paragraphs (2) through (5) of this 

definition and subject to GAAP, Service 

Revenue shall mean: 

(i) All revenue from End Users 

recognized by a Service for the 

provision of any Offering; 

(ii) All revenue recognized by a 

Service by way of sponsorship and 

commissions as a result of the inclusion 

of third-party ‘‘in-stream’’ or ‘‘indownload’’ advertising as part of any 

Offering, i.e., advertising placed 

immediately at the start or end of, or 

during the actual delivery of, a musical 

work, by way of Interactive Streaming or 

Limited Downloads; and 

(iii) All revenue recognized by the 

Service, including by way of 

sponsorship and commissions, as a 

result of the placement of third-party 

advertising on a Relevant Page of the 

2034 Federal Register / Vol. 84, No. 24 / Tuesday, February 5, 2019 / Rules and Regulations 

Service or on any page that directly 

follows a Relevant Page leading up to 

and including the Limited Download or 

Interactive Stream of a musical work; 

provided that, in case more than one 

Offering is available to End Users from 

a Relevant Page, any advertising 

revenue shall be allocated between or 

among the Services on the basis of the 

relative amounts of the page they 

occupy. 

(2) Service Revenue shall: 

(i) Include revenue recognized by the 

Service, or by any associate, affiliate, 

agent, or representative of the Service in 

lieu of its being recognized by the 

Service; and 

(ii) Include the value of any barter or 

other nonmonetary consideration; and 

(iii) Except as expressly detailed in 

this part, not be subject to any other 

deduction or set-off other than refunds 

to End Users for Offerings that the End 

Users were unable to use because of 

technical faults in the Offering or other 

bona fide refunds or credits issued to 

End Users in the ordinary course of 

business. 

(3) Service Revenue shall exclude 

revenue derived by the Service solely in 

connection with activities other than 

Offering(s), whereas advertising or 

sponsorship revenue derived in 

connection with any Offering(s) shall be 

treated as provided in paragraphs (2) 

and (4) of this definition. 

(4) For purposes of paragraph (1) of 

this definition, advertising or 

sponsorship revenue shall be reduced 

by the actual cost of obtaining that 

revenue, not to exceed 15%. 

(5) In instances in which a Service 

provides an Offering to End Users as 

part of the same transaction with one or 

more other products or services that are 

not Licensed Activities, then the 

revenue from End Users deemed to be 

recognized by the Service for the 

Offering for the purpose of paragraph (1) 

of this definition shall be the lesser of 

the revenue recognized from End Users 

for the bundle and the aggregate 

standalone published prices for End 

Users for each of the component(s) of 

the bundle that are Licensed Activities; 

provided that, if there is no standalone 

published price for a component of the 

bundle, then the Service shall use the 

average standalone published price for 

End Users for the most closely 

comparable product or service in the 

U.S. or, if more than one comparable 

exists, the average of standalone prices 

for comparables. 

Stream means the digital transmission 

of a sound recording of a musical work 

to an End User— 

(1) To allow the End User to listen to 

the sound recording, while maintaining 

a live network connection to the 

transmitting service, substantially at the 

time of transmission, except to the 

extent that the sound recording remains 

accessible for future listening from a 

Streaming Cache Reproduction; 

(2) Using technology that is designed 

such that the sound recording does not 

remain accessible for future listening, 

except to the extent that the sound 

recording remains accessible for future 

listening from a Streaming Cache 

Reproduction; and 

(3) That is subject to licensing as a 

public performance of the musical work. 

Streaming Cache Reproduction means 

a reproduction of a sound recording 

embodying a musical work made on a 

computer or other receiving device by a 

Service solely for the purpose of 

permitting an End User who has 

previously received a Stream of that 

sound recording to play the sound 

recording again from local storage on 

the computer or other device rather than 

by means of a transmission; provided 

that the End User is only able to do so 

while maintaining a live network 

connection to the Service, and the 

reproduction is encrypted or otherwise 

protected consistent with prevailing 

industry standards to prevent it from 

being played in any other manner or on 

any device other than the computer or 

other device on which it was originally 

made. 

Student Plan means a discounted 

Subscription to an Offering available on 

a limited basis to students. 

Subscription means an Offering for 

which End Users are required to pay a 

fee to have access to the Offering for 

defined subscription periods of 3 years 

or less (in contrast to, for example, a 

service where the basic charge to users 

is a payment per download or per play), 

whether the End User makes payment 

for access to the Offering on a 

standalone basis or as part of a Bundle 

with one or more other products or 

services. 

Total Cost of Content or TCC means 

the total amount expensed by a Service 

or any of its affiliates in accordance 

with GAAP for rights to make 

interactive streams or limited 

downloads of a musical work embodied 

in a sound recording through the 

Service for the accounting period, 

which amount shall equal the 

applicable consideration for those rights 

at the time the applicable consideration 

is properly recognized as an expense 

under GAAP. As used in this definition, 

‘‘applicable consideration’’ means 

anything of value given for the 

identified rights to undertake the 

Licensed Activity, including, without 

limitation, ownership equity, monetary 

advances, barter or any other monetary 

and/or nonmonetary consideration, 

whether that consideration is conveyed 

via a single agreement, multiple 

agreements and/or agreements that do 

not themselves authorize the Licensed 

Activity but nevertheless provide 

consideration for the identified rights to 

undertake the Licensed Activity, and 

including any value given to an affiliate 

of a record company for the rights to 

undertake the Licensed Activity. Value 

given to a Copyright Owner of musical 

works that is controlling, controlled by, 

or under common control with a Record 

Company for rights to undertake the 

Licensed Activity shall not be 

considered value given to the Record 

Company. Notwithstanding the 

foregoing, applicable consideration shall 

not include in-kind promotional 

consideration given to a Record 

Company (or affiliate thereof) that is 

used to promote the sale or paid use of 

sound recordings embodying musical 

works or the paid use of music services 

through which sound recordings 

embodying musical works are available 

where the in-kind promotional 

consideration is given in connection 

with a use that qualifies for licensing 

under 17 U.S.C. 115. 

§ 385.3 Late payments. 

A Licensee shall pay a late fee of 1.5% 

per month, or the highest lawful rate, 

whichever is lower, for any payment 

owed to a Copyright Owner and 

remaining unpaid after the due date 

established in 17 U.S.C. 115(c)(5) and 

detailed in part 210 of this title. Late 

fees shall accrue from the due date until 

the Copyright Owner receives payment. 

§ 385.4 Recordkeeping for promotional or 

free trial non-royalty-bearing uses. 

(a) General. A Licensee transmitting a 

sound recording embodying a musical 

work subject to section 115 and subparts 

C and D of this part and claiming a 

Promotional or Free Trial zero royalty 

rate shall keep complete and accurate 

contemporaneous written records of 

making or authorizing Interactive 

Streams or Limited Downloads, 

including the sound recordings and 

musical works involved, the artists, the 

release dates of the sound recordings, a 

brief statement of the promotional 

activities authorized, the identity of the 

Offering or Offerings for which the zerorate is authorized (including the internet 

address if applicable), and the beginning 

and end date of each zero rate Offering. 

(b) Retention of records. A Service 

claiming zero rates shall maintain the 

records required by this section for no 

less time than the Service maintains 

records of royalty-bearing uses 

Federal Register / Vol. 84, No. 24 / Tuesday, February 5, 2019 / Rules and Regulations 2035 

involving the same types of Offerings in 

the ordinary course of business, but in 

no event for fewer than five years from 

the conclusion of the zero rate Offerings 

to which they pertain. 

(c) Availability of records. If a 

Copyright Owner or agent requests 

information concerning zero rate 

Offerings, the Licensee shall respond to 

the request within an agreed, reasonable 

time. 

Subpart B—Physical Phonorecord 

Deliveries, Permanent Digital 

Downloads, Ringtones, and Music 

Bundles 

§ 385.10 Scope. 

This subpart establishes rates and 

terms of royalty payments for making 

and distributing phonorecords, 

including by means of Digital 

Phonorecord Deliveries, in accordance 

with the provisions of 17 U.S.C. 115. 

§ 385.11 Royalty rates. 

(a) Physical phonorecord deliveries 

and Permanent Digital Downloads. For 

every physical phonorecord and 

Permanent Digital Download the 

Licensee makes and distributes or 

authorizes to be made and distributed, 

the royalty rate payable for each work 

embodied in the phonorecord or PDD 

shall be either 9.1 cents or 1.75 cents 

per minute of playing time or fraction 

thereof, whichever amount is larger. 

(b) Ringtones. For every Ringtone the 

Licensee makes and distributes or 

authorizes to be made and distributed, 

the royalty rate payable for each work 

embodied therein shall be 24 cents. 

(c) Music Bundles. For a Music 

Bundle, the royalty rate for each 

element of the Music Bundle shall be 

the rate required under paragraph (a) or 

(b) of this section, as appropriate. 

Subpart C—Interactive Streaming, 

Limited Downloads, Limited Offerings, 

Mixed Service Bundles, Bundled 

Subscription Offerings, Locker 

Services, and Other Delivery 

Configurations 

§ 385.20 Scope. 

This subpart establishes rates and 

terms of royalty payments for Interactive 

Streams and Limited Downloads of 

musical works, and other reproductions 

or distributions of musical works 

through Limited Offerings, Mixed 

Service Bundles, Bundled Subscription 

Offerings, Paid Locker Services, and 

Purchased Content Locker Services 

provided through subscription and 

nonsubscription digital music Services 

in accordance with the provisions of 17 

U.S.C. 115, exclusive of Offerings 

subject to subpart D of this part. 

§ 385.21 Royalty rates and calculations. 

(a) Applicable royalty. Licensees that 

engage in Licensed Activity covered by 

this subpart pursuant to 17 U.S.C. 115 

shall pay royalties therefor that are 

calculated as provided in this section, 

subject to the royalty floors for specific 

types of services described in § 385.22. 

(b) Rate calculation. Royalty 

payments for Licensed Activity in this 

subpart shall be calculated as provided 

in paragraph (b) of this section. If a 

Service includes different Offerings, 

royalties must be calculated separately 

with respect to each Offering taking into 

consideration Service Revenue and 

expenses associated with each Offering. 

(1) Step 1: Calculate the all-In royalty 

for the Offering. For each Accounting 

Period, the all-in royalty shall be the 

greater of the applicable percent of 

Service Revenue and the applicable 

percent of TCC set forth in the following 

table. 

TABLE 1 TO PARAGRAPH (b)(1)—2018–2022 ALL-IN ROYALTY RATES

Royalty year 2018 

(%) 

2019 

(%) 

2020 

(%) 

2021 

(%) 

2022 

(%) 

Percent of Revenue ............................................................. 11.4 12.3 13.3 14.2 15.1 

Percent of TCC .................................................................... 22.0 23.1 24.1 25.2 26.2 

(2) Step 2: Subtract applicable 

Performance Royalties. From the 

amount determined in step 1 in 

paragraph (b)(1) of this section, for each 

Offering of the Service, subtract the total 

amount of Performance Royalty that the 

Service has expensed or will expense 

pursuant to public performance licenses 

in connection with uses of musical 

works through that Offering during the 

Accounting Period that constitute 

Licensed Activity. Although this 

amount may be the total of the Service’s 

payments for that Offering for the 

Accounting Period, it will be less than 

the total of the Performance Royalties if 

the Service is also engaging in public 

performance of musical works that does 

not constitute Licensed Activity. In the 

case in which the Service is also 

engaging in the public performance of 

musical works that does not constitute 

Licensed Activity, the amount to be 

subtracted for Performance Royalties 

shall be the amount allocable to 

Licensed Activity uses through the 

relevant Offering as determined in 

relation to all uses of musical works for 

which the Service pays Performance 

Royalties for the Accounting Period. 

The Service shall make this allocation 

on the basis of Plays of musical works 

or, where per-play information is 

unavailable because of bona fide 

technical limitations as described in 

step 3 in paragraph (b)(3) of this section, 

using the same alternative methodology 

as provided in step 4 in paragraph (b)(4) 

of this section. 

(3) Step 3: Determine the payable 

royalty pool. The payable royalty pool is 

the amount payable for the reproduction 

and distribution of all musical works 

used by the Service by virtue of its 

Licensed Activity for a particular 

Offering during the Accounting Period. 

This amount is the greater of: 

(i) The result determined in step 2 in 

paragraph (b)(2) of this section; and 

(ii) The royalty floor (if any) resulting 

from the calculations described in 

§ 385.22. 

(4) Step 4: Calculate the per-work 

royalty allocation. This is the amount 

payable for the reproduction and 

distribution of each musical work used 

by the Service by virtue of its Licensed 

Activity through a particular Offering 

during the Accounting Period. To 

determine this amount, the Service must 

allocate the result determined in step 3 

in paragraph (b)(3) of this section to 

each musical work used through the 

Offering. The allocation shall be 

accomplished by dividing the payable 

royalty pool determined in step 3 for the 

Offering by the total number of Plays of 

all musical works through the Offering 

during the Accounting Period (other 

than Plays subject to subpart D of this 

part) to yield a per-Play allocation, and 

multiplying that result by the number of 

Plays of each musical work (other than 

Plays subject to subpart D of this part)) 

through the Offering during the 

Accounting Period. For purposes of 

determining the per-work royalty 

allocation in all calculations under step 

4 in this paragraph (b)(4) only (i.e., after 

the payable royalty pool has been 

determined), for sound recordings of 

musical works with a playing time of 

2036 Federal Register / Vol. 84, No. 24 / Tuesday, February 5, 2019 / Rules and Regulations 

over 5 minutes, each Play shall be 

counted as provided in paragraph (c) of 

this section. Notwithstanding the 

foregoing, if the Service is not capable 

of tracking Play information because of 

bona fide limitations of the available 

technology for Offerings of that nature 

or of devices useable with the Offering, 

the per-work royalty allocation may 

instead be accomplished in a manner 

consistent with the methodology used 

by the Service for making royalty 

payment allocations for the use of 

individual sound recordings. 

(c) Overtime adjustment. For purposes 

of the calculations in step 4 in 

paragraph (b)(4) of this section only, for 

sound recordings of musical works with 

a playing time of over 5 minutes, adjust 

the number of Plays as follows. 

(1) 5:01 to 6:00 minutes—Each play = 

1.2 plays. 

(2) 6:01 to 7:00 minutes—Each play = 

1.4 plays. 

(3) 7:01 to 8:00 minutes—Each play = 

1.6 plays. 

(4) 8:01 to 9:00 minutes—Each play = 

1.8 plays. 

(5) 9:01 to 10:00 minutes—Each play 

= 2.0 plays. 

(6) For playing times of greater than 

10 minutes, continue to add 0.2 plays 

for each additional minute or fraction 

thereof. 

(d) Accounting. The calculations 

required by paragraph (b) of this section 

shall be made in good faith and on the 

basis of the best knowledge, 

information, and belief of the Licensee 

at the time payment is due, and subject 

to the additional accounting and 

certification requirements of 17 U.S.C. 

115(c)(5) and part 210 of this title. 

Without limitation, a Licensee’s 

statements of account shall set forth 

each step of its calculations with 

sufficient information to allow the 

Copyright Owner to assess the accuracy 

and manner in which the Licensee 

determined the payable royalty pool and 

per-play allocations (including 

information sufficient to demonstrate 

whether and how a royalty floor 

pursuant to § 385.22 does or does not 

apply) and, for each Offering the 

Licensee reports, also indicate the type 

of Licensed Activity involved and the 

number of Plays of each musical work 

(including an indication of any overtime 

adjustment applied) that is the basis of 

the per-work royalty allocation being 

paid. 

§ 385.22 Royalty floors for specific types 

of offerings. 

(a) In general. The following royalty 

floors for use in step 3 of 

§ 385.21(b)(3)(ii) shall apply to the 

respective types of Offerings. 

(1) Standalone non-portable 

Subscription—streaming only. Except as 

provided in paragraph (a)(4) of this 

section, in the case of a Subscription 

Offering through which an End User can 

listen to sound recordings only in the 

form of Interactive Streams and only 

from a non-portable device to which 

those Streams are originally transmitted 

while the device has a live network 

connection, the royalty floor is the 

aggregate amount of 15 cents per 

subscriber per month. 

(2) Standalone non-portable 

Subscription—mixed. Except as 

provided in paragraph (a)(4) of this 

section, in the case of a Subscription 

Offering through which an End User can 

listen to sound recordings either in the 

form of Interactive Streams or Limited 

Downloads but only from a non-portable 

device to which those Streams or 

Limited Downloads are originally 

transmitted, the royalty floor for use in 

step 3 of § 385.21(b)(3)(ii) is the 

aggregate amount of 30 cents per 

subscriber per month. 

(3) Standalone portable Subscription 

Offering. Except as provided in 

paragraph (a)(4) of this section, in the 

case of a Subscription Offering through 

which an End User can listen to sound 

recordings in the form of Interactive 

Streams or Limited Downloads from a 

portable device, the royalty floor for use 

in step 3 of § 385.21(b)(3)(ii) is the 

aggregate amount of 50 cents per 

subscriber per month. 

(4) Bundled Subscription Offerings. In 

the case of a Bundled Subscription 

Offering, the royalty floor for use in step 

3 of § 385.21(b)(3)(ii) is the royalty floor 

that would apply to the music 

component of the bundle if it were 

offered on a standalone basis for each 

End User who has made at least one 

Play of a licensed work during that 

month (each such End User to be 

considered an ‘‘active subscriber’’). 

(b) Computation of royalty rates. For 

purposes of paragraph (a) of this section, 

to determine the royalty floor, as 

applicable to any particular Offering, 

the total number of subscriber-months 

for the Accounting Period, shall be 

calculated by taking all End Users who 

were subscribers for complete calendar 

months, prorating in the case of End 

Users who were subscribers for only 

part of a calendar month, and deducting 

on a prorated basis for End Users 

covered by an Offering subject to 

subpart D of this part, except in the case 

of a Bundled Subscription Offering, 

subscriber-months shall be determined 

with respect to active subscribers as 

defined in paragraph (a)(4) of this 

section. The product of the total number 

of subscriber-months for the Accounting 

Period and the specified number of 

cents per subscriber (or active 

subscriber, as the case may be) shall be 

used as the subscriber-based component 

of the royalty floor for the Accounting 

Period. A Family Plan shall be treated 

as 1.5 subscribers per month, prorated 

in the case of a Family Plan 

Subscription in effect for only part of a 

calendar month. A Student Plan shall be 

treated as 0.50 subscribers per month, 

prorated in the case of a Student Plan 

End User who subscribed for only part 

of a calendar month. 

Subpart D—Promotional and Free-tothe-User Offerings 

§ 385.30 Scope. 

This subpart establishes rates and 

terms of royalty payments for 

Promotional Offerings, Free Trial 

Offerings, and Certain Purchased 

Content Locker Services provided by 

subscription and nonsubscription 

digital music Services in accordance 

with the provisions of 17 U.S.C. 115. 

§ 385.31 Royalty rates. 

(a) Promotional Offerings. For 

Promotional Offerings of audio-only 

Interactive Streaming and Limited 

Downloads of sound recordings 

embodying musical works that the 

Record Company authorizes royalty-free 

to the Service, the royalty rate is zero. 

(b) Free Trial Offerings. For Free Trial 

Offerings for which the Service receives 

no monetary consideration, the royalty 

rate is zero. 

(c) Certain Purchased Content Locker 

Services. For every Purchased Content 

Locker Service for which the Service 

receives no monetary consideration, the 

royalty rate is zero. 

(d) Unauthorized use. If a Copyright 

Owner or agent of the Copyright Owner 

sends written notice to a Licensee 

stating in good faith that a particular 

Offering subject to this subpart differs in 

a material manner from the terms 

governing that Offering, the Licensee 

must within 5 business days cease 

Streaming or otherwise making 

available that Copyright Owner’s 

musical works and shall withdraw from 

the identified Offering any End User’s 

access to the subject musical work. 

Dated: December 18, 2018. 

Suzanne M. Barnett, 

Chief Copyright Royalty Judge. 

Approved by: 

Carla D. Hayden, 

Librarian of Congress. 

[FR Doc. 2019–00249 Filed 2–4–19; 8:45 am] 

BILLING CODE 1410–72–P